A la Recherchedu Prix du Carbone

Transcription

1 A la Recherchedu Prix du Carbone SYSTÈME EUROPÉEN D ÉCHANGE DE QUOTAS DECO 2 : DES ANALYSES EX ANTE ET EX POST À LA PROJECTION EN22 23 Novembre 212 Friday Lunch Meeting Climate Economics Chair - raphael.trotignon@chaireeconomieduclimat.org

2 Introduction This thesis is the result of five years studying the European Emission Trading Scheme, the most complete experience of carbon pricing to date An empirical analysis based on ex ante/ex post comparison Supplemented by the creation of a simulation model, an original approach In a context full of uncertainties, nobody knows the right carbon price: it is necessary to combine the three core flexibility mechanisms associated to the EU ETS to understand the market development (Chapter I) Analysis build by progressively integrating in the model: baseline emissions and abatement (Chapter II), the use of offsets (Chapter III), and banking and borrowing (Chapter IV) Eventually, shift from an ex post use to a prospective use of the model to 22 (Chapter V) 2

3 I. Ex ante vs. ex post Beginning of 25 Beginning of 28 Beginning of MtCO2-2 GtCO MtCO2-5 GtCO ,2 GtCO2-85 MtCO MtCO Millions 5 Total cap (free+auction+offsets) Cap (free+auction) Baseline as in Millions 5 Total cap (free+auction+offsets) Cap (free+auction) Verified Emissions Baseline as in Millions 5 Total cap (free+auction+offsets) Cap (free+auction) Verified Emissions Baseline as in Difference between initial expectations and actual outcome: Past emission reductions (carbon price and economic crisis) Decentralized use of offsets, supplemental to the cap Interactions with other policies Weakened anticipations 3

4 I. The observed price The price is very different from initial expectations A classic for cap-andtrade programs (SO 2, Kyoto, RGGI) 2 Capacity to drive short term and long term reductions in this context? Given uncertainties, the key for understanding the market is the dynamics provided by the three flexibility mechanisms EU ETS Directive adoption Observed spot and DEC12 price over Decisions on NAP1 Expectations in line with early analysts forecasts Illiquid market 25 Cold winter 26 Discussions on 22 targets NAP 2 decisions Release of 25 verified emissions 27 Phase 1 surplus not transferable to Phase 2 28 Climate Energy Package Financial and economic crisis Roadmap 25 Fukushima Energy efficiency OTC Point Carbon BNS Phase EUA5-7 1 spot price ICE December ECX EUA 212 DEC12 Future price 29 New equilibirum in a context of slow recovery 21 Debt crisis and worsening growth outlook Set aside debate Source: Climate Economics Chair 4

5 I. Methodology Initial distribution of allowances Counterfactual or baseline emissions Reduction costs Behavior of participants with Flexibility mechanisms Trading Use of offsets Banking Borrowing Analysis of the past Prospective exercise 5

6 Outline Part I - Emissions trading: the key role of flexibility Part II - A prototype of ZEPHYR-Flex based on abatement and trading Part III - The use of carbon offsets: Good or Evil? Part IV - The calibration of ZEPHYR-Flex and the results on the first two trading periods Part V - Looking ahead: a multi-level regulation challenge 6

7 II. Allocation and auctions -21% /25-38% /25 Offsets Auctions Free allocations Baseline emissions 7 Millions

8 II. Baseline emissions Emissions as they would be without carbon policies Scenarios based on the past relationship between GDP growth and emissions Relationship between growth and emissions Using production indexes as a sectoral breakdown of gross production rates 12 EU ETS industrial production (calculated from Eurostat, 25=1) CO2 Emissions EU27 (UNFCCC 1A1 and 1A2 sectors, 25=1) GDP EU27 (Eurostat 25=1) Production growth by sector used for sectoral baselines Electricity production And an elasticity of emissions to production (.6 in general; 1.2 in case of economic choc) Limit: Not differentiated by sector e 8 Rest of combustion Refineries Iron and steel Cement Rest of industry EU ETS weighted index

