avoiding the threat of competitiveness disadvantage through benchmarking integer/eii conference...
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Avoiding the threat of competitiveness disadvantage through benchmarking
Integer/EII Conference“Energy Intensive Industries & Climate Change”Brussels, 25-27 November 2008Annette LoskeChairwoman Climate and Efficiency
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Auctioning is the costly way
High ETS cost causes threat of carbon leakageHigh ETS cost causes threat of carbon leakage Auctioning causes high ETS costs – direct & indirect through
electricity No signal from major players (India/China/US) to accept auctioning
as general method Auctioning in EU alone therefore too big risk, because it:
distracts financial resources from industry for making investments
causes carbon leakage at any meaningful CO2-price
delays global agreement:
• auctioning in EU = cost advantage abroad
• global auctioning = cost advantage of efficient EU over USA, China, India
IFIEC method – benchmarking based on actual production, IFIEC method – benchmarking based on actual production, also for electricity – is advocated as the better way forward!also for electricity – is advocated as the better way forward!
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33
Auctioning is the costly way
Additional indirect costs for consumers through electricity price (as compared to dynamic benchmarking)
Total EU-27 consumers
Dynamic benchmarking vs. auctioning for the electricity costs (€ billion/a)*
32-48
55-83
23-35
Households & services
Industry
* CO2-price € 40-60/tonne
Such cost savings resulting from a power price lower by 20 to 40 €/MWh as compared to auctioning
Source: ECOFYS 2008
Carbon Leakage - Prove for high risk
80%
60%
40%
20%
8%4%
120%
90%
60%
30%
12%6%
*The impact on power price is more like about 60%-65% than 50 %
Impact on Gross Value Added :
• at € 20/ton CO2 and € 10/MWh*
• at € 40/ton CO2 and € 20/MWh
• at € 60/ton CO2 and € 30/MWh
The 4% “danger line” drops significantly at the expected CO2 price of € 50-70/ton
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Findings of Climate Strategies
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Carbon Leakage – Negative in any case !
BUT: Any contribution to EU reduction target achievement from carbon
leakage is detrimental and directly minimises the EU climate change target, thus its global contribution!
Misunderstanding of NGOs:
Carbon leakage beneficial and no problem if production outside EU is more efficient.
of EU Commission:
Definition of carbon leakage in draft Directive: „loss of market share to less carbon efficient installations outside the Community“
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What does carbon leakage mean to the CO2 reduction target achievement and to global reduction effect?
CO2 emissions to be reduced until 2020
withauctioning
with dynamic benchmarking = decrease of EU
contribution minimized
RES acc. to EU 20 % target
(separate support)
JI/CDM remainder from 2nd trading period
JI/CDM remainder from 2nd trading period
Carbon leakage
Efficiency improvement,
fuel shift, innovation
Efficiency improvement, fuel shift, innovation
CO2 emissions to be reduced until 2020
Carbon Leakage – Negative in any case !
RES acc. to EU 20 % target
(separate support)
CO2 emissions actually reduced until 2020
global effect RES acc. to EU 20 % target
(separate support)
JI/CDM remainder from 2nd trading period
Carbon leakage = emissions elsewhere
Efficiency improvement,
fuel shift, innovation
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Benchmarks for the major emittersTotal quantity of allowances is the same as under auctioningIs not a free ride, but gives challenging objectivesEfficiency improvements directly stimulatedA more realistic path towards a global scheme, on the way to global auctioning in the future
Intelligent Benchmarking is the better way
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88
For allocation: what activity level – production – to be used?Historic production (2005 or 2005-2007)
No reliable indicator for the future
Means auctioning for growth and suppresses market share growth of innovative producers
Will not avoid potential carbon leakage
New entrants reserve: source of distortions thresholds suppress efficient growth by debottlenecking, anyway uncertainty for growth
Closure rule: wrong principle -100% is loss of allowances, -x% no consequence!
Source Entec-NERA
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Historic production: source of distortions, unfairness and carbon leakage!Historic production: source of distortions, unfairness and carbon leakage!
Intelligent Benchmarking is the better way
99
For allocation: what activity level – production – to be used?
Actual production: allowed & effective, minimising leakage • Is permitted: Court of First Instance refuted Commission‘s worry that “ex-post
adjustments would create uncertainty for operators, and be detrimental to investment decisions [to reduce emissions] and the trading market”
• Ex-post corrections are normal in economic life
Income tax
CERs and ERUs
• Provide clear certainty on trading position
Benchmark set ex ante
Production level and specific emissions known to installations
Currently: uncertainty by guessing how long the granted allowances will really last
• Dynamic system for a dynamic world: rewarding efficient market share winners
• Gives no incentives for lowering production in EU – avoiding carbon leakage
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Intelligent Benchmarking is the better way
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Dynamic Benchmarking and Guarantee of the Cap - 1
Dynamic benchmarking: equal assurance on achieving the cap as auctioning Whereas: No allocation method can guarantee an unrealistic cap!
• If necessary: possible adjustment of the benchmarks ex-ante for the future to guarantee the total cap
Method 1 for overall benchmarking system
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Dynamic Benchmarking and Guarantee of the Cap - 2
• If necessary: correcting the electricity auction volume
• Not unfair: reflects the normal additional shortage as in a full auctioning system while protecting industry for carbon leakage
Method 2 for a mixed system (benchmarking for industry / auctioning for electricity)
Method 3: Applying a rolling average production
• Instead of actual production, e.g. last three year rolling average
• Approximation to a good system, however with remaining distortions
• Growing company must buy additional allowances once (competitive distortions vs. other companies remain)
1111
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Dynamic Benchmarking – analysis of criticisms:Not valid, not based on facts
Market transparency and liquidity not at all harmed• Benchmarks are always ex-ante benchmarks
• Good knowledge of trading position (deviation from the benchmark x production)
No need for additional benchmarks (compared to proposed Directive)• Benchmarks for the vital few (Pareto rule) covering 80+% of emissions
• Generous treatment of the trivial many necessary
No source for lobby pressure – it is an ex-ante determined system • In contrast: determination of „exposed“ every 3 years, with vague criteria
Avoidance of potential windfall profits for electricity / industry• Historic frozen basis for benchmarking is the very source of windfall profits
Equal scarcity of allowances• Ex-post correction system allows some borrowing from the future, however:
borrowing from future years also allowed in auctioning
• Unnecessary NER in dynamic benchmarking eases scarcity
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Thank you for your attention !Annette Loske
IFIEC EuropeChairwoman Working Party “Climate and Efficiency“
Member of the Management Team [email protected]
+49-201-8108 422
For further details see “The benefits and feasibility of an ETS based on benchmarks and actual production“
27 October 2008, at www.ifieceurope.org