Transcript Slide 1

EU Emissions Trading Scheme
What were the purposes of free allocation, where are
we now, what do we want, what happens globally
University of Maastricht, Faculty of Law
An impression for visiting Australian students
7 February 2012
Vianney Schyns, Utility Support Group
www.usg.sitech-services.nl
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Agenda
1. History and overview EU ETS
2. Co-operation with Maastricht University, Faculty of Law
3. EU ETS regulatory framework
4. What were the purposes of free allocation?
5. Free allocation of allowances / general assessment
6. Financial compensation (IFIEC, Germany, NL)
7. Some examples of problems / opinion Alliance
8. Status ETS globally … EU ETS under fire … revision EU
ETS Directive … which changes do we want?
Appendix 1: EU ETS allocation rules 2013-2020 in more detail
Appendix 2: Financial compensation
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1. History and overview EU ETS (1)
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EU ETS has the following trading phases (periods)
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Phase 1: 2005-2007
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Phase 2: 2008-2012 (the 5-year Kyoto period)
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Phase 3: 2013-2020
EU ETS scope:  2,000 Mton,  50% EU GHG emissions by 2013
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Electricity production + energy intensive industries (steel, cement,
chemical industry, paper, ceramics, glass – scope widened by 2013
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Industry versus European Commission
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Industry: Allocation by benchmarks (emission per unit of product) x
production, provisional ex-post adjusted to actual
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Commission: Allocation is fixed ex-ante
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1. History and overview EU ETS (2)
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EU ETS developments and characteristics
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Phase 1, 2005-2007: complex allocation rules, most historical
grandfathering (emissions), high discretion individual Member States
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Phase 2, 2008-2012 (the 5-year Kyoto period): more or less the same
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Phase 3, 2013-2020: historical grandfathering abandoned, benchmark
based allocation, but still ex-ante, based on historical production
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EU ETS supply-demand balance
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Phase 1: over-allocation, price from > € 30/ton to zero (no banking)
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Phase 2: price > € 30/ton to € 5-8/ton, ex-ante caused huge overhang
(up to 1,400 Mton) of allowances (crisis), banking, now allowed,
prevents zero price >> set-aside debate (no structural solution)
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2. Co-operation with MU Faculty of Law
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Started in 2002, prof. Marjan Peeters & prof. Michael Faure
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Many studies undertaken in co-operation with industry companies
Study 13 November 2002
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“A directive proposal weakened by ambiguous and ill-defined
provisions”
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“The directive proposal as currently drafted is likely not to achieve
one of its objectives, which is the maintenance of the integrity of the
Common market and the establishment of a cost-efficient regulatory
scheme”
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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 (all 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, etc.)
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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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5. Free allocation of allowances (1)
• Theory
Industry incumbents get free allocation according to a (stringent, “top
10”) benchmark and a representative historical production
2. Capacity extensions in the period 2005 to 30 June 2011 and after this
date (= new entrants) also get free allocation according to a (stringent,
“top 10”) benchmark and a representative production
Commission notion: “There is no problem with growth and carbon leakage”
1.
• Practice
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Terribly complex allocation rules with perverse effects (over-allocation
or under-allocation) – conflicts with purposes of free allocation
• Root cause: ‘ex-ante’ instead of ‘ex-post’
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CIMs and Guidance Documents: lack of logic, arbitrary thresholds,
operational and legal uncertainties, inconsistencies
Legally: MSs and Commission treat non-legally binding rules as
binding
Mistrust in industry: e.g. flare gases crackers not in benchmark,
Commission knows this but states the contrary
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5. Free allocation of allowances (2)
• Free allocation for direct emissions
1.
2.
