Transcript Slide 1

European Greenhouse Gas Emissions
Trading: Lessons to be Learned
A view from industry
One question is: ex-ante or ex-post
Maastricht University, Law faculty, METRO
Conference “European Greenhouse Gas Emissions Trading:
Lessons to be Learned”
Maastricht, 29-30 January 2009
Vianney Schyns – DSM/SABIC – VEMW – IFIEC Europe
Revised Directive 2013-2020 (1)
 Political will to get most industrial sectors and sub-sectors recognised
as exposed to risk of carbon leakage – determination in 2009
• Criteria: (1) 5% GVA impact and 10% trade intensity or (2) 30% GVA or
(3) 30% trade intensity or (4) qualitative future assessment
 Allocation principles
• Electricity: auctioning, except from waste gases – temporary derogation
Poland, etc.  Possibility financial compensation to industry
• Industry: stringent top 10% benchmarks as a rule (for exposed sectors)
• New entrants / benchmarks; closures / no allowances
 Quite a few legal & technical issues
• Unclarities, e.g. Combined Heat and Power -1.74%/year
• Unintended issues, e.g. quality requirement CHP versus boilers,
new entrant electricity from waste heat
• Technical definition BMs (all energy carriers vs distorted BM)
•
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The total cap is not compromised for exposed (sub)sectors, no free lunch
Öko-Institut – example Germany
3.33 %-line 20 %-line
Impact on Gross
Value Added (GVA) at
€ 20/ton CO2 and at
0.967 ton CO2/MWh
So: 3.33% (20 %) line
at € 20/ton CO2 in
this graph is
equivalent to 5%
(30 %) at € 30/ton
EU ETS sectors are
in the bottom part of
the figureexposed
At high CO2-prices
above fuel-switch
coal is marginal (
high CO2 content per
MWh realistic)
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Öko-Institut – example Germany
Note: Non-EU trade
intensity will be
based on European
(Eurostat) data;
Data availability?
Level of
disagregation will
have an influence
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Revised Directive 2013-2020 (2)
 Production volume for benchmarks unspecified, stated principle is exante frozen: historical (2005-2007?) or capacity untilisation factor (?)
• What about gap between 2007 & new entrants only as from mid 2011
 Ex-ante or ex-post to actual production is contentious issue
• Ex-ante scheme is not recession-proof – two next recessions towards
2020 erode impact from EU ETS due to low CO2-prices
• Benchmarking chosen to avoid carbon leakage, but inadequate measure,
since ex-ante rewards lowering production: “export of pollution and import
of unemployment” (Commissioner Verheugen)
• Ex-ante needed for carbon price signal – is this consistent with avoiding
carbon leakage?
• Much literature focus on (product) carbon price signal and “lower
production”, a.o. Nentjes & Woerdman (ESB Sept08), de Bruyn,
Davidson & Korteland from CE (ESB Oct08), Grubb, Neuhoff,
Matthes, etc.
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Intelligent Benchmarking is the better way
For allocation: what activity level – production – to be used?
Historic production (2005-2007 – or what else?)
 No reliable indicator for the
future
 Means auctioning for growth
and suppresses market share
growth of innovative producers
 Will not avoid potential carbon
leakage, e.g. Matthes
 New entrants reserve: source of
distortions  thresholds
suppress efficient growth by
Source Entec-NERA
debottlenecking, anyway
uncertainty for growth
 Closure rule: wrong principle -100% is loss of allowances, -x% no consequence!
Historic production: source of distortions, unfairness and carbon leakage
No scientific basis whatsoever
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Revised Directive 2013-2020 (3)
 Ex-post stated not to be within EU ETS, but:
• 300 Mton bonus for CCS based on verified (ex-post) avoided emissions
• New entrants & closures in general (ex-post)
• “Polish” derogation: de-facto ex-post
• Commission must come with (ex-post) measures adapting allocation for
installations “partially cease to operate” or “significantly reduce capacity”;
what will it be?
• -90%?: meaningless; or -10%?: mirror of new entrants threshold
• -50%?, no consequence at -49%, 50% carbon price signal
 Any % is arbitrary, logical only is actual production
• Financial compensation likely to be based on actual electricity
consumption, so (ex-post) to actual production with benchmark
Ex-post adjustment to actual production in fact legally allowed,
provided total cap is guaranteed  methods available & published.
 Legal case Germany / EU Commission (November 2007)
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Two mechanisms of carbon leakage
Carbon leakage can occur in two ways
 CO2-cost > transportation costs from abroad into the EU
• This is valid under auctioning and under static benchmarking with
pass-through of CO2-price into product price
 CO2 opportunity-costs > Gross Value Added
• This happens with static benchmarking at zero pass-through of the
CO2-price into product price, at a higher CO2-price than method above
• Example: impact of CO2 opportunity costs will exceed Gross Value
Added of cement and steel at higher CO2-prices
• Above GVA break-even price, lowering production and selling
allowances is more profitable than maintaining production
• Thereby: GVA varies according to supply-demand and can become
quite low
 Carbon leakage will also occur at zero pass-through of CO2-price !
