Defining Sectors within a Regulated Environment

In order for the chemical industry to adequately manage risks and contribute to the design of an effective emissions trading scheme, it is important to understand various climate policy instruments and how to categorize the business in terms of energy and GHG emissions as well as end products and trade markets. Cefic strongly advocates for dividing chemical processes into eight major categories in order to appropriately allocate emissions allowances to avoid putting unilateral cost burden on the chemical industry. According to Cefic, the inclusion of the following sub - sectors would represent approximately 80% of chemical industry emissions [3]

• ammonia for the production of fertilizers;

• ethylene (cracker products);

• nitric and adipic acid;

• energy installations in chemical production process (CHP, boilers, captive power, etc.);

• chlor - alkali (compensation for indirect emissions from electricity).

While emissions trading schemes such as proposed in Europe, Australia, and the USA are different in their scope and approach to allocating allowances, each scheme must define the mechanisms to address market distortion and leakage.

The inclusion of sub- sectors as outlined above enables industry to qualify for certain exemptions from an emissions trading schemes such as the case in Europe where the Commission and the European Council are determining which sectors and sub-sectors will benefit from leakage protection based on the following criteria [35]:

• Additional production costs resulting from the ETS will exceed 5% of the gross value added.

• The total value of exports and imports divided by the total value of turnover and imports (a measurement called the non-EU trade intensity) exceeds 10%.

Emissions trading schemes can also incorporate border tax adjustments as an instrument to prevent leakage of emissions to hot spots. While this is a possible measure protect domestic industries, it poses concern with trade partners outside of the regulated country. An effective emissions trading scheme that considers sub-sector exposure can be designed to avoid such border tax adjustments.

84 | 2 Managing the Regulatory Environment 2.5.2

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