Co 2 emissions trading progress eu ets in 2007
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CO 2 emissions trading Progress EU ETS in 2007. European Chemical Regions Network (ECRN) “Competitive Chemical Regions in Europe” 5th Congress of the European Chemical Regions Network Ludwigshafen, BASF-Gesellschaftshaus, Rhineland-Palatinate, Germany 29-30 November 2007 . Vianney Schyns

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CO 2 emissions trading Progress EU ETS in 2007

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CO2 emissions trading Progress EU ETS in 2007

European Chemical Regions Network (ECRN)

“Competitive Chemical Regions in Europe”

5th Congress of the European Chemical Regions Network

Ludwigshafen, BASF-Gesellschaftshaus,

Rhineland-Palatinate, Germany

29-30 November 2007

Vianney Schyns

Manager Climate & Energy Efficiency

Utility Support Group

Utility provider for a.o. DSM and SABIC


Contents

  • ECRN’s vision on emissions trading

  • High Level Groups EU Commission

  • Present situation

  • Annex: Structural shortcoming present allocation rules

  • Annex: Structural solution benchmarks with ex-post adjustment to actual production


ECRN’s vision on the instrument Greenhouse Gas emissions trading

Maastricht Declaration, 22 December 2005

Tarragona Declaration, 9 November 2006

“Major improvements still needed”


ECRN’s vision on GHG emissions trading

  • Present flaws

    • Historical grandfathering not effective

    • Electricity windfall profits, bound to increase from 1st period 2005-2007 € 15 billion/year to 2nd period 2008-2012 € 55 billion/year  loss of competitiveness

    • No level playing field

    • Finite new entrant reserves  insecurity new plant & debottlenecking investments

    • Frozen ex-ante allocation  enhances frozen market shares

    • Lack of stable long-term recognition of CHP

  • Proposed solution, as alternative to auctioning

    • Benchmarks with ex-post adjustment to actual production

    • Guarantee of the total cap (novel method launched in Tarragona


High Level GroupsHLG Competitiveness, Energy and the EnvironmentHLG Chemical Industry

Clear advice HLG CEE


HLG CEE and HLG Chemical industry

  • High Level Group CEE members

    • Commissioners Verheugen, Kroes, Piebalgs and Dimas + representatives industry, NGOs and others

  • The HLG CEE advice for EU ETS on 2 June 2006

    • EU Commission & Member States to undertake (for implementation in 2nd period, but this failed)

      • Stronger signal towards low carbon technologies

      • Competitiveness, reduce impact windfall profits

      • Level playing field new investments across EU

      • How can rules, notably for new entrants and closure, be more harmonised, incl. the possibility of using a benchmarking approach

  • HLG CEE 30 October 2006 confirmed statements above

  • HLG Chemicals: Member Reiner Haseloff, president ECRN


Present situation

Historical grandfathering  historical mistake

Lowering production, no benefit for environment

Industry wants benchmarks  no (partial) auctioning

Auctioning seems ideal for electricity  facts tell a different story

Recent legal cases


Historical grandfathering  historical mistake

  • Historical grandfathering was a historical mistake

    • Recognised by EU Commission, March 2007

  • 3rd Trading period: perhaps auctioning for electricity & (partial?) auctioning and/or benchmarking for industry

  • EU Commission will come with a proposal for revised EU ETS Directive January 2008 – then co-decision EU Parliament & Council

    • Takes 1.5 – 2 years, is no decision for single Member State

  • Benchmarking for allocation to operators

    • Ex-ante: based on historical production  second historical mistake?

    • Ex-post: based on actual production


  • Lowering production …

    • “Lowering Production is no Benefit for the Environment, says European Industry”

      Paper Alliance-Cefic-IFIEC, 21 May 2007, in line with ECRN

      • EU Commission declared end 2006

        • Lowering production and selling freed allowances is equally legitimate than investing in emissions reductions and selling freed allowances

      • European Industry recalled founding father J.H. Dales (1968):

        • “Pollution in one region must never be reduced by increasing pollution in another”

        • Ex-ante allocation  root cause of many distortions

        • Call for link to actual production

        • Italian representatives EU ETS review: “intra-period updates”


    Benchmarks, no auctioning & solution “windfalls”

    • Industry is against auctioning

      • Auctioning electricity

        • Electricity prices remain high  bad for competitiveness / leakage

        • Windfall profits 1st period € 15 billion/year to 2nd period € 55 billion/year at CO2-price 30/ton

        • Full auctioning 3rd period: windfalls still high (IFIEC paper 23 Nov 07)

      • Auctioning industry

        • Bad for competitiveness, “leakage” by production relocation

      • Call for benchmarks (ECRN, CEOs e.g. Jürgen Hambrecht BASF with Alain Perroy Cefic visit Verheugen 23 Nov 07) and solution windfall profits (letter European industry 16 Nov 07)

      • Auctioning with Border Adjustments at EU borders is not practical (huge bureaucracy), cannot be realised with few products only (it affects thousands of products)


    Recent legal cases (1)

    • UK against EU Commission (judged 23 November 2005)

      • EU Commission can only assess NAP against art. 10 & Annex III

      • No objection within 3 months = approval (e.g. rules of Germany, France, Italy, Luxembourg, Poland about guarantee new entrants)

      • A NAP can be changed after Commission’s approval of an earlier notified NAP (no “provisional” notification needed)

    • 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 asserts 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

      • Germany may apply ex-post in 2nd period if case is won …


    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, SEE ANNEX


    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 bad?