9 II. Abatement In the model, abatement is done instantly Perfect recognition of opportunity cost Price P EUA Marginal abatement cost curve of a given installation Total costof emissions reduction Opportunity cost (the value of emissionreductions at the market price is greater than the internal reduction costs) A share of reductions are removed from the emission baseline the following years Hypothesis on abatement costs of participating entities, by sector Cost can evolve over time Carbon Price ( /tco2) E peua E E -E peua : reduced emissions at price P EUA? Quantities Relationship between price and abatement EU ETS level % 1% 2% 3% 4% Reductions below the baseline 9

10 II. Results with trading only /tco Carbon Price Millions Total cap, baseline and verified emissions Carbon price (Phase 1) Carbon price (Phase 2) Bluenext EUA 25-7 Bluenext EUA Simulated emissions Baseline Emissions Cap (free+auction) CITL Verified Emissions Total cap (free+auction+offsets) With trading only (no banking, no borrowing, no offsets): Does not replicate observations Despite the existence of a net surplus, trades are necessary for short installations to be compliant Trading is very efficient to lower compliance costs price is zero as soon as baseline emissions are below the cap (assumption of zero transaction costs in the model) 1

11 Outline Part I - Emissions trading: the key role of flexibility Part II - A prototype of ZEPHYR-Flex based on abatement and trading Part III - The use of carbon offsets: Good or Evil? Part IV - The calibration of ZEPHYR-Flex and the results on the first two trading periods Part V - Looking ahead: a multi-level regulation challenge 11

12 III. Offsets: Good or Evil? Major characteristic of the EU ETS: articulation with the Kyoto Protocol s flexibility mechanisms, with quantitative and qualitative restrictions The attitude towards offsets has changed: initially worshiped, Kyoto offsets are now perceived as aggravating disequilibrium on the EUA market In the thesis: Observation of prices Use of offsets at the installation level Effect on past EUA equilibrium price with ZEPHYR-Flex Scenario for the use of offsets up to 22 12

13 III. Price evidence 12 Existence of spot discount depends on whether the limit is binding or not Price/Marginal Cost Different time discounts if offsets and allowances are not perceived as fully equivalent for future use Ln(Fut/Spot) 15% 1% 5% -1% -15% -2% DEC8 DEC9 DEC1 DEC11 DEC12 DEC13 Linear (DEC8) Linear (DEC9) Emissions/Abatement Linear (DEC1) Linear (DEC11) Linear (DEC12) y = -,395x R² =,233 y = -,365x R² =,649 y = -,391x R² =,6161 y = -,383x R² =,5132 %, 1, 2, 3, 4, 5, 6, 7, (T-t) in years -5% Announcement of Phase 3 qualitative restrictions 13-25%

14 III. Offset supply 919 Mt 65 Mt 282 Mt 47 Mt 14 Million tonnes (cumulated) Jan-5 May-5 Sep-5 Jan-6 May-6 Sep-6 Jan-7 May-7 Sep-7 Jan-8 May-8 Sep-8 Jan-9 May-9 Sep-9 Jan-1 May-1 Sep-1 Jan-11 May-11 Sep-11 Jan-12 May-12 Sep-12 Jan-13 May-13 ERUs (Track 2) ERUs (Track 1) CERs (Other types) CERs (N2O) CERs (HFC)

15 III. Spot EUA CER spread FIGURE 1 EUA AND OFFSETS PRICE SPREAD OVER EUA-CER price spread ( /t) Jan-8 Apr-8 Jul-8 Oct-8 Jan-9 Apr-9 Jul-9 Oct-9 Jan-1 Apr-1 Jul-1 Oct-1 Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 Apr-12 Jul-12 Oct-12 7% 6% 5% 4% 3% 2% 1% % Jan-8 Apr-8 Jul-8 Oct-8 Jan-9 Apr-9 Jul-9 Oct-9 Jan-1 Apr-1 Jul-1 Oct-1 Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 Apr-12 Jul-12 Oct-12 EUA-CER price spread (% of EUA price)

16 Use of offsets Total offset used (Mt) CER used (Mt) ERU used (Mt) Cumulated offsets used (Mt) Share of offsets in surrendered units 4% 4% 7% 13% Cumulated share of offsets in surrendered units 4% 4% 5% 7% 16

