EU ETS Phase IV CSCF application and market balance Comparison between the European Commission, Parliament and Council phase IV proposals 19/05/2017 Ecofys by order of CEMBUREAU
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Objective of this study The main objective of this study is to compare the impacts on the EU ETS cross-sectoral correction factor (CSCF) application and market balance of: The European Commission (EC) proposal of July 2015 The European Parliament (EP) Amendments of February 2017 The European Council General Approach of February 2017 Contents This slide deck contains the following sections: Summary of key findings Outline model Comparison of the three Phase IV positions (Commission, Parliament, Council) on: CSCF application: total free allowances unused/shortage at the end of Phase IV (2030) CSCF application: impact of a hot metal benchmark on the total free allowances unused/shortage Market balance: total allowances in circulation Market balance: total allowances in MSR Annex: modelling assumptions 3 ECOFYS. A Navigant Company. 19/05/2017
Summary of key findings All proposals show a free allowance shortage at a minimum benchmark (BM) and unused free allocation at maximum BM > A shortage would result in the cross sectoral correction factor (CSCF) being triggered, which could lead to even the best performing installations facing a shortage of free allowances. The Parliament amendments show the lowest probability of a CSCF application > The CSCF flexibility to use up to 5% share of the cap for free allocation reduces the probability of the CSCF significantly compared to the other reform proposals. Should the full carbon content of waste gases used for electricity production be included in the BM, this increases the probability of a CSCF application > If the hot metal benchmark would increase by 10% due to full inclusion of waste gases, this would be equal to about 0.4% of the Phase 4 allowances (under a 1% BM across all sectors). In turn, this leads to the total free allowances demand to allocate all installations up to their BM levels becoming higher, increasing the probability of a CSCF application. The Parliament amendments have the largest impact on lowering the surplus on the market by the end of 2030, whereas the Council General Approach cancels the most allowances from the MSR 4 ECOFYS. A Navigant Company. 19/05/2017
The Ecofys E3C3 model calculates different components of the EU ETS to determine the CSCF and market balance Allowances to NER, Innovation fund & Indirect cost compensation Auction supply incl MSR and demand Phase 3 baseline Cap & cap reduction CSCF flexibility Emissions Auctioning share CSCF Market balance supply and demand Production growth Benchmark Free allocation supply Carbon leakage compensation Free allocation demand (100% of d BMs) Input parameters Calculations 5 ECOFYS. A Navigant Company. 19/05/2017
All proposals have an allowance shortage at a minimum BM and unused allocation at maximum BM Free allowance unused/shortage at the end of Phase 4 (2030) under different policy proposals and BM scenarios Annual benchmark flat rate across all sectors Min 1% Max (different per policy proposal) (different per policy proposal) Filled: Unused free allowances Horizontal: unused CSCF flexibility Dashed: Free allowance shortage to avoid the CSCF CSCF application line Highest probability of triggering the CSCF due to a shortage of allowances available for free allocation -0.5% -139 542-1.5% The 5% CSCF flexibility is being used to (partially) prevent CSCF -0.25% -476 536 775 773-1.75% The lower CSCF flexibility of 2% has a more limited impact in preventing the CSCF -0.2% -981 117 310 493-1.5% -819 EC Parliament Council > Besides these allowances, there are also potentially unallocated allowances from the NER and the proposals do not specify what will happen with these allowances at the end of Phase IV in the Parliament amendments where they come from the free allocation supply, these unused allowances decrease the available EUA supply, effectively reducing the ETS cap 6 ECOFYS. A Navigant Company. 19/05/2017
