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If you are a Life Sciences Industry, carbon restrictions may directly apply to you. Chemical and pharmaceutical sectors use energy-heavy processes in their value chain: research, manufacturing and transport . Hence these companies represent important CO2 emitters. Due to the global warming issue, chemical and pharmaceutical firms need to raise their environmental awareness and adopt responsible care.

Since the beginning of the 2000’s, a carbon legislation has been gradually enacted in the European Union to reduce Greenhouse Gases (GHG) emissions to the required levels. Graph shows Ireland’s GHG emission trajectory since 1990. Under the Kyoto Protocol, EU-15 (Western Europe) committed to an abatement of 8% over the 2008-2012 period compared to 1990. To reach this objective in a cost-effective manner, the EU built an internal CO2 emission trading system (EU ETS). The ETS imposes carbon restrictions on large emitters: energy industries and heavy energy consuming manufacturers. According to the European directive, industries covered by ETS are power and heat generation, combustion plants, oil refineries, coke ovens, iron and steel plants, cement, glass, bricks and ceramics. Participating companies are distributed a certain number of allowances. An allowance gives its holder the permission to emit 1 tonne of CO2. Emission rights can be freely traded on an EU-wide market, at the prevailing price.

                                          Source : EPA, 2011

Chemical and pharmaceutical carriers are currently not included in the ETS. However, a significant number of large fuel combustion installations (boilers, generators…) fall within the scheme when exceeding a rated thermal input of 20 MW, and so they must hold emission permits . Thus, in Ireland, many pharmaceutical companies hold an emission licence in the National Registry: Abbott, Allergan, Genzyme, Hovione, Janssen, Novartis, Schering Plough, Pfizer...

The chemical sector should be officially covered during Phase 3 of the ETS (2013-2020). Consequently, more chemical processes should be covered in the future. Emissions from the following productions are scheduled to be integrated to the scheme: carbon black, nitric acid, adipic acid, glyoxylic acid, ammonia, hydrogen, synthetic gas, sodium bicarbonate, bulk organic chemicals by cracking, reforming and oxidation .

The carbon constraint (paying for the right to emit) represents a substantial charge for chemical and pharmaceutical companies. It alters profits margins and handicaps international competitiveness, especially for chemical producers, who face a fierce competition from non-EU countries . Thus, firms must enter in carbon management strategies. The chemical sector may face difficulties to pass its additional carbon costs on its customers as this may create a loss of competitiveness. Emission constraints on chemical companies may also lead to carbon leakage (industries relocating in countries without carbon regulation).

                                                        Source: CEFIC, 2010

Carbon abatement in the chemical and pharmaceutical sectors can be achieved mainly by energy efficiency, especially in production or conversion facilities (fossil fuel savings). However, substantial mitigation potentials lie in the transport stage.

The chemical sector is a highly energy-intensive industry. It accounts for one third of industrial energy use and 12% of total energy demand in the European Union. In this sector, energy/carbon savings can be achieved in boilers, coolers, heaters, electricity generators, Combined Heat and Power (CHP) plants. CO2 reduction in chemical installations may also be achieved by fuel switch (for example switching from coal to gas powered facilities).

The pharmaceutical industry is lighter in terms of energy consumption, which amounts to a small percentage of expenses. Energy/carbon savings can be made at each stage of product manufacturing: preparation of process intermediates, coupling, separation, granulation, drying, film-coating . Since one or two decades, many pharmaceutical firms (Pfizer, Novartis…) have developed energy management systems or carbon management programs. This translates into voluntary reduction measures enforced by these companies, such as energy efficiency or GHG targets.

In 2010, as a complementary instrument to address emissions in non-ETS sectors, the Irish government introduced a new carbon tax of 15 E per tonne on the use of fossil fuels (petrol, gas, coal and peat). The tax applies to non-ETS sectors (manufacturers, transport, households). However, chemical and pharmaceutical industries participating in the ETS are exempted in respect of these fuels (in order to avoid double regulation).

The Environmental Protection Agency (EPA) is the competent authority who has responsibility for CO2 matters in Ireland. If exceeding the prescribed threshold (in terms of capacity, input or output), a polluting firm must make an application to the EPA for a greenhouse gas emissions permit, by giving a detailed description of its installations, material used and emission sources. A permit may cover several technical units on the same site. A company can hold multiple permits if it operates on diverse sites.

In the current phase of the EU ETS (2008-2012), the EPA distributes allowances at the installation level according to its past emissions. But from the 3rd Phase (2013-2020), allocation of allowances will be done centrally at the EC level according to harmonised rules. Currently, allowances are free of charges for chemical and pharmaceuticals companies, but from 2013 there will be gradual auctioning of allowances for the European chemical sector (from 20% in 2013 to 70% in 2020). However, due to competitiveness concerns, the European chemical industry, through its representative organisation (CEFIC), is currently lobbying to maintain free allocation of allowances.

GHG permits are identified by a registration number, details of the operator, and the installation name and location. The licence contains a description of the activities and emissions from the installation, the monitoring and reporting methodology and other requirements.

Each permitted installation follows a specific emission monitoring and reporting procedure, according to an approved Monitoring and Reporting Plan. The operator of the installation monitors its own discharges (by measurement or calculation). But before submission, reports should be verified by an accredited verifier. Emission reports for a year shall be submitted to the Agency not later than 31th March of the following year.

The system works as a “cap and trade”. Each operator is allocated an annual emissions limit for the Commitment Period (currently 2008-2012). Companies emitting below their limit can sell excess allowances while companies emitting over their limit must buy additional allowances (or, alternately, enforce internal reduction measures). Allowances can be traded directly with another operator within EU, or they can be traded via a carbon market (Bluenext, ECX, EEX…). Trading companies may also resort to a broker (Vertis…), who acts as an intermediary between permit buyers and sellers . The exchange of allowances on an EU-wide marketplace gives rise to a European spot CO2 price. The graph below displays a record of the allowance price in Europe since 1 year. The spot price ranges in an interval of 10-15E per tonne of CO2. To protect from variability, hedging instruments such as futures and derivatives are also available. From 2013, the European carbon price should rise due to the more stringent caps on ETS emissions and the gradually higher level of government auctioning.

                                                     Source: Bloomberg website, 15th August 2011

An essential point of the current EU legislation is that by the 30th April of each year, each holder of a GHG permit must return sufficient allowances to the Environmental Protection Agency to match its emissions of the preceding calendar year. If it doesn’t own enough allowances, the company must acquire some additional allowances on the EU ETS.

An operator who doesn’t comply with this requirement will face a financial penalty. Under the current phase (2008-2012), operators in breach must pay to the Agency an amount of 100 E for each tonne of CO2 emitted in excess.

Operator allowances are held in individual electronic accounts within the National Emissions Trading Registry, which is managed by the EPA. Member State Registries are integrated in an EU-wide, centrally administered system. This regional platform tracks the issue, holding, transfer and cancellation of allowances. However, from Phase 3 of the ETS (2013-2020), it is expected that operators will hold their allowances in a central Community registry rather than in separate national accounts.