The EU Emissions Trading Scheme (ETS)

1. Introduction2. Markets, Firms

&the Role of Government

3. The case of environmental policy

4. Global Economy I

5. Global Economy II

6. Global Economy III

Business in a Modern World Fabian Girod

The EU Emissions Trading Scheme (ETS)

Environmental Policy: Taxes, Permits, Standards




4. Global Economy I




2

1. Emissions Trading Scheme

… designed as an entity-based (countries) domestic cap & trade emissions allowance programme

… governed by Community Law specifying specificconditions for trading between entities & using a

special unit of trade – allowances – within the EU

… compatible with international emissions trading under the Kyoto Protocol (negotiated 1997; became effective 2005) & contribute towards achievement of KP target entity-based domestic cap & trade allowance scheme

...follow up agreement is going to discussed in Durban, 28th Nov. To 9th Dec. 2011




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Coverage

• start with carbon dioxide, other greenhouse gases are excluded at the moment

• The ETS now operates in 30 countries (the 27 EU Member States plus Iceland, Liechtenstein and Norway)

• CO2 emissions from installations such as power stations, combustion plants, oil refineries, iron & steel works, as well as factories making cement, glass, lime, bricks, ceramics, pulp, paper etc.




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Coverage (2)

– Installations are registered, not companies

– large installations

– Approx. 12000 installations

– These account for more than 45% CO2, 30% greenhouse gases in the EU

– Other sectors like transport are not covered, but addresses but other governmental programs to reduce emissions




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Time schedule of the ETS & initial allocation of permits

• Phase I: 2005 – 2007– free allocation (grandfathering)

• Phase II: 2008 – 2012 (incl. 2012)– Auctions for up to 10% of the permits

• Phase III: post 2012– A higher share of permits is planned to be sold





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Allocation

- Member States may auction up to 5% for 2005 to 2007 and up to 10% for 2008 to 2012

- Each Member State draws up an ex-ante national allocation plan (NAP); transparency and comments by the public. The third phase won’t allow NAPs anymore.

- scrutiny by the Commission

- Member States observe common allocation criteria




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Monitoring and reporting

– companies will monitor & report emissions following certain monitoring & reporting guidelines

– emission reports will be subject to independent verificationregistries

– Member States & the Community must establish & maintain electronic registries to track allowances

– at Community level a transaction log is maintained (see next slide)




4. Global Economy I




Example of NAP &Transaction log

8




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Example of transaction log - installation

9




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Sanctions

– for every tonne of emissions that is not covered by an allowance a company will have to pay a penalty of 40€ in 2005 to 2007 & 100€ in the period 2008 – 2012

– companies will also have to surrender a compensating amount of allowances in the subsequent year




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Cost-effective realisation of Kyoto-targets:

– cuts in greenhouse gases by 8% in the EU (average p.a. 2008-2012 compared to 1990)– e.g., UK: minus 12,5%; Germany: minus 21%

European Emissions Trading Scheme (EU ETS):(see EU Directive 2003/87/EC)

– CO2 emissions – energy-intensive sectors (iron and steel, minerals,

energy, pulp and paper)




4. Global Economy I




Cap from 2013 on

• Cap for 2013 determined at 2,04 billion allowances

• The cap for the year 2013 has been determined at 2,039,152,882 allowances, i.e. just under 2.04 billion allowances.

• The cap will decrease each year by 1.74% of the average annual total quantity of allowances issued by the Member States

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Emissions of carbon dioxide 2008 - (Mio t)

Source: Eurostat




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2. Data on the ETS

Source: Eurostat

Greenhouse gas emissions - Index of greenhouse gas emissions and targets - In CO2 equivalents (Actual base year = 100)




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Allocation of emissions & verified emissions2006

AT BE BG CY CZ DK EE FI FR DE GR HU IE IT LV LT LU MT NL PL PT RO SK SI ES SE GB0

100,000

200,000

300,000

400,000

500,000

600,000Allocation & verified emissions all sectors Allocation

Verified emissions

1000

EUA

/ kt

CO

2

2. Data on the ETS

Source: Eurostat




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Allocation of emissions, 2006

