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Folie
Susanne Dröge
14 March 2012
SWP
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The EU ETS: its environmental efficiency
and its influence on industry
Susanne Droege - German Institute for International and Security Affairs -
IGES Emissions Trading Seminar “Effectiveness of ETS and its Influences on Industry and Employment”
14th March 2012, Tokyo
Folie
Susanne Dröge
14 March 2012
SWP
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Outline
I The European Emissions Trading Scheme – Overview and First
Lessons
II Further ambitions by the EU 2020 or 2030
III Competitiveness and leakage effects under the EU ETS
IV Summary
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Susanne Dröge
14 March 2012
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I The EU ETS
The EU ETS’s goals are
– to help the EU meet its immediate as well as longer-term
emissions reduction objectives (Kyoto Protocol) by
“promot[ing] reductions of greenhouse gas emissions in a
cost-effective and economically efficient manner” (Art.
1, Directive EC/87/2003).
– This comprises both short-term abatement measures and
effort sharing, as well as providing longer-term incentives
for low-carbon investment and innovation to “deliver
gradual and predictable reductions of emissions over time”
(Recital 13, Directive EC/29/2009).
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I.1 Allocation and Emissions in the EU ETS 2005 - 2020
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Source: Climate Strategies, GMF 2009
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I.2 The Features of the EU ETS
EU ETS is the largest scheme in operation
Three Phases: I from 2005 to 2007 (learning phase)
II from 2008 – 2012;
III from 2013 – 2013
Concept&Target: set a cap for overall emissions, trade in
carbon allowances, price is flexible achieve emission
reductions at least cost; stimulate investment in energy
efficiency, renewable energy, and other low-carbon
technologies
Coverage: emissions from power production and industrial
processes (around 11,500 installations in phases I and II), 40%
of emissions in the participating countries (EU-27+3)
Learning: National Allocation Plans, (over)allocation, effects
from free allowance grandfathering, carbon price fluctuations,
investment behaviour
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I.3 The EU„s Approach on Carbon Pricing – Political Challenges
Policy makers must choose between the certainty of carbon
prices and certainty of quantity. The effectiveness is
established through the cap on emissions, the trade off is that
the carbon market determines the carbon price
Secondary goals: support international climate policy and CDM ,
raise finance for further support of innovation and efficiency
EU as an early mover wrt to carbon pricing Phase III 2013-2020
(Climate Package 2008)
Challenge: few other schemes, unilateral position
High pressure to avoid negative effects on industrial
competitiveness (short term) and to maintain the
environmental integrity of the scheme (carbon leakage)
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I.4 Total EU Emissions since 1990
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Source: Data from IEA World Energy Balances, 2011 *Total EU 27 2009 & 2010 points are estimated using data from. BP Statistical Review of World Energy 2011
Only recent annual total emissions of 2009 approach a linear 20% reduction trajectory; total EU 2010 emissions indicate a sharp return to higher levels, EU Emissions well above a trajectory that could lead to a 30% reduction
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I.5 Achievements: Emissions and Energy Intensity Reductions
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Source: data from IEA World Energy Balances 2011 and IMF World Economic Outlook (Edition: September 2011)
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I.6 The EU Industry in Times of Economic Crisis
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The graph shows all manufacturing sectors (dotted), sectors covered by the EU ETS, including (red) and excluding (yellow) power production. EU ETS sectors production is below pre-crisis trend levels by more than 10% for over 3 years. Emissions went down accordingly, demand for allowances declined. The fixed supply of allowances for 2008-2020 was set assuming much better economic circumstances: market produces an adjusted price
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I.7 The EUA Price 2008 - 2012
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Source: CDC climat research, Climate Brief 12/2012
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I.8 A Weak Carbon Price Signal …
The EU ETS has contributed to emissions decline in the EU since
2005: fuel switching in the power sector, industrial processes,
e.g. in cement production were improved
Cost of achieving the Phase II target are lower than expected
Complementary policies (energy efficency and infrastrure, e.g.
Strategic Energy rtechnology Plan, interact with the EU ETS
expectation on future carbon price
Undermines the long-term carbon price signal
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I.9 … Fails to Produce the Investment Stimulus
Huge investment in energy supply needed across Europe –
estimates around € 1,000 bn over the decade
For some renewabels a low carbon price could suffice (e.g.
onshore wind or biomass)
For major new investment which is more costly (e.g. offshore
wind or CCS) additional support is needed
Various uncertainties increase cost of capital for investment
(see Energy Roadmap 2050)
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II Further ambitions by the EU 2020 or 2030
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II.1 Higher unilateral ambitions by the EU – a New Target for 2020 or 2030?
In context of international negotiations before and after
Durban (COP 17), the EU is considering a higher unilateral
target of 30% (1990 level)
The EU climate and energy package includes two more targets:
20% renewables and 20% higher energy efficiency by 2020
An evaluation by the EU Commission was undertaken in 2010
given the recession, declining allowance prices, and efficiency
incentives from high oil prices and the interaction with the two
other 20% targets
Results: an increase of the ambitions would cost €33 billion by
2020 (0.2 of yearly, and 0.32% of GDP in 2020). A price around
€30 per tonne of CO2 was estimated (similar to 2008 when the
20% reduction target was estimated). Domestic emissions
would reduce to -25% compared to 1990, the remaining being
covered by banked allowances and international credits.
