WG1/2 27th April 2007

CCA23 lessons learned in M3 in the glass sector– Analysis of pass/fail scenarios in M3– What should be a ‘Satisfactory Outcome’?– Result after CCA23

• CCA target changes• Tonnes CO2 taken/given

– What Actually Happened– Analysis of CCA23 Situation– A Way Forward

Prepared by John Stockdale & Jenni Staves British Glass

5 out of the 13 were in EUETS Ph1Only 4 survived to M3

Fail:

Fail

Fail: Pass

Pass:

Fail

Pass:

Pass

EUETS

CCANo. of cases 2 0 1 1

Summary of Glass Sector Double Counting in 2006

Analysis of total of 13 EUETS installations

Fail:

Fail

Fail: Pass

Pass:

Fail

Pass:

Pass

EUETS

CCANo. of cases 3 3 5 2

62%

Sector No of TUs involved in Double Counting

TUs in either fail – pass or pass-fail situation (36/114)

Aerospace 4 ?

Cement 4 ?

Ceramics - non-fletton 13 6

Chemicals 49 14

Dairy Industry 7 1

Food & Drink 16 7

Glass 4 1

Lime 3 ?

Malting 3 ?

Motor Manufacturers 12 3

Steel 4 2

Textiles 3 2

Wood Panel 4 0

All sectors with fewer than 3 TUs 15 ?

Of the sectors for which there was information, over 30% of opted in TUs ended up with mixed P/F results. What would have been the ratio for all EUETS eligible TUs?

How many mixed results in M3 double counting participants?

What is a satisfactory outcome?DEFRA draft review paragraph 3: “It was necessary to avoid the situation where the TU would be able

to benefit from a surplus arising from the same emission reduction in both schemes, or alternatively be penalised in both schemes to cover the same shortfall. CCA23, and a subsequent addendum for CHP, describe the methodology that was used to avoid this double counting of emissions for TP3.”

Because of potential for mixed outcomes glass suggestion for a better approach was: CCA23 method prevents a company from double trading without changing the CCA pass/fail outcome. Contained a “logic” step.

Other industry methodologies also aimed at reducing extremes.

Co.

EU

ETS

CCA

CCA 23

Effect of DEFRA Double Counting in 2006

All EU ETS companies* Those in EUETS & applying CCA23 in M3

Conclusion:

DEFRA: 13 satisfactory

Glass: 4 satisfactory

1* → Not penalised twice but not pushed into a CCA pass Satisfactory

2 → Not penalised twice but not pushed into a CCA pass Satisfactory

3* → Not penalised twice but not pushed into a CCA pass Satisfactory

4→ Could never double trade but can now ringfence more greatly Unsatisfactory

5→ Could never double trade but can now ringfence more greatly Unsatisfactory

6 → Could never double trade but can now ringfence more greatly Unsatisfactory

7→ Could never double trade but now forced to buy yet more CO2 to be CCA

compliant. Unsatisfactory

8

→ Could never double trade but now forced to buy yet more CO2 to be CCA compliant.

Unsatisfactory

9

→ Could never double trade but now forced to buy yet more CO2 to be CCA compliant.

Unsatisfactory

10

→ Could never double trade but now forced to buy yet more CO2 to be CCA compliant.

Unsatisfactory

11*

→ Could never double trade but now forced to buy yet more CO2 to be CCA compliant.

Unsatisfactory

12*→ Company passes both but is forced into a CCA fail and has to purchase CO2 Unsatisfactory

13 → Company passes both but is not pushed into a CCA fail Satisfactory

Co.

EU

ETS

CCA

CCA

23

Out come

Effect of CCA23 Double Counting in 2006

Opted in companies

Conclusion:

9 out of 13 unsatisfactory

1 → Not penalised twice but not pushed into a CCA pass Satisfactory

3 → Not penalised twice but not pushed into a CCA pass. Satisfactory

11→ Could never double trade but is now forced to buy more CO2 to be

CCA compliantUnsatisfactory

12→ Company passes both but is forced into a CCA fail and has to

purchase CO2Unsatisfactory

EUETS Opt ins surviving to end M3

CCA deficit increased by 2,000 tCO2e95→10

CCA deficit increased by 28,000 tCO2e51→11*

CCA surplus increased by 4,000 tCO2e101→6

CCA surplus increased by 1,800 tCO2e106→5

CCA deficit reduced by 8,000 tCO2e106→2

CCA surplus increased by 25,000 tCO2e120→4

→

→

→

→

→

→

→

CCA

23

Out come

99

90

38

71

97

104

106

New CCA23 target as %age of

original CCA target

EU

ETS

CCA

CCA surplus reduced by 3,500 tCO2e 13

Deficit created due to CCA surplus reduced by 7,500 tCO2e 12*

CCA deficit increased by 21,000 tCO2e9

CCA deficit increased by 600 tCO2e8

CCA deficit increased by 2,000 tCO2e7

CCA deficit reduced by 1,500 tCO2e3*

CCA deficit reduced by 10,000 tCO2e1*

Effect of EUETS adjustment on the C02e tonnage to be ringfenced or

purchasedCo.

