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Proposal new EU ETS directive

Proposal new EU ETS directive. Announced 23 January 2008. Vianney Schyns Manager Climate & Energy Efficiency Utility Support Group Utility provider for a.o. DSM and SABIC. No surprises on the scope. Extension with aviation as from about 2011 Extension with big emitters

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Proposal new EU ETS directive

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  1. Proposal new EU ETS directive Announced 23 January 2008 Vianney Schyns Manager Climate & Energy Efficiency Utility Support Group Utility provider for a.o. DSM and SABIC

  2. No surprises on the scope • Extension with aviation as from about 2011 • Extension with big emitters • Ammonia – including the process emissions – aluminium including PFCs (perfluorocarbons) and N2O from nitric-, adipic-, glyoxal- and glyoxylic acid • Extension about 145 Mton/year (7%) • Exclusion of small emitters possible • Provided measures with similar reduction result • Criteria are rated thermal input capacity < 25 MW and < 10,000 ton/year GHG emissions • Exclusion can be 15 Mton/year (0.7%) and up to 5,000 sites of the present 12,000 • Re-entry if GHG emission 10,000 ton or more • Net addition: 130 Mton/year excl. aviation

  3. Total cap • Allocation 2008-2012: 2,083 Mton/year • Shortage 6.5% of verified 2005 emissions • 2,220 Mton 2005 is 43% of 5,177 Mton GHG EU-27 • With net addition 130 Mton/year: 2,350 Mton in 2005 45% EU-27 • EU-27 is in 2005 at -6% of -8% Kyoto target • EU-27 2020 target -20%: so -14% remains, “but” • ETS sectors: -21% compared with 2005; but electricity goes down faster due to much more renewables (est. +300 (min) – 500 TWh; 400 TWh x 0.7 Mton (modern coal) 280 Mton = 13% of 2005 ! • Non-ETS sectors -10% • ETS sectors: • -21% of 2,220 = 1,754, but Commission says 1,720 • Cap linear down from 1,974 in 2013 to 1,720 in 2020 • With addition 130 Mton: cap 2020 1,820 Mton (excl. aviation)

  4. Use of CERs and ERUs • Allowed in 2nd period: 1,400 Mton = 280 Mton/year • Allowed in 3rd period 2013-2020 in absence of a global agreement: zero extra • Unused credits can be banked • Allowed 1400/13 = 108 Mton/year • Allowed with global agreement: 50% of extra reduction • Assume extra reduction 200 Mton/year • Allowed then 100 Mton/year in 2020, so 50 Mton/year average • Total then: (1,400 + 400)/13 = 138 Mton/year • Fortis modeled € 48/ton in absence of global agreement

  5. Proposal of the allocation • Electricity: 100% auctioning as from 2013 • Industry: phase-in of auctioning, 20% in 2013 and 100% in 2020, unless: • Industry is exposed to global competition; • Then up to 100% free allocation, or • Border Adjustments: importers buy allowances, exporters get refund of allowances • Who is exposed • Commission will present report not later than mid 2011 to EP and Council who is exposed and who not

  6. Positions about allocation • Industry is against auctioning • Germany wants free allocation for industry, supported (more or less) by France, UK and probably Poland and others • So no discussion about who is exposed and who not • Border Adjustments • Mandelson, UK, USA opposed; Sarkozy (was) in favour

  7. Auctioning seems ideal  facts tell different story • 1st trading period, € 12/ton CO2 • Higher electricity cost: 2,750 mln MWh x € 5/MWh ~ € 14 billion/year • Cost of allowances: ~ zero (EU as a whole) • Economic rents electricity: ~ € 14 billion/year • 2nd trading period, € 30/ton CO2,electricitytypically 25% short • Higher electricity cost: 3,000 mln MWh x € 21/MWh ~ € 63 billion/year • Cost of allowances: 25% x 1,250 Mton x € 30/ton ~ € 9 billion/year • Economic rents electricity: ~ € 54 billion/year • 3rd trading period, € 35/ton CO2,assume full auctioning • Higher electricity cost: 3,300 mln MWh x € 25/MWh ~ € 82 billion/year • Cost of allowances: 100% x 1,070 Mton x € 35/ton ~ € 37 billion/year • Economic rents electricity: ~ € 45 billion/year • Auction revenues only 45% of total economic effect • Auctioning reduces economic rents with only 17%