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II.2 … Factors that Support a Higher Target at Lower Cost …
ETS phase III can use allowances from phase II (banking),
companies will be able to carry over some 5-8% of their
allowances from the 2008–2012 due to recession
Meeting the renewables target and energy efficiency measures
already under way will help the non-ETS sectors (10% target by
2020, based on 2005)
Emissions by 2011 decreased 17% (from 1990 level) and COM
assumes that with more energy efficiency, a 25% domestic
reduction is possible
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II.3 Remember: Total EU Emissions since 1990
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Source: Data from IEA World Energy Balances, 2011 *Total EU 27 2009 & 2010 points are estimated using data from. BP Statistical Review of World Energy 2011
EU Emissions well above a trajectory that could lead to a 30% reduction
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Susanne Dröge
14 March 2012
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II.4 Proposals by the EU Commission for Stepping up the Target
Recalibrating the ETS by "setting aside" a share of the
allowances planned for auction: a gradual reduction, 15% over
the whole period 2013-2020 equivalent to 1.4bn allowances
“could be sufficient”
Rewarding fast movers that invest in top performing technology
– financial support for innovative companies
A carbon tax for non-ETS sectors
Regional support (cohesion fund) for green investments
Split along ETS and non-ETS sectors in same proportion: 34%
for ETS sectors, 16% for non-ETS sectors (base year 2005).
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II.5 Summary of Calculations
2010 Commission Report: Total cost of a 30% reduction at €81
billion, or 0.54% of GDP. (Early 2008 estimate: €70 billion, or
0.45% of GDP in 2020)
Update 2012: handle inner EU conflict by uneven distribution of
the burden (e.g. less allowances in rich MS to be reduced by
38% while unchanged for poorer MS). Extra cut by non-ETS
estimated to be 6.5%
Reduction of €20 billion in fuel costs each year over the period
2016-2020 compared to reference scenario. Of this, by 2020,
€9 billion comes from reduced oil and gas imports
Health and air pollution benefits
Auction revenues up to €7 billion (one-third higher), totalling to
around €28.5 billion by 2020
Leakage needs evaluation in light of international pledges 18
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III Competitiveness and Leakage Concerns
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III.1 From Competitiveness to Carbon Leakage
Competitiveness effects can cost jobs
Carbon Leakage undermines the global environmental
effectiveness of climate policies
Competitiveness effects determined by profits and market
shares of producers
Translate into investment and production decisions under
carbon pricing
Leakage follows from:
(A) Relocation potential of carbon-intensive producers
(B) Substitution of production through imports
-------------------------------------------------------------
(C) International markets, mainly energy markets,
depending on substitution elasticities feedback loops
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III.2 Value-added (m€) and Employment of CO2-Intensive Sectors (EU-27)
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III.3 Impacts of the EU ETS on Industrial Cost Structures
Effects from carbon pricing:
direct and indirect operation cost increase
Cost recovery depends on ability to pass them through
Pass-through depends on:
– International/national competition
– Regulation (indirect costs)
– Market structures
– Abatement costs reducing emissions or electricity
consumption
– Share of carbon costs in overall cost structure, elasticities
(demand, substitutes)
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III.4 EU-27 Aggregate Data on CO2-Cost Impact > 5% (30€/tCO2)
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Source: Juergens et al., 2012, Climate Policy
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III.5 National Competitiveness Studies
Some sectors cannot recover carbon costs in their resp. markets
(home and abroad) as this would impact demand, profitability,
market shares loss of competitiveness
This is potentially contributing to carbon leakage due to
operational and investment decisions
Other factors for competitiveness/pass-through position:
– Capacity utilisation (+/-)
– Transport cost and other barriers (-)
– Quality and product differentiation (-)
not all factors work in the same direction!
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Susanne Dröge
14 March 2012
SWP
III.6 Sectors and a Higher EU Effort by 2020
EU Commission analysis suggests greatest potential for
emissions reductions comes from the electricity sector:
improved demand-side efficiency and a reduction of carbon-
intensive supply-side investments
Replacement of ageing electricity generating capacity by low-
carbon solutions
Some industrial sectors with significant cost-effective potential
(e.g. refineries).
In the "effort sharing sectors“ non-ETS sectors, households and
services could reduce emissions from heating. In agricultural
there is potential for reducing methane and nitrous oxide
emissions
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IV Summary
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IV.1 Lessons from Eight Years EU ETS
– A positive price was produced despite ex-post over-allocation
– Price signal is not as expected – trade-off with effective
capping of emissions
– ETS sector emissions flattened during 2005-07 despite
relatively robust GDP growth and adverse energy price
relations
– Short-term abatement, mostly in power sector, long-term
abatement not stimulated
– Free allocation has produced assets and windfall profits for
some sectors, it has prevented negative competitiveness
effects and carbon leakage (cement sector an exemption)
– No stimulus of innovation in energy intensive industries, long-
term challenge is to support this beyond carbon price incentive
– Revenues will become subject of interest once phase III
commences
– Repeated political struggle about the cap (stringency) and the
burden sharing
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