Europe is a great big sieve, leaking carbon, worries the European Commission. It has identified 146 holes that must be filled — heavy industry, businesses that use lots of fuel to make stuff that we need: metal, chemicals, glass and cement. It also includes textiles, aircraft, jewellery and toys.

Carbon leakage is making a nonsense of Europe’s Emissions Trading System (ETS) — the mechanism that enables businesses to trade permits to emit carbon dioxide. Worse still, the ETS is exposing Europe’s corroded underbelly and the rot that is infecting huge tracts of industrial plant as companies shift their spending from an over-regulated Europe to places further east.

In Brussels, the competitive threat is viewed as carbon leakage — the import of goods from countries outside the ETS and from states that have not made a big commitment to reduce CO2 emissions.

The European Commission is missing the point. It is not carbon that is leaking, but investment. Billions of dollars of potential investment in heavy industry, notably refining and petrochemicals, is moving east in search of lower costs — and carbon trading is making the money drain flow faster.

The popular prejudice in Britain is that chemicals is a sunset industry, an embarrassing industrial legacy that soon will be buried by the service sector and some fanciful “green manufacturing”, powered on alternate Wednesdays by windmills. For decades our government has condoned this nonsense, but the truth is that chemicals is big business for Europe. The European Union runs a huge trade surplus in chemicals, €37 billion in 2007 — more than €70 billion, if you include pharmaceuticals.

Unfortunately, the surplus is gradually shrinking. Asia, which for many years was a net importer of chemicals, is now in balance and is moving into surplus. China, with the assistance of American and European petrochemical companies, is building plant to satisfy domestic demand. In the Middle East, meanwhile, they have been building export industries — manufacturing bulk plastics and oil products for export to Asia and to Europe. They are building scale while we are shrinking.

The Gulf has a competitive advantage. Abundant supplies of crude oil and natural gas can be used as a feedstock to make ethylene, the basic raw material for many plastics. With few competing uses, natural gas has almost zero cost for the petrochemical companies of Saudi Arabia and Kuwait.

Meanwhile, in Europe, we are building up cost with carbon trading. Having made a mess of the ETS by allocating too many carbon permits to businesses and creating a glut of carbon, the EU has decided to sell permits by auction from 2013. No one believes for one second that Chinese or Indian companies exporting goods to the EU will agree to buy these permits — hence the carbon leakage problem.

The Commission’s solution is to exempt the most challenged industries from the permit auction. However, only companies that meet the top 10 per cent in terms of carbon-cutting performance will get exemptions. The laggards will be penalised.

All to the good, you might say, except that an Indian manufacturer fuelled by a dirty coal or diesel generator won’t be penalised and can sell his plastics at rock-bottom prices in the EU. Small wonder that the French and German governments are desperate for border controls. But we British are morally superior. Make the polluters pay, we say. After all, we don’t need chemicals. We have our banking and financial sectors to heat our homes in winter, to provide us with foam insulation and PVC window frames.

Consequently, Europe’s oil refining industry is voting with its feet. A swath of less competitive oil refineries are to be sold or closed over the next year. Three plants in Britain are threatened: Shell’s huge facility at Stanlow in Cheshire; the Ineos plant in Grangemouth, Scotland; and the Petroplus Teesside refinery, which will close if a buyer is not found. Shell is talking to buyers — Essar, the Indian conglomerate, is in the frame.

Total is threatening to close several of its facilities in France, but the French multinational is hoping to tempt Russian investors, offering asset swaps. A Russian oil company, such as Lukoil or Rosneft, might swap a refinery for upstream oil and gas reserves in Siberia.

The question is why these assets are being chased by companies from Russia and the Far East and whether it matters. The overseas chemical giants are, first and foremost, looking for technology and, second, they are excited by the market access. Sabic, the Saudi Arabian chemicals company, made several big acquisitions in Europe, picking up technology licenses and, at the same time, building market positions in Europe.

Chemicals is different, not only to banking but to other manufacturing. It is about integrating processes and finding small margins in a business that has huge fixed costs in plant, equipment and energy.

What is happening at Teesside in England and at Berre-l’Étang in the South of France is the gradual disintegration of a great industry that was slowly assembled over decades. When ICI assembled its plant at Wilton, it knew it was for the long term. The plant lasted longer than the company itself, but finally it is being disassembled. We still need the products, but someone else will make them, out of sight and out of mind.

carl.mortished@thetimes.co.uk

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