17 Use of offsets Cumulated use of offsets/total limit of use 6% 12% 21% 39% Share of installation having used at least one offset since 28 14% 21% 31% 44% Frequency of use (share of installations using offsets) 14% 15% 22% 3% Intensity of use (offsets used / average annual limit of use) 31% 3% 51% 95% Specific intensity of use (offsets used / average annual limit, only for installation using offsets) 98% 97% 136% 173% Share of installation having reach 1% of limit % 1% 2% 4% Share of installation having reach 75% of limit 2% 3% 6% 18% Share of installation having reach 5% of limit 2% 4% 13% 24% Share of installation having reach 25% of limit 4% 11% 21% 35% Share of installation which did not use any offsets 87% 8% 7% 58% 17

18 III. Observed and forecasted use Average intensity of offsets use, by category of behavior etc Average use of annual limit Constant users 83% 73% 92% 98% 86% All except % 118% 127% 118% All except % 96% 128% 114% 86% 7% 78% All except 29 91% 148% 147% 129% 83% 151% 117% 85% 182% 133% Only in % 133% All except % 115% 14% 112% 127% 71% 99% 95% 19% 12% Only in % 135% 171% 186% 179% Only in % 281% Only in % 256% Absent users % Million tonnes Simulated use of offsets up to 22 + Assumptions : Phase 3 rules Phase 3 offset supply Evolution of behavior Offsets used in the EU ETS ZEPHYR-Flex scenario 18

19 III. Lessons from Linking Decentralized rules can lead to more uncertainty on the cap, and thus on future price and emission trajectory Legacy from the Kyoto framework: relying on outside standards can raise regulatory issues Applying ex post restrictions: intervention on the rules/criteria can have an opposite effect in the short term Clearly an arbitrage by participants on the market, leading to a relatively high use of offsets (55Mt in four years), and lower compliance costs Nevertheless, economic optimum not fully established information problems reputational concerns transaction costs /tco Simulated Carbon price (Phase 1) Simulated Carbon price 19(Phase 2) Bluenext spot price 25-7 Bluenext Spot price 28-12

20 Outline Part I - Emissions trading: the key role of flexibility Part II - A prototype of ZEPHYR-Flex based on abatement and trading Part III - The use of carbon offsets: Good or Evil? Part IV - The calibration of ZEPHYR-Flex and the results on the first two trading periods Part V - Looking ahead: a multi-level regulation challenge 2

21 IV. Complete version of the model We add the time flexibility into ZEPHYR-Flex: the banking and borrowing provisions Time flexibility mechanisms implies to represent the anticipations of participants which play an essential role in our calibration exercise. Three decision criteria : 1/ Present internal position (EUA Stock Baseline Emissions) Perfectly known 2/ Anticipated future internal position (Expected growth compared to free allocations) over an anticipation period Imperfectly anticipated 3/ Market position through anticipation of bullish or bearish price Random (parameterized) 21

22 IV. Complete version of the model Total Allowances for Year Y (annual cap) Use of Kyoto offset for Year Y (exogenous) Free Allocation Auctions Installation 1 Installation 2 Installation 3 Installation 1, EUA Stock Baseline Emissions Position for Year Y MACCs EUA Price Year N+1 Anticipated position over the period Anticipated Future price Buying Selling Banking Borrowing Hedging/Speculation Market exchanges: Supply/Demand equilibirum for Year Y The price starts from zero and goes up as long as Buy +/- Hedging-Spec > Sales + AucMons + Offsets EUA equilibrium price Year Y Verified Emissions Year Y Emission Reductions Year Y Bought/Sold Year Y Banking/Borrowing Year Y 22

23 IV. Results after calibration /tco Million tonnes Simulated Carbon price (Phase 1) Simulated Carbon price (Phase 2) Bluenext spot price 25-7 Bluenext spot price Verified Emissions Baseline Emissions Cap (free+auction) CITL Verified Emissions Total cap (free+auction+offsets) Million tonnes Million tonnes Borrowed Hedged EUAs Borrowed Compliance EUAs Banked Hedged EUAs Banked Compliance EUAs 212

