Conference
CO2 trading 2006
Institute for International Research (IIR)
Mercure Hotel Amsterdam
aan de Amstel
26-27 September 2006
Vianney Schyns
Manager Climate & Energy Efficiency
Utility Support Group
Utility provider for a.o. DSM and SABIC
Contents
1. Structural shortcomings present allocation rules
2. High Level Group Competitiveness, Energy and
the Environment
3. Structural solution: benchmarks with ex-post
4. What may happen next
Structural shortcomings of present allocation
rules in the EU ETS
Environmental effectiveness
Level playing field
Competitiveness & electricity windfall profits
Harmonisation results so far 2nd period
Scope definition
Success (??)
Furnaces in ammonia out
Auctioning % (max 10%)
No
From 0% - low %
Limit JI/CDM
No
7%-50% (Esp/Irl)
Germany/NL 12%
New entrants
Yes: from reserve
Guarantee allowances:
No: finite reserve
only Germany, Poland,
No: uniform benchmarks France, Italy, Luxembourg
Closure
Yes: no allowances if
total permit site closes
What if part of site? What
if decrease <100%
Small installations
No
Fuzzy, EU Commission
offers “legal creativity”
Electricity windfall profits
No
Lower allocation Eproducers, hardly a cure
Incentive low carbon
technologies
No
EU ETS not effective for
CHP, CCS, innovation
Allocation to incumbents
• Ex-ante frozen caps per company: scientific method?
– Different (choices) reference years in different Member States
– Different efficiencies of different plants, polluter rewarded
– What is allocation in 2013 in case of investment to reduce
emissions in say 2010?
– What happens in case of market share winners & losers?
= Innovative winners (‘frontrunners”) hampered/penalised
– Production decrease 100% (closure)
= Site closure: no allowances
= Multiple plants one site: all allowances retained … how long?
– Production decrease < 100%
= Always all allowances … how long?
– Trade-off import product from outside EU (leakage of emissions)
= AGE models show 5%-20% leakage (Kuik, 2005)
• Historical grandfathering must come to an end
Allocation to new entrants – expansions
• Idea is equal treatment with incumbents, therefore
reserves for new entrants, but many distortions
– Thresholds in many Member States, not in others
– Finite reserves without solution (most Member States)
– Solution: state buys allowances from market as borrow from next
period (Germany) or not ? (France, Italy, Poland, Luxembourg)
– Transfer rules: incumbent producer shuts down old plant and
keeps allowances (Germany, France, Italy, etc.)
• Highly polluting plants longer alive
– Few allowances to new entrants
– Closure rules, thresholds new entrants, finite reserves
– A remedy is transfer rules, but these distort
Environment & Competitiveness
• Incentive low carbon technologies, effectiveness
– CHP hardly stimulated, rules generally fail for CCS (Carbon Capture
& Sequestration), allocation to coal twice as for gas
– Highly polluting plants longer alive
– Innovative growers hampered
– Incentive for “leakage” (disincentive for growth, reward shrinkage)
• Present ex-ante rules simply kill electricity liberalisation
– Winning and losing market share: zero sum game
– New entrants vital for competition, but ex-ante state decision of
operating hours determine profitability – plan economy
– Transfer rules protect incumbents: barrier to entry can be € 0.25
billion 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, 1 ton/MWh, 6-7
Mton/year = ~ € 0.2 billion/year … how long?)
