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Technology held back by EU climate policy: Sandbag

London — Companies investing in low-carbon industrial innovations in Europe arebeing held back by their exclusion from product benchmarks that providefree carbon allowances under the EU Emissions Trading System, UK-basedenvironmental campaign group Sandbag warned in a report Tuesday.

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* Low carbon innovations excluded from product benchmarks

* 'Systematic exclusion of viable low carbon innovations'

Sandbag issued a call for evidence from industrial stakeholders fromNovember 2017 to January 2018, and its findings indicate that companiesdeveloping low-carbon alternatives to widely used products in Europe havebeen excluded from industry standard benchmarks used to allocate freecarbon allowances.

The findings suggest that the rules being employed under the EU ETS maybe failing to encourage a switch to lower emissions industrial productsby rewarding more emissions-intensive products under the benchmarks.

"As the European Commission makes preparations for Phase IV of the EU ETS[2021-2030], stakeholders have provided Sandbag with information showingthat implementation of EU climate policy -- and in particular EU ETSproduct benchmarks -- are proving detrimental to efforts to reduceindustrial emissions," the group said in a statement.

The group said the exclusions have been known for years but its latestresearch indicates that the problem is much more widespread than firstassumed.

"For years, producers of low-carbon substitutes for commonly usedmaterials have been excluded from applicable ETS product benchmarks onthe grounds that their products are manufactured in processes that differfrom traditional production methods as defined by benchmarks," it said.

"That line of reasoning falls foul of the ETS Directive which states thatbenchmarks and free allocation should take into account the mostefficient techniques, substitutes [and] alternative productionprocesses," it said.

Under the EU ETS rules, many of the non-energy industrial sectors qualifyfor free allowances due to their exposure to international competition,and these are allocated according to industry product benchmarks that areintended to reward the best available technology in each market segment,encouraging companies to upgrade equipment and processes.

However, Sandbag's analysis suggests that the rules do not encouragecompanies to innovate and develop low carbon products. CO2 emissions frompower generation have fallen significantly since the EU carbon market waslaunched in 2005 but industrial sector emissions have not followed suit.

When raised in the past, these issues have been brushed aside as nicheexamples in an otherwise well-functioning EU ETS, Sandbag said.

"However, far from being limited to isolated cases, the numerous accountsand evidence presented to Sandbag point to systematic exclusion of viableand readily available low-carbon innovations from relevant benchmarkswhich threatens the ability of the ETS to deliver on its objective ofreducing emissions," it said.

In the case of cement, iron and steel companies, this has resulted inbest available technologies being offered limited or no credit for theemissions savings they generate, the group said.

"That approach has played into the hands of those who claim that yet tobe discovered breakthrough technologies -- requiring billions of euros inpublic funding -- are the solution to the problem of industrialemissions," it said.

"The argument has been strengthened by a prevailing discourse that seeksto relegate competing low carbon products to niche markets," it said.

"There are also concerns that ETS product benchmark reduction rates inPhase IV neither reflect the decarbonization potential of technologiesthey apply to, nor do they align with the rate of emissions reductionimplied by the Paris Agreement, which the EU and Member States aresignatories to," the group said.

The EU's executive arm and carbon market regulator, the EuropeanCommission, declined to comment when contacted Tuesday.

--Frank Watson, frank.watson@spglobal.com

--Edited by Jonathan Loades-Carter, newsdesk@spglobal.com