ETS POLICY COHERENCE MECHANISM V June Gareth Davies, Stuart Murray, Jenni Patronen, Mostyn Brown, Alex Luta

Transcription

1 ETS POLICY COHERENCE MECHANISM V June 2017 Gareth Davies, Stuart Murray, Jenni Patronen, Mostyn Brown, Alex Luta

2 POLICY COHERENCE ISSUES WILL NOT GO AWAY Current proposals to strengthen MSR and so on do not address this problem Original expected demand for EUAs Arising from energy production and industrial sectors Major EC climate package level policies: Energy efficiency Renewable energy Demand for EUAs Other EC administered overlapping policies: LCPD & IED Ecodesign & labelling MS policies: Coal phase out Carbon price floor EPS Energy efficiency Renewable energy Total Projected impact of EE & RES directive in Mt 990Mt 115Mt % relative to 2016 surplus 52% 7% 59% Impact on EU ETS of increased RES (26.5 % to 27%) and EE (25% to 30%) targets relative to when the 2030 cap was set Sources: CEZ Group and FTI Consulting ETS POLICY COHERENCE MECHANISM 2

3 NOW IS THE TIME TO ADDRESS THIS PROBLEM PRO-ACTIVELY Next opportunity to address this issue again will be in early/mid 2020s Paris Agreement Policy Coherence Mechanism Ongoing trialogue for ETS review Focus on coherence Clean Energy Package INCEPs Governance Regulation ETS POLICY COHERENCE MECHANISM 3

4 OUR MECHANISM HAS A SIMPLE PREMISE Scope covers all national and EU-level instruments on an ongoing basis Today (t) Let s make a new policy! Calculate the expected impact on EU ETS ex ante COMM cross checks time 2 years after (t+2) COMM recommends cancellation from MS auctions How is my policy doing? Assess actual impact ex post Compare with ex ante assesment Revised schedule ensures correct volume withdrawn over time ETS POLICY COHERENCE MECHANISM 4

5 Questions/Choices OPTIONS FOR ETS POLICY COHERENCE MECHANISM Building blocks 1 Scope The policy instruments that are the object of analysis Instruments covered: RES and EE Directive? Other EU-level instruments? Member-state level instruments? Duration: One-off intervention for period ; or a continuous intervention? 2 3 Quantification Intervention Analysis revealing extent to which Lever neutralising the overlapping overlapping instruments affect EU instruments effect on CO 2 market ETS Actor: European Commission? Member State led? Frequency: Quantify every 1, 2, 5 or 10 years? Timing: Forward looking (ex ante); or backwards (ex post) assessment? Baseline: Against which level is overlap extent assessed? Commission scenario from 2030 targets? MS INECPs? Nature: Direct changes to headline target (LRF, allowance cancellation from auctions); shift volume to MSR; or adjust MSR parameters (intake rate, thresholds) Frequency: Intervene every 1, 2, 5 or 10 years? ex ante; or Timing: ex post intervention? Burden sharing: Pro-rata as per allocation; or policy pays? Governance Regulation and measures within EU ETS Directive create the key legal basis for building blocks all options identified linked to existing or proposed Articles ETS POLICY COHERENCE MECHANISM 5

6 Commission Member States THE MECHANISM IS EASY TO IMPLEMENT A set of amendments have been identified that would have the mechanism operating almost entirely through the Governance Regulation Document Due date Long-term emission strategy 15 Mar Integrated national energy and climate plans 01 Jan Biennial progress report 15 Mar Reporting requirements under the INECPs State of the Energy Union report 31 Oct Assessment of Member State submissions Recommendation to individual MSs 31 Oct 31 Oct No new data flows required Union level action to ensure Energy Union goals N/A ETS POLICY COHERENCE MECHANISM 6

7 WHY THIS MECHANISM? We have investigated a range of alternatives but this mechanism was favoured Comprehensive Broad scope Timely Immediate impact Accurate Regular quantification and intervention Predictable Well defined responsibilities Enshrined in proposed regular reporting Feasible Complementary to the MSR Does not impact Free Allocation Implemented through amendments to Governance Regulation ETS POLICY COHERENCE MECHANISM 7

8 ETS POLICY COHERENCE MECHANISM CAN ADDRESS THE PROBLEM OF FUTURE OVERLAPPING POLICIES 1 Lack of policy coherence is not being addressed under current reforms and will not go away 2 The mechanism could easily be implemented by amending the proposed Governance Regulation 3 Proactively addressing the lack of policy coherence can put Europe back on a least-cost decarbonisation pathway ETS POLICY COHERENCE MECHANISM 8

9 Dr Gareth Davies Pöyry Management Consulting Oxford, UK Direct: Mobile:

10 WHAT MIGHT SUCH A MECHANISM LOOK LIKE? Building block Element Selected option 1. Scope (i.e. coverage) 2. Quantification (i.e. assessment of effect of overlapping instruments) 3. Intervention (i.e. lever used to correct effect) n/a Baseline Actor Timing & frequency Nature Actor Timing & frequency All national and EU-level instruments, on an ongoing basis Latest Integrated National Energy and Climate Plan/biennial progress reports Member State, subject to verification by Commission, with possibility to reconcile discrepancies Ex ante, every two years from 2019 onwards but with an ex post assessment/re-adjustment to correct volume over time Cancellation of allowances from upcoming auctions Cancellation by Member States on their own allocation, pursuant to recommendation by the Commission Ex ante, every year from 2021 onwards ETS POLICY COHERENCE MECHANISM 10

