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19112012 industry policy brief - rethinking the eu emissions trading system

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19112012 industry policy brief - rethinking the eu emissions trading system

  1. 1. Industry policy brief Rethinking the EU Emissions Trading System The European Commission has just presented in November its views on the future evolution of the EU Emissions Trading System (ETS). Firstly, as a short term measure, the Commission proposes to change the timing of the auctioning of ETS and postpone auctions of 900 million GHG emission allowances planned for 2013, 2014 and 2015. A ‘fast track’ decision on this proposal is expected by March 2013. Secondly, in a report on the state of the European carbon market, the European executive unveiled six-policy options to review, in the long term, the EU ETS structure. There is now scope for stakeholders to make their views known on the Commission’s proposals. With a turnover of some €90 billion in 2010, the EU ETS is the world’s largest carbon market. Around 80% of it is traded in futures markets and 20% in spot markets. The EU ETS Third trading period will start on 1st January 2013 and from that date the distribution of greenhouse gas (GHG) emission allowances will be entirely managed at EU level. The EU ETS had at the end of 2011 a surplus of almost 1 billion allowances and this amount is likely to be well over 1.5 billion by the end of 2013. The surplus has been building up due to national over-allocation policy and specific EU regulatory provisions related to the transition from Phase II to Phase III. In the near future, this may result in temporary downward pressures on carbon markets where the recent price are already low at around €6 per tonne. In its report on the state of the European carbon market, the European Commission notices therefore that the current price signal has become less important for investment decisions and does not incentivize fuel switching from coal to gas and renewable energies. In order to tackle the growing structural supply-demand imbalance, the Commission presented long term structural policy options to pave the way for a revision of the ETS Directive. Diagram 1: Short-to-long term ETS future developments according to the draft Directive 1
  2. 2. Industry policy brief The ‘backloading’ proposal1 Amendment to the Auctioning Regulation On November 12th, the European Commissioner for climate action, Connie Hedegard presented an amendment to the Auctioning Regulation for the phase III. The Commission proposed to delay 400 million tonnes in 2013, 300 in 2014 and 200 in 2015; increasing consequently the volumes of auctions by 300 million tonnes in 2019 and 600 million in 2020. This adjustment is supposed to ensure a smooth transition from the second to the third period. The European commission opted thus for the ‘medium change’ option from the three alternatives it previously presented to public consultation: a limited delay of 400 million tonnes, an intermediate option of 900 million tonnes or a major intervention with the backloading of 1.4 billion tonnes. By selecting the middle option, the Commission hopes that it will have a reasonable impact on carbon prices. Diagram 2: Adjustments of credit allowances to be auctioned in 2013-2020 according to the draft Directive Pro and contra arguments The information was considered as market sensitive. After the announcement, the carbon prices rose slightly to over €9 a tonne in anticipation of the move, but remains still well below the €30 objective set in 2009. The proposal raised debate among stakeholders which are divided on the question between companies defending low-carbon investments and energy-intensive industries which fear a negative impact on their business model. 1 COM(2012) 595 Final Proposal for a Directive of the European Parliament and of the Council amending Directive 98/70/EC relating to the quality of petrol and diesel fuels and amending Directive 2009/28/EC on the promotion of the use of energy from renewable sources. 2
  3. 3. Industry policy brief European businesses in favour of an intervention on the carbon market underline that the unprecedented economic and financial crisis created an ill-balanced pattern of emission allowances which provide a negative signal on investments in low carbon technologies. The low carbon price leads furthermore to significantly lower than expected revenues from auctions for Governments. In a joint statement sent to the European institutions, 16 major energy companies 2 underlined the fact that a failure to act quickly could threaten growth as investments may remain on hold. Without urgent intervention, the EU ETS would face the risk of being undermined and replaced by other national policy instruments. The market intervention remains however controversial as price allowances would be increased artificially. Some agree that higher carbon price may reduce competitiveness and be detrimental to certain energy-intensive industries which are already facing an economic crisis. This short term measure could also undermine progress on ETS structural revision. Diagram 3: Arguments in favor and against the proposal of backloading EU ETS emission allowances according to the draft Directive Next steps The draft amendment has been sent to the European Parliament and the Council of Ministers and requires an approval by both institutions. In this file, the European Commission is supporting a ‘fast track’ procedure with the objective to reach a final compromise by spring 2013. On December 17th, the European Parliament environment committee is expected to present its draft report. The first vote in the European Parliament is expected in March 2013. 2 th In a letter sent to the European Parliament, Council and Climate Change Committee on November 12 , 16 leading companies pleaded for an urgent intervention in the carbon markets. This included Alpine Energie, Alstom, Areva, Danish energy association, Dong energy, Doosan, EDF, EnBW, E-on, Eurec Agency, First Solar, GDF Suez, GE, Statoil, Shell and Unilever. 3
