Avoiding the threat of competitiveness disadvantage through benchmarking

Integer/EII Conference “Energy Intensive Industries & Climate Change” Brussels, 25-27 November 2008

Annette Loske Chairwoman Climate and Efficiency

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Auctioning is the costly way High ETS cost causes threat of carbon leakage

 Auctioning causes high ETS costs – direct & indirect through electricity  No signal from major players (India/China/US) to accept auctioning as general method    Auctioning in EU alone therefore too big risk, because it:  distracts financial resources from industry for making investments • • causes carbon leakage at any meaningful CO delays global agreement: auctioning in EU = cost advantage abroad 2 -price global auctioning = cost advantage of efficient EU over USA, China, India

IFIEC method – benchmarking based on actual production, also for electricity – is advocated as the better way forward!

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Auctioning is the costly way

 Additional indirect costs for consumers through electricity price (as compared to dynamic benchmarking)

Dynamic benchmarking vs. auctioning for the electricity costs ( € billion/a)*

* CO 2 -price € 40-60/tonne

Total EU-27 consumers 55-83 Households & services 32-48 Industry 23-35

Source: ECOFYS 2008 Such cost savings resulting from a power price lower by 20 to 40 €/MWh as compared to auctioning 3

Carbon Leakage - Prove for high risk

Findings of Climate Strategies

• • •

Impact on Gross Value Added : at € 20/ton CO 2 at € 40/ton CO 2 and and € 10/MWh* € 20/MWh at € 60/ton CO 2 and € 30/MWh 120% 80% 90% 60% 60% 40% 30% 12% 6% 20% 8% 4%

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The 4% “danger line” drops significantly at the expected CO 2 price of € 50-70/ton *The impact on power price is more like about 60%-65% than 50 %

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Carbon Leakage – Negative in any case !

Misunderstanding  of NGOs: Carbon leakage beneficial and no problem if production outside EU is more efficient.

 of EU Commission: Definition of carbon leakage in draft Directive: „

loss of market share to less carbon efficient installations outside the Community

“

BUT: Any contribution to EU reduction target achievement from carbon leakage is detrimental and directly minimises the EU climate change target, thus its global contribution!

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Carbon Leakage – Negative in any case !

What does carbon leakage mean to the CO 2 achievement and to global reduction effect?

reduction target

with auctioning

RES

acc. to EU 20 % target (separate support) CO 2 emissions to be reduced until 2020

JI/CDM

remainder from 2 nd trading period

Carbon leakage Efficiency improvement, fuel shift, innovation

global effect

RES

acc. to EU 20 % target (separate support) CO 2 emissions actually reduced until 2020

JI/CDM

remainder from 2 nd trading period

Efficiency improvement, fuel shift, innovation Carbon leakage = emissions elsewhere

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with dynamic benchmarking = decrease of EU contribution minimized RES

acc. to EU 20 % target (separate support) CO 2 emissions to be reduced until 2020

JI/CDM

remainder from 2 nd trading period

Efficiency improvement, fuel shift, innovation

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Intelligent Benchmarking is the better way

 

Benchmarks for the major emitters



Total quantity of allowances is the same as under auctioning



Is not a free ride, but gives challenging objectives Efficiency improvements directly stimulated A more realistic path towards a global scheme, on the way to global auctioning in the future

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Intelligent Benchmarking is the better way

For allocation: what activity level – production – to be used?

 Historic production (2005 or 2005-2007)  No reliable indicator for the future  Means auctioning for growth and suppresses market share growth of innovative producers  Will not avoid potential carbon leakage  New entrants reserve: source of distortions  thresholds suppress efficient growth by debottlenecking, anyway uncertainty for growth Source Entec-NERA  Closure rule: wrong principle -100% is loss of allowances, -x% no consequence!

Historic production: source of distortions, unfairness and carbon leakage!

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Intelligent Benchmarking is the better way

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For allocation: what activity level – production – to be used?

 Actual production: allowed & effective, minimising leakage • Is permitted: Court of First Instance refuted Commission‘s worry that “

ex-post adjustments would create uncertainty for operators, and be detrimental to investment decisions

[to reduce emissions]

and the trading market

” • Ex-post corrections are normal in economic life  Income tax  CERs and ERUs • Provide clear certainty on trading position  Benchmark set ex ante  Production level and specific emissions known to installations  Currently: uncertainty by guessing how long the granted allowances will really last • Dynamic system for a dynamic world: rewarding efficient market share winners • Gives no incentives for lowering production in EU – avoiding carbon leakage 9

Dynamic Benchmarking and Guarantee of the Cap - 1

 Dynamic benchmarking: equal assurance on achieving the cap as auctioning  Whereas: No allocation method can guarantee an unrealistic cap!

Method 1 for overall benchmarking system

10 • If necessary: possible adjustment of the benchmarks ex-ante for the future to guarantee the total cap 10

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Dynamic Benchmarking and Guarantee of the Cap - 2

Method 2 for a mixed system (benchmarking for industry / auctioning for electricity)

• • If necessary: correcting the electricity auction volume Not unfair: reflects the normal additional shortage as in a full auctioning system while protecting industry for carbon leakage

Method 3: Applying a rolling average production

• • Instead of actual production, e.g. last three year rolling average Approximation to a good system, however with remaining distortions • Growing company must buy additional allowances once (competitive distortions vs. other companies remain) 11

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Dynamic Benchmarking – analysis of criticisms: Not valid, not based on facts

     • • Market transparency and liquidity not at all harmed Benchmarks are always ex-ante benchmarks Good knowledge of trading position (deviation from the benchmark x production) • • No need for additional benchmarks (compared to proposed Directive) Benchmarks for the vital few (Pareto rule) covering 80+% of emissions Generous treatment of the trivial many necessary • No source for lobby pressure – it is an ex-ante determined system In contrast: determination of „exposed“ every 3 years, with vague criteria • Avoidance of potential windfall profits for electricity / industry Historic frozen basis for benchmarking is the very source of windfall profits • • Equal scarcity of allowances Ex-post correction system allows some borrowing from the future, however: borrowing from future years also allowed in auctioning Unnecessary NER in dynamic benchmarking eases scarcity 12

Thank you for your attention !

Annette Loske

IFIEC Europe Chairwoman Working Party “Climate and Efficiency“ Member of the Management Team  [email protected]

 +49-201-8108 422 For further details see “The benefits and feasibility of an ETS based on benchmarks and actual production“ 27 October 2008, at www.ifieceurope.org

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