Including the full carbon content of waste gases in the BM setting would increase the probability of the CSCF Free allowance unused/shortage at the end of Phase 4 (2030) under different positions and BM scenarios with 10% higher hot metal BM Annual benchmark flat rate across all sectors Min 1% Max (different per policy proposal) (different per policy proposal) Filled: Unused free allowances Horizontal: unused CSCF flexibility Dashed: Free allowance shortage to avoid the CSCF CSCF application line -0.5% -206 482-1.5% -0.25% -554 469 775 717-1.75% -0.2% -1,060 50 310 433-1.5% -893 EC Parliament Council > AM165 of the Parliament proposes to include the full carbon content of waste gases used for electricity production in the benchmark calculation > To illustrate this impact, if the hot metal benchmark would increase by 10%* with full inclusion of waste gases, this would equal to about 0.4% of the Phase 4 EUAs under 1% BM *Value based on http://www.eurofer.org/news%26events/archives/press%20releases/eurofer%20goes%20to%20court%20on%20eu%20ets.fhtml 7 ECOFYS. A Navigant Company. 19/05/2017
The Parliament amendments have the largest impact on lowering the surplus on the market EUAs [MtCO2] 2,000 1,500 1,000 500 EC proposal * -1% BM flat rate for all sectors 0 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 EUAs [MtCO2] Total allowance demand Total allowance supply Total allowances in circulation Parliament Amendments * 2,000 Market Stability Reserve withdraw and release 1,500 1,000 500-1% BM flat rate for all sectors 0 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 EUAs [MtCO2] Total allowance demand Total allowance supply Total allowances in circulation 2,000 Council General Approach * Market Stability Reserve withdraw and release thresholds 1,500 1,000 500 0-1% BM flat rate for all sectors 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 Total allowance demand Total allowance supply Total allowances in circulation Market Stability Reserve withdraw and release *Note: This is under the assumption that unallocated allowances in 2030 are not available to the market. The total allowance supply include the MSR effects. As specified in the MSR Decision, aviation allowances and emissions are not considered in the determination of the total allowance in circulation. 8 ECOFYS. A Navigant Company. 19/05/2017
The Council General Approach removes a large amount of allowances from the MSR EUAs withheld (+) or released (-) in the MSR [MtCO 2 e] EC proposal* 3,000 2,000 1,000 0-1,000-2,000 EUAs 2019 withheld 2020 2021 (+) or 2022 released 2023(-) 2024 in the 2025 MSR 2026 [MtCO 2027 EUAs withheld (+) or released (-) in the MSR [MtCO 2 e] 2 e] 2028 2029 2030 3,000 3,000 Parliament Amendments* 2,000 1,0002,000 0-1,0001,000-2,000 2019 0 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 EUAs withheld (+) or released (-) in the MSR [MtCO 2 e] 3,000-1,000 2,000 Council General Approach* 1,000-2,000 0 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030-1,000-2,000 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 > EUAs Under to the the NER EC proposal, EUAs modelling to the Innovation results show fund that Unallocated the MSR EUAs withdraws Phase III EUAs allowances from backloading throughout Regular Phase MSR IV mechanism Total EUAs in the MSR > Under the Council General Total allowances in circulation Approach, 2.3 billion EUAs** from the MSR have EUAs cancelled been EUAs to cancelled the Innovation by the fund end of Leftover Phase non-cl IV EUAs Phase III Unallocated EUAs Phase III EUAs EUAs from to the backloading NER Regular MSR mechanism Total EUAs EUAs cancelled in the MSR Total EUAs allowances to the Innovation in circulation fund Leftover non-cl EUAs Phase III Unallocated EUAs Phase III EUAs from backloading Regular MSR mechanism EUAs Total to the EUAs NERin the MSR EUAs cancelled EUAs Total to the allowances Innovation in fund circulation Leftover non-cl EUAs Phase III *-1% BM flat rate for all sectors Unallocated EUAs Phase III **The expected allowances to be EUAs from backloading Regular cancelled MSR mechanism strongly depend on the underlying modelling assumptions 9 ECOFYS. A Navigant Company. 19/05/2017