  4. 4. Industry policy brief The report on the State of the European carbon market3 Six policy options The European Commission considers the ‘backloading’ proposal as an interim measure which would not affect the structural surplus of around 2 billion allowances over the 2013-2020 period. As allowances allocated during the crisis can be used long after the crisis is over, the effects of the surplus will be making themselves felt up to 2020 and beyond. The European Commission proposes thus six non-exhaustive options for structural measures to tackle these growing supply-demand imbalances. Diagram 4: Overview of the six options proposed by the European Commission for the structural revision of EU ETS Option 1: Increasing the EU reduction target to 30% in 2020 The European Commission proposes as a first option to increase the GHG reduction target to 30% in 2020. This would require reducing the overall cap in the ETS in the period 2013-2020 by 1.4 billion allowances. This could be achieved either through a consequential amendment to the quantity of allowances (option b) or via a revision of the annual linear reduction factor (option c). A more ambitious cap for phase 3 would also have implications on the carbon market beyond 2020. Option 2: Retiring a number of allowances in phase III The European Commission also suggests reducing the number of allowances in phase III by permanently retiring a number of allowances from the amount foreseen to be auctioned. This measure requires primary legislation, but could be implemented via a separate decision, to be taken by the European Parliament and Council, rather than a fully-fledged revision of the EU ETS directive. Option 3: Reviewing the annual linear reduction factor The emission cap in the ETS decreases by a linear factor of 1.74% annually below the average total cap for the period 2008-2012. Now, the current linear factor leads to a just over 70% reduction in 3 COM(2012) 652 Report from the Commission to the European Parliament and the Council on the state of the European carbon market in 2012. 4
  5. 5. Industry policy brief the ETS cap by 2050, which is not in line with the EU’s long term objective of 80-95% reduction by 2050, as agreed in the 2050 Low-carbon Roadmap. The European Commission proposes to change this linear factor in order to set more ambitious reductions over time. Nonetheless, this option poses problems, such as how to ensure the EU’s competitiveness in key low carbon technologies, and limit the risk of ‘carbon leakage’. Option 4: Extending the scope of the EU ETS to other sectors Another option could be to include sectors less strongly influenced by economic cycles and currently outside the EU ETS, as for instance the fuel consumption in other sectors. The European Commission considers it as a possible next step in the strengthening of the EU ETS. However, it recognizes that this option would require more analytical work, on how it would affect already existing policies in those areas and who would carry the obligation to report on the progress achieved. Option 5: Limiting access to international credits The recognition of international credits in the ETS was in principle set to limits compliance costs for businesses. But with emissions being substantially lower than the cap, the volume of international credits allowed in the period 2008 to 2020 has turned out to be rather generous and is strongly contributing to the structural surplus. The Commission estimates that without international credits, the surplus would be only around a quarter of the current amount. The European executive suggests that after 2020, access to international credits could be limited or even not allowed. This would create more certainty regarding the effort to be undertaken in Europe, but may impact financial flows and the transfer of technology to developing countries. Option 6: Setting discretionary price management mechanisms The ETS is designed as a quantity-based instrument, where a predefined quantity of emission allowances determines the outcome. This can result in periods of low prices if emissions decrease below the cap. The European Commission proposes to set a carbon price floor for auctions that would create more certainty about the minimum price. Discretionary price mechanisms could also be supported through a price management reserve where allowances are deposited in cases of excessive price decreases. However, such market intervention raise a number of design questions, including what the required governance arrangements would be to avoid carbon prices becoming a product of administrative and political decisions, rather than a result of market demand and supply. Next steps The Commission is now inviting stakeholders to give their points of view. Any of the options considered would require a new legislative proposal, accompanied by an impact assessment and a public consultation. The Commission is expected to unveil its final proposal in 2013. Brussels, 19 November For further information on this issue, please contact Romain Seignovert at : romain.seignovert@mslgroup.com o: +32 27 37 92 18 m: +32 490569350 5

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