Ontario Cement Sector:Input to Ontario Cap and Trade Consultations

Toronto, ONFebruary 13, 2009

1. Cement WCI Climate Principles

Western Climate Initiative - Overview• Canadian Cement Representation:

85% of Canadian cement manufacturing

14 of 17 Canadian facilities fall under WCI Partners’ jurisdiction

BC – 3 plants, QC – 4 plants, ON – 7 plants

Other (non-WCI) plants are in Alberta (2) and Nova Scotia (1)

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CAC Participation in WCI• March 2008: Submission in response to the Initial Draft Design Recommendations.• May 2008: Participated in Stakeholder Consultations SLC, Utah.• June 2008: Submitted response to Draft Design Recommendations.• July 2008: Participated in Final stakeholder consultations in San Diego.• August 2008: Submitted additional comments on the Draft Final Design

Recommendations.• October 2008 - participated in stakeholder teleconference on design

recommendations.• October 2008 – Coordination of WCI Canadian Partners Cement Caucus at QCI

meeting in Quebec City (October 21 & 22).\• December 2008: Joint CAC / PCA meeting with WCI Co-Chairs (Lesiuk and Adair)

• Ongoing: • Engagement with Ontario, BC, Quebec, and Manitoba officials on WCI-related issues.• Participation in California AB-32 teleconferences on design of State climate plan and

participation in WCI.• Coordination of Canadian cement sector positions with those of the US industry, via

Portland Cement Association.• Development of WCI Essential Reporting Requirements – Draft 1, 2, 3• Communication and consultation with member companies.

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Context: We Share Common Goals

• The ON cement industry supports the need to address global climate change, while at the same time maintain a strong, vibrant, and competitive economy.– The cement industry has been fully engaged in the development of the Western

Climate Initiative (“WCI”).

• Input on the following consultation issues is provided in the context of Ontario participation in the broader WCI initiative:– Positions are consistent with those communicated to other WCI Partners– Positions are consistent with those negotiated with the Government of Canada during

development of the Federal Regulatory Framework.

• CAC member companies may not support the following positions in the context of an early (2010) unilateral cap and trade initiative within Ontario or Ontario / Quebec.– With every indication that Ottawa will not regulate in January 2010, we strongly encourage

Ontario to continue development of cap and trade in the context of the multi-jurisdictional WCI initiative.

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Cement Perspectives on ON / WCI Cap and Trade

• The following objectives should guide cement sector participation in the ON / WCI Cap and Trade System(s):

1. Irreducible process emissions originating from the calcination of limestone in the manufacture of cement reduction targets should be exempted

• Including process emissions, but avaoiding price signal accomplishes same objective.

2. Sector / facility-level reduction requirements caps should be developed on the basis of a uniform cement GHG performance standard (e.g. kg CO2 per tonne of cement) involving all cement facilities in the WCI (see California Draft Scoping Plan);

3. The uniform intensity standard should be expressed in a form (e.g. kg CO2 per tonne of cement) which recognizes and incents the important role that cement substitutes can play in reducing GHG emissions from cement manufacturing;

4. The use of renewable and alternative energies from biomass, waste, and other combustible by-products as should be encouraged, and appropriately accounted for in the cap and trade framework;

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Cement Perspectives on Cap and Trade (cont’d)

5. The use of cement substitutes at locations other than regulated facilities should be recognized and incented via the offset system;

6. GHG emissions should be measured and reported in accordance with the WBCSD CSI Cement CO2 Protocol – or an equivalent;

7. Care must be taken to avoid leakage of cement production and associated greenhouse gas emissions;

8. Participation in the ON / WCI cap and trade system must lead to exemption from additional Government of Canada requirements under the Federal Regulatory Framework.

9. Ontario must engage cement sector in addressing opportunities and barriers to realizing the sectors climate and clean air strategy, as discussed in the February 12 workshop.

