WG1/2 27 th April 2007

1. WG1/2 27th April 2007 CCA23 lessons learned in M3 in the glass sector • Analysis of pass/fail scenarios in M3 • What should be a ‘Satisfactory Outcome’? • Result after CCA23 • CCA target changes • Tonnes CO2 taken/given • What Actually Happened • Analysis of CCA23 Situation • A Way Forward Prepared by John Stockdale & Jenni Staves British Glass

2. 5 out of the 13 were in EUETS Ph1Only 4 survived to M3

3. Summary of Glass Sector Double Counting in 2006Analysis of total of 13 EUETS installations 62%

4. How many mixed results in M3 double counting participants? Of the sectors for which there was information, over 30% of opted in TUs ended up with mixed P/F results. What would have been the ratio for all EUETS eligible TUs?

5. What is a satisfactory outcome? DEFRA draft review paragraph 3: “It was necessary to avoid the situation where the TU would be able to benefit from a surplus arising from the same emission reduction in both schemes, or alternatively be penalised in both schemes to cover the same shortfall. CCA23, and a subsequent addendum for CHP, describe the methodology that was used to avoid this double counting of emissions for TP3.” Because of potential for mixed outcomes glass suggestion for a better approach was: CCA23 method prevents a company from double trading without changing the CCA pass/fail outcome. Contained a “logic” step. Other industry methodologies also aimed at reducing extremes.

7. EUETS Opt ins surviving to end M3

8. Co. EUETS CCA CCA 23 Out come New CCA23 target as %age of original CCA target Effect of EUETS adjustment on the C02e tonnage to be ringfenced or purchased 1* → 106 CCA deficit reduced by 10,000 tCO2e 2 → 106 CCA deficit reduced by 8,000 tCO2e 3* → 104 CCA deficit reduced by 1,500 tCO2e 4 → 120 CCA surplus increased by 25,000 tCO2e 5 → 106 CCA surplus increased by 1,800 tCO2e 6 → 101 CCA surplus increased by 4,000 tCO2e 7 → 97 CCA deficit increased by 2,000 tCO2e 8 → 71 CCA deficit increased by 600 tCO2e 9 → 38 CCA deficit increased by 21,000 tCO2e 10 → 95 CCA deficit increased by 2,000 tCO2e 11* → 51 CCA deficit increased by 28,000 tCO2e 12* → 90 Deficit created due to CCA surplus reduced by 7,500 tCO2e 13 → 99 CCA surplus reduced by 3,500 tCO2e * Those in EUETS & applying CCA23 in M3

9. Co. EUETS CCA CCA 23 Out come EUETS adjusted target as %age of original target Effect of EUETS adjustment on the C02e tonnage to be ringfenced or purchased 1 → 106 CCA deficit reduced by ~10,000 tCO2e 3 → 104 CCA deficit reduced by ~1,500 tCO2e 11 → 51 CCA deficit increased by ~28,000 tCO2e 12 → 90 CCA surplus reduced by ~7,500 tCO2eto create a deficit EUETS Opt ins surviving to end M3

10. CCA23 and Phase Balancing In 2008 CCA23 requires no sale of 2007 allowances. But residue in 2007 is reduced by previous borrowing. What happens?

11. Double counting opt-ins for Ceramics

12. Effect of EUETS CCA23 adjustment on performance relative to target - All EU ETS companies Extreme changes to target values are recognised in last column of Table 2 of DEFRA review

13. Effect of EUETS CCA23 adjustment – Opted in Co.s

14. What actually happened? • In glass most of the eligible TUs fell into the mixed result scenario for which, glass would argue, CCA23 is not designed. Many TUs in other sectors did the same. • CCA23 changes to TU CCA target values were often greatly out of proportion to what could realistically be achieved. • The resulting deficit or surplus was often out of proportion to the actual performance against target. • In 5/13 cases there was no surplus to trade in CCA because there had been failure in any case and yet the deficit was increased. • In 3/13 cases the surplus of a passing CCA company was increased. • The financial damage/windfall was only limited due to what will most likely prove to be in the long term an exceptionally low market price.

15. Analysis of CCA23 situation • Analysis and decision making process on hold since July 2006 with the result that now short of time for M4 • Proposal for use in M4 only tolerable because it relies on very low EUETS price due to closure of Phase 1 market and excess MS allowances1. Will not be repeated at M5. • Current DEFRA review incomplete: • awaiting further information on categories of performance i.e. P/P, F/F, P/F, F/P. This is important because CCA23 is designed to deal with P/P & F/F scenarios and need to know extent of anomalies in P/F and F/P. (How many out of 140? 30%? E.g. actually 18/19 ceramics, 8/13 glass). • shows no thorough analysis of the alternative proposals and no other methodology has been put forward by government. • no financial analysis; results in tonnes CO2, yet recommendation for M4 relies entirely on market prices remaining as they are. • review (table 2 col. 6) suggests that sector balancing removes financial damage – not always the case as TUs not necessarily pooled and individual target swings can be extreme. • Opt in data skews picture as represents only those who opted to go in or couldn’t avoid it. Those at a disadvantage stayed out – sectors could provide complete opt out and opt in analysis. 1/ Paragraph 1 - A proposal for TP3 and TP4: “assuming there is no significant change to the EU allowance value, it is likely that double counting will have no adverse impact”

16. A Possible Way Forward: a compromise • Given • Lack of time now left before M4 • Low price and closure of Ph1 EUETS • Limited number Opt ins (and ignoring individual TU issues) • Do the following • As a backstop: use CCA23 for M4 • Comprehensively complete the review including points given above • Redefine the double counting objectives for all circumstances under Phase 2 conditions and reformulate CCA23 • Where appropriate develop split target regimes for those sectors/TUs capable of using them AND NOT “one size fits all”. End