carbon leakage list
Sectors exposed to the risk of carbon leakage: 100% of benchmark
Non-exposed sectors: 80% of benchmark in 2013 down to 30% in 2020
• Auctioning for electricity generation
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Except for waste gases, in fact only partly free allocation
Except for “Polish” derogation (Art. 10c)
• Each “installation” (CITL code) is for allocation purposes
(incumbents and new entrants) divided into sub-installations
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–
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
One product benchmark (BM) sub-installation
One heat BM sub-installation
One fuel BM sub-installation
One process emissions sub-installation
One GHG permit may cover one or more installations (Directive, Art. 6)
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5. EU ETS 2013-2020: general assessment
• Benchmarks for industry: the right decision
– but benchmarks are stringent, especially since they apply as from 2013
no lead time for investments, no adaptation time
• Allocation rules…
– … adequate for installations without production changes
– … result partly in shortage of allowances or wrong incentives for
installations with production changes
EU experience has shown:
 To set up a benchmark system is challenging but feasible
 EU system can be a model for the world

if benchmarks are phased in (time for adaptation) and
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allocation is based on actual production levels
•
safeguards right incentives, reduces complexity of allocation rules
significantly etc. while maintaining (production) carbon price signal
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6. Financial compensation (1)
• Electricity prices in Europe are (among) the highest globally
– 21% higher than in USA and 197% higher than in China (source: Commission
2020 Energy Strategy)
• Real issues are: (1) global level playing field, (2) how to
provide stability and predictability for European industry
– Financial compensation is inherently unstable (MS is free to decide, can
change each year
– IFIEC promoted indirect allocation of allowances
• Restricted compensation contrary to Europe 2020 Strategy
– Strategy: not weakening but strengthening competitiveness
– Competitive industry needed for growth and jobs, for European welfare,
to finance challenging climate change policies
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6. Financial compensation (2)
• IFIEC proposes: financial compensation for indirect
emissions should also be based on Carbon Leakage List
– Otherwise: there would be competitive distortions between installations
with direct emissions and those with indirect emissions
– We expect the European Commission, especially DG Competition, to
prevent such competitive distortions
• Germany proposed a (realistic) other way
– Threshold: 1 kWh/EURO Added Value (no Carbon Leakage List)
– Basis is marginal electricity factor: not below 0.7 ton CO2/MWh
– No reduction factor on CO2-price, no general reduction factor
• Netherlands proposed a very restricted compensation
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7. Some examples of problems
• Allocation of new entrants (extensions after 30 June 2011)
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Uncertain financial compensation (full, partial, or nothing)
No allowances for growth within existing capacity
No allowances if thresholds are not met (10% extension, etc.)
Connected downstream or upstream plants get nothing if they have
enough spare capacity
New Entrants’ Reserve (NER) may be depleted when needed
There is no NER defined after 2020
The formal “capacity” is usually based on the 2 highest production
volumes in the 6 months after ‘start of normal operation’ (first day of a
consecutive 90-day period in which 40% of design capacity is used)
Etc.
• Allocation for growth between 2005 & 30 June 2011
– Very complex, contradictory rules, e.g. “capacity” old sub-installation
includes production until ‘start of normal operation’ (legally binding, but
still a grave error in the CIMs, conflict with Directive)
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7. Alliance of Energy Intensive Industries (29-3-2011)
• Most of the problems of the Guidance Documents are the
result of the ex-ante allocation by the EU Commission
• Industry has always advocated against ex-ante allocation
– Risk of over-allocation, incentive for carbon leakage
– Risk of severe under-allocation, uncertainty preventing investments and
sustainable growth in Europe, needed for jobs and innovation
• Ex-ante no longer appropriate, alternative is both feasible and
legally possible
– Next revision of EU ETS Directive
• The Alliance wrote: In fact, one major reason why no other
major country considers to copy the EU ETS is this flawed
‘ex-ante’ approach. It is this fundamental characteristic which
makes the EU ETS so complicated, counterproductive and
unattractive”
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8. ETSs status globally
• New Zealand: runs for a year (intensity-based, “ex-post”)
• US federal: blocked for some years
• ETS may start sooner or later:
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Australia (close to ex-post, will start)
WCI California, incl. other states and Canadian Provinces
South Korea
Taiwan
Japan
Canada, after federal USA
• ETS pilots
– China, likely to start ETS in 2015/2016
– India
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8. EU ETS under fire ... for example
• European Energy Review (EER), 29-11-2010
– “EU ETS: can it deliver?”, overhang of allowances
– Phase 1 over-allocation, phase 2 new spanner in the works: the
recession (European Climate Foundation, Sandbag, and others)
• Arnold Mulder, EER 18-4-2011 overhang of allowances
– Mulder sees the flaws as: banking, the use of CERs/ERUs, auctioning of
leftovers from the NER (valid!), structural changes Directive needed
• Cover story EU ETS “Under pressure”, Point Carbon magazine
Trading Carbon, July-August 2011
– “This is the only market that has a fixed supply and unknown demand.
