EU ETS Hearig, Europea Parliamet Xavier Labadeira, FSR Climate (EUI) 0. Thaks Chairma, MEPs. Thak you very much for ivitig me here today. I am hoored to participate i the work of a Committee whose previous activities ad cotributios I have bee followig with iterest ad respect. I am here to try to provide a academic perspective o the EU ETS. As a researcher who has bee particularly iterested i the aalysis of market-based climate policies ad as director of FSR Climate, at the Europea Uiversity Istitute, I am pleased to have the opportuity to share some views o the topic ad to try to aswer your questios. I actually ivite you to follow our research ad dissemiatio activities o the EU ETS ad other EU climate policies i Florece: Needless to say, beig a EU Uiversity, we will be very happy to collaborate with you i the future o these matters. I will orgaize my presetatio i three parts which, due to the limited time, will ecessarily be superficial (more iformatio will be probably coveyed durig the questio time). After a short reflectio o the ecoomic ad evirometal reasos for emissios tradig systems, I will summarize the existig academic empirical evidece o the EU ETS. Fially, I will stress the importace of the EU ETS for the developmet of climate policies i the EU ad beyod ad will emphasize the importace of the learig by doig process that keeps a efficiet ETS i place. 1. Emissios tradig systems: a preferred climate policy optio Let me start by uderliig the preferece of ecoomists for emissios tradig systems. This is based o several characteristics that are particularly useful whe tacklig climate chage. First, they guaratee the attaimet of a evirometal objective (the emissios cap) ad thus ca be easily liked to policy targets or iteratioal agreemets i the field. Secod, they do so at miimum cost (costeffectiveess). This is a very importat elemet whe mitigatio costs are likely to be sizable, such as i climate chage. Third, by puttig a price o emissios they icorporate evirometal costs ad sed the adequate sigals to producers ad cosumers so that behavioral/operatioal chages ad ivestmets are promoted. Fially, they are able to provide public reveues that may be used for differet policy purposes. It is true that real-world climate policies, ad that is also the case of Emissios Tradig Systems, have to depart from idealized hadbook descriptios. First, due to a umber of reasos ad practical costraits, additioal climate ad eergy policy istrumets (that themselves have effects o ETS) may be eeded for evirometal ad techological purposes. Secod, i the presece of coutries with o climate policies i place (as is ufortuately the case), egative effects o 1
competitiveess with limited or ull evirometal beefits (that is, presece of carbo leakage), may occur. The multiple chages see i the relatively short lifetime of the EU ETS (apart from the icreasig evirometal ambitios) ca actually be see as a way to deal with the complexities of climate policies whe implemeted i the real world. 2. Some academic evidece o the EU ETS More tha 10 years have passed sice the start of the EU ETS ad thus data are already available for academic ex-post assessmets. Such assessmets complemet the theoretical headlies just preseted. I ext summarize the outcomes of the existig academic (ecoomic) literature o two wide areas: evirometal effects (icludig iovatio) ad competitiveess ad carbo leakage. Although there is a icreasig umber of high-quality studies, some cosideratios are ecessary. First, there is still quite limited evidece (short time spa, the delay i the publicatio process, etc.), also with the applicatio of differet/o-comparable methodologies. Secod, results reflect specific EU ETS ad overall socio-ecoomic cotexts. Therefore, their extrapolatio to the future should be cautious. Although EU GHG emissios showed a substatial reductio durig the lifetime of the EU ETS, the quatificatio of the specific evirometal effects of the system is ot straightforward (other possible causes advaced by the literature are the ecoomic crisis or the itroductio of reewable policies) or techically simple. Yet there is clear evidece, based o both aggregate ad firm-level data with sophisticated ecoomic modelig, that the EU ETS has cotributed to GHG abatemet across all regulated sectors at least util the early stages of Phase 2. There is also evidece o the positive impacts of the EU ETS o patetig ad ivestmets i low carbo techologies, eve though reewable promotio policies seem to have had a more importat effect due to low EU ETS prices. Regardig the ecoomic impacts o the regulated idustry, existig research based o firm-level ad survey data does ot idicate that the EU ETS has had egative effects o employmet, output or busiess closures. There is, moreover, evidece of cost pass-through for the power ad idustrial sectors. Fially, there is o evidece so far of carbo leakage brought about by the EU ETS outside the EU. 3. O the importace of the EU ETS i Europe ad beyod At this stage it is clear that I am brigig a positive message o the EU ETS. It is a istrumet with (theoretical ad empirical) academic backig ad with two importat properties, cost-effectiveess ad the itroductio of a log-term price sigal, which make it the perfect cadidate to be the corerstoe of EU climate policies. Moreover, its effects are remarkable outside the EU because the evetual applicatio of similar approaches, after our experiece, may facilitate the extesio of climate policies across the world. Beig a objective i itself, this pheomeo will also be 2
positive for the EU ETS by reducig competitiveess cocers ad expadig its cost-effective properties through likage. Ideed, the EU ETS is a sophisticated istrumet that is beig implemeted i a supraatioal ad heterogeeous settig, ad thus could be see as a prototype for the rest of the world. That iteral ad exteral relevace demads, however, a careful fie tuig of the system i the complex cotext for applicatio which I already metioed. Modificatios, such as the oes ow beig cosidered by the Committee, are ot ew for the EU ETS, which is a clear example of learig by doig ad adaptatio to chagig circumstaces. Compromises are ecessary but the properties that largely explai the academic attractio to these systems - evirometal itegrity, logterm sigals for operatioal ad techological improvemets ad cost-effectiveess - should be especially preserved. Thaks a lot ad I look forward to your commets ad questios. 3
Emissios Tradig System - ETS Xavier Labadeira FSR Climate, Europea Uiversity Istitute Public Hearig, Europea Parliamet Brussels, 18 February 2016 q Emissios tradig systems: A preferred policy optio Challeges of climate chage Good properties of market-based istrumets The complexities of climate policies i reality q Some academic evidece o the EU ETS Evirometal effects Competitiveess ad Leakage 4
q O the importace of the EU ETS i Europe ad beyod Academic backig: Theory meets practice EU: cost-effectiveess ad log-term sigal A prototype for the world The importace of Learig by doig 5