David Morgan - Confederation of Paper Industries

ePolitix.com speaks to David Morgan, Head of Regulatory Affairs at the Confederation of Paper Industries, about energy prices, carbon footprints and the industry's compliance with the European Union's Emissions Trading Scheme (ETS) targets.

Q: Can you tell us a bit about the Confederation of Paper Industries?

David Morgan: CPI is the leading organisation working on behalf of the UK's paper-related industry.

It was launched in January 2000 and brought together four long-established industry trade associations, each now reflected in CPI's four Sector Bodies: Tissue, Recovered Paper, Corrugated Packaging and Papermaking. Thus, CPI represents the paper chain from the recovery of used paper through papermaking and conversion to distribution.
 
CPI member companies' activities cover the full paper cycle which starts with importing pulp and sourcing recovered paper, then using these to make new paper products such as graphics papers, newsprint, tissue and cardboard packaging, distributing and marketing these products, and then collecting the recovered paper for recycling.

CPI has about 80 member companies ranging from large multinationals present in all aspects of paper-making to smaller companies participating in one aspect of paper-making, for example, recovered paper management or converting paper into corrugated boxes.  

Q: How are your members being affected by the steadily increasing energy prices? How do high energy prices impact upon your members' environmental considerations?

David Morgan: CPI members are being tremendously affected by the rising energy prices. Papermaking is a highly energy-intensive process and energy represents a major proportion of the operating costs of a paper mill. Energy is also a significant cost in the conversion of paper into other paper products.

These increasing energy prices – and particularly now that UK prices are increasing faster than those in continental Europe - are bad news for the paper sector because many paper companies operate in world markets and cannot easily absorb these increased costs. If energy prices – and particularly UK wholesale gas and electricity prices - stay at current levels for a long time, CPI could see some of its more vulnerable mills close because they will be unable to sustain their businesses.

With regard to environmental considerations, higher energy prices in general mean that the incentive to save energy (and therefore to reduce environmental impact in terms of carbon emissions), is greater.

At the moment, with high energy prices the main problem is that some paper companies will be finding it hard to make the level of return that has historically been possible. In the last month one member mill has closed, another has gone into administration and a third has announced that it is entering a period of consultation about possible closure. Now this is not the case for all companies - depending on the products made and the market in which they operate, many will be able to maintain their businesses, but it is certainly a very tough operating environment at the moment.

UK manufacturers are constrained to buying energy from UK suppliers. Current electricity prices in the UK are 20 per cent - 25 per cent higher than in other EU countries and the UK industry does not have access to the EU energy markets. These UK price premia are due to a number of factors such as poor nuclear station availability, the effects on older coal stations of the Large Combustion Plant Directive and the fact that the UK is now a gas importer. It is difficult to know what can be done about this in the short term but government should certainly have incentivised additional gas storage years ago as it has long been known that the UK would become a net importer of gas.

There is not much gas storage capacity in the UK but there is a lot of gas storage capacity on the Continent. Gas storage means that when the prices are low and gas is in plentiful supply, it is worthwhile for the gas suppliers to put gas into storage – for example, in the summer. As the prices rise because of the rising demand and decreasing supply – for example, in winter - the gas suppliers can release the stored supplies onto the market to smooth out supply and reduce price spikes.

It would help if the government did something more to promote incentives for companies to significantly invest in gas storage but the CPI knows that this would take time. There are gas storage infrastructure projects being developed but these projects will achieve a relatively small increase in Britain's gas storage capacity when compared with that available in other EU countries. 

Q: What is the CPI doing to help its members reduce their carbon footprint?

David Morgan: The most energy-intensive stage of the paper industry cycle is the process of paper manufacturing; distributing the paper or converting it is far less carbon-intensive. The reason for this is that paper is produced from wet cellulose fibres, which are formed into sheets of paper. These are then heated to drive the water off and this requires a lot of energy.

At the moment the industry has 56 paper mills in the UK and these use most of the energy consumed within the paper sector, most of which comes from fossil fuels, which leads to a carbon footprint associated with paper manufacture.

One of the initiatives in which the paper manufacturing industry participates to reduce its carbon footprint is the Climate Change Agreement. This is an agreement between CPI and DEFRA - started in 2001 - to meet biennial targets for energy efficiency and all of which to date the industry has met. Energy efficiency in the paper sector has improved by 38 per cent since 1990. If we look at our carbon emissions, the paper manufacturing industry's actual carbon footprint is 27 per cent lower than it was in 1990.

Most of our paper mills are now also in the EU Emissions Trading Scheme. This is similar to the CCA, although it concentrates directly on reducing carbon emissions rather than on ways of using energy more efficiently.

Q: What is CPI's view of the principle of emissions trading?

David Morgan: The CPI wholeheartedly supports this. If we aim to reduce carbon emissions from the energy production and manufacturing industries in the most economic and effective way then an emissions trading scheme is the way to do it. In other words, those people who find it cheap to reduce their carbon emissions will do it; those people who cannot do it cheaply will have to buy carbon allowances from those who can. As the government limits the number of carbon allowances available and makes it illegal to emit carbon unless an allowance to do so has been purchased, then the allowable levels in carbon emissions can be driven down year on year in the most economic fashion.