24 IV. Results after calibration The EU ETS induced a cumulated amount of emission reduction of about 1,54 Mt over the first two Phases. 6% have been obtained outside the scheme s perimeter through the use of carbon offsets (9 Mt) Given the level of the allowance cap, the cumulated net banking is close to 2, Mt at the end of 212 Anticipations are preventing the price from being zero Dynamic of behavior in the future? (shift to auctions, change of behavior following an intervention from public authority ) 24

25 Outline Part I - Emissions trading: the key role of flexibility Part II - A prototype of ZEPHYR-Flex based on abatement and trading Part III - The use of carbon offsets: Good or Evil? Part IV - The calibration of ZEPHYR-Flex and the results on the first two trading periods Part V - Looking ahead: a multi-level regulation challenge 25

26 V. Baseline with policy interactions Renewable Energy and Energy Efficiency policies can affect EU ETS perimeter s emissions independently from the EUA price: BAU EMISSIONS (a) SUPPLEMENTARY POLICIES UNDERACHIEVE (b) SUPPLEMENTARY POLICIES OVERACHIEVE 1 % 15 % 5 % EMISSIONS CAP 3% BELOW BAU Reductions from: energy efficiency polices technology policies price response in trading scheme Source: Baron (212) Integration in the model as a progressively lowered elasticity between production growth and baseline emissions growth (average of 6 Mt/yr in Phase 2 to 1 Mt/yr in 22) 26

27 V. Simulation of interventions /tco Three intervention scenarios are tested with the model: The introduction of a reserve price of 2 /t at auctions A back-loading (or set-aside) of allowances as proposed by the Commission on July, 25 th 212 A reevaluation of the allowance cap to 22 and 23 compatible with the Roadmap 25 /tco /tco Set aside 4Mt Set aside 12Mt Set aside 9Mt Roadmap (no anticipation change) Roadmap (change of anticipation) 27

28 V. Lessons Some intervention measures can induce more uncertainty and instability, as they would not allow firms to set up correct anticipations by themselves It is very difficult to send the right incentives to market players in the absence of explicit long term targets that are connected with the current and medium term cap (US SO 2 trading program included a 3 years cap) The unforeseen evolution of the macro-economic context, the state of international carbon markets and the link with an offsetting mechanism are factors which can be extraordinarily stimulating but also undermining if not dealt with appropriately 28

29 Propositions de la Commission La Commission vient de faire plusieurs propositions afin de «rétablir» l équilibre offre-demande : A court terme : Un «set aside» ou «back-loading» de 9 Mt, retirés des enchères de 213, 214 et 215 et réintroduits sur A plus long terme : un objectif renforcé pour 22? annulation d une partie des quotas de Phase 3? une révision du facteur linéaire de réduction du plafond? extension à d autres secteurs? révision de l accès aux crédits internationaux? management du prix? («discrete price management») Autres : Lien direct avec d autres marchés (Australie, Corée du Sud, Californie, Chine?) 29

30 Merci de votre attention October 17th, 212 Paris Dauphine University (D52) Climate Economics Chair - raphael.trotignon@chaireeconomieduclimat.org

31 Working papers and peer reviewed articles Trotignon, R. and Delbosc, A. (28), Allowance Trading Patterns During the EU ETS Trial Period: What does the CITL reveal?, Climate Report n 13, CDC Climat Research, June 28 Ellerman, A. D. and Trotignon, R. (29), Cross Border Trading and Borrowing in the EU ETS, The Energy Journal, Volume 3 (Special Issue 2), Climate Change Policies After 212, 29 Trotignon, R. and Leguet, B. (29), How Many CERs by 213?, Mission Climat of Caisse des depots, Working Paper n 29-5, August 29 Trotignon, R. and Solier, B. (211), The European Market on the Road to Phase 3, in De Perthuis, C. and Jouvet, P-A., eds. (211), Climate Economics in Progress 211, Chapter 2, Economica, October 211 Trotignon, R (212), Combining cap-and-trade with offsets: lessons from the EU-ETS, Climate Policy, Vol. 12, Iss. 3, 212 De Perthuis, C. and Trotignon, R. (212), The European CO 2 allowances market: issues in the transition to Phase III, Climate Economics Chair, Information and Debates n 14, March