Review of the EU Emissions Trading System Jos Delbeke DG Environment European Commission
Objectives of EU ETS review Cost-effective contribution to -20% GHG target for 2020, or to stricter target under international climate agreement Improvement of the EU ETS based on experience More predictability for long-term emission reductions
Scope Cover all large industrial emitters: extension e.g. to chemical sectors and aluminium Extension to other GHG: nitrous oxide (fertilisers), perfluorocarbons (aluminium) Potential opt-out of small emitters if equivalent emission reduction measures in place
Cap setting Single EU-wide cap instead of 27 caps proposed by Member States Annual caps with linear decrease to 2020 and beyond In 2020: -21% compared to 2005 emissions Cap adjusted when international agreement concluded
Allocation principles Harmonised allocation rules ensure level playing field across the EU Full auctioning for sectors able to pass on costs: Power sector Partial free allocation to industry as a transitional measure, to be phased out by 2020 Exception: higher levels of free allocation where there is significant risk of carbon leakage
Auctioning and earmarking Auctioning on the basis of harmonised rules ensuring transparency and non-discrimination Auctioning rights distributed from Member States with relatively high GDP/capita to MS with lower GDP/capita to balance high investment costs Auctions must be non-discriminatory, open to everybody and will be carried out by Member States on the basis of harmonised rules 20% of auction revenues should be earmarked for combating climate change
Impact Assessment: Auctioning vs. free allocation options Benefits of auctioning vs. other means of allocation Efficiency of the system (no NER and closure rules) Windfall profits Move to low carbon economy Level playing field for new entrants and incumbents Quantified positive macro-economic impacts (GEM E3) 1. Scenario with free allocation in ETS and NTS 2. Scenario with revenue generation in ETS 3. Scenario with revenue generation in ETS and NTS Modelling assumptions MS receive revenues of acquisition by its own ETS sector Recycling through lump sum payment to consumers Companies maximise profits and incorporate opportunity costs to the extent possible Cost-efficient scenario (no JI/CDM) All results for 2020
No revenue generation, free allocation EU ETS GDP -0.54% Change Private Consum ption -0.11% Auctioning vs. free allocation results Cost Efficient Scenario, EU impact in 2020 Employ ment -0.41% Revenue generation through auctioning in the EU ETS GDP -0.35% Change Private Consum ption 0.19% Employ ment -0.04% Revenue generation in both the EU ETS and Non ETS GDP -0.35% Change Private Consum ption 0.23% Auctioning has positive effect on overall economic performance. Emplo yment -0.06% But this depends of course on the method of recycling, in this example lump sum transfers to households. This macro-economic modelling does not take into account RES target and e.g. associated employment effects
Auctioning vs. free allocation Conclusions Auctioning may reduce negative impact on economy GDP growth, private consumption and employment higher Impact on private consumption is bigger than on GDP Employment effect very small. Shifts between sectors from increased consumer demand > loss due to auctioning and taxation Most MS see GDP increase Poor MS see high positive impact on private consumption Rich MS see higher reduction in GDP costs, less pronounced for poor MS Impact depends on the way revenues are recycled in the economy and the initial structure of that economy Lump sum to consumers has higher positive effect on private consumption than on GDP Reduction of labour costs will give more positive impact on employment
International aspects: JI/CDM Companies can already use credits from JI and CDM projects for compliance Left-over credits from 2008-2012 can be used 2013-2020 = 1.4 billion tons for 2008-2020 = 1/3 of reduction effort over the period With int l agreement: Substantial additional use of credits allowed from countries which have ratified the agreement -> Important incentives for global climate agreement and reduced cost of additional effort for the EU
Impacts access to JI/CDM Reduction EU ETS sectors compared to 2005 Carbon value in all sectors ( /ton CO2-eq.) Renewables value ( /MWh) Direct costs as % GDP No access to JI/CDM -21.3% 39 45 0.58% Access to JI CDM -16.0% 30 49.5 0.45% JI/CDM reduced emission reductions in EU ETS, increases the need for additional incentives to achieve the RES target and reduces cobenefits in terms of energy security and health However it improves overall cost-efficiency of package Allowing the use of JI/CDM credits in the ETS by 2020 equal to 5% of 2005 emissions would lower the carbon price from 39 to 30.
