|Guidance Document n°7 on New Entrants and Closures – important clues on the definition of ‘physical change’ made in the installation in the context of free allocation of carbon credits|
|Monday, 03 October 2011 05:29|
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The long-awaited Guidance Document n°7 issued in September specifies which technical modifications constitute ‘physical change’ in the EU ETS installation and which do not. The additional or reduced allocation of emission allowances valid in the third trading period obviously is at stake.
The long-awaited Guidance Document n°7 on the harmonized free allocation methodology for the EU-ETS post 2012 Guidance on New Entrants and Closures (Final version) has been issued on 14 September 2011. Those interested in the issue should refer to the webpage http://ec.europa.eu/clima/documentation/ets/benchmarking_en.htm for the full text of this important document.
It is evident that the significance of the document concerned will extend throughout the entire third trading period i.e. till 2020. Furthermore, given the fact, the statutory definition of ‘new entrant’ covers the period since 30 June 2011, the Guidance Document n°7 should be the subject of particular, urgent consideration of every EU ETS installation’s operator. It is likely it would be necessary to return to the detailed analysis contained in the Guidance Document n°7 not once but in this place let’s start with elaborations thereof on the definition and practical examples of a ‘physical change’ made to the installation and its correlations with the extent of free allocation of carbon credits valid in the third trading period.
As the Guidance Document explains, in the context of the definition of significant capacity extensions/reductions, such physical changes must be understood as modifications of production processes and the equipment required, and the different subparts of the definition should be interpreted as:
1. The necessary condition is the physical nature of the change related to the technical configuration and functioning. This excludes all types of merely organizational or operational changes (e.g. longer daily operation hours, higher speed of rotating kiln, application of new process control software, change in major process parameters such as pressure, temperature).
2. The impact of the physical change on the technical configuration and functioning constitutes the sufficient condition. Any physical change without such impact (e.g. a repaint coating of the outer face of a kiln) does not match the definition as there needs to be a clear causality link between the physical change(s) and the change in capacity. In other words, only physical changes allowing for changes in throughputs could lead to a significant change of capacity.
3. Furthermore, the mere replacement of an existing production line cannot be considered in the context of the definition of significant capacity extensions. This includes the replacement of parts of a production line without impacts on the technical configuration and functioning (e.g. replacement of a pre-heater with the same performance). But, in case of higher maximum throughput of the production line after the replacement, this change could in principle constitute a physical change leading a significant capacity extension (provided the
quantitative criteria are met).