1. Cement Input on Consultation Issues

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Input on WCI Scoping Recommendations

• Irreducible chemical process emissions from cement manufacturing should be excluded from the scope of the cap and trade system– Including process emissions puts the competitiveness of the ON

cement sector at risk and does nothing to reduce global GHG emissions – the production and associated emissions will be transferred to other jurisdictions (leakage);

– Assigning a zero reduction target, and issuing gratis allowances for all process emissions would be an acceptable means of achieving the same objective; and

– Process emissions can be “scoped in” on a global sectoral basis – or when proven and cost-effective technologies are available

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Proposed Scope – WCI Cap and Trade Rule• For the purposes of measuring, reporting and controlling

greenhouse gas emissions at Regulated Cement Facilities, the scope of the ON / WCI cap and trade system should include:

1. CO2 from raw materials (ie. process emissions) – assigned 0% reduction target:

– CO2 from calcination of clinker;– CO2 from calcination of bypass dust leaving the kiln system;– CO2 from calcination of CKD leaving the kiln system; and,– CO2 from organic carbon content of raw meal.

2. CO2 from kiln fuels (ie. combustion emissions):– CO2 from conventional fossil fuels;– CO2 from the fossil fuel component of mixed composition; and, alternative energy

sources.

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Proposed Scope – WCI Cap and Trade Rule• The scope of the WCI cap and trade system should

exclude:

1. Other GHG (non-CO2) releases from raw materials:– Non-CO2 releases are negligible and no definitive emissions factors exist

2. CO2 from biomass-based kiln fuels:– CO2 from the biogenic component of mixed-composition alternative energy sources;

and,– CO2 from renewable (biomass) energy sources.

3. Indirect CO2 releases from electricity purchases

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Proposed Point of Regulation

• Regulated Cement Facilities in WCI should include: – Locations engaged in the production of clinker from burning of

quarried limestone and subsequent grinding of clinker:– Locations engaged in the blending / use of supplementary cementing

materials to produce blended cements;– Locations engaged in the production and / or sale of supplementary

cementing materials.

• Regulated cement production in WCI should include “total cement produced at a regulated cement facility” and which is the sum (in tonnes) of:

1. Total clinker produced in the year,

2. Total mineral components consumed in the production of Portland and blended cements in the year, and

3. Total mineral components sold for use as cement substitutes (e.g. flyash, slag, puzzolana, etc.) in the year

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Scope and Point of Regulation – Outstanding Issues• Additional consideration is needed to determine the status of GHG

releases from non-kiln energy use:– CO2 from equipment and on-site vehicles – CO2e from mining and quarrying activities (i.e explosives);– CO2 from room heating / cooling;– CO2 from drying of raw materials and mineral components; and

• Secondary issues for further discussion with WCI include:– Treatment of new / modified facilities? – Treatment for retiring assets?

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Input on WCI Allocation Issues

• Allocation decisions have most potential to impact the competitiveness cement sector.

• A coordinated and ‘uniform approach’ to allocation is needed across all cement facilities in all WCI Partner jurisdictions.

• Uniform approach should be based on:• Establishing sector targets / allowances on the basis of a “cement CO2

performance standard”, as is being considered by California’s Climate Action Team – Cement Sub Group

• Allocating sufficient “gratis” allowances to cover baseline process emissions• Providing sufficient additional “gratis” allowances with respect to

combustion emissions from cement manufacturing to mitigate risks of cement production and emissions leakage, as is currently being proposed by Australia

• Considering the biological fraction of mixed-composition, refuse-derived fuels used in cement manufacturing as carbon neutral, equivalent to fully renewable biomass energy sources.

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Proposed Approach to Cement Allocations

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Input on WCI Offset Issues

• WCI should not place limits (e.g. 49%) on offset projects, nor place priority on ‘made in WCI’ offsets:– GHG emissions have global impacts. A tonne removed anywhere is a

tonne removed everywhere– To maintain competitiveness, least cost opportunities must be realized,

wherever they occur– Industry must have flexibility to rationalize investments across its fleet.

Especially in instances where ON / WCI assets are new / modernized, with less modern assets in place in other WCI jurisdictions (e.g. WA, CA)

– Ontario cement industry is globally oriented – parent companies must have ability to surrender CDM and other international flexibility mechanism credits for compliance in Ontario / WCI

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Input on WCI Reporting Issues

• Sector has made comprehensive submissions on the three drafts of the WCI Essential Reporting Requirements.

