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The way forward to a more efficient and effective EU-ETS IFIEC Europe‘s views. Brussels, April 17 th 2008. Lessons from the ECOFYS report : Not just the alternative: Windfall Profits or Auctioning But: Free allocation is possible without windfall profits !
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The wayforwardto a moreefficientandeffective EU-ETSIFIEC Europe‘sviews Brussels, April 17th 2008
Lessonsfromthe ECOFYS report: • Not just the alternative: Windfall Profits orAuctioning • But: Free allocationispossiblewithoutwindfallprofits! • Withthe IFIEC method: • Achievingthereductiontargetsbysetting same low-carbonincentives • Byguaranteeingthe total cap • Thusreaching same CO2-price level • Setting necessarypricesignalforevaluatinginvestments in efficiencyimprovements • Avoidingcarbonleakage ClimatePolicyEffective-ness Economical Efficiency • Atsignificantlylowercostsfor all consumers • Withthewindfallprofitsproblemcompletelysolved • Avoidingknowledge, jobandwealthleakage
Economical Efficiency Small adaptation of current system – actual but not historical production level is what counts – allows to limit the price effect to the costs for abatement requirements For the power price that makes a huge difference: 20,60 €/MWh Power priceupliftbyauctioning • Possiblecostsavings: • For all consumers: €55 bn/yr • Thereofforindustry: €23 bn/yr Power pricewith IFIEC method
Economical Efficiency Solving the windfall profits problem with auctioning? • Windfall profitproblemonlypartlysolvedbyauctioning • Windfall profitproblemsolvedcompletelyby IFIEC method • Effectofauctioningforthefunctioningoftheelectricitymarket: • Hugefunds in thehandsof a smallgroupof large generatorsforfurtherconsolidatingthemarket Extra cost for all consumers auctioning vs. IFIEC method Thereof windfall profits for nuclear power CO2-price 40 €/t, Benchmark 0.515
Economical Efficiency Effect of lower electricity price in the IFIEC method on households – assessment of a trade-off • Households save electricitycostsof € 32 bn / yr* • Households will usemoreelectricityand save less CO2 • But: households‘ electricityconsumptionisverypriceinelastic • Assumption: 10 % priceincreaseleadsto 1 % lessconsumption • Thatmeans: • With IFIEC method 7.7 Mt CO2 not saved • Targetedreductionmeasuresforhouseholdsatrealistic 40 €/t CO2wouldcost € 308 Mio = about 1 % ofthecostsaved in households *) Assumption: CO2-price 40 €/t, Benchmark 0.515
EcologicalEffectiveness • For an investmentdecisionthepossiblecostadvantagereachedthrough an efficiencyimprovementiswhatcounts • In auctioning: - havingtobuyless • In IFIEC-method: - havingtobuyless, and/or • havingsomethingtosell • Twocalculationswithidenticaloutcome ! • The underlying, additional costsforauctioning do not changethiscalculation! • Same low-carboninvestmentincentives ! • But is an investmentreallyequallyrealistic in bothsystems???
EcologicalEffectiveness The option of relocation means: Auctioning makes investments less realistic • High auctioningcostbasis • isdistractingfinancialmeansfromindustryformakinginvestments • makesother global locationsmuchmoreattractive • Auctioningisstimulatingrelocationofproduction • Relocationofproductionmeans: • Carbonleakage • Job leakage • Knowledgeleakage • Wealthleakage
EcologicalEffectiveness What does carbon leakage mean to the CO2 reduction target achievement? How to reach the target? CO2 emissions to be reduced until 2020 Fossil fuelreplacedbyRESacc. to EU 20 % target (separate support) JI/CDMremainderfrom 2ndtradingperiod Carbonleakage Further efficiencyimprovement, fuelshift, innovation with auctioning CO2 emissions to be reduced until 2020 JI/CDMremainderfrom 2ndtradingperiod Further efficiencyimprovement, fuelshift, innovation Carbonleakage Fossil fuelreplacedbyRESacc. to EU 20 % target (separate support) with IFIEC-method
EcologicalEffectiveness What does carbon leakage mean to the CO2 reduction target achievement? • More carbonleakageresults in lowerincentivesforefficiencyimprovement, fuelshiftandinnovation • Loweringproductionis not a positive measure • Real carbonefficiencyimprovementsare • EU industrywantstocontributetohigh CO2-reductions withinthe EU
Allow EU Industrytoremainthe global low-carbonleader ! • Develop EU-ETS in a waythat • Reachesthechallengingtargetsatreasonablecost • Saving € 20-80 bnofcoststoconsumersannually • Cuts windfallprofitsof fossil fuelgeneration plus upto €30 bnannualwindfallprofits also ofnuclear power producers • Builds on efficiencyimprovementsand innovative technologiesratherthan on loweringproduction • Counts on thehighqualitycontributionsof EU industrywithinthe EU • The IFIEC methodcanprovideforthat! Can the EU affordtoignore an optionfor EU-ETS whichdeliversthe same CO2reductionsbysettingequalincentivesforlow-carbontechnologies, but atsignificantlylowercostsfor all electricityconsumers?