Transcript Slide 1

BIT’s 1st Annual World Congress of
Greentech
EU Emissions Trading Scheme: Much Progress, But
Not Yet A Blueprint For The World
Guangzhou Baiyun International Convention Center,
19-21 October 2012, Guangzhou, China
Vianney Schyns, Utility Support Group
www.ifieceurope.org & www.usgbv.com for publications
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Contents
1. Chinese ETS – introductory remarks
2. Theory allocation: auctioning or free allocation (historical
grandfathering, or benchmark based)
3. EU ETS progress / achievement: industry benchmarks
4. Theory activity factor: absolute or relative or “hybrid”
5. The EU ETS for phase 3 (2013-2020)
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Regulatory framework
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What were the aims of free allocation?
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Needed changes in Europe (in our opinion)
6. Thoughts about Chinese ETS
7. Some references
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1. Chinese ETS – introductory remarks
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A successful Chinese ETS is of high importance: global
level playing field, sustainability ETS long-term globally
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China is the biggest emitter, with high growth
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No BRIC ETS was the argument for no ETS in USA & Canada
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Chinese ETS may be the key for a successful COP-21 result
Important issues Chinese ETS
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MRV (monitoring, reporting, verification)
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Market liberalisation, esp. electricity
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Theoretical framework
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Difficulty: not all experts agree totally
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Thus, China will decide based on careful analysis
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2. Theory: method of allocation (1)
1. Auctioning
2. Free allocation, historical grandfathering (basis historical
emissions), like EU ETS phase 1 (2005-2007), phase 2 (2008-2012)
3. Free allocation, benchmark based
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Static benchmarking: allocation = benchmark x historical production
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Dynamic benchmarking: allocation = benchmark x actual production
4. Hybrids, like EU ETS phase 3 (2013-2020):
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Auctioning for electricity production, static benchmarking for direct
emissions of industry, possible financial compensation for the
indirect (electricity) emissions (restricted, inherently unstable)
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2. Theory: method of allocation (2)
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Auctioning: only if applied globally (otherwise carbon leakage)
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Generally regarded as ideal system: most effective & efficient
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Production & product carbon price signal
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Production: incentive to reduce emissions for manufacturing installations
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Product: carbon cost fully in variable costs of each product
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Higher product price  lower market demand (price elasticity of demand)
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Inter-product competition  lower carbon products win market share
Note, dynamic benchmarking: same production carbon price signal
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Carbon costs also variable costs, carbon cost difference between 2
manufacturing plants: same as for auctioning (unlike static systems)
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Auctioning & dynamic BM: same in following of market dynamics: win/lose
market share, growth and shrinkage on firm level (unlike static systems)
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2. Theory: method of allocation (3)
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Free allocation, historical grandfathering
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EU ETS, phase 1 (2005-2007) and phase 2 (2008-2012)
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Considered in the 7 Chinese ETS pilots
EU ETS experience: historical grandfathering was a failure
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Baseline years include crisis years, shut downs, expansions
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High polluters are rewarded (high allocation), disadvantage for modern
efficient plants (no reward of early action) as scarcity increases
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Uncertainty for expansions, complex rules, barriers & risks for growth
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Huge windfall profits for electricity producers (opportunity costs)
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“Update” problem: investment to reduce emission  lower allocation
later, so operators delay abatement (discount of carbon price signal)
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2. Theory: method of allocation (4)
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Free allocation, static benchmarking
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For industry, EU ETS, phase 3 (2013-2020)
EU ETS experience: progress, but still huge problems

Baseline years for historical production include crisis years, shut downs,
expansions: historical production tells nothing about the future
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Uncertainty for expansions, complex rules, barriers & risks for growth
(see reference 4)