• Support for a common cement sector GHG reporting protocol, modeled on the methodology of the WBCSD Cement CO2 Protocol

• Issues remaining to be dealt with include:– Need to combine all cement requirements (combustion and non-combustion) into

one protocol (WCI 90)– Exclude non-combustion CH4 and N2O emissions until there are globally

accepted emissions factors for these – Consistent, cross partner treatment of biomass and biogenic component of

mixed composition fuels. They should be considered carbon neutral at the point of combustion for useful energy, as per UNFCCC.

– Several examples of burdensome administrative requirements (Authorized official, seven years record keeping, monthly data collection)

– More attention to Confidentiality with respect to production and fuel use (type and quantity).

Credit for Early Action / Other

• Credit For Early Action:– Request for ‘uniform sector approach’ embodies concept of Credit for

Early Action, while avoiding messy rules and allocation issues.

– If the recommendation approach is not pursued, credit for early action must play a prominent role in any early (2010) and unilateral Ontario initiative.

• Other:– Ontario, Canadian and US cement sector continue calls for WCI Partners

to embark on a sectoral consultation process with cement manufacturers in all WCI Partner jurisdictions.

– The current jurisdiction-by-jurisdiction approach is inefficient and could lead to inequitable outcomes.

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3. Economic Considerations

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Cement Market Fundamentals • Cement is a relatively homogenous, bulk product that is highly

substitutable and sold almost exclusively on the basis of price:– ON Cement sector must compete for market share in both domestic and export

markets

• Globally, more than 2 billion tonnes of cement are produced annually:– At less than 1% of global production totals, Canada and ON are price and

trend takers, not setters.

• Cement manufacturing is consolidated among and within a small number of globally oriented, vertically integrated materials companies:

– 100% of ON cement manufacturing is owned by global multinationals – ON facilities must ‘compete’ for investment to sustain and grow the provincial

cement manufacturing sector

• Global, regional, and provincial cement demand is forecast to grow.– Global cement demand to grow 4.7% annually through 2012, to 3.5 billion

tonnes. – No guarantee that provincial / regional market demand will be met by ‘made in

ON’ cement production

Cement Sector is Uniquely Exposed

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Exposure of Select Canadian Manufacturing Sectors (2005 data)

(CIEEDAC, 2007)

GO = Gross Output

Leakage Concerns• With limited ability to pass on costs, sector is particularly

vulnerable to leakage of cement production and associated emission to jurisdictions that will not result in an overall reduction of GHG emissions:

– “With high carbon prices, the cement sector is the one sector that will respond with large output reductions.” National Roundtable on the Environment and Economy -January 2008.

– “While the majority of sectors will be unaffected (by EU climate policies) the cement sector will be uniquely threatened by leakage to offshore production.” UK Carbon Trust - January 2008.

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Other Jurisdictions Acknowledge Competitiveness Concerns

California Air Resources Board Interim Report :

• “Leakage has been a key consideration in developing the GHG emission reduction strategies in this (cement) sector.

• If GHG requirements were applied to California cement manufacturing facilities only, the cost of cement from those facilities would rise relative to imports, and imports could displace California productivity.

• Generally, California’s cement manufacturing plants are more efficient than those that produce imported cement.

• California plants would decrease their GHGs produced, but increased imports would likely result in a net worldwide increase in GHG emissions.

• To minimize leakage, in-state and imported products need to be subject to the same standards.”

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Other Jurisdictions Acknowledge Competitiveness Concerns

EU Emissions Trading System (Phase I and II):

• “The predominant method of cement sector allocation in EU Member States is grandfathering, whereby allowances are handed out to firms for free, using a baseline of historical emissions.”

• Competitiveness concerns mean that (EU ETS cement sector) allocations are relatively generous:

– In Phase I the aggregate EU cap for cement turned out to be higher than annual emissions;– In Phase II, allocations remain relatively generous (i.e. upwards of 90% of firms’ BAU emissions) and some

states have chosen to continue to allocate allowances equal to firms’ BAU emissions.

• This also reflects the fact that the cement sector has a 5-10 year time horizon for large investments in new plants, technology and energy efficiency equipment, while Phase II lasts for just 5 years. Firms thus have a constricted ability to significantly reduce emissions within the timeframe of Phase II.”