11 ADJUSTMENT IS TIMELY AND RESPONSIVE Year t Initial intervention schedule Year t+2 ex post revised quantification Unexpected extra abatement Adjustment based on ex post quantification Revised intervention schedule Plus revised ex ante quantification t t+1 t+2 t+3 t+4 t+5 t+ Instrument not yet implemented (moment of first quantification) Instrument being implemented (moment of second quantification) New ETS Phase ETS POLICY COHERENCE MECHANISM 11

12 CASE 1: AN EX ANTE ONLY ADJUSTMENT WOULD LEAD TO INACCURATE INTERVENTION Year Event Cancelled EUAs 2023 Germany announces the implementation of demand side management (DSM) to start in 2024 In its 2023 biennial progress report, German ex ante quantification reveals expected emissions reductions of 20Mt/year Without ex post adjustment Commission agrees with the historic German mismatches quantification, and cannot recommends be a cancellation schedule of 20M EUAs/year until 2030 (the remainder of Phase 4 of the EU ETS) rectified Actual abatement (Mt) 2024 Germany starts implementing DSM and cancelling allowances Germany continues implementing DSM and cancelling allowances as per original schedule However, ex ante quantification in new biennial report suggests that the impact will be only 15Mt/year for the future Commission agrees with the German quantification, and recommends an updated cancellation schedule of 15M EUAs/year until 2030 (the remainder of Phase 4 of the EU ETS) In this case this results in cancelling 10M EUAs too many Germany continues implementing DSM and cancelling allowances as per updated schedule Germany continues implementing DSM and cancelling allowances as per updated schedule New biennial progress report confirms accuracy of 2025 quantification Germany continues implementing DSM and cancelling allowances as per updated schedule Germany continues implementing DSM and cancelling allowances as per updated schedule New biennial progress report confirms accuracy of 2025 quantification Germany continues implementing DSM and cancelling allowances as per updated schedule PHASE 4 TOTAL ETS POLICY COHERENCE MECHANISM 12

13 Proposed intervention (M EUAs) Quantified effect (Mt) MS & COMM in discussions Quantified effect (Mt) CASE 1: AN EX ANTE ONLY ADJUSTMENT WOULD LEAD TO INACCURATE INTERVENTION First quantification (2023) Second quantification (2025) Ex ante quantification from M excessive intervention MS & COMM Cancellation schedule from 2023 (already implemented) Actual emissions Ex ante quantification from 2025 Actual cancellation schedule Lack of ex post adjustment is inaccurate Cancellation schedule from 2023 (already implemented) Cancellation schedule from 2025 onward The mechanism intervenes by cancelling 20M EUAs until the quantification is updated The update revises interventions down to 15M EUAs when new evidence is accepted But there is no mechanism to adjust for mistakes in the ex ante quantification resulting in cancelling 10M EUAs too many ETS POLICY COHERENCE MECHANISM 13

14 CASE 2: POLICY COHERENCE MECHANISM Year Event Cancelled EUAs 2023 Germany announces the implementation of demand side management (DSM) to start in 2024 In its 2023 biennial progress report, German ex ante quantification reveals expected emissions reductions of 20Mt/year Commission agrees with the German quantification, and recommends a cancellation schedule of 20M EUAs/year until 2030 (the remainder of Phase 4 of the EU ETS) Actual abatement (Mt) 2024 Germany starts implementing DSM and cancelling allowances Germany continues implementing DSM and cancelling as per original schedule However, ex post quantification in the new biennial report reveals that DSM only reduces emissions by 15 Mt/year. Given 2024 cancellations and scheduled cancellations for 2025, Germany will have cancelled 2x(20-15)=10M EUAs too much. With 5 future years still remaining in the Phase, Germany proposes recovering 10/5 = 2M EUAs/year. Furthermore, ex ante quantification reveals that the future impact will also be only 15Mt/year The Commission agrees with the German quantification and recommends a cancellation schedule of 15 2 = 13M EUAs/year Germany continues implementing DSM and cancelling allowances as per updated schedule Germany continues implementing DSM and cancelling allowances as per updated schedule New biennial progress report confirms accuracy of 2025 quantification Germany continues implementing DSM and cancelling allowances as per updated schedule Germany continues implementing DSM and cancelling allowances as per updated schedule New biennial progress report confirms accuracy of 2025 quantification Germany continues implementing DSM and cancelling allowances as per updated schedule PHASE 4 TOTAL ETS POLICY COHERENCE MECHANISM 14

15 Proposed intervention (M EUAs) Quantified effect (Mt) vs proposed itnervention (M EUAs) Quantified effect (Mt) vs Proposed intervention (M EUAs) CASE 2: POLICY COHERENCE MECHANISM Through ex post adjustment the mechanism can correct for 10M EUA overachievement Second quantification (2025): Looking back Second quantification (2025): Looking forward MS & COMM 40 M cancellation locked in minus 30 M actual effect equals 10 M excessive intervention Cancellation schedule from 2023 (already implemented) Ex post quantification from M excessive intervention divided by 5 remaining years equals 2 M adjustment MS & COMM Ex ante quantification from 2025 Cancellation schedule from 2025 (corrected) Actual cancellation schedule Flexible quantification enables accurate intervention Cancellation schedule from 2023 (already implemented) Cancellation schedule from 2025 onward (corrected) The mechanism intervenes by cancelling 20M EUAs until the quantification is updated The update revises interventions down to 13M EUAs when new evidence is accepted The intervention still matches the actual impact of the overlapping policy: Actual: 7 years x 15 M/year = 105 M. Intervention: (2 years x 20 M/year) + (5 years x 13 M/year) = 40 M + 65 M = 105 M. ETS POLICY COHERENCE MECHANISM 15