[PPT] - Competitiveness Post 2020: The Cement Report Karsten Neuhoff, Bruno PowerPoint Presentation

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Carbon Control and Competitiveness Post 2020: The Cement Report

Cecilia 2050 Conference, Brussels, 6.3.2014 Karsten Neuhoff, Bruno Vanderborght, Arjan van Rooij, Phlilippe Quirion, Misato Sato, Roland Ismer, Manuel Haussner, Oliver Sartor , Andrzej Ancygier, Ayse Tugba Atasoy, Benedikt Mack, Anne Schopp, Nagore Sabio, Jean-Pierre Ponssard . ++++++ Project team

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Mitigation opportunities in the cement sector

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Realization of individual mitigation opportunities

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Policy requirements emerging from analysis

Carbon Control and Competitiveness Post 2020: The Cement Report

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Cement demand (EU 27) Emissions / t cement Fuel related emissions (35%) Process related emissions (65%) Substitution/efficient cement use Carbon Capture & Sequestration New cement types

Mitigation options in cement

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Illustration

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Lower clinker content Energy Efficiency Pre-treated waste Biomass waste

Policy for mitigation needs to also address options on consumption side.

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Mitigation opportunities in the cement sector

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Realization of individual mitigation opportunities

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Policy requirements emerging from analysis

Carbon Control and Competitiveness Post 2020: The Cement Report

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Emission savings through use of bio-mass (waste)

Save of fuel cost (10 €/t clinker) + hedge on fuel price
RE support for biomass in heat& power not available in cement
> only 10% wood (large share in Spain, check RE provision)
Primarily waste products, 50% animal meal & fat, 17% sewage sludge
Save CO2 opportunity (!) cost (1,5€ /t clinker at 10 €/tCO2)

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0,0 0,5 1,0 1,5 2,0 2,5 0,0 0,1 0,2 0,3 0,4 0,5 0,6 0,7 0,8 0,9 1,0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Absolute Volume of Biomass (Mt) Absolute Volume of Biomass (Mt) D F E I UK PL EU

Source: CSI GNR: Indicator 314 right axis

9% of thermal energy from bio- mass (waste) ~ savings of about 3.3 Mt CO2

Carbon price too low / instable
Opportunity cost have limited impact on choices

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Emission savings through use of pre-treated waste

Save of fuel cost (10 €/t clinker) + hedge on fuel price
Capture waste service fee (1-10 €/t clinker)
Opportunities as EU Directive (99/31/EC) restricts landfill
Only slow transposition (2009 deadline only met by 9 MS)
Save C02 opportunity (!) cost (0.3 € /t clinker at 10€/tCO2)

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1 2 3 4 5 6 7 8 9 1 2 3 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Volume of Waste (Mt) (EU) Volume of waste (Mt) (Member states) D F E I UK PL EU

Source: CSI GNR: Indicator 313 right axis

25% of thermal energy from pre- treated waste ~ savings of about 2.4 Mt CO2 Limited role of EU ETS - to date energy cost driven

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3200 3400 3600 3800 4000 4200 4400 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 MJ/ton clinker

Average Thermal Energy Efficiency

D F E I UK PL EU

Source: CSI GNR: Indicator 329

Emissions savings through efficiency improvements

Main savings potential: Replace (semi-) wet kilns
Slow progress, kiln conversions, Pl pre, UK post 2005
Potential 0.5 Mt CO2 savings / year

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% Clinker produced Semi-Wet Kiln (9% more energy) Wet Kiln (50% more energy) 2000 12% 6% (19 installations) 2005 9% 5% (13 installations) 2011 7% (30 kilns) 5% (11 installations)

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Substitution of clinker with other materials

CEM with 25-30% substitution saves 2€ /t cement (at 10 €/tCO2)
Drawbacks: (i) Dependence on other companies (ii) Surplus clinker capacity
Result: Slag largely utilized, fly-ash to less than 50% for cement production
Needs market acceptance for cement with different features
Attempts with CO2 labelling, but product quality & price dominate acceptance
Adjusting norms and standards might be able to achieve more rapid change

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1 2 3 4 5 6 7 8 9 10 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 in % Total Volume of Cements

European Union

Source: CSI GNR: Indicator 3219

Carbon price too low / instable
Uncertainty of cost pass through of opportunity costs
> reduces competitiveness of lower carbon products?

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Asset rationalization – distorted by activity requirements

50% utilization of the Historic Activity Level required for full free allocation,

25% operation to receive 50% of the allocation.

Incentive to (i) spread production over installations (ii) export excess

clinker/cement (iii) increase clinker content (possibly stockpiling slag)

Thus creates incentive to avoid (temporary) closure of inefficient plants
Further factors: Prospect of future demand, value of permits, access to market,

cost of closure (social, site clean-up), impact on company’s balance sheet

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0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% 110% 20 40 60 80 100 Share of HAL emissions Installations ranked from lowest to highest 2011 Emissions vs HAL 2012 Emissions vs HAL

Free allowance allocation creates distortion and inhibits energy and CO2 efficiency improvements

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No operational leakage

Trade flows are predominantly influenced by supply and demand balance
2 to 4% of cement is exported, twice the volume of imports
Europe was a net importer of clinker till 2009 (demand in Spain and Italy)
Activity level requirements for free allowance allocation have caused increase of

export since 2009, amplified since 2012 (Spain, Portugal, Ireland and Greece)

ETS has not caused an increase of clinker or cement import

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20
15
10
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5 10 15 20 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 Cement Clinker total

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No evidence of emission leakage to other regions
50% activity level provisions encouraged exports

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No Investment Leakage

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The European economic outlook is obviously unfavourable for major

investments;

There is no evidence of investment leakage, i.e. no evidence of investment

moving out of EU or cancelled because of the ETS.