The important “update” problem: disappeared, problem solved
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3. EU ETS achievement: industry benchmarks
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The European Union achieved benchmarks for phase 3
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Leading support role by Ecofys/Fraunhofer and industry federations
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52 benchmarks: chemicals (15), Paper & pulp (11), ceramics incl.
plaster/gypsum/plasterboard (7), steel industry (6), cement industry incl.
lime/dolime (5), glass (4) aluminium (2), refineries & aromatics (2)
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EU ETS lessons
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A correct technical definition is feasible in a reasonable time
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Stringency of the benchmark is an important framework choice
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EU ETS: “top 10%” benchmarks (average of 10% best installations)
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Australian ETS: weighted average benchmarks, better for competitiveness
More stringent benchmarks: not better for the environment, to the
contrary: higher incentive carbon leakage  lower overall efficiency
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4. Theory: absolute or relative or “hybrid” (1)
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Introduction names & concepts: absolute, relative, hybrid
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Absolute schemes, cap & trade in narrow sense
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Permit trading (environmental economists’ literature), ex-ante fixed caps
per firm or auctioning; includes static benchmarking (see reference 5)
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Aims: certainty environmental outcome, claimed as most efficient system
because of (product) carbon price signal – price elasticity of demand
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Relative schemes
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Credit trading (environmental economists’ literature), ex-post to actual
production; other names: baseline-and-credit, performance standard rate
(PSR), rate-, intensity-, output-based; includes dynamic benchmarking
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Claim: auctioning = “relative” (benchmark x actual production, BM = 0)
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Aims: avoid carbon leakage, avoid competitive distortions (winning/losing
market share), avoid barriers & risks for growth (see references 2 & 3)
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A hybrid: relative for firms, absolute cap for total (see references 2 & 3)
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4. Theory: absolute or relative or “hybrid” (2)
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What is best? Difficult subject, analyse via “elimination”
Level 1: absolute caps give certainty of environmental
outcome, relative caps do not; often expressed
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E.g. by Koutstaal et al (CATEP, 2002), EU Commission e.g. in
Decision (2003) on Dutch NOx ETS, EU ETS Directive demands
“absolute” for linking trading schemes (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 guaranteed: 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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4. Theory: absolute or relative or “hybrid” (3)
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Level 1: issues about ex-ante absolute caps
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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? Or something in between?
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Or: what will happen if Europe recovers from the crisis and economic
growth becomes much higher than expectation? (explosion to very
high carbon price)
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4. Theory: absolute or relative or “hybrid” (4)
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Level 2: carbon price signal – carbon leakage – windfalls
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Climate Strategies / Carbon Trust, Öko-Institut and many other
environmental economists: 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, mutually exclusive
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Carbon leakage >> elasticity profit (Carbon Trust)
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Carbon leakage is inefficient, total loss for the environment
(see reference 3)
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4. Theory: absolute or relative or “hybrid” (5)
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Level 3, hybrid, combining absolute with relative: ex-ante
absolute cap for total, relative (actual production, ex-post
correction 1 or 2 years later) for individual operator *)
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Examples: (1) Australian ETS (average benchmark incl. indirect
(electricity) allocation, ‘true-up’ to actual production), (2) Waxman-Markey
bill (with strategic reserve for growth/shrinkage and with price collar)
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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): allowances for growth, allowances flow back
if production is lower than assumed (certainty for growth)
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NER to be refilled from action volume, if NER is depleted

However, EU ETS cap > 2020 is problem in case of no global ETS by 2020
*) Fischer (Resources of the Future), Quirion (CIRED a.o.), Loske / Schyns (see reference 2 & 3)
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4. Theory: absolute or relative or “hybrid” (7)
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Summary problems EU ETS ex-ante allocation
1.
Under-allocation: major barriers and risks for growth, likelihood of
investment carbon leakage, neglected by advocates of permit trading
2.
Incentive for production carbon leakage (49%, partial cessation rules),
neglected by advocates of permit trading
3.
Possibility of windfall profits (but permit trading advocates state: there
must be windfall profits (carbon price signal), efficiency of the scheme)
4.
The big debate for 3 years in Europe: over-supply during crisis (EU ETS
only commodity market without supply response) – backloading / setaside is conceptually questionable, no structural solution
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4. Theory: absolute or relative or “hybrid” (8)
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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
(otherwise allocation problems are reintroduced via backdoor)
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Probably also: some supply response – e.g. with carbon banks
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Global cap, one single carbon price
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Same & clever ETS coverage, avoid incentive lack by “ETS borders”
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Example: full bio-based manufacturing plant should not be ‘non-ETS’
(such as now in the EU ETS), this removes the incentive
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5. EU ETS: regulatory framework 2013-2020
1. EU ETS Directive of 2003
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Revised, 23 April 2009 (published OJ 5 June 2009), legally binding
2. Commission Decision on Benchmarks and Allocation Rules
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Adopted 27 April 2011 (OJ 17 May 2011), legally binding (the “CIMs” *)
3. 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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5. EU ETS: The aims of free allocation?
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Globally
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Avoid carbon leakage (e.g. recital 24, statements 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)
Within Europe: avoid distortions, improve effectiveness
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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.): move
away from historical grandfathering
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5. What about these aims – needed changes
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Avoid carbon leakage, protect competitiveness better, 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, stringent targets need time & resources)
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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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6. Thoughts about Chinese ETS
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The 7 pilot schemes: avoid historical grandfathering
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Company “individual” benchmarks {(direct + indirect emission)/production},
average 2009-2011, little extra complexity
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Create strategic reserve
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Annual true-up to actual production (higher production than previous year
from reserve, lower production to reserve) – OK for new entrants / growth
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The future nation-wide ETS
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Nation-wide average benchmarks {(direct + indirect emission)/production},
also average 2009-2011, to promote reductions in pilots until national ETS)
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Create strategic reserve
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Annual true-up to actual production (higher production than previous year
from reserve, lower production to reserve) – OK for new entrants / growth
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7. Some References
1.
“Climate change challenges and the search for a sustainable policy”, Schyns (2005),
a.o. about absolute or relative targets
2.
“The IFIEC method for the allocation of CO2 allowances in the EU Emissions Trading
Scheme”, by Ecofys (2008), a.o. electricity benchmark as alternative for auctioning
3.
Trilogy Study: “The benefits and feasibility of an ETS based on benchmarks and
actual production”, Loske, Schyns (2008), about ensuring the total cap in an intensity
based scheme & carbon leakage, possible windfall profits and the product- and the
production carbon price signal
4.
“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),
detailed study of CIMs & Guidance Documents: major barriers & risks for growth
5.
“Tradable Permits versus Tradable Credits: A Survey and Analysis”, Nentjes,
Woerdman (2012), a comprehensive ETS history & a comparison of ex-ante
(absolute) fixed emission caps per firm with (relative) ex-post systems
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