Transcript Slide 1

Roundtable: Opportunities with climate
policy development in China
Theory & lessons learned from the EU ETS in practice
Roundtable organised by the Ministry of Infrastructure
and Environment, The Hague, 25 June 2012
Vianney Schyns, Utility Support Group
www.usg.sitech-services.nl
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Contents
1. Chinese ETS – questions about support
2. Theory: absolute or relative or “hybrid”
3. The EU ETS regulatory framework
4. What were the purposes of free allocation?
5. What about these purposes – needed changes
6. Some references
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1. Chinese ETS – questions about support (1)
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USG (for a.o. DSM, SABIC, OCI) finds the emergence of a
successful Chinese ETS of high importance – level playing
field – sustainability EU ETS long-term
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China is the biggest emitter, with high growth
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No BRIC ETS was the argument for inaction in USA (Canada)
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Chinese ETS may be the key for a successful COP-21 result
Some USG action
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Contacts (high level) about EU ETS experiences, about the theories of
a robust and effective ETS (studies discussed, send to Beijing)
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USG is invited to speak on BIT's 1st Annual World Congress of
Greentech, Guangzhou, 19-21 October 2012
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1. Chinese ETS – questions about support (2)
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Dutch support is important
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We have (with Flanders) most experience with benchmarks, played
important role in making EU ETS benchmarks, leading role of Ecofys
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Other important issues in China:
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MRV (can we support here, NEa above average level)
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Market liberalisation, especially for electricity
Support for the best possible theoretical ETS framework
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Difficulty: agreement of experts unlikely within short notice
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So: let the Chinese decide based on argumentation
But, let us not forget India, Brazil, etc.
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2. Theory: absolute or relative or “hybrid” (1)
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Most difficult subject, try to analyse via “elimination”
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Level 1: absolute gives certainty of environmental outcome,
relative does not; expressed often, by e.g.
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Koutstaal c.s. (CATEP, 2002), EU Commission e.g. Decision (2003) on
Dutch NOx ETS, EU ETS Directive demands “absolute” for linking
(but: position is softening)
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However “absolute” is no guarantee, some targets “can’t be done”:
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Who could have foreseen the immense Chinese growth 10 years ago?
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If absolute would be guarantee: why not set -85% for 2020, or for 2025?
Canada (2007): “World Resources Institute noted in a 2006 report, ‘for environmental
performance, what matters overall is that targets are set at reasonably stringent levels
and subsequently are met. This may be achieved with absolute or intensity targets.’”
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2. Theory: absolute or relative or “hybrid” (2)
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Level 1: absolute gives no certainty of outcome
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Illusion: supply-demand balance predictable for e.g. 10 years ahead
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Will Europe recover from the crisis? Or remain depressed for 10
years? (like Japan, for a long time and may be still)
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2. Theory: absolute or relative or “hybrid” (3)
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Level 2: carbon price signal – carbon leakage – windfalls
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Climate Strategies / Carbon Trust, Öko-Institut and others incl.
