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Interaction between incentives for carbon abatement

The end of Emissions Trading?

A.J. Mulder (arnold.mulder@rug.nl)

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Introduction› EU ETS is key incentive to reach deep CO2 reduction in

the industry in an cost-effective manner

› Yet, many other ‘parallel incentives’ for carbon abatement are in place

› Literature* suggests: merely a more costly substitute of the EU ETS and undermines the carbon price

› A quantitative analysis of the full system is needed to better understand interactions with the EU ETS

* e.g. Unger and Ahlgren, 2005; Smith and Sorrell, 2001; Sorrell and Sijm, 2004; Rathmann, 2007; De Jonghe et al., 2009; Hepburn, 2006; Morris et al., 2010

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Methodology› Stochastic Simulation Model of the EU ETS (Mulder and

Jepma, 2013)

› Check marginal effect on carbon price and emission level before and after expiration of parallel incentives Distinguish between two types…

Surplus / Scarcity

of Allowances at t

Supply of

Allowances at t

Demand for

Allowances at t

FCPI at t Build-

up/Use of

Banked

Allowances

at t

Abatement at t based on

Marginal Costs of Merit

Order of Available

Technologies Non-

Compliance

Penalty at t

Forward Loop Input Output Stochastic Input

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Estimating the combined effectAttribute / Type Type 1 Type 2

Sectoral Scope

ETS sectors (e.g. power, steel, oil, cement sector)

End-use sectors (e.g. Houeholds, small business)

Aim Efficiency improvements, greater share of renewables, direct carbon abatement

Decentralized renewables, efficiency improvements, recycling

Effect on ETS - Reduction of CO2 emissions in ETS sectors (lower carbon intensity of production)

- Use of abatement potential from ETS merit-order (proportionately)

- Reduction of CO2 emissions in ETS sectors (lower production levels)

Examples CCS subsidies, feed-in-tarriffs, biomass co-firing mandate, etc.

Incentives for solar panels, heat pumps, insulation, emission standards for road transport, etc.

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Methodology› We run multiple scenarios, each time assuming a

greater annual impact of either type of parallel incentive: between 0 and 30 MtCO2/yr of abatement (0 - 1,6% per annum)

› Simulation horizon is 2030

› Parallel incentives take effect between 2012-2025

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Results – Carbon Price› Carbon Price over time assuming 30 MtCO2/yr impact

Type 1 Type 2

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Conclusion on carbon price› Type 2 incentives have greatest depreciating effect on

the carbon price

› Type 1 incentives do depreciate the carbon price, but rebound fairly quickly after these incentives have expired/phased-out.

› Low carbon prices could trigger policy-makers to introduce extra parallel incentives!!

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ResultsComplementarity of abatement Sensitivity to Economic Growth

Average = 16%

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Conclusion on Emissions› Complementarity is generally low (~30%) but can be

higher, although this would signal the silent death of emissions trading (if impact > 40 MtCO2/yr).

› This treshold level could be lower if economic growth projections are grim

› Current market conditions are alarming! (low prices, low economic growth)

› Policy-makers could end up in deadly spiral and unwillingly pull the plug on emissions trading