Europe’s “backfiring” climate and energy policies are adding to high natural gas costs and holding back Dow Chemical's investment in the region, said the company’s director of global climate change policy.

European Union proposals to limit the amount of free emission permits in its cap-and-trade program boost industry costs, and are one reason Dow and other chemical makers limited refining capacity expansion in the region for the past 12 years, Russel Mills said by phone from Zurich on Dec. 12. 

That compares with the Midland, Michigan-based company’s $4 billion of US investment planned for the next four years, he said.

Dow, the biggest US chemical maker, joined companies including ExxonMobil in a Dutch court challenge to the European Commission’s decision to reduce the pollution rights it hands out to factories, Mills said. Manufacturers may seek compensation of about 4 billion euros ($5.5 billion) in total for the lost free permits, according to Utility Support Group, an adviser to some Dutch chemical factories on the matter.

“It really is a slap in the face for manufacturers,” Mills said. “Maybe they underestimate the efficiency with which markets can work if they are allowed to work.”

Commission spokesman Isaac Valero-Ladron in Brussels declined to comment when reached by e-mail.

Lower portion

The EU is seeking to curb a surplus of permits in its carbon market that pushed prices to a record low and eroded the incentive for companies to invest in emission-reducing technologies. The commission decided in September to lower the handout of free allowances to factories by 12% in the eight years through 2020.

Under the bloc’s emissions trading system, permits to emit carbon dioxide are mostly allocated for free to factories, which must surrender enough to match their CO2 output or pay fines. Power companies must pay for their allowances. Mills and Utility Support Group argue the commission isn’t giving enough free carbon rights for manufacturers’ heat generation and waste-gas production.

European gas prices are already relatively high, with the cost of the fuel in the UK more than twice the level in the US. BASF in Germany, India’s Tata Chemicals and Lotte Chemical of South Korea shut plants in Britain this year.

ExxonMobil’s Dutch unit is also appealing against the commission decision to cut free allowances, Richard Scrase, a Leatherhead, England-based spokesman for the company, said Dec. 12. The move was “a standard procedure to preserve our rights in anticipation of more data transparency from the EU commission on its calculation of free ETS allowances,” he said.

Europe’s adoption of renewable energy subsidies, Germany’s shift from nuclear power and the EU’s effort to support carbon prices are all adding to industry costs, Dow’s Mills said.

Nations embracing carbon markets need to “make it a low- cost club not a high-cost club,” he said.

EU carbon permits for December 2014 dropped 0.8% on Monday to 4.88 euros a metric ton on ICE Futures Europe in London. The benchmark contract was as high as 31 euros a ton in 2006.