As a major emitter of carbon dioxide (CO2), the cement industry - particularly within Europe - has not been slow in addressing the climate change issue. On a sector level, the industry initiated the Cement Sustainability Initiative back in 1999. Many of the leading companies have put voluntary emissions reduction targets in place. On the regulatory front, cement is one of the five sectors that falls under the EU Emissions Trading Scheme (ETS).
To a large extent, the cement sector has weathered the emissions constraints imposed upon it by the EU ETS in its first phase (2005-07). But, as we approach Phase II (2008-12) of the EU ETS, concerns are growing that abatement options may be becoming more limited, and more expensive. The industry fears that pressures imposed by the current structure of the EU ETS could see production - and therefore emissions - exported beyond the EU's borders.This, they believe, gives grist to their arguments for a new approach to controlling emissions within the sector.
To assess the impact to date of the EU ETS on the European cement industry, The Strategy Works carried out face-to-face interviews with the key personnel at the top five global players: Lafarge, Holcim, Heidelberg, Cemex and Italcementi [1] and a telephone interview with Cembureau, the European trade association for the industry.
Total European sales from these five companies are estimated at EUR26 billion (.5 billion) in 2006. Lafarge is the market leader in Europe for cement, while Holcim and Cemex compete closely for second place. Together, these three companies account for some 70% of the turnover among the five companies interviewed.
Demand for cement is growing steadily within Europe at 2-3%/year. It is proportional to economic development and Lafarge reports that developing economies now account for as much as 80% of global demand, a trend which is likely to increase and which is changing the global landscape of the industry. Industry efforts to reduce emissions predate the launch of the EU ETS. Lafarge says that it was the first global cement producer to set medium-term targets for CO2 emissions, in 2001. Other firms followed suit; now all of the five companies interviewed have medium-term targets (for 2010-15) for CO2 emissions. Public domain information, published within their corporate accounts and annual sustainability reports, confirms that four of the five companies have reduced their emissions in accordance with their targets to date.
However, the introduction of the EU ETS puts mandatory limits on the sector's emissions. Under the EU ETS, companies are issued CO2 allowances (EUAs) by national governments based on their reported emissions in previous years, a procedure known as 'grandfathering'. If they emit more than their allocation, they must buy EUAs on the open market. If they expect to emit less, they can sell surplus allowances.
Generally, within the sector, Phase I saw generous allocations in Eastern Europe, but stringent ones in the West, which Holcim believes is "not a level playing field". By and large, companies were allocated allowances in line with their expected emissions in Phase I.
Firms have been able to transfer their allocations between countries without having to trade on the open market. Three of the five firms appear to be balancing their allocation on an overall, or net basis. Heidelberg "does it on an individual country basis because CO2 has the same value in all countries".
Cemex, meanwhile, will consider trading allowances between facilities or countries in the second phase.
Cembureau reports that Phase I has been "business as usual" for the industry. There is no evidence of plant closure solely because of the scheme, but some plants have reduced their output or even stopped producing as a consequence of the EU ETS. However, there are concerns that the allocations for Phase II from 2008 will be much tighter. If this occurs, the scheme could effectively act as a cap on production, because it could become uneconomical for the industry in Europe to buy the additional allowances needed to produce (and therefore emit) more than its allocation.
There are several approaches to reducing the emissions associated with cement manufacture, but within Europe at least, two are key. The first involves reducing the amount of clinker in the finished cement, known as 'clinker factor reduction' or material substitution.
Clinker is the main constituent of cement and it provides the strength of the finished product. However, the production of clinker is emissions-intensive, both in terms of the fuel necessary to heat the kilns, and the chemical process that converts calcium carbonate to clinker (releasing large amounts of CO2).
There are two main alternatives to clinker - blast furnace slag and pulverized fuel ash (PVA, or fly-ash). Slag is a non-metallic byproduct of the steel making process, while PVA is waste produced when the flue gas from a coal-fired power station is 'scrubbed', which effectively means removing the noxious gases.
The second method of emissions reduction is by using alternative fuels, including organic waste, animal feed and biomass. The emissions saving results from the fact that these fuels are considered "carbon neutral" - on a net basis over their lifecycle, they do not release CO2.
This results in two savings. First, the CO2 emitted per unit of energy content is lower than traditional fossil fuels, and secondly, there is an indirect saving associated with recovering these waste products. If they were not used in the cement kiln, they would either be landfilled or incinerated, both of which result in their CO2 being released to the atmosphere (although the EU ETS does not provide credit for avoiding these emissions).
Material substitution is by far the most efficient means through which to reduce cement emissions.This is because around 60% of emissions are released from the chemical processes occurring inside the kiln, with the remaining 40% come from the burning of the fuel. Material substitution targets both of these sources, because less clinker is required in the first place, which also mean less fuel. Fuel substitution, on the other hand, reduces only the fuel-related emissions.
