UPDATE 3-Steelmakers sue EU over carbon market rules

Thu Jul 21, 2011 11:34am EDT

* Steel body Eurofer challenges ETS at EU Court of Justice

* Eurofer says EU Commission wrongly set ETS benchmarks

(Adds background, analyst)

By Pete Harrison and Nina Chestney

BRUSSELS/LONDON, July 21 (Reuters) - European steelmakers said they started legal action on Thursday to overturn the way the sector has been included in the European Union's carbon market.

Industry body Eurofer says the rules for the Emissions Trading Scheme (ETS) do not set a fair benchmark for allowing the industry's most efficient 10 percent of factories to get all their pollution permits for free after 2013.

"Nowhere in the world is a steelworks that could operate its plants at the level of this benchmark," Eurofer Director General Gordon Moffat said in a statement.

The European Commission, which oversees the ETS, could not be reached to comment on the challenge, launched at the European Court of Justice. But it has repeatedly stood firm on its methodology.

The European Union aims to cut carbon dioxide emissions to 20 percent below 1990 levels over the next decade. Its main tool for doing that is the ETS, which forces companies to acquire permits for each tonne of carbon they emit.

Some industries, including steel, have been given permits for free to prevent their costs rising above those of overseas rivals.

That has often translated into windfall profits worth tens of millions of euros for the companies involved, such as steel giant ArcelorMittal .

From 2013, the EU aims to tighten up the ETS to eliminate such windfall profits, and only the 10 percent most efficient plants, which meet an efficiency benchmark, will receive all their permits for free.

It is these benchmarks that have caused the dispute.

The steel industry says its installations recycle waste gases as an additional source of energy and has criticised the decision not to give credit for that in the benchmarking process.

"This is a clear infringement of the ETS directive, as the best performers will be short of free allowances," Moffat said.

LITTLE MARKET IMPACT

Eurofer says the problems it sees with the benchmarks will cost the industry about 5 billion euros ($7.1 billion) in the period 2013-2020.

The move follows a court challenge to the ETS this month by U.S. airlines, arguing that their inclusion in the scheme breached U.S. sovereignty.

"It doesn't seem to be a very strong case, especially compared to the U.S. airline case, which seems a lot stronger," said Trevor Sikorski, head of carbon research at Barclays Capital.

"I think (Eurofer) will have to try and prove the EU Commission has over-stepped its remit as a regulator," he added.

If Eurofer succeeds, it would probably not have much of an impact on the price of ETS permits or on the overall ETS cap on emissions, said analyst Bjorn Inge Vik at Point Carbon, a Thomson Reuters company focused on energy and environmental markets.

"If (Eurofer) is successful, I don't think it would affect the overall cap," he said. "It would increase the benchmark, and the steel industry would get more free allowances but the overall cap would remain fixed."

(Writing by Pete Harrison, editing by Rex Merrifield and Jane Baird)

($1 = 0.704 Euros)