Dutch NAP 2 is not better, peculiarities
• Emission factor steam production gas or real (lowest)
– Punishment of rest fuel utilisation instead of flaring – incinnerator
• Maximisation 115% & minimisation 85%: ineffective
– Study Öko-Institut dismisses this Dutch practice
• Beta-formula (benchmark/real) even worse than in NAP 1
– Now beta x emission plants, now excl. utility emissions
– Meaningless if emission outside plant (paper, chemical industry)
• Worldtop severe against historical emission elsewhere
– Statistically elsewhere = EU average emission
• Allocation to new entrants: discrimination & not effective
– Thresholds (+10% site or 50 kton): often not abroad, NL new sites
and NL industry parks; not effective; NE before 1-1-07: beta & -5%
– Few allowances not effective, “never more than needed” by definition
24€
46€
(2)
(3)
60€
84€
(3)
67€
(3)
(3)
57€
(3)
60€
(3)
28€
70€
(1)
(3)
49€
(3)
24€
(1)
32€
(1)
< 25€
(4)
World Map electricity prices (€/MWh)
20€
(1)
Sources:
(1) Presentation European Aluminium
Association HLG-Ad hoc 1 (Long
Term Contracts) -2005
(2) R.Tarjanne and K. Luostaninen,
Lappeenranta University of
technology (Long term contract) –
2003
(3) Platts Base load year 2007 (Platts 4
April 2006)
(4) Jean Maillard
Electricity windfall profits
• Electricity windfall profits have arrived – as predicted
– Cause is the ex-ante frozen cap per operator, the opportunity to
sell allowances when not agreeing a contract (opportunity-costs)
– Systemic “disincentive for growth”, “reward of shrinkage”
– Transfer of wealth to € 40-50 billion/year or more (EU)
– Opportunity-cost = government induced minimum cash flow
• Remedy of short allocation E-sector hardly a cure
– Cut of 15% means 85% advantage remains
– Dutch cut 15% largely compensated by 3 out of 5 reference years
– Short allocation to E-sector encourages 100% pass-through
• Structural solution = elimination root cause
– From ex-ante to ex-post
High Level Group on Competitiveness, Energy
and the Environment
Advice for 2008-2012
Review Directive (2013+)
HLG on Competitiveness, Energy & the Environment
• High Level Group Members: Commissioners Verheugen,
Kroes, Piebalgs and Dimas + representatives industry,
NGOs and others
• Advisory: each member a sherpa and 4 ad hoc groups
• The HLG decided to advice for EU ETS on 2 June 2006
– EU Commission & Member States to undertake for
implementation in 2nd period
=
=
=
=
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, can be
more harmonised, incl. the possibility of using a benchmarking
approach
Structural solution: benchmarks with ex-post
Which benchmarks and how
Ex-post and the Directive
What may happen next?
NAPs can be modified
Legal case Germany against EU Commission
Starting with benchmarks is easy
4. Lobby Dutch Parliament & EZ/VROM
• EZ/VROM must formally answer to Parliament
• Focus on electricity and ex-post plus better
benchmark for crackers
• Current allocation to electricity
– Killer free market, liberalisation process
– Misunderstanding: one benchmark would kill coal
• Ex-post allocation
– Most Member States really want but don’t dare
– Legal case Germany very strong, outcome Oct-Dec 06
– DSM/SABIC “invented” new elegant method
4. Progress lobby Europe
• HLG recommended improvements 2008-2012
• Most Member States far too late with NAPs
– Most have low allocation to electricity, windfalls remain 80%
• All -1 EU federations advocate benchmarks & ex-post
• First Commission paper on review of Directive (2013+)
– DG ENV doesn’t dare to admit failures now … “regulatory stability”
– Strong tendency towards partial auctioning, esp. EP
– Chemical industry probably fully in the scheme
• Chance Germany wins ex-post case against Commission
– October/November or early December 2006
– Germany reserved the right to apply ex-post 2008-2012 (… our help)
4. Focus lobby 2nd half 2006
• Main targets
–
–
–
–
–
Benchmark & ex-post electricity
Benchmarks for main products really feasible
Planning security new entrants
No auctioning 2013+ (review)
Environmental effective scheme: now far away
• Actions
–
–
–
–
–
Participation Cefic, IFIEC, VNCI, etc., contact VCI, VIK, etc.
Dutch Parliament
More action via (board) VNO-NCW (?)
Participation HLG & contacts Member States & EP
Case DSM/SABIC against Commission and/or Dutch gvmt NAP 2 (?)