Koutstaal and RUG: actual production is solution to avoid carbon
leakage, but not acceptable because of loss of carbon price signal
(meant: product carbon price signal), “with relative caps product
prices are inefficient” (Koutstaal) – price elasticity of demand
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However: avoidance of carbon leakage and avoidance of possibility
of windfall profits (ref. CE Delft) and maintenance of product carbon
price signal are conflicting objectives
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Leakage >> elasticity profit (Carbon Trust)
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Leakage is anyway inefficient and total loss for the environment
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2. Theory: absolute or relative or “hybrid” (4)
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Level 3: combining absolute with relative, one ‘hybrid”
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Not studied very much, but by Carolyn Fischer (Resources of the
Future), Philippe Quirion (CIRED a.o.), Loske / Schyns
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“Ex-post” with guarantee of total cap is easy in present EU ETS:
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New entrants’ reserve (NER) can absorb growth, allowances to flow back
if production is lower than assumed
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NER to be refilled from action volume, if depleted
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However, EU ETS cap > 2020 is problem in case of no global ETS by 2020
Level 3: another “hybrid”, with “Carbon Bank(s)”
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Waxman-Markey idea: large strategic reserve, with price collar
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Addresses long-term supply-demand uncertainty, avoids lock-ins
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2. Theory: absolute or relative or “hybrid” (5)
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Summary problems with EU ETS ex-ante allocation
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Possibility of windfall profits
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Over-supply during crisis (EU ETS only commodity market without
supply response) – set-aside is questionable & no structural solution
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Incentive for production carbon leakage (49%, partial cessation rules)
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Under-allocation: major barriers and risks for growth, likelihood of
investment carbon leakage
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Wide agreement on ideal system long-term
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Auctioning, but then also global rules: what (not) to do with revenues
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Probably also: some supply response – e.g. with carbon banks
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Global cap – same ETS coverage – one single carbon price
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3. The EU ETS regulatory framework
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EU ETS Directive of 2003
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Commission Decision on Benchmarks and Allocation Rules
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Revised, 23 April 2009 (OJ 5 June 2009), legally binding
Comitology, adopted 27 April 2011, legally binding (the “CIMs” *)
Guidance Documents on Benchmarks and Allocation Rules
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Adopted 14 April 2011 and later, not legally binding
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(1) General guidance, (2) allocation methodologies, (3) data collection, (4)
verification NIMs baseline data reports, (5) carbon leakage, (6) cross boundary
heat flows, (7) new entrants / closure rules, (8) waste gases, (9) sector specific
guidance, PLUS guidance methodology report + Q&As (together 500+ pages)
*) CIMs: Community-wide and fully-harmonised Implementation Measures
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4. What were the purposes of free allocation?
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Globally
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Avoid carbon leakage (e.g. recital 24, statement Barroso, EP, Council)
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Production leakage (lower production, import product & unemployment)
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Investment leakage
Protect competitiveness as good as possible (recital 25, Tajani)
Europe (EU-27 plus Norway etc.): avoid distortions
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“Harmonised ETS is imperative to avoid distortions in the internal
market” (recital 8) through “Community-wide and fully-harmonised
implementing measures” (Art. 10a(1))
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Environmental effectiveness (recital 20 old, Art. 1, Art. 10a, etc.), away
from historical grandfathering
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4. What about these purposes – needed changes
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Avoid carbon leakage, protect competitiveness, support Europe 2020
Strategy for growth and jobs
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Ex-ante incentive to 49% lower production; should move to ex-post,
eliminates barriers & risks for growth, creates recession-proof system
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NER limited (sufficient for 1.2% annual growth), should move to refill from
auction volume if depleted and be defined also for after 2020
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Unstable, unpredictable financial compensation, should move to indirect
allocation, complementary to direct allocation
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Stringent top 10% immediately in 2013, should move to top 10% for 2025
or 2030 (‘sliding path’ allocation)
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Carbon Leakage List: assessments each 5 years, should move to:
industry “exposed” by default (comparison EU ETS with ETSs outside EU)
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Abandon correction factors on allocation (“LRF”, “CSF”, “CLEF”)
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Abandon Guidance Docs, move to legally binding rules, simplify rules
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5. Some References
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“Climate change challenges and the search for a sustainable policy”,
Schyns (2005), a.o. about absolute or relative targets
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“The IFIEC method for the allocation of CO2 allowances in the EU
Emissions Trading Scheme”, by Ecofys (2008)
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Trilogy Study: “The benefits and feasibility of an ETS based on benchmarks
and actual production”, Loske / Schyns (2008), about ensuring the cap in an
intensity based scheme & about carbon leakage, possible windfall profits and the
product- and the production carbon price signal
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“A reality check of the EU Emissions Trading Scheme; Does it allow growth
– the major objective of the EU industry policy?”, Brouwers / Stalmans /
Schyns (2012), a detailed analysis of CIMs & Guidance Documents: major barriers
& risks for growth
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