CEPS Carbon Market Forum 23 April 2013, Brussels Options for structural measures in the EU ETS Stefan P. Schleicher Wegener Center for Climate and Global Change University of Graz A B B C C D E F F G G H I I I L L L L M N N P P R S S S S U T
Suggested steps for structural measures A long-term target path instead of trading periods with fixed caps A flexible supply mechanism that maintains the intended stringency of the target path Emissions or emissions intensities can be used as base of the target path Auctioning revenues can serve for stimulating technical innovation Small emitters may be considered for a different instrument
These steps motivate the agenda A reminder of the facts Understanding the fragmentation of the EU ETS market What may have gone wrong It is not only the oversupply of allowances Elements of a structural reform of EU ETS More than backloading and tightening
A reminder of the facts Understanding the fragmentation of the market
Power sector dominates Accounts for 73 % of emissions
Short and long positions Measuring the stringency of the market The (relative) position is the difference between allocation and verified emissions related to allocation The position is short if negative and long if positive Gross long positions summarize all long positions and gross short positions all short positions The net position is the difference between gross long and gross short positions
Time profile of positions Overall market Only in 2008 the market was in a short position The net positions result from a wide variation of long and short positions Percent of allocation 50 25 0-25 -50 Gross long Gross short Net long Net short EU ETS Net Position All Sectors 2005 2006 2007 2008 2009 2010 2011 2012
Market fragmentation between Power and NonPower sectors 50 25 Gross long Gross short Net long Net short EU ETS Net Position Power and Heat Power sector was rather short Percent of allocation 0-25 NonPower sector was always long Differences between trading periods -50 50 25 2005 2006 2007 2008 2009 2010 2011 2012 Gross long Gross short Net long Net short EU ETS Net Position NonPower and NonHeat Percent of allocation 0-25 -50 2005 2006 2007 2008 2009 2010 2011 2012
Profile of sector positions 2008-2012 Only Power and Heat was short EU ETS Total Power and Heat Refineries Cement and Lime EU ETS 2008-2012 Net Position All countries Pulp and Paper Substantial long Other Sectors Coke, Iron, Steel and Metals positions of Aircraft other sectors -40-20 0 20 40 60 Percent of allocation Net short Net long Gross short Gross long
Profile of country positions 2008-2012 The overall market was long by about 5 % Country positions differ EU ETS Net Positions All sectors 2008-2012 Scale x -50% -50% < x -20% -20% < x -5% -5% < x 0% 0% < x 5% 5% < x 20% 20% < x 50% 50% < x not in EU ETS ETS but no data Austria 7.2% Belgium 15.3% Bulgaria 27.5% Cypres 26.0% Czech Republic 13.4% Denmark 3.2% Estonia -2.1% Finland 6.4% France 21.6% Germany -11.0% Greece 2.8% Hungary 5.6% Iceland 14.6% Ireland 12.9% Italy 4.4% Latvia 37.9% Liechtenstein 59.7% Lithuenia 25.3% Luxembourg 27.9% Malta 8.5% Netherlands 5.6% Norway -86.2% Poland 3.4% Portugal 18.3% Romania 30.1% Slovakia 33.2% Slovenia 1.1% Spain 9.5% Sweden 13.6% United Kingdom -4.0% Total 4.7%
Dispersion of country positions 2008-2012 Only 4 countries were short Many countries show a wide variation of gross positions EU ETS Total Norway Germany United Kingdom Estonia Slovenia Greece Denmark Poland Italy Netherlands Hungary Finland Austria Malta Spain Ireland Czech Republic Sweden Iceland Belgium Portugal France Lithuania Cyprus Bulgaria Luxembourg Romania Slovakia Latvia Liechtenstein EU ETS 2008-2012 Net Position All Sectors Net short Net long Gross short Gross long -40-20 0 20 40 60 Percent of allocation
What may have gone wrong It is not only the oversupply of allowances
The uncertainty from the stringency of allowances to technical change Stringency of allowances Carbon price Technical change
Interacting and conflicting EU 2020 targets 20 % reduction of GHG emissions 20 % share of renewable 20 % less end-use energy One of these targets is redundant Subsidies for renewables had perverse impacts on the electricity market Incentives for switching from gas to coal
The performance of the current fixed emissions cap based supply mechanism This mechanism serves as a benchmark for evaluating enhanced mechanisms
The current fixed cap based mechanism (1) Fixed trading periods and (seemingly) fixed caps 110 Emissions cap based supply Allocations 2005 =100 100 90 80-1.74 % p.a. Target path 70 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
The current fixed cap based mechanism (2) Actual performance in two trading periods Allocations 2005 =100 110 100 90 80 Emissions cap based supply ETS Emissions verified ETS Emissions allocated Target path 70 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