* Those in EUETS & applying CCA23 in M3

CCA deficit increased by ~28,000 tCO2e51→11

→

→

→

CCA

23

Out come

90

104

106

EUETS adjusted target as %age of

original target

EU

ETS

CCA

CCA surplus reduced by ~7,500 tCO2e to create a deficit 12

CCA deficit reduced by ~1,500 tCO2e3

CCA deficit reduced by ~10,000 tCO2e1

Effect of EUETS adjustment on the C02e tonnage to be ringfenced or

purchasedCo.

EUETS Opt ins surviving to end M3

CCA23 and Phase Balancing

-50

0

50

100

150

Allocation Emission Borrowing Balance

CO2

2005 2006 2007

In 2008 CCA23 requires no sale of 2007 allowances.

But residue in 2007 is reduced by previous borrowing.

What happens?

Double counting opt-ins for Ceramics

Company

EU ETS

CCA

CCA

23

Outcome

Effect of EUETS adjustment on the C02e tonnage to be ringfenced or purchased

 

ConclusionsDEFRA: 13 satisfactory?

Ceramics:10 out of 13 unsatisfactory 

1       CCA deficit decreased by 150 tCO2e Satisfactory

2       CCA deficit increased by 50 tCO2e Unsatisfactory

3       CCA deficit increased by 1000 tCO2e Unsatisfactory

4       CCA deficit increased by 21500 tCO2e Unsatisfactory

5       CCA deficit increased by 9000 tCO2e Unsatisfactory

6       CCA deficit increased by 5500 tCO2e Unsatisfactory

7       CCA deficit increased by 150 tCO2e Unsatisfactory

8       CCA surplus reduced to deficit of 750 tCO2e Unsatisfactory

9       CCA surplus reduced to deficit of 50 tCO2e Unsatisfactory

10       CCA surplus reduced to deficit of 1350 tCO2e Unsatisfactory 

11       CCA surplus reduced to deficit of 1500 tCO2e Unsatisfactory 

12       CCA surplus reduced by 300 tCO2e Satisfactory 

13       CCA surplus reduced by 350 tCO2e Satisfactory

Effect of EUETS CCA23 adjustment on performance relative to target - All EU ETS companies

Effect of CCA Double Counting on Performance Relative to Target

0

50

100

150

200

250

300

CCA performance as % of original CCAtarget

CCA performance as % of EU ETSadjusted target

%

Extreme changes to target values are recognised in last column of Table 2 of DEFRA review

Effect of EUETS CCA23 adjustment – Opted in Co.s

Effect of CCA Double Counting on Performance Relative to Target

0

50

100

150

200

250

CCA performance as % of original CCAtarget

CCA performance as % of EU ETSadjusted target

%

What actually happened?• In glass most of the eligible TUs fell into the mixed result scenario for which,

glass would argue, CCA23 is not designed. Many TUs in other sectors did the same.

• CCA23 changes to TU CCA target values were often greatly out of

proportion to what could realistically be achieved.

• The resulting deficit or surplus was often out of proportion to the actual performance against target.

• In 5/13 cases there was no surplus to trade in CCA because there had been failure in any case and yet the deficit was increased.

• In 3/13 cases the surplus of a passing CCA company was increased.

• The financial damage/windfall was only limited due to what will most likely prove to be in the long term an exceptionally low market price.

Analysis of CCA23 situation• Analysis and decision making process on hold since July 2006 with

the result that now short of time for M4• Proposal for use in M4 only tolerable because it relies on very low

EUETS price due to closure of Phase 1 market and excess MS allowances1. Will not be repeated at M5.

• Current DEFRA review incomplete:– awaiting further information on categories of performance i.e. P/P, F/F,

P/F, F/P. This is important because CCA23 is designed to deal with P/P & F/F scenarios and need to know extent of anomalies in P/F and F/P. (How many out of 140? 30%? E.g. actually 18/19 ceramics, 8/13 glass).

– shows no thorough analysis of the alternative proposals and no other methodology has been put forward by government.

– no financial analysis; results in tonnes CO2, yet recommendation for M4 relies entirely on market prices remaining as they are.

– review (table 2 col. 6) suggests that sector balancing removes financial damage – not always the case as TUs not necessarily pooled and individual target swings can be extreme.

– Opt in data skews picture as represents only those who opted to go in or couldn’t avoid it. Those at a disadvantage stayed out – sectors could provide complete opt out and opt in analysis.

1/ Paragraph 1 - A proposal for TP3 and TP4: “assuming there is no significant change to the EU allowance value, it is likely that double counting will have no adverse impact”

A Possible Way Forward: a compromise

• Given– Lack of time now left before M4– Low price and closure of Ph1 EUETS– Limited number Opt ins (and ignoring individual TU issues)

• Do the following– As a backstop: use CCA23 for M4– Comprehensively complete the review including points given

above– Redefine the double counting objectives for all circumstances

under Phase 2 conditions and reformulate CCA23 – Where appropriate develop split target regimes for those

sectors/TUs capable of using them AND NOT “one size fits all”.

End