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CO2 emissions trading Progress EU ETS in 2007European Chemical Regions Network (ECRN)“Competitive Chemical Regions in Europe”
5th Congress of the European Chemical Regions NetworkLudwigshafen, BASF-Gesellschaftshaus,
Rhineland-Palatinate, Germany 29-30 November 2007
Vianney SchynsManager Climate & Energy Efficiency
Utility Support GroupUtility provider for a.o. DSM and SABIC
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Contents
1. ECRN’s vision on emissions trading2. High Level Groups EU Commission3. Present situation4. Annex: Structural shortcoming present allocation
rules5. Annex: Structural solution benchmarks with ex-
post adjustment to actual production
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ECRN’s vision on the instrument Greenhouse Gas emissions trading
Maastricht Declaration, 22 December 2005Tarragona Declaration, 9 November 2006
“Major improvements still needed”
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ECRN’s vision on GHG emissions trading• Present flaws
– Historical grandfathering not effective– Electricity windfall profits, bound to increase from 1st period 2005-
2007 € 15 billion/year to 2nd period 2008-2012 € 55 billion/year loss of competitiveness
– No level playing field– Finite new entrant reserves insecurity new plant &
debottlenecking investments– Frozen ex-ante allocation enhances frozen market shares– Lack of stable long-term recognition of CHP
• Proposed solution, as alternative to auctioning– Benchmarks with ex-post adjustment to actual production– Guarantee of the total cap (novel method launched in Tarragona
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High Level GroupsHLG Competitiveness, Energy and the
EnvironmentHLG Chemical Industry
Clear advice HLG CEE
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HLG CEE and HLG Chemical industry• High Level Group CEE members
– Commissioners Verheugen, Kroes, Piebalgs and Dimas + representatives industry, NGOs and others
• The HLG CEE advice for EU ETS on 2 June 2006– EU Commission & Member States to undertake (for
implementation in 2nd period, but this failed)= Stronger signal towards low carbon technologies= Competitiveness, reduce impact windfall profits= Level playing field new investments across EU= How can rules, notably for new entrants and closure, be more
harmonised, incl. the possibility of using a benchmarking approach
• HLG CEE 30 October 2006 confirmed statements above• HLG Chemicals: Member Reiner Haseloff, president
ECRN
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Present situation
Historical grandfathering historical mistakeLowering production, no benefit for environment
Industry wants benchmarks no (partial) auctioningAuctioning seems ideal for electricity facts tell a
different storyRecent legal cases
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Historical grandfathering Historical grandfathering historical mistake historical mistake• Historical grandfathering was a historical mistake
= Recognised by EU Commission, March 2007
• 3rd Trading period: perhaps auctioning for electricity & (partial?) auctioning and/or benchmarking for industry
• EU Commission will come with a proposal for revised EU ETS Directive January 2008 – then co-decision EU Parliament & Council – Takes 1.5 – 2 years, is no decision for single Member State
• Benchmarking for allocation to operators= Ex-ante: based on historical production second historical
mistake?= Ex-post: based on actual production
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Lowering production …Lowering production …• “Lowering Production is no Benefit for the
Environment, says European Industry”Paper Alliance-Cefic-IFIEC, 21 May 2007, in line with ECRN
– EU Commission declared end 2006= Lowering production and selling freed allowances is equally legitimate
than investing in emissions reductions and selling freed allowances
– European Industry recalled founding father J.H. Dales (1968): = “Pollution in one region must never be reduced by increasing pollution
in another”= Ex-ante allocation root cause of many distortions= Call for link to actual production= Italian representatives EU ETS review: “intra-period updates”
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Benchmarks, no auctioning & solution “windfalls”Benchmarks, no auctioning & solution “windfalls”• Industry is against auctioning
– Auctioning electricity= Electricity prices remain high bad for competitiveness / leakage= Windfall profits 1st period € 15 billion/year to 2nd period € 55 billion/year
at CO2-price 30/ton= Full auctioning 3rd period: windfalls still high (IFIEC paper 23 Nov 07)
– Auctioning industry= Bad for competitiveness, “leakage” by production relocation
– Call for benchmarks (ECRN, CEOs e.g. Jürgen Hambrecht BASF with Alain Perroy Cefic visit Verheugen 23 Nov 07) and solution windfall profits (letter European industry 16 Nov 07)
– Auctioning with Border Adjustments at EU borders is not practical (huge bureaucracy), cannot be realised with few products only (it affects thousands of products)
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Recent legal cases (1)
• UK against EU Commission (judged 23 November 2005)– EU Commission can only assess NAP against art. 10 & Annex III– No objection within 3 months = approval (e.g. rules of Germany, France,
Italy, Luxembourg, Poland about guarantee new entrants)– A NAP can be changed after Commission’s approval of an earlier notified
NAP (no “provisional” notification needed)
• Germany against EU Commission (judged 7 Nov 2007)– Germany contested the prohibition of the EU Commission to apply ex-
post adjustments (also in 1st & 2nd guidance note)– Germany asserts that the whole Directive – also art. 10 and Annex III –
does not forbid ex-post, provided total cap ensured– Court of First Instance fully confirmed German case– Germany may apply ex-post in 2nd period if case is won …
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Quality of historic data for operatorsQuality of historic data for operators
Variations in annual load factors over five years, found in
UK by consultant NERAfor UK government
… with climate change instruments based on history?
