Titre. coordination of economic tools : Sous-titre. the EU ETS case. de Copenhague. Nicolas Berghmans

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1 Les politiques Emissions climatiques reductions and Titre et les the enjeux coordination of economic tools : Sous-titre de Copenhague the EU ETS case Nicolas Berghmans nicolas.berghmans@cdcclimat.com Date 1

2 The EU ETS = 41 % of EU GHG emissions Cap-and-trade scheme started in 2005 Pulp, paper, board 2% Iron and Steel 8% Cement 9% Ceramics 1% Oil refining 8% Other combustion 9% Glass 1% Public Cogeneration 11% Coke Ovens Other 1% 0.4% Electricity 50% EU (27 + Croatia this year) + 3 EEA countries 2 GtCO2 per year 70 % of industrial emissions New sectors and gases in Phase 3 ( 2013) : MtCO2 Source : CDC Climat Research from EU ITL Data 2

3 Overlapping policies: a factor of uncertainty for the EU ETS In the EU ETS, the cap is set in advance according to environmental objectives but also against a defined baseline scenario Baseline scenario depends on: Industrial activity Technological progress Other complementary policies Energy prices In an ETS, there is a direct link between the level of CO2 emissions and abatement coming from overlapping policies. 3

4 Overlapping of EU policies mainly applies to energy Technology-focused policies: Renewable energy subsidies, Nuclear and fossil-fuels subsidies, CCS policies Energy efficiency policies: White certificates, norms on energy consumption for buildings and electric appliances Environmental emissions standards for other pollutants like Large Combustion Plant Directive that will drive more than 30 GW to retirement in 2015 Reforms in the electricity market towards capacity payments could reduce even more the influence of market prices for investments 4

5 Other policies are mainly defined at the national level The example of renewable energy policies in the EU Source : «Financing Renewable Energy in the European Energy market» (Ecofys, 2011) 5

6 and their result in terms of CO2 emissions are varied Investments in RE and EE have different contributions to CO2 emissions reductions: For technical and geographical reasons: problem of common measure Regulatory uncertainty coming from policy changes: In electricity market, RE injections increase the volatility and decrease the level of the wholesale market price. Incentivize MSs towards directing investments in power generation by other policies: capacity payments, EMR in the UK, CCS policies. 6

7 The 2020 Climate-Energy original burden-sharing The 2020 Climate-Energy original burden-sharing : the EU ETS played a limited role from the start, Source : Berghmans, CDC Climat Research % abatement needed in ETS projected comes from RE. New EE directive could account for 10 % of this abatement. After the economic crisis, the EU ETS is clearly perceived as a residual tool for mitigation since it has been the first one to automatically adjust. 7

8 Since 2005, the EU ETS was not the main driver of the GHG reductions Based on a counterfactual scenario : 1.1 to 1.2 GtCO2 domestic abatement between 2005 and 2011 in the energy and industrial sectors included in the EU ETS, Factors behind CO2 emissions variations Explanatory Factor RE production Economic crisis Coal-gas price variation CO2 reduction compared to the BAU scenario 500 MtCO2 300 MtCO2 200 MtCO2 Energy intensity of the economy 100 to 200 MtCO2 Source : Gloaguen and Alberola (CDC Climat research, 2013) RE deployment represents 40 % of the abatement and its impact on CO2 emissions is larger than the economic crisis 8

9 Consequence: the CO2 price on the market Source : Tendances Carbone, CDC Climat Research 9

10 Coordination of energy and climate policies in Europe: ways forward The policy mix in Europe is unbalanced and the EU ETS is left as the residual policy It has allowed less emissions reductions than expected; But at a lower cost than those obtained by the RE deployment around 5-60 times less expensive than reductions from wind or solar. Don t forget that ex ante it is a problem of consistency in targets definition. To manage ex post consistency two ways: Reforming the EU ETS to make it more resilient to changing conditions and other policies result. Make overlapping policies more ETS friendly One condition: assess regularly the interactions between policies and instruments 10

11 Reforming the EU ETS Main advantages: The EU ETS is the only EU policy instrument The EU ETS allows emissions reductions at lower costs The EU ETS is technological neutral Reflection launched by the EC in November 2012 : six options focusing mainly on the target definition and ETS perimeter Ways to make the EU ETS more resilient : Price control mechanism (price floor, price collars). Discretionary supply management (i.e. Central Bank). Financial options to sell the EUAs to a central buyer at a certain date in the future with a guaranteed price. But also see what s done in other markets: Allowances reserve in Californian market. Rolling cap that was planned Australian ETS. The main tradeoff: any flexibility should not hinder EU ETS credibility. 11

12 Make overlapping policies more ETS-friendly At first sight, more complicated : Don t apply for command-and-control approach National level of decisions make it complicated But could apply to some technology-focused policies: Build a link between ETS price and CO2 implicit price of other technology subsidies. Doesn t have to cover the overall technology subsidy even on theoretical level since technology-focused policies respond to other objectives and technological development policies. 12

13 CDC Climat Research Independent economic research in: Energy & Carbon Markets Carbon Offsets, Agriculture & Forestry Sub-national Climate Policies Climate Investment & Decision Making Clubs: Energy & Carbon Trends Club Forestry Club Agriculture Club Cities, Local Governments and Climate Change Club 13

14 Links Thank you for your attention, any questions? All publications of CDC Climat Research are available: Ours clubs (working groups) and research programs 14