AT BE BG CY CZ DK EE FI FR DE GR HU IE IT LV LT LU MT NL PL PT RO SK SI ES SE GB-40,000

-30,000

-20,000

-10,000

0

10,000

20,000

30,000

40,000

Absolute difference between allocation & verfied emissions

1000

EUA

/ kt

CO

2

2. Data on the ETS

Source: Eurostat




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Verified Emissions

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Carbix – Price per certificate at the EEX

(European Energy Exchange)

2. Data on the ETS

Source: EEX, Leipzig; 2008




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Carbix – Price per certificate at the EEX (European Energy Exchange)

2. Data on the ETS (2)

Source: EEX, Leipzig; Nov. 2011




4. Global Economy I




2. Data on the ETS

Cost-/Benefit analysis of the German limestone industry

2010 to 2020, full auction from 2013 on, CO2-Price 30 € (2010)

1 2 3 4 5 6 7 8 9 10 110

50000

100000

150000

200000

250000

300000

350000

Source: EEFA, Berlin/Münster

Contribution margin additional CO2 costs additional CO2 costs and electricityMio Euro




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3. Problems and limitations

Problems: (what should be!)

Regulation of non-ETC sectors such that – marginal abatement costs are identical for all firms in

the non-ETS sectors and ETS sectors (cost effectiveness)

– national emission targets are met.– Info about marginal abatement costs necessary!

Limited number of participating sectors ‘appropriate’?See discussion Airlines!




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Political-economic issues:– Limited number of ETS sectors makes lobbyism easier

– generous allocation of allowances

– stricter emission targets for non-ETS sectors

– different marginal abatement costs (technological restrictions)

– no overall cost-effectiveness




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Dynamic issues:– Allocation of allowances is decided for each period

separately; no clear long-term perspective – incentives for strategic emission and production

behaviour– lack of dynamic incentives due to uncertainty about

future policy

Existing National Allocation Plans:- Allocation plans at short notice, e.g.: the aviation

industry might be included already within 3 years




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Distributional conflicts• Generous free-of-charge allocation of allowances:

– preferential treatment of ETS sectors over non-ETS– unequal allocation within ETS sectors

The question which arise with regard to the allocation is, what method to use when a distribution plan for certificates needs to be agreed on! Producing electricity is a different technological process and cannot be compared with the production of limestone.




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Competition Neutrality:Avoiding distortions of competition within the EU requires ‘identical’ cuts in emissions.

Problem: Competition neutrality inconsistent with EU burden sharing

Solution:– adjustment of total allowances for ETS sectors and

respective emissions in non-ETS sectorsBUT: inconsistent with cost-effectiveness

– partial auctioningBUT: inconsistent with compensation objective

•




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Competition Neutrality (2)• Competition between EU and Rest-of-the-world• Compensation for abatement costs to avoid leakage effects

Discussion:• Does international trade force states to implement lax

environmental policies? (“Race to the bottom?”)




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NAP Allocations

• The question of auctioning the permits and to which extend is still unsolved.

• Allocations below ‘business-as-usual’ policy but to generous to contribute to Kyoto targets.

• Preferential treatment of sectors exposed to international competition.




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4. (some) Conclusions & remarks

• Cost-effectiveness are only partially achieved.

• The objective of neutrality with respect to competition is not compatible with the objective of compensation and cost-effectiveness, given the EU burden sharing.

• Dynamic incentives are reduced by political uncertainty.

• Administrative costs?

• Conflicting goals: economic growth and environmental protection ?




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References

On various policies experiences:

• Tietenberg, T. (2007), Environmental Economics and Policy, 5th Edition, Boston et al.: Pearson – Addison Wesley, chapter 14-15.




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References

On ETS:• European Commission on emission trading:

http://ec.europa.eu/environment/climat/emission/index_en.htm

• Gilbert, A., Bode, J.W., and Phylipsen, D. (2004), Analysis of the National Allocation Plans for the EU Emissions Trading Scheme. ECOFYS.

• Grubb, M., Azar, C., and Persson, U.M. (2005), Allowance Allocation in the European Emissions Trading Scheme, Climate Policy 5 (2005), 127-136.

• Kolshus, H.H., and Torvanger, A. (2005), Analysis of EU Member States’ National Allocation Plans, CICERO WP 2005:02.

• Zetterberg, L., et al. (2004), Analysis of National Allocation Plans for the EU ETS, IVL Report, IVL Swedish Environmental Research Institute.

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The EU Emissions Trading Scheme (ETS)

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