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Watch the video accompanying these slides at http://www.policyexchange.org.uk/modevents/item/the-future-of-the-ets-in-europe-s-climate-strategy Slides from the German Institute for Economic Research's Dr Karsten Neuhoff. Presented at Policy Exchange's event "The future of the ETS in Europe’s climate strategy"
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Policy Exchange , London 28.10.2014
The future of the ETS in Europe’s climate strategy
Karsten Neuhoff
The future of the ETS in Europe’s climate strategy
1. What role plays ETS as European climate policy evolves?
2. Should the ETS remain the centrepiece of European climate policy? How should it fit with other policy instruments, such as the Renewables Directive?
3. What reforms are needed to keep the ETS relevant? Should policymakers worry about a low carbon price?
Reso
urce
Use
/ En
ergy
& E
mis
sion
s
Economic Output / Consumption
“Optimising”behaviour
“Business-as-usual”
innovation
Accelerated low-carbon innovationPurely carbon-
price-driven innovation
“Transforming” behaviour
Innovation & evolution of
complex systems
Real-world individual and organisational decision-
making
“Satisficing”behaviour
What role plays ETS as European climate policy evolves? 1
Source: Grubb, Hourcade & Neuhoff (2014): Planetary Economics, Energy, Climate Change and the three domains of sustainable development. Routledge.
Pric
e
Targ
et
Atten
tion
Source: Neuhoff et al. (2014): Staying with the Leaders: Europe’s path to a low carbon economy. www.climatestrategies.org. DIW Berlin Calculations based on REN 21, 2013; EPIA, 2014; Clean Energy Regulator, 2014.
How should EU ETS it fit with other policy instruments, such as the Renewables Directive?2In 2013 70% of solar deployment was outside of Europe.
DIW Berlin Calculations based on BP Statistical Review of World Energy; Energy Statistics for the EU-27; Bundesverband Solarwirtschaft e. V.; IEA; European Wind Energy Association.
Securing a long-term economic energy supply & JobsComparison of European fossil fuel bill and capital costs for renewables 2By 2013, annualised capital costs for renewable generation to replace fossil fuels have declined to a level of the fossil fuel expenditures
Illustration excluding system cost!
3What reforms are needed for EU ETS to support an efficient abatement pathway?
Schopp A., K. Neuhoff 2013 The Role of Hedging in Carbon Markets, DIW Discussion Papers 12716
If accumulated surplus exceeds hedging demand: 1. Price falls until low enough allow annual price increases that attract speculators 2. High rate of annual price increases not reflected in forward curve-> inconsistency undermines credibility of EU ETS-> strategic investments are miss-guided by low spot price (ignoring future scarcity)
Hed
ging
Accu
mul
ated
sur
plus
Surplus
Spec
ulati
on
Banking capacity
Rate of annual spot price increase
Risk
-free
arib
trag
e at
cos
t of
carr
iage
(3-5
% o
ffere
d by
ban
ks)
spot price increase with slope of forward curve
at return requirements of speculators (> 10-15%)
Slope of forward price curve
Need for Market Stability Reserve(Early+linked to back-loading)
What reforms are needed for leakage protection post 2020 with long-term perspective?
• Ensure leakage protection also for scenarios with differences on climate policy ambition and emphasis on carbon pricing across regions
• While supporting investment in innovation and modernization opportunities in energy intensive industries
3
7
Curr
ent
Out
put b
ased
(O
B)
Cons
umpti
on
tax
OB
& in
clus
ion
of c
onsu
mpti
on
Incl
usio
n of
im
port
s
Incentives for efficiency + ++
++ +++ Framework for fuel switching + +
++ ++
Business case for break-through process + +
+++ +++ Moving to higher value steel and efficient use +
+++ +++ +++
Source: Climate Strategies – The Steel Report – www.climatestrategies.org
Curr
ent
Out
put b
ased
(O
B)
Cons
umpti
on
tax
OB
& in
clus
ion
of c
onsu
mpti
on
Incl
usio
n of
im
port
s
Incentives for efficiency + ++
++ +++ Framework for fuel switching + +
++ ++
Business case for break-through process + +
+++ +++ Moving to higher value steel and efficient use +
+++ +++ +++
Free allowance allocation as leakage protection provides limited incentives for investments.
Sector needs to be able to pass mitigation and carbon costs to consumers.
Leakage protection with inclusion of consumption can focus on energy/carbon intensive materials
• allocation of mitigation and carbon costs of steel, cement, (perhaps aluminium and cooper) is essential for credible investment perspective
• coverage of competing materials avoids distortions• focus on few materials limits administrative efforts and complexity
3
8Industrial activities with the highest cost increase from carbon pricing, and their contribution to UK GDP, assumed carbon price increase 20 €/t CO2, electricity price increase 10 €/MWh.
The future of the ETS in Europe’s climate strategy
1. What role plays ETS as European climate policy evolves?
2. Should the ETS remain the centrepiece of European climate policy? How should it fit with other policy instruments, such as the Renewables Directive?
3. What reforms are needed to keep the ETS relevant? Should policymakers worry about a low carbon price?