    • Eight new legal cases

      • 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

      • Rumania and Bulgaria to follow?

      • Influence Burden Sharing on allocation is perverse

    • Solution: benchmarks linked to actual production


    AnnexStructural shortcomings of present allocation rules in the EU ETS

    Environmental effectiveness

    Level playing field

    Competitiveness & electricity windfall profits

    Insolvable problems new entrants & closures


    Basics of shortcomings present allocation

    • Existing plants: ex-ante frozen cap based on historical emissions – rewarding pollution – same quantity allowances whether production increases or decreases

    • New plants and debottleneckings: also an ex-ante frozen cap, which is plan-economy

    • Systemic “disincentive for efficient growth”, “reward of shrinkage”

    • This allocation principle = root cause of all shortcomings, PLUS, mostly as a result of this:

      • Insecurity investments in new plants (finite reserves)

      • Highly distorting transfer rules

      • New plants few versus existing plants many allowances: LACK OF EFFECTIVENESS to invest to reduce emissions


    Summary shortcomings allocation

    • Threat to reduce economic activities in Europe

      • Not producing & selling allowances can be more profitable

      • CARBON LEAKAGE without environmental justification

    • Rules differ across Europe

      • NO LEVEL PLAYING FIELD

    • No structural reward of early action, no equal standards, lower emissions can come into next historic reference

      • INNOVATION NOT STIMULATED, NO EFFECTIVENESS

    • New entrants: thresholds, finite reserves

      • INVESTMENT INSECURITY

    • Market share winners buy allowances, to losers sell

      • CARTEL, winners pay penalty to losers … no free market


    Electricity windfall profits

    • State interference prevents competitive market

      • New entrants, vital for more competition, but ex-ante state decision of operating hours determine profitability – plan economy

      • Transfer rules protect incumbents: barrier to entry can be € 0.25billion for a 1000 MWe power plant (4 years, or trading period)

      • Even worse: incumbent does not apply for transfer rule and keeps old plant stand-by (imagine 1000 MWe plant, ~ € 0.2 billion/year)

    • Fight for allowances overrides fight for market share

    • Price of system: economic rents – windfall profits

      • Transfer of wealth 2nd period € 55 billion/year at € 30/ton CO2(EU-27)

      • Even with full auctioning 3rd trading period 2013-2020 still € 45 billion at € 35/ton CO2


    24€

    46€

    (2)

    (3)

    60€

    67€

    (3)

    84€

    (3)

    (3)

    57€

    (3)

    60€

    (3)

    28€

    70€

    (1)

    (3)

    49€

    (3)

    24€

    (1)

    32€

    (1)

    < 25€

    (4)

    • Sources:

    • Presentation European Aluminium Association HLG-Ad hoc 1 (Long Term Contracts) -2005

    • R.Tarjanne and K. Luostaninen, Lappeenranta University of technology (Long term contract) – 2003

    • Platts Base load year 2007 (Platts 4 April 2006)

    • Jean Maillard

    World Map electricity prices (€/MWh)

    20€

    (1)


    Present ETS rules: new entrants & closures

    • Unsolvable dilemmas new entrants (NE) & closures (C)(see e.g. also Grubb and Neuhoff, Stern, Egenhofer, Weishaar, Matthes, Schyns, Ecofys report for the EU Commission)

      • Theory: freeze allocation [all allowances after C & zero for NE]

      • Zero for NE actually hinders low carbon investments/competitiveness

      • Retaining allowances after C – how long? – is worse than transfer rules as it enhances market concentration

      • Withdrawal allowances after C: perverse incentive keeping inefficient plants in operation

    • Most authors elaborate these problems, but fail to conclude that within individual ex-ante frozen caps solutions are simply impossible  search for squared circle


    AnnexStructural solution: benchmarks with ex-post

    Which benchmarks and how

    Guarantee of total cap


    Benchmarks with ex-post

    • Few benchmarks provide high coverage

      • E.g. electricity, cement, refineries, steamcrackers, etc.

  • Real benchmarking is easier that often assumed

    • Output related, same BM for incumbents & new entrants

  • Benchmarks with ex-post adjustments of production, solution for:

    • Leakage, level playing field, effectiveness, no insecurity for new entrants, no transfer rules, no windfall profits, free market without cartel problem

    • Works exactly as auctioning

  • Two new studies launched at ECRN Tarragona

    • How to ensure total cap with ex-post

    • How does it work in the electricity market


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