Annex General modelling assumptions (1) > EU ETS input parameters and growth rates The EU ETS emissions are a static modelling input The total allowances in circulation in 2016 published by the EC is used as the basis for future surplus calculations, i.e. 1,694 million EUAs 1 Future EU ETS emissions are projected based on the PRIMES 2016 reference scenario beyond 2016 (-1.5% per year for 2016-2020 and -1.9% per year for 2021-2030) For consistency with the future emission projections, the PRIMES sector value added growth rates are used (except refineries based on fuel input), see table below. The sector value growth rates used as a proxy for production growth rates to determine the free allowances required to fully compensate all sectors up 100% of the benchmark values after application of the annual flat rate. It should be noted that production growth rates are different from value added growth rates. For details on the modelling approach on the CSCF application, see http://www.ecofys.com/en/news/ecofys-launches-eu-ets-carbon-cost-calculator/ Annual sector value added growth rates 16-20 21-30 Annual sector value added growth rates 16-20 21-30 Steel production 0.6% 0.5% Cement production 0.6% 1.2% Chemicals production 1.2% 1.1% Other industries 0.8% 1.0% Refineries production -1.3% -0.6% 1 Source: https://ec.europa.eu/clima/sites/clima/files/ets/reform/docs/c_2017_3228_en.pdf 10 ECOFYS. A Navigant Company. 19/05/2017
Annex General modelling assumptions (2) > Cap and auctioning Linear cap reduction factor of 2.2% per year in Phase IV Before taking the CSCF flexibility into account, auctioning share of 57% The EUAs to be auctioned from the different funds are assumed to spread out over Phase IV in line with the stationary installation cap. > Market stability reserve Backloading of 300 million EUAs in 2019 and 600 million EUAs in 2020. Unallocated Phase 3 allowances from (partial) cessation, closures and leftover NER EUAs are assumed to be 700 million 1, going in the MSR at the end of 2020. 50 million allowances from MSR auctioned for Innovation Fund before 2021. > New Entrant Reserve (NER) A decrease or increase of at least 10% in production expressed as a rolling average of verified production data for the two preceding years is adjusted with a corresponding amount of allowances by placing allowances into, or releasing them from the NER. The result is that in the model a large part of the NER allowances remain unallocated by the end of Phase IV 1 Based on communication with EU ETS market analysts 11 ECOFYS. A Navigant Company. 19/05/2017
Annex Policy proposal specific modelling assumptions (1) Parameter EC Proposal Parliament Amendments Council General Approach CSCF flexibility as % of total cap 0% 5% 2% Indirect cost compensation from free allocation as % of total cap Innovation fund from free allocation share [million EUAS] 0% 1% 0% 400 0 400 NER from free allocation share [million EUAS] 0 400 0 Compensation factor for non-cl installations other than district heating 30% 0% 30% CSCF exemption - threshold trade intensity N/A 15% N/A CSCF exemption - threshold emission intensity [kgco 2 e/ GVA] N/A 7.00 N/A Unallocated allowances from MSR for NER Phase IV 250 0 250 Max additional EUAs cancelled from auction share that are not used for the CSCF flexibility [million EUAS] 0 200 0 12 ECOFYS. A Navigant Company. 19/05/2017
Annex Policy proposal specific modelling assumptions (2) > Leftover non-cl allowances from the CSCF calculation are assumed to be 145 million 1: Going into the MSR at the end of 2020 under the EP Amendments Going into the NER at the end of 2020 under the EC proposal and Council General Approach > The MSR withholding quantity doubles from 12% to 24% of the total allowances in circulation: In the first four years of the start of the MSR (2019) under the EP Amendments In the first five years of the start of the MSR (2019) under the Council General Approach > The MSR release quantity doubles from 100 million to 200 million EUAs in the first five years of the MSR operation (2019) under the Council general approach > The quantity of allowances in the MSR are cancelled: 800 million EUAs in 2021 under the EP amendments The difference between the EUAs in MSR in a certain year and the auction volume of the previous year from 2024 onwards under the Council general approach 1 Source: https://ec.europa.eu/clima/sites/clima/files/ets/revision/docs/impact_assessment_en.pdf 13 ECOFYS. A Navigant Company. 19/05/2017
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