Companies vary in the degree to which they are pursuing these two routes. The market leader for material substitution is Holcim, with around 27% of alternative materials, including gypsum, being used in its cement in 2006, while the figure for most other companies was approximately 10%. Heidelberg is the market leader in the use of alternative fuels, with around 16% of its total fuel input in 2006 coming from sources such as biomass, tyres and plastics.
However, there are limits to the above methods of reducing emissions. Generally speaking, material substitution cannot exceed about 75% of total cement composition for slag and 25% for fly ash.
Companies also report quality being a limiting factor for fly-ash: it is often contaminated and requires further processing before it can be used in cement. Lafarge states that this fly-ash quality issue will become more significant in the future because "power generators will have increasing constraints on their emissions," meaning that the fly ash will contain rising levels of contaminants. Italcementi also reports that many of its clients are willing to pay more for a higher clinker content, which acts as a limit to the material substitution rate.
Slag, on the other hand, appears to be limited in supply. Cemex concedes that there is "no sign of a possible increase of slag production in Europe". Only companies with long-term contracts therefore have a guaranteed supply. Interviewees were reluctant to divulge their sources of supply, but Lafarge claims to have secured long-term contracts with steel manufacturers. Holcim has a vertically integrated approach and "owns and operates slag granulation plants at a couple of steel companies", such as Arcelor in France and Salzgitter in Germany.
However, even this limited supply is threatened. Heidelberg reports that "new steel plants do not produce granulated blast furnace slag - it's not part of the process". Italcementi foresees a problem within two generations (given the c 50-year lifecycle of a steel plant) in that "the bulk of the steel production is still made from the traditional process, but unfortunately that's true for emerging countries like China and less and less in Europe or in North America, where new technologies recycle scrap iron".
The industry is also facing growing competition for carbon neutral kiln fuels. There is a distortion of competition from the power sector, because this sector receives so-called green certificates for burning renewable biomass fuels. Italcementi points to "a 'double-penalty' from the power sector". Electricity generators can afford to pay a higher price for biofuels because they pass it on to the consumer. They receive credits for using renewables, which certify that the electricity generated is 'carbon free'. But they can also benefit by selling the resulting excess of EU ETS permits.
The interviewees estimated an average carbon price during Phase II of EUR25/t, perhaps even reaching EUR35/t. EUR30 per tonne of carbon corresponds to a price increase in the finished cement of about 30%. However much customers value the brand, says Lafarge,"they will not accept such a price increase".The company warns of a future scenario in which the industry is driven out of Europe: "It could generate delocalisation by transferring demand to non-European suppliers. That's the challenge we are facing now."
Cembureau suggests the EU ETS is ineffective in that it focuses on carbon reductions in Europe: climate change is "a global problem", to which the EU ETS is an attempt to find "a European solution".
The fear is that, if the carbon price does rise as anticipated during Phase II, the scheme will act as a cap on production within Europe. It might then become economical to import cement or clinker from outside the EU, which would defeat the very object of the EU ETS.
Many of the firms state that this is not their intention, but say it might be the only option in a worst-case scenario. Cembureau believes this "would be the worst solution". The irony is that overall emissions would then actually increase, because of those resulting from transporting cement or clinker.
An obvious solution is to change the way the EU ETS operates for the European cement industry, and rethink the grandfathering approach. Lafarge believes that "it's not the right way of calculating future allocations ... it's imperfect".
Cembureau, along with most of the firms, favours a worldwide benchmarking approach instead of grandfathering. This would establish an emissions intensity benchmark, based on best practice, against which performance would be measured. As benchmarking is performance-related, it rewards efficient operation. This is the opposite of the grandfathering approach which, by allocating permits based on previous activities, can reward the heaviest polluters and punish the "good guys".
Cembureau proposes "to combine the cement industry worldwide, to have defined a specific performance to be achieved which is per tonne of product".
Any future scheme clearly needs to be global. The association favours a scheme which "either encompasses the OECD and the major developing countries, or protects countries in the lead of CO2 reduction from competitive distortions".
[1] The individuals are:Vincent Mages, vice president, climate change initiatives, Lafarge; Bruno Vanderborght, vice president, environmental strategy, Holcim; Rob van der Meer, director, EU public affairs, Heidelberg Cement; Luis Trevino, director, energy and CO2, Cemex; Xavier Blutel, group vice president, environmental affairs, Italcementi; and Claude Loréa, technical director, Cembureau.
Michael Herson is director of The Strategy Works, a London-based marketing consultancy specialising in original business-to-business research across Europe.
Company website: http://www.thestrategyworks.com
This article was published in Carbon finance, November 2009.