The current fixed cap based mechanism (3) Supply discrepancies Percent of 2005 allocation 40 20 0 Accumulated allocation discrepancies Emissions cap based supply -20 2005 2006 2007 2008 2009 2010 2011 2012
Elements of a structural reform of EU ETS More than backloading and tightening
(1) A long-term target path (up to 2050?) instead of fixed caps with fixed trading periods This will create confidence for investors
A long-term target path Emissions Start target T α Target path End target T ω α ω Time
(2) A flexible supply mechanism that maintains the intended stringency of the target path This will decouple the stringency of supply from fluctuations of economic activity
Supply compensation for maintaining target stringency S actual supply of allowances Emissions Adjusting to a long market T -1 T Adjusting to a short market D -1 C -1 D C D -1-1 -1 S D -1 S T -1 T T target supply as to the emissions target path C actual emissions D discrepancy between target supply and actual emission D T C S = T D -1-1 0-1 0 Actual supply of allowances in the current year compensates the discrepancy between target supply and actual emissions of the previous year. Time
(3) Emissions or emissions intensities can be used as base for the target path The stringency of the target path will determine the incentives for technical change
Emissions target path based mechanism (1) Long-term emissions path e.g. -1.6 % p.a. Allocations 2005 =100 110 100 90 80-1.6 % p.a. Emissions target path based supply with compensation Target path 70 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
Emissions target path based mechanism (2) Simulated performance in two trading periods Allocations 2005 =100 110 100 90 80 Emissions target path based supply with compensation Emissions verified Compensated supply Target path 70 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
Emissions target path based mechanism (3) Supply discrepancies Percent of 2005 allocation 40 20 0-20 Accumulated allocation discrepancies Emissions cap based supply Emissions target path based supply 2005 2006 2007 2008 2009 2010 2011 2012
Reasons for switching to an emissions intensity target An emissions intensity target encompasses both an - energy efficiency target and a - carbon share target C carbon emissions E energy used Q GDP I emissions intensity An emissions intensity target can be considered as a substitute for the current three EU 2020 targets I C / Q emissions intensity energy efficiency carbon share [C / Q ] [E / Q] [C / E]
Emissions intensity target path based mechanism (1) Long-term emissions intensity path e.g. -1.4 % p.a. Allocations 2005 =100 110 100 90 80 Emissions intensity target path based supply with compensation Emissions intensity target x GDP -1.4 % p.a. Emissions intensity actual Emissions intensity target Emissions target 70 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
Emissions intensity target path based mechanism (2) Simulated performance in two trading periods Allocations 2005 =100 110 100 90 80 Emissions intensity target path based supply with compensation Emissions verified Compensated supply 70 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
Emissions intensity target path based mechanism (3) Supply discrepancies Percent of 2005 allocation 40 20 0 Accumulated allocation discrepancies Emissions cap based supply Emissions intensity target path based supply -20 2005 2006 2007 2008 2009 2010 2011 2012
Extensions of the compensated supply mechanisms Different sector target paths e.g. power and heat and remaining sectors Compensation for offsets Offsets shall not have an impact on stringency of supply Corrections for forecast errors Updates depending on reported emissions and GDP figures
(4) Auctioning revenues may serve for stimulating technical innovation This can be done via a technology fund for targeted technology policies
EU needs to become aware of loosing in the global technology competition National Science Board (2012): Science and Engineering Indicators The technology gap of EU vs. US and China is widening
(5) Small emitters may be considered for a different instrument 85 % of installations account for only 10 % of total emissions
Highly unequal size distribution of installations 85 % installations account for only 10 % emissions Percent of emissions 100.00 90.00 80.00 70.00 60.00 50.00 40.00 30.00 20.00 10.00 Emissions vs. installations 75 % installations 5 % emissions 0.00 0.00 20.00 40.00 60.00 80.00 100.00 Percent of installations 85 % installations 10 % emissions
Not back to square one but opening the mindset for a structural reform Embedding EU ETS into a targeted technology package Focusing on big emitters and long-term emissions targets Maintaining the stringency of the targets independent of output fluctuations by an enhanced supply mechanism
Thank you. Stefan P. Schleicher Wegener Center for Climate and Global Change University of Graz Stefan.Schleicher@uni-graz.at +43 (316) 380-7512 A B B C C D E F F G G H I I I L L L L M N N P P R S S S S U T