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Carbon Trust
Product carbon price signal: lower product demand (price elasticity),
inter-sector competition, fewer exports & more imports = carbon leakage:
Cement
Steel
Key observations
Note: economists argue degree of price elasticity; and it takes lead time
Carbon Trust modelled leakage at least twice as high than lower demand
This is more than “a few percentage points”, mentioned in European Parliament
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Report mentions all EU ETS sectors and signals either likelihood of leakage or
major uncertainties
Climate Strategies & Carbon Trust
Three solutions against carbon leakage:
(1) Global carbon market – sectoral agreements
(2) Border Adjustments
(3) Benchmarks in proportion to actual production – dynamic
benchmarking
Dynamic benchmarking is rejected by Delbeke, Grubb and others
because of “loss of carbon price signal”, while at the same time carbon
leakage must be avoided with an ex-ante frozen free allocation – static
benchmarking.
But is this argument consistent?
No it isn‘t!
There is either carbon leakage or loss of carbon price signal
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Climate Strategies & Carbon Trust & DG Environment
Their point of view:
The allocation must be balanced between auctioning and static
benchmarking, the latter for the carbon price signal stimulating radical
innovation (in the use of products), a balance between avoiding carbon
leakage and avoiding windfall profits
However: Grubb and Delay: “Moreover, industry‘s arguments that domestic
producers would pass-through very little carbon cost implies pricing
strategies to minimise loss to overseas production – avoiding carbon
leakage – rather than to maximise short-run profits”.
Is the argument above then consistent?
No it isn‘t!
“Maximising profits” means the EU ETS (with static benchmarking)
is supposed to generate windfall profits, if the product carbon price
signal should occur.
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Dynamic benchmarking: production carbon price signal
Dynamic benchmarking (1)
Break-even CO2-price for leakage is a factor 4-5 higher than under
auctioning or static benchmarking – carbon price signal limited to the
difference of emissions per unit of product with the benchmark
• Hardly an incentive to lower production and import product
Unambiguous production carbon price signal for investments to reduce
emissions, independent of benchmark value in a certain year, often
overlooked
• Example:




Project reduces emissions from 900 to 600 kg per unit of product
Incentive = avoided purchases + sales of allowances
At benchmark 700 kg: incentive = {900 – 700} + {700 – 600} = 300
At benchmark 600 kg: incentive = {900 – 600} + {600 – 600} = 300
The production carbon price signal will spur radical innovations in
manufacturing processes, driving inter-sector competition as well
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Dynamic benchmarking: production carbon price signal
Dynamic benchmarking (2)
 Increasing market share: a most important objectives in business
 Gradual capacity increases often achieved by “debottlenecking”, by
improving mass and heat transfer  ecological gain
Static benchmarking, a static approach in dynamic markets:
Efficient winners of market share are seriously hindered.
Winning market share at same carbon efficiency as competitor is fully
penalised, overlooked in most literature
 Fully against a free undistorted market
Dynamic benchmarking, a dynamic approach in dynamic markets:
 Efficient and innovative market share winners are stimulated, laggards
face an economic disadvantage.
 Winning market share at same carbon efficiency as competitor is
neutral – as it should be.
It’s just like auctioning, but with resistance to carbon leakage
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EU ETS blueprint for the world (1)
 Other global regions showed so far little (no) interest in unilateral
auctioning, to the contrary:
 India, China & others
 Refused imposed benchmarks for sectoral agreements (UNFCCC –
Accra meeting August 2008)
 Refused absolute caps (repeatedly)
 A gradually emerging global carbon market with dynamic benchmarking
will already be a major challenge, therefore:
 EU ETS must abandon requiring an absolute cap from e.g. India, China
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EU ETS blueprint for the world (2)
 European Industry Federations jointly proposed (ECCP, May 2007):
 Regionally differentiated benchmarks without demanding absolute caps from
developing nations provide transition time for regions with higher emissions per
unit of product enabling the global carbon market sooner
 Providing fair and acceptable basis for internationally shared objectives
 In contrast auctioning: accepting disadvantages for own industry towards the
more efficient ones (e.g. China, India compared to the EU) is unrealistic
 Auctioning policy is an obstacle to international agreement
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Dynamic benchmarking – analogies
Personal and corporate income taxes
 Provisional tax, ex-post corrected to the actual income for the final tax
 The EU ETS is like: personal & corporate income tax for the period 20132020, based on the income of 2005-2007
 No one would ever consider a frozen ex-ante system for taxes
Clean Development Mechanism and Joint Implementation
 Allowances are granted according to a baseline and actual production
 Only allowances for the actual realised savings
 No one considers a frozen ex-ante system for CDM & JI
 Before global auctioning: benchmarks with actual production
 With global auctioning: full carbon price in product prices, but only then
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Thank you for your attention !
Vianney Schyns
USG for a.o. DSM/SABIC
Member of the Management Team IFIEC Europe
 [email protected]
 +31 4647 65017
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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