This structural feature is causing the problems” Miles Austin, Carbon
Markets & Investors Association
– “...fixes to supply through the back door ... likely to further undermine
market confidence”, Matthew Gray, Idea Carbon
– “Set-aside ... These are all ex-post measures.” Mark Lewis, Deutsche
Bank
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8. EU ETS under fire, Commission response
• New post 2012 Global Climate Agreement
– Move from -20% to up to -30%, versus 1990, of other states commit
– Revision EU ETS Directive: for ETS from -21% to  -35%, versus 2005
• Overhang of crisis allowances
– Call for unilateral move to e.g. -25%, needs revision Directive
• Energy efficiency target 20% will result in only 10% with
unchanged policies (MSs are still reluctant for extra actions)
– Energy efficiency to go to 20% presented as new fact
– Commission therefore considers “set-aside” in EU ETS, e.g. 100
Mton/year (800 Mton) not to be auctioned, needs revision Directive
• Roadmap 2050, then -25% in 2020 is on the path
– Then -30% still for Global Climate Agreement, needs revision Directive
• Stronger target after 2020
– As backdoor fix, needs revision Directive
 Ex-post ... Not yet
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8. Where are we and what do we want?
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Avoid carbon leakage (e.g. recital 24, statement Barroso, etc.), protect
competitiveness as good as possible (recital 25) support Europe 2020
Strategy for growth and jobs (Commissioner Tajani)
•
Ex-ante gives incentive to 50% lower production; should move to ex-post,
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 for after 2020
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Unstable, unpredictable financial compensation, should move to direct
plus indirect allocation
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Stringent top 10% immediately in 2013, should move to top 10% in or
around 2020 (‘sliding path’ allocation)
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Carbon Leakage List: new assessments each 5 year, move to: industry
should be regarded as “exposed” by default
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Abandon all kind of correction factors on allocation (“LRF” “CLEF”)
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Appendix 1:
Rules for free allocation of allowances
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1. Free allocation of allowances – incumbents (1)
• Allocation = HAL x Benchmark x CLEF x CSF
• HAL = Historical Activity Level, 1 set of 2 years per “sub-installation”
– Median 2005-2008 or, when higher, median 2009-2010
• Benchmark
– Product BMs top 10% (52), 14 with interchangeability of fuel & electricity
• Allocation = {(direct/(direct + indirect) of plant} x BM (direct + indirect)
– Heat BM, for measurable heat: 62.3 ton CO2/TJ (natural gas, 90%)
• To consumer, if non-ETS consumer to heat producer
– Fuel BM, for non-measurable heat: 56.1 CO2/TJ (natural gas)
– Process emission BM, 0.97 x median
• CLEF = Carbon Leakage Exposure Factor; for heat of consumer,
also in case of non-ETS consumers (burden of proof to operator)
• CSF = Cross-sectoral correction factor, if necessary
– CSF = industry cap / total preliminary allocation (CSF </= 1.00)
– Industry cap declines linearly, linear factor 1.74% (of 2010)
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1. Free allocation of allowances – incumbents (2)
• Allocation to ETS consumers for net heat consumption of ETS
consumers, also from CHP: no distinction between source of
heat (heat is heat); only no allocation for
1.
2.
3.
4.

Heat for electricity production
Heat from electric boilers
Heat from nitric acid
Heat (imported) from a non-ETS installation
Heat from product BM or (other) exothermic processes qualifies
• Heat export to non-ETS heat consumers, allocation to the ETS
producer, no allocation for
–
Same as above
• Incentive CHP: low ton CO2/MWh ( 0.25-0.30)
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ETS I & II: same + free allocation for electricity
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1. Free allocation of allowances – incumbents (3)
• Initial capacity (IC)
– Average 2 highest months in 2005-2008 times 12, or experimental verif.
– Must now be determined for product BM sub-installations
– For fallbacks: only in case of capacity extension as incumbent (or later in
case of new entrant, meaning an extension after 30 June 2011)
• “Significant capacity extension” or “... reduction”, definition
1.
2.
3.
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One or more physical changes
Extension at least 10% > initial capacity, or:
More than 50,000 EUAs and >/= 5% more allocation of sub-installation
Reduction: mirror, lower capacity plus “and its activity level” (!)
• Physical change
– Excludes: more operating hrs, repaint, process software,  T-P, higher
speed rotating kiln, etc. and mere replacement production line
– Abatement of fallback sub-installation is no capacity reduction (needs
proof to competent authority ... change & production volumes)
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1. Free allocation of allowances – incumbents (4)
• Extension (reduction) after 1 Jan 2005, before 30 June 2011
– Capacity = average 2 highest monthly productions, in the 6 months after
“start of normal operation”, multiplied with 12
– Start: First day of the 90-day period in which the extension has
(aggregated) produced at least at 40% of design capacity
– HALad = added capacity x average HCUF (Historical Capacity Utilisation
Factor) of the sub-installation before added capacity
• HAL existing sub-installation = HCUF x IC
• HAL existing data flow in HAL of installation
 HCUF: can be of different physical plants, in one sub-installation
• Significant capacity extension or reduction
– Causality between the physical change and the capacity change
• No or lower production (crisis): wait; what if minor change?
