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Decarbonsing the

European Power Sector:

is there a role for the

EU ETS?

Brussels, 31 May 2011

Jos Delbeke

DG Climate Action

European Commission

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What the EU is doing already: 2020 targets

Reduce GHG emissions by 20% (compared to 1990) EU Emissions Trading System reducing overall emissions from

industrial installations National emission targets cover other sectors: e.g. buildings,

services, agriculture, transport (except aviation)

Increase share of renewables in EU’s energy mix to 20% National targets agreed

Improve energy efficiency by 20% compared to business as usual projections – not on track

Current policies are not sufficient to achieve the long-term target of -80 to -95% GHG emissions by 2050

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Energy Efficiency Plan

EU Heads of State on 4 Feb 2011 committed to“Take determined action to tap the considerable potential for higher energy savings of buildings, transport and products and processes.”

European Commission adopts new Energy Efficiency Plan with additional measures in order to reach 20% target by 2020Public sector to give the good example: binding targets for refurbishing public buildings + highest energy-efficiency criteria for public procurementIndustry: energy efficiency requirements for industrial equipment, energy audits, energy management systemsImprove efficiency of power and heat generationRoll out smart power grids and smart meters

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2050 Roadmap

The first extensive global and EU analysis on how the long term target can be reached:

identifies cost-effective pathway, with intermediate milestonesidentifies key technologies guiding R&Didentifies investments needs and benefitsidentifies opportunities and trade-offsguides EU, national and regional policiesgives direction to private sector and private households for long term investments

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Ensure the achievement of 20% energy efficiency target by 2020, and in this context use the role of the emissions trading system

Give clarity for long term investments, especially in ETS sectors Define 2020 - 2030 policy framework

Upward review of 1.74% linear reduction to be considered to achieve -80% GHG emissions by 2050

Measures to protect vulnerable industries against carbon leakage in the case of fragmented action

Policy challenges and future work

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Efficient pathway:-25% in 2020-40% in 2030-60% in 2040

A cost-efficient pathway towards 2050

80% domestic reduction in 2050 is feasiblewith currently available technologies,with behavioural change only induced through pricesIf all economic sectors contribute to a varying degree & pace.

0%

20%

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60%

80%

100%

1990 2000 2010 2020 2030 2040 2050

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100%

Current policy

Power Sector

Residential & Tertiary

Non CO2 Other Sectors

Industry

Transport

Non CO2 Agriculture

Power sector: technologies and investments

Almost completely carbon-free by 2050 from 45% low-carbon technology today

to 60% by 2020, 75% in 2030 (-54 to 68% CO2) RES, fossil fuels with CCS, nuclear

EU-ETS key driver Linear factor not sufficient to reach 2030 milestone

Further investment needs in power generation and smart grids: € 30 bn annually

Up to 2020 already significant investment in referenceIf CCS is delayed: still feasible, but higher costs

ETS – the corner stone of the EU climate policy

ETS – a cost-effective and stable instrument in a rapidly changing energy landscape

Currently the EU ETS covers some 11,000 power stations and industrial plants in 30 countries.

The number of allowances is reduced over time so that total emissions fall. In 2020 emissions will be 21% lower than in 2005.

ETS should become the main incentive for the EU-wide deployment of CCS, which plays a central role for the decarbonisation of the European Power Sector

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As from 2013:A Broader Scope

New sectors Aluminium Basic chemical production

Aviation as from 2012 internal, incoming and outgoing flights On basis of equivalent measures in 3rd countries, incoming flights can

be exempted

More gases (nitrous oxide, PFCs)

Auctioning and Registry Security

As from 2013, full auctioning for electricity sector:• More than half of all allowances will be auctioned• Potentially some transitional free allocation to electricity producers in up to 10

new Member States

Use of Auction Revenue• Member States should use at least 50% of revenues for climate and energy

related purposes• Revision of Monitoring Mechanism Decision will include provisions for

Member States to report on use of auction revenues

Registry Security is now under control• Amendment of the Registries Regulation in 2011• In the wake of organised cyber attacks on national ETS registries, strands of

action pursued • Move to single registry in 2012 will allow harmonisation of security measures

Benchmarking

Main principle: one product – one benchmark• no modification based on which fuel is used, which technology is used,

which inputs are used• 52 benchmarks cover ~80% industrial emissions in the EU ETS

Starting point for benchmark values: EU-wide average performance of 10% most efficient installations in (sub)sector• hence an allocation methodology that “rewards” the best performers

Commission adopted Decision in April 2011

Enhanced market oversight

Next challenge – an appropriate market oversight regime The carbon market has undergone significant growth over the last years A market oversight framework appropriate for the current and future market

size is needed

Communication in December 2010 on enhanced market oversight

A comprehensive study ongoing looking at levels of market oversight and implications of introducing new measures

Several options under consideration incl. full coverage of the European carbon market by financial markets legislation (e.g. via classification of allowances as financial instruments)

Milestones over time: ETS and non-ETS sectors

Reductions compared to 2005 2030 2050

Overall -35 to -40% -77 to -81%

ETS sectors -43 to -48% -88 to -92%

Non-ETS sectors -24 to -36% -66 to -71%

Reductions compared to 1990 in %

2005 2030 2050

Overall -7% -40 to -44% -79 to -82%

Cost-effective distribution between sectors: (ranges reflect variation across scenarios)

Key driver: carbon prices

Carbon price*

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100

150

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2020 2025 2030 2035 2040 2045 2050

Reference (frag. action, ref.fossil f . prices)

Effect. Techn. (glob. action,low fossil f . prices)

Effect. Techn. (frag. action,ref. fossil f . prices)

Delay. Electr. (glob. action,low fossil f . prices)

Delay. Clim. Act. (frag.action, ref. fossil f . prices)

Delayed climate actionincreases carbon price

Higher oil price red-uces carbon price

Alternative Measures

Additional tax (UK)

Emission Performance Standards (EPS)Study of the Commission shows EPS would have little

impact

Energy efficiency standards/ Renewables targets at national level

The EU ETS is the preferred instrument compared to other alternative measure because of its stability and cost-effectiveness

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For further information:

http://ec.europa.eu/clima/roadmap2050/