However, there are several aspects of the EU climate goals, ETS Directive and

the implementation measures that add to the uncertainty for decisions and as such discourage rather than encourage investments in low carbon technology. These are:

Long-term CO2 targets for the economy, ETS and EII;
Sectoral technical-economic potential to reduce CO2 emissions;
Linear reduction factor – cross sectoral reduction factor;
Post 2020 leakage protection measures;
Complexity and deficiencies of the historic allocation methodologies;
Perception of lack of legislative predictability.

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Low carbon cement and efficient use of cement

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Primary customer demands:
1. Proven long-term product quality, adapted to application;
2. Price.
In the absence of CO2 cost pass through there is little market incentive for low

CO2 construction materials.

But the price signal alone is insufficient; other incentives are indispensible.

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Mitigation opportunities in the cement sector

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Realization of individual mitigation opportunities

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Policy requirements emerging from analysis

Carbon Control and Competitiveness Post 2020: The Cement Report

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Cement demand (EU 27) Emissions / t cement Fuel related emissions (35%) Process related emissions (65%) Substitution/efficient cement use Carbon Capture & Sequestration New cement types

Success on mitigation in cement?

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Illustration

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Lower clinker content Energy Efficiency Pre-treated waste Biomass waste

To date progress only on some mitigation options.

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Summary: Policy requirements emerging from analysis

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Combination of policy levers required to advance mitigation.

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Effective Carbon Price requrired

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Leakage protection measure needs to preserve carbon cost for consumer.
Two main options: Inclusion of imports or inclusion of consumption in EU ETS

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Inclusion of imports in EU ETS

Combined with shift to full auctioning;
At benchmark level (Best Available Technology- BAT)
> addresses leakage risk;
> does not discriminate against foreign producers;
> retains full incentives for EU producer and consumers.

Challenge: International political acceptance When applied to selected other sectors:

How far down the value chain track cement, steel …
Compensation of exports needed;
Treatment of electricity?

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Inclusion of imports&exports in EU ETS: leakage protection &full carbon price .
But international politics difficult.

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Inclusion of consumption in EU ETS (one new approach)

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Production sphere Consumption sphere Cement Producer EU ETS Cap Output * Benchmark Consumption Trader Cement export Import Consumption Auction Finance climate action Buy for cons. > prod. Trust fund Levy at time of release for consumption (clinker transfered * benchmark * CO2 price) cancel CO2 allowance Cement Inclusion of consumption

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Inclusion of consumption can reinstate carbon price and full incentives.
Avoids political complications of trade related approach.

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Clarity on future developments needed

EU ETS has attracted top management attention on need to reduce CO2:
> Emission reductions is now part of the strategy of most cement companies;
> Emission target equally important to carbon price for some firms/decisions.
Overall economic situation (surplus capacity) dominates investment picture
Uncertainty about future development of EU ETS slows down decision making
> What sector on leakage list, what provisions post 2020, what price level?
> What will impact development in the future?
> Differs from other input uncertainty as it only impacts Europe
> If system does not fully meet policy needs, what reforms to expect?

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Shared perspective required: Low-carbon roadmaps facilitate coordination.
Backed by EU ETS overall targets allowing for competition across sectors.

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Innovation support required for low-carbon cement & CCS

Low/uncertain carbon-price and pass through;
> uncertainty about future market demand.
Substitutes for cement can reduce value of assets;
> incumbents need competition from (potential) entry.
Long demonstration period can increase technological spill-over:
> investors might require support to advance techn. development.

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Development and demonstration of processes and products requires large

scale investment.

Innovation strategy needed to advance portfolio of mitigation options.

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Adjustments to regulations and building codes

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Enable use of lower-carbon options;
> Reduction of clinker content often requires adjustments;
> Further adjustments likely required for innovative materials.
Encourage use of lower-carbon options;
> Engage decision makers to consider embedded carbon;
> Formulate min or max requirements for products/practices.
Several tailored policy (changes) require coordinated approach.
Consider guidance from low-carbon road-map and suitable political mandate.

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Summary – insights from cement sector

I. ETS creates visibility for emission targets & captured management attention:
But attention has declined (partially due to economic crisis);
Credibility needs to be restored with „robust“ carbon prices.
II. Effective carbon price essential for economics of mitigation options:
Free allowance allocation reduces effectiveness of EU ETS in cement;
New leakage protection: inclusion of imports or of consumption in EU ETS.
III. EU ETS not sufficient - policy mix needed to unlock mitigation portfolio:
Addressing regulatory and institutional constraints for low-carbon options;
Engaging decision makers to overcome inertia / low share of total cost;
Supporting investment in innovation (process, products, building practice).

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