– Cannot be determined by experimental verification (only for IC)
– Debottlenecking, series of small changes qualifies (if 10% or 50 kt & 5%)
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1. Free allocation of allowances – incumbents (5)
• Guidance 6: “‘Significant capacity extension’ of a heat
benchmark sub-installation means either
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–
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a significant increase in the capacity of consumption of heat eligible for
free allocation or
a significant increase in the capacity of heat export to non-ETS entities
or a combination of both.”
• Guidance 6: “‘Significant increase in the capacity of heat
export to non-ETS entities' results
– from one or more identifiable physical changes relating to the technical
configuration and functioning of the equipment producing the heat.
– This excludes mere replacements of an existing boiler.
– The physical change has to take place within the boundaries of the subinstallation concerned.”
 The added capacity: determined on heat consumption (nothing for new boiler)
 Example: non-ETS heat consumer(s) expand 30% of total sub-installation, heat
comes from spare capacity of CHP or boilers: no allocation for the extension (but
… with a (small) physical change, allocation is possible)
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1. Free allocation of allowances – incumbents (6)
• Process emissions (Guidance 8): N2O or directly formed CO2
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1. Free allocation of allowances – incumbents (7)
• Waste gases: emissions from incompletely oxidised carbon,
see definition Art. 3(h) of the Commission Decision
– Of product BM sub-installation: allocation to producer, is part of BM
– Of non-product BM sub-installation: allocation for the emissions higher
than natural gas, to consumer (note: conceptually wrong), if the waste
gas is not flared but used to produce (non-)measurable heat or electricity
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1. Free allocation of allowances – incumbents (8)
• Waste gases use of a product BM sub-installation
– Waste gases in BM, used to produce electricity outside: no allocation
– Waste gases to produce (non-)measurable heat: allocation by heat
benchmark to consumer, or to producer in case non-ETS consumer
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1. Free allocation of allowances – incumbents (9)
• Waste gases use of a non-product BM sub-installation
– Waste gases used to produce electricity: no allocation
– Waste gases to produce (non-)measurable heat: allocation by heat
benchmark to consumer, or to producer in case non-ETS consumer
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2. Free allocation of allowances – new entrants (1)
• New entrants
– New plants or extensions existing plants or opt-ins, all after 30 June 2011
• Allocation = AL x Benchmark x CLEF x Linear Factor
• Activity Level “significant extensions”, eligible for allocation
– Initial capacity x SCUF or RCUF
– Product BMs: Standard Capacity Utilisation Factor
– Fallbacks: Relevant Capacity Utilisation Factor
• Initial capacity
– Average of the 2 highest monthly productions, in the 90-day period after
“start of normal operation”, multiplied with 12
– Start: First day of the 90-day period in which the extension has
(aggregated) produced at least at 40% of design capacity, (to be
confirmed) in which the extension has operated each day (!)