  8. Historical grandfathering  historical mistake • EU Commission will come with a proposal for revised EU ETS Directive in January 2008, then co-decision EU Parliament & Council • Takes 1.5-2 years, is no decision for single Member State Allocation rules • Historical grandfathering was a historical mistake • Finally recognised by EU Commission, March 2007 • 3rd Trading period: perhaps auctioning for electricity & (partial?) auctioning and/or benchmarking for industry • Benchmarking for allocation to operators • Ex-ante: based on historical production latest of 2006 2nd historical mistake? • Ex-post: based on actual production

  9. Leakage danger underestimated • Leakage analyses show serious flaws • Assumption low CO2-price, e.g. € 20/ton both in Ecfin and Climate Strategies; most analysts predict much higher prices as consequence of the stringent targets, e.g. Deutsche Bank in de 2nd period € 35/ton, Fortis € 48/ton in absence of global agreement, CBI/McKinsey € 60-90/ton by 2020. • Assumption “only few sub-sectors” exposed to global competition  most sectors affected • Assumption electricity “not exposed”  industry pays 40% of bill • Detrimental for especially aluminium, electrolysis, etc. • Assumption (prosperous) recent added value, recent import and export balances  no guarantee for the long period to 2020 • Assumption added value hardly relevant  relevant is trade-off direct + indirect CO2-cost against transportation in Europe

  10. Border Adjustments: not feasible in practice • Border adjustments • Border obligation for only most CO2-intensive part of each sector – e.g. clinker for cement, blast furnace steel for steel, crackers for petrochemical industry no remedy for value chain optimisations • Thousands of products affected, example chemicals and polymers until their application in final consumer goods (cars, electronic equipment, etc.) • Check on importer data enormous work/bureaucracy • Import: buy allowances  how much, how many products? • Export: refund of allowances  how much, how many products? • Results • Hole in the total cap! • Huge bureaucracy, can never be effective

  11. Recent legal cases (1) • Germany against EU Commission (judged 7 Nov 2007) • Germany contested the prohibition of the EU Commission to apply ex-post adjustments (also in 1st & 2nd guidance note) • Germany asserted that the whole Directive – also art. 10 and Annex III – does not forbid ex-post, provided total cap ensured • Court of First Instance fully confirmed German case • Findings of the Court a.o.: • “…, neither the incentivefor operatorsto reducetheiremissionsnor the certainty in respect of investmentsmade for this purpose is affected by the ex-post adjustments, quite the reverse.” (para 128) • “The Commission was wrong in asserting at the hearing that this recital [20] did no more than “record” a desirable future effect … only a “subordinate objective” … “whether the ex-post adjustments at issue are compatible with … recital 20 … the Directive “will encourage the use of more energy-efficient technologies … producing less emissions per unit of output.” (para 139)

  12. Historic production tells nothing about the future Quality of historic data for operators … with climate change instruments based on history? Variations in annual load factors over five years, found in UK by consultant NERA for UK government • Link to actual production: • Avoids distortions • Avoids windfall profits • Solves problems new entrants and closures

  13. Recent legal cases (2) • What means a historic cap: many new plants enter the market? • Many new power plants in Italy around 2009 .. Germany .. NL • What means a historic cap: import or export of product? • More electricity import NL from Germany – Is NL then doing well? • New CHP in Luxembourg – Is Luxembourg doing badly? • Nine new legal cases running now • What means a historic cap: economy is strongly recovering? • Forecast of growth in central Europe, 8 legal cases European Court of Justice against EU Commission: Czech Republic, Estonia, Hungary, Latvia, Poland, Slovakia, Lithuania and Malta, Slovakia withdrew. • Rumania and Bulgaria followed • Influence Burden Sharing on allocation is perverse • Solution: benchmarks linked to actual production

  14. Transition for a global trading scheme Benchmark: Specific energy use or CO2 emission Benchmark China-India Incentive low carbon technologies the same in global trading scheme Benchmark USA-Canada Benchmark EU-Japan Global benchmark Transition period (with 3 or more BMs for same product) avoids high cost in case of auctioning for regions with higher emissions per unit of product (vital: BMs without differentiation new/old plants) 2008 2012 2017 2022 2027 2032

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