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The way forward to a more efficient and effective EU-ETS IFIEC Europe‘s views

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 way forward to a more efficient and effective EU-ETS IFIEC Europe‘s views

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  1. The wayforwardto a moreefficientandeffective EU-ETSIFIEC Europe‘sviews Brussels, April 17th 2008

  2. 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

  3. 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

  4. 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

  5. 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

  6. 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???

  7. EcologicalEffectiveness The option of relocation means: Auctioning makes investments less realistic • High auctioningcostbasis • isdistractingfinancialmeansfromindustryformakinginvestments • makesother global locationsmuchmoreattractive • Auctioningisstimulatingrelocationofproduction • Relocationofproductionmeans: • Carbonleakage • Job leakage • Knowledgeleakage • Wealthleakage

  8. 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

  9. 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

  10. 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?

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