Interntional aspects: Linking Currently, EU ETS covers 30 countries including Norway, Iceland and Liechtenstein Linking agreements can be concluded with developed country which has ratified the Kyoto Protocol In revision, Commission proposes to enable EU ETS to also link with other mandatory emission trading system capping absolute emissions: with any third country, or in sub-federal and regional systems
Monitoring & Reporting, Verification & Accreditation, Compliance More harmonised rules on: monitoring and reporting of emissions by operators verification of reports, mutual recognition of verifiers and accreditation Non-compliance penalties ( 100/ton CO 2 ) to increase by inflation rate to keep deterrent effect
What are the benefits of the package? The ultimate goal: avoid the cost of climate change impacts: 5-20% of global GDP (Stern) Large scale innovation in the energy sector First mover advantage, aiming for technological leadership in low carbon technology Significant energy efficiency improvements Energy security: reduction of oil and gas import of 50 billion per year (at $61 per barrel of oil) Reduced air pollution giving significant health benefits Reduced need for air pollution control measures: 11 billion per year in 2020
What are the costs of the package? Direct cost: increased energy and non CO 2 mitigation cost to meet both targets domestically: 0.6% of GDP in 2020, or some 90 billion Macro-economic GDP effects : GDP growth reduced by some 0.04-0.06% between 2013 and 2020, or in 2020 some GDP reduction of 0.5% of GDP compared to business as usual These are conservative estimates: oil price of $100 per barrel would reduce costs by 30 billion foreseen use of cheaper CO 2 credits through investments in Clean Development Mechanism reduces costs by a quarter does not include positive macro-economic rebound effects of re-injecting auctioning revenues back into the economy, estimated at maximum +0.15% of GDP
Conclusions A more harmonised EU ETS exploits the benefits of emissions trading to the full Ensures significant contribution to overall targets Provides reliable long-term perspective for economic actors to take necessary investment decisions Is sufficiently simple to be attractive for linking Credibly underlines EU leadership and maintains incentives for others to take action to address climate change
Impact assessment Direct cost impacts as % GDP Cost efficient achievement RES and GHG + targets Non- ETS redistributed + right to auction redistributed + access to JI/CDM ( 30 ) + targets RES distributed and trading of GOs EU27 0,58 0,61 0,61 0,45 0,45 AT 0,66 0,86 0,82 0,58 0,34 BE 0,76 0,83 0,93 0,69 0,70 BG 2,16 1,09-0,35 0,14-1,25 CY 0,09 0,08-0,04-0,03 0,07 CZ 1,12 0,49 0,03 0,20-0,51 DK 0,29 0,57 0,50 0,22 0,11 EE 1,59 1,09 0,41 0,58-0,53 FI 0,47 0,53 0,56 0,52 0,22 FR 0,39 0,39 0,37 0,32 0,47 DE 0,57 0,47 0,60 0,49 0,57 EL 0,97 0,74 0,53 0,60 0,59 HU 1,22 0,46 0,29 0,36-0,40 IE 0,47 0,61 0,63 0,47 0,45
Impact assessment Direct cost impacts as % GDP UK Cost efficient achievement RES and GHG 0,49 + targets Non- ETS redistributed 0,36 + right to auction redistributed 0,36 + access to JI/CDM ( 30 ) SI 0,86 1,11 0,86 0,47 ES 0,70 1,20 1,08 0,62 SE 0,66 0,69 0,70 0,74 0,34 + targets RES distributed and trading of GOs IT 0,49 0,99 1,05 0,51 0,66 LV 1,10 1,60 1,50 0,88-0,18 LT 1,02 0,52 0,36 0,43-0,72 LU 0,54 0,89 0,91 0,59 0,70 MT 0,31 0,17-0,36-0,21 0,00 NL 0,28 0,34 0,43 0,28 0,32 PL 1,24 0,48 0,32 0,38 0,02 PT 0,87 0,48 0,54 0,57 0,51 RO 0,95 0,37 0,29 0,29 0,04 SK 1,17 0,79 0,74 0,60 0,26 0,53 0,42 0,78 0,41