21st January 2004

UK Government proposals for allocation of CO2 emissions allowances to UK Oil Refineries under the EU Trading Scheme.

According to UKPIA, the trade association representing the main oil refining and marketing companies in the UK, the proposed CO2 emission allowances under the EU Emissions Trading Scheme, contained in the Government’s Consultation Document published on 19th January, do not seem to be in accordance with the Government’s stated policy and if implemented in this form could seriously damage the UK oil refining industry.

Commenting on the proposed allowances, Malcolm Webb, the Director General of UKPIA, said, “Whilst we support the principle of emissions trading and recognise that DEFRA officials have been under extreme time pressure to produce these numbers, we have to say that these proposals as drafted are not acceptable. We are seeking an urgent meeting with DEFRA to discuss the matter further and help correct the calculation errors."

UKPIA’s main concerns include:-

The lack of clarity on how the allowances for the oil refining sector have been calculated.

There seem to be serious errors in the calculation of allowances for individual refineries.

An apparent inconsistency and hence lack of equity in the treatment of different refineries. Most have received unrealistically large reductions in their allowances for the first period whereas, curiously, two have received very significant increases compared to their historic data.

The potential impact of the central set aside pool for new entrants, if applied to the refining sector, and the resultant auctioning of allowances that this will introduce.

It is not clear how, as is allowed for under the EU Directive and as was promised by the UK Government, allowances have been set so as to allow UK refineries to emit more CO2 in order to produce the new sulphur free fuels mandated by recent EU legislation.

Far from seeing a business as usual case for industry outside the power generation sector (as Government Ministers had promised when releasing these figures), on the basis of these proposals the UK oil refiners could be faced with very serious disruption and significant additional cost.

Unlike a number of other sectors, particularly power generation, the UK Refining Industry is subject to competition from other European plants which have spare capacity adequate to supply a large proportion of the UK fuels market. If these proposals were implemented as currently drafted, it is quite likely that imports would rise and UK refinery output would fall, potentially affecting both UK jobs and security of supply, without any additional environmental benefit to the UK.