• Linear Factor, 2013 as basis
– Allocation = PA (preliminary allocation) – 0.0174 x PA(2013) x (k – 2013)
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2. Free allocation of allowances – new entrants (2)
• There is also allocation before start of normal operation
– Ex-post, historical emission x CLEF x Linear Factor
• Initial capacity of draft Guidance 7 was disputed
– Art. 18(3): added capacity existing plant is in definition CIMs Art. 3(l):
• Average 2 highest of 6 months after start of normal operation
– Art. 17(4) for new plants: “the methodology set out in Art. 7(3) using the
continuous 90-day period on the basis of which start of normal operation
is determined as a reference” is wrong reference because
• Methodology Art. 7(3) is 2 highest months in 48 months (2005-2008)
• There is no reference to 90-day period (is here not relevant)
• Reference should be Art. 7(4): significant change as incumbent, again
average 2 highest of 6 months after start of normal operation
– The 2 highest months in 90-day period was nevertheless adopted
• Significant capacity reduction
– Abatement of fallback sub-installation is no capacity reduction (needs
proof to competent authority ... physical change & production volumes)
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3. Free allocation of allowances – closure (1)
• CIMs Art. 22.1 cessation of operation (closure)
– An installation is deemed to have ceased operations, where any of the
following is met:
a)
b)
c)
d)
GHG permit or environmental permit has expired
Permit referred to in (a) have been withdrawn
Operation of the installation is technically impossible
Installation is not operating, but has been operating before and the operator
cannot prove that operation can resume within 6 months; Member States can
extend period to 18 months if operator can prove exceptional and unforeseeable
circumstances that could not be avoided ...; in particular “natural disasters, war,
threats of war, terrorist acts, revolution, riot, sabotage or acts of vandalism” are
mentioned
• CIMs Art. 22.2 installations kept in reserve or standby:
not closed
a) Operator holds GHG permit and the other relevant permits
b) It is technically possible to restart without physical changes
c) Regular maintenance is carried out
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3. Free allocation of allowances – closure (2)
• Allocation after closure of an installation
– No issue of allowances in the year following closure
– Member States may suspend allocation as long as it is not established
that the installation will resume operations (CIMs Art. 23.4)
– After re-start, the installation is a new entrant, only in exceptional cases
MSs can go to interruption of 18 months
• Unclear: allowances after closure, to auctioning pot or to NER?
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4. Allocation of allowances – partial cessation
• Partial cessation of operation, if
– A sub-installation has reduced its annual activity in a calendar year by at
least 50% compared to its initial activity level, and
– sub-installation contributes to at least 30% of the installation’s final
amount of allowances allocated free of charge, or
– to more than 50,000 allowances
–
Unclear: allowances to auctioning pot or to NER?
• Partial cessation is not result of a physical change
–
•
Therefore no loss of allowances after abatement in a fallback subinstallation (proof must be delivered)
Schedule of partial cessation, activity level becomes
–
–
–

50% until 75%: 50% lower allocation in next year
75% until 90%: 75% lower allocation in next year
90% or more: 100% lower allocation in next year (!)
Vice versa in case of higher activity level
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Appendix 2:
Financial compensation for the indirect EU
ETS cost effect
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Financial compensation: Eligibility & Distortions
• Free allocation for direct emissions
1.
2.
carbon leakage list
Sectors exposed to the risk of carbon leakage: 100% of benchmark
Non-exposed sectors: 80% of benchmark in 2013 down to 30% in 2020
• IFIEC proposes: financial compensation for indirect emissions
should also be based on carbon leakage list
–
–
Otherwise: there would be competitive distortions between
installations with direct emissions and those with indirect emissions
We expect the European Commission, especially DG Competition, to
prevent such competitive distortions
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Financial compensation: Eligibility & Distortions
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Financial compensation: General considerations
• Carbon leakage is loss for economy and environment
– Leakage of e.g. 100 Mton CO2 to same efficiency installations outside
Europe = 100 Mton loss for the global GHG balance because EU ETS
cap remains unchanged
• Restricted compensation contrary to Europe 2020 Strategy
– Strategy: not weakening but strengthening competitiveness
– Competitive industry needed for growth and jobs, for European welfare,
to finance challenging climate change policies
• Real issues are: (1) global level playing field, (2) how to
provide stability and predictability for European industry
– IFIEC promoted indirect allocation of allowances
37
Financial compensation: General considerations
• Electricity prices in Europe are (among) the highest globally
– 21% higher than in USA and 197% higher than in China
(source: Commission 2020 Energy Strategy)
• CO2 cost impact on power prices comes on top and depends
on marginal power plant
– IFIEC regrets that the carbon leakage list is based on the average
emission of European power plants
– The marginal effect is correct and well known in the Commission (DG
COMP a.o. sector inquiry, DG Climate Action)
• Any reduction factor is neither justified nor effective
– Neither a general reduction factor nor a CO2-price reduction
– Environmental effectiveness is not ensured through a reduction factor
but through the benchmarking approach
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IFIEC proposal: Financial compensation shall be
based on ...
• … electricity consumption benchmarks (BMs)
– BMs give an incentive to lower electricity use: a) benefit of avoided
cost (if worse than BM) plus b) benefit of extra revenue (if - becoming better than BM)
– Thus, a more stringent BM does not affect environmental effectiveness
but affects competitiveness significantly (a + b always the same)
• … relevant CO2 factor
– In general: the marginal CO2 factor
– Exception for existing contracts and existing self-generation units with
a CO2 factor above the marginal: actual CO2 factor
– For new contracts and new self-generation: mechanism that maintains
the ETS incentive for low-carbon technologies
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