Historic production tells nothing about the futureHistoric production tells nothing about the future
Link to actual production: Avoids distortions Avoids windfall profits Solves problems new entrants and closures, SEE ANNEX
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Recent legal cases (2)• What means a historic cap: many new plants enter the market?
– Many new power plants in Italy around 2009 .. Germany .. NL
• What means a historic cap: import or export of product?– More electricity import NL from Germany – Is NL then doing well?– New CHP in Luxembourg – Is Luxembourg doing bad?
• Eight new legal cases– What means a historic cap: economy is strongly recovering?– Forecast of growth in central Europe, 8 legal cases European Court of
Justice against EU Commission: Czech Republic, Estonia, Hungary, Latvia, Poland, Slovakia, Lithuania and Malta
– Rumania and Bulgaria to follow?
– Influence Burden Sharing on allocation is perverse
• Solution: benchmarks linked to actual production
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AnnexStructural shortcomings of present allocation
rules in the EU ETS
Environmental effectivenessLevel playing field
Competitiveness & electricity windfall profitsInsolvable problems new entrants & closures
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Basics of shortcomings present allocation• Existing plants: ex-ante frozen cap based on
historical emissions – rewarding pollution – same quantity allowances whether production increases or decreases
• New plants and debottleneckings: also an ex-ante frozen cap, which is plan-economy
• Systemic “disincentive for efficient growth”, “reward of shrinkage”
• This allocation principle = root cause of all shortcomings, PLUS, mostly as a result of this:– Insecurity investments in new plants (finite reserves)– Highly distorting transfer rules– New plants few versus existing plants many allowances: LACK OF
EFFECTIVENESS to invest to reduce emissions
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Summary shortcomings allocation• Threat to reduce economic activities in Europe
– Not producing & selling allowances can be more profitable– CARBON LEAKAGE without environmental justification
• Rules differ across Europe– NO LEVEL PLAYING FIELD
• No structural reward of early action, no equal standards, lower emissions can come into next historic reference– INNOVATION NOT STIMULATED, NO EFFECTIVENESS
• New entrants: thresholds, finite reserves– INVESTMENT INSECURITY
• Market share winners buy allowances, to losers sell– CARTEL, winners pay penalty to losers … no free market
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Electricity windfall profits• State interference prevents competitive market
– New entrants, vital for more competition, but ex-ante state decision of operating hours determine profitability – plan economy
– Transfer rules protect incumbents: barrier to entry can be € 0.25 billion for a 1000 MWe power plant (4 years, or trading period)
– Even worse: incumbent does not apply for transfer rule and keeps old plant stand-by (imagine 1000 MWe plant, ~ € 0.2 billion/year)
• Fight for allowances overrides fight for market share• Price of system: economic rents – windfall profits
– Transfer of wealth 2nd period € 55 billion/year at € 30/ton CO2 (EU-27)
– Even with full auctioning 3rd trading period 2013-2020 still € 45 billion at € 35/ton CO2
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28€28€
20€20€
24€24€32€32€
49€49€
60€60€
84€84€
46€46€ 24€24€
57€57€
70€70€(1)
(1)
(1)
(1)
(2)
(3)
(3)
(3)
(3)
(3)
World Map electricity prices (€/MWh)Sources: (1) Presentation European Aluminium
Association HLG-Ad hoc 1 (Long Term Contracts) -2005
(2) R.Tarjanne and K. Luostaninen, Lappeenranta University of technology (Long term contract) – 2003
(3) Platts Base load year 2007 (Platts 4 April 2006)
(4) Jean Maillard
(3)
60€60€(3) 67€67€
(3)
< 25€< 25€ (4)(4)
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Present ETS rules: new entrants & closuresPresent ETS rules: new entrants & closures Unsolvable dilemmas new entrants (NE) & closures (C)
(see e.g. also Grubb and Neuhoff, Stern, Egenhofer, Weishaar, Matthes, Schyns, Ecofys report for the EU Commission) Theory: freeze allocation [all allowances after C & zero for NE] Zero for NE actually hinders low carbon investments/competitiveness Retaining allowances after C – how long? – is worse than transfer
rules as it enhances market concentration Withdrawal allowances after C: perverse incentive keeping inefficient
plants in operation Most authors elaborate these problems, but fail to conclude
that within individual ex-ante frozen caps solutions are simply impossible search for squared circle
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AnnexStructural solution: benchmarks with ex-post
Which benchmarks and howGuarantee of total cap
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Benchmarks with ex-post• Few benchmarks provide high coverage
= E.g. electricity, cement, refineries, steamcrackers, etc.• Real benchmarking is easier that often assumed
= Output related, same BM for incumbents & new entrants• Benchmarks with ex-post adjustments of production,
solution for:= Leakage, level playing field, effectiveness, no insecurity for new
entrants, no transfer rules, no windfall profits, free market without cartel problem
= Works exactly as auctioning
• Two new studies launched at ECRN Tarragona= How to ensure total cap with ex-post= How does it work in the electricity market