Idea Carbon: EU ETS Cement Sector Survey and Analysis (May 2008)

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EU Legislates Cement Sector Leakage Concerns• EU member states have been careful to limit impacts on their cement

sectors from carbon and energy taxes and from the EU Emissions Trading System.

• December 2008 agreement on Phase III of the EU-ETS will further limit carbon pricing impacts on the cement sector, at least through 2020:

– The agreement includes three quantitative tests for identifying the “sectors at significant risk of carbon leakage” due to the continued implementation of the Emissions Trading System, through 2020

– The EU cement sector satisfies at least one of the three tests (compliance costs would be greater than 30% of Gross Value Added) and will be identified as a sector at significant risk

– As a result, the EU cement sector will continue to receive 100% free allowances under the ETS from 2013 to 2020

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Other Jurisdictions Acknowledge Competitiveness Concerns

Australia Green Paper:

• “If the introduction of a carbon price ahead of key competitors simply resulted in (Australian) industries contracting, relocating offshore and using similar or worse emissions-intensive fuels or technologies, it would weaken Australia’s contribution to the global emissions reductions effort.”

• “Compared to the rest of the economy … cement stands out as extremely emissions-intensive and trade exposed. “

• To reduce the risk of production and carbon ‘leakage’ to less regulated jurisdictions Australia is proposing that, initially, gratis allowances be issued to the cement manufacturing industry at sufficient levels to cover 90% of the sector’s baseline emissions.

(Chapter 9 – Treatment of Energy Intensive / Trade Exposed Sectors)

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Can Leakage Be Addressed?• CAC commissioned a comprehensive analysis of the opportunities

and constraints associated with the imposition of border adjustments aimed at addressing cement production and GHG leakage.

– Important study - widely requested by Provincial governments, other Canadian industries, US industry sectors;

– Report has been submitted to Province for its review and comment.

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Conclusions on Border Adjustments:1. The energy-intensive cement sector is particularly at risk;

2. The specifics of the domestic requirement and the intended border adjustment will bear heavily on the ability to successfully promote border adjustments;– The development and implementation of the proposed California cement

intensity metric, intended to cover domestic and imported cement products, will need to watched carefully.

3. Provinces, in particular, have limited ability to implement border adjustments for internationally-traded goods;

4. Attempts to impose border adjustments will be challenged;

5. Given the likely challenges and risks in imposing border adjustments, the best course of action is to avoid policy prescriptions that will lead to leakage from ‘at risk’ sectors (e.g. cement).

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Australia Holds Similar Views• Study conclusions similar to those reached by Government of Australia in its

“Green Paper”:– “Border adjustments … would be considerably more complicated than the

exclusion of exports from the goods and services tax (GST).” – “For imported goods, effective border adjustments would be very difficult to

implement transparently.” – “Accessing reliable and robust data from other jurisdictions is not straightforward,

and the complexity of the task is significantly increased when multiple jurisdictions contribute to the production of the good.”

– “If they were widely adopted, border adjustments could be used to pursue protectionist policies and constrain global trade. This could be very costly for a small, open economy like Australia.”

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Additional Analysis

• Cement sector has engaged EnviroEconomics and Mark Jaccard Associates to undertake competitiveness analysis to better understand impacts of:

– Federal regulatory Framework on Canadian cement sector;– Carbon Tax and cap and trade proposals on BC cement sector– These have both been provided to Ontario officials

• Similar analysis is proposed for the Ontario cement sector in first half or 2009.

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Next Steps• Developing and implementing appropriate climate policies is critical to the

continued competitiveness of the cement sector and will allow it to continue to provide sustainable benefits to Ontario (jobs, taxes, secure cement supplies, etc.)– The sector has a comprehensive, global strategy for addressing climate change

and clean air. – Ontario’s engagement in the delivery of this strategy is critical

• The pace of program implementation is very rapid. WCI Partners, including Ontario, must approach the cement sector is a coordinated, sector-wide manner to avoid inefficiencies and inequitable outcomes.

• We wish to be consulted and engaged on the continued development of Ontario’s participation in WCI.

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