Q: How does the CPI view the performance of EU ETS so far?

David Morgan: At the moment the general view on this – and the CPI subscribes to this view – is that Phase 1 of the scheme, which ran from 2005 to and including 2007, did not really achieve very much. The reason for that was that the governments of most European Union member states allocated too many carbon allowances. They did not limit the supply of carbon allowances sufficiently to create a proper market.

Having said that, the UK government did implement the scheme as it was supposed to be implemented, whilst most other EU member states did not. Therefore, when it became apparent that there were far too many carbon allowances in the market, the price of these allowances went down to virtually nothing. As a result there has not been much of an impact made by EU ETS in terms of reducing carbon emissions.

But lessons have been learned. Phase II of the EU ETS started this year. Although it is still too early to comment definitively, if one looks at the Phase II allocations, most of the EU governments have recognised that there was an excess in the supply of the carbon allowances in Phase I; the number of carbon allowances the EU governments have authorised in 2008 is less than in 2007, 2006 or 2005. Hopefully, that should mean that the market price for carbon will stay high enough to provide the incentive for participants to reduce their carbon emissions. Therefore, we should see the scheme deliver reductions in industrial carbon dioxide emissions in the next five years.

Having said that, we will not know for sure whether this is actually the case until the results for 2008 are published which will not be until March or April of next year.

Q: How has EU ETS affected the UK paper industry?

David Morgan: The paper industry managed to opt-out of Phase I; the European Commission allowed any UK industry already participating in the Climate Change Agreement the choice of opting out of EU ETS Phase I as both schemes were deemed to be broadly equivalent. CPI talked to its members and the vast majority agreed that it would be better to opt out. They did not want the additional regulatory burden of complying with two similar schemes at the same time. There is no possibility to opt out of Phase II and other subsequent phases so all CPI paper mills – except seven very small mills - have been participating in the EU ETS from January 1, 2008.

At the moment it is too early to say how CPI members' combined participation in the CCAs and EU ETS would work out in terms of being able to measure a significant additional improvement in emissions performance. Again, we will not really know for sure until the results for 2008 are published early next year.

Q: Is the delay in the UK issuing 2008 allowances of concern?

David Morgan: Yes, it is. It should be a concern for all UK businesses. Everyone expected these carbon allowances to be issued in February this year. Once the allowances are issued, a company can develop strategies to maximise the value of those carbon allowances for its business. Although the UK government has now said that 2008 allowances will be issued in December, this is very late and CPI hopes that this date will be moved forward. There have been consultancy studies confirming that the delays in issuing the allowances in other EU counties is costing EU ETS participants millions of pounds in lost opportunities.

The rationale used by the UK government is that it is waiting for the European Commission to apply and test some complicated IT systems which will connect the EU's electronic transaction log with the UNFCCC transaction log. However, eight other EU counties, including France, have already issued their allowances. CPI finds it hard to see why France – and others - can issue its carbon allowances whereas the UK cannot.

The CPI has already written to DEFRA twice urging it to speed up the issue of carbon allowances as much as possible but the replies received offer little hope that the government sees this issue as a priority.

Q: Do you have any comments about the proposals for Phase III?

David Morgan: The CPI has a number of concerns about Phase III of EU ETS. The original Directive, approved in 2003, contained a provision that, if necessary, it should be revised with the revision taking effect from 2013. The European Commission and Member States governments are working on this revision now.

As far as CPI is concerned, the major concern is the proposal from the European Commission, supported by many EU governments, that from 2013 manufacturing industry will have to buy an increasing proportion of its carbon allowances and that this proportion will be 100 per cent from 2018.

The paper industry operates in a world market where it competes with producers from other economies whose producers are not constrained by their carbon emissions and do not have to factor the cost of producing carbon into their product prices. Our industry cannot absorb or pass on all the incremental costs associated with buying allowances.

The ETS would work perfectly well if the carbon allowances continue to be issued mainly for free. Carbon emissions would reduce, which, after all, is the main objective of EU ETS. However, if governments charge for carbon allowances they generate revenue - the UK government could raise over 6 billion Euros a year in tax revenue under this proposal so it is clear why it is of interest to them!

CPI believes that unless special measures are taken to protect certain parts of European manufacturing industry then products will no longer be produced in the EU but will be made elsewhere in the world where economies are not carbon-constrained. In other words, the carbon will still be emitted but will be uncontrolled; the EU would lose the contribution to the economy of manufacturing industry. A manufacturing sector, such as paper, that is characterised by this description is known as a "carbon migration" sector and we hope that the work that is being undertaken by the European Commission to define these sectors will be delivered sooner rather than later as business needs clear and early indications of factors likely to affect future prospects..

Q: Do you have any final messages for ePolitix.com readers?

David Morgan: We must have special treatment for "carbon migration" sectors of energy-intensive manufacturing post-2013 - unrestricted auctioning of EU ETS allowances by government will cause huge damage to the paper industry. However, the key issue that is affecting us right now are the high, volatile and uncompetitive energy prices currently suffered by the UK in comparison with its EU neighbours. Government should recognise that this is an issue.