Transcript Slide 1

Avoiding the threat of competitiveness
disadvantage through benchmarking
Integer/EII Conference
“Energy Intensive Industries & Climate Change”
Brussels, 25-27 November 2008
Annette Loske
Chairwoman Climate and Efficiency
Auctioning is the costly way
High ETS cost causes threat of carbon leakage
 Auctioning causes high ETS costs – direct & indirect through
electricity
 No signal from major players (India/China/US) to accept auctioning
as general method
 Auctioning in EU alone therefore too big risk, because it:
 distracts financial resources from industry for making investments
 causes carbon leakage at any meaningful CO2-price
 delays global agreement:
• auctioning in EU = cost advantage abroad
• global auctioning = cost advantage of efficient EU over USA,
China, India
IFIEC method – benchmarking based on actual production,
also for electricity – is advocated as the better way forward!
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Auctioning is the costly way
 Additional indirect costs for consumers through electricity price (as
compared to dynamic benchmarking)
Dynamic benchmarking vs. auctioning for the electricity costs (€ billion/a)*
* CO2-price € 40-60/tonne
Total EU-27
consumers
55-83
Households &
services
Industry
32-48
23-35
Source: ECOFYS 2008
Such cost savings resulting from a power price lower by 20 to 40 €/MWh
as compared to auctioning
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Carbon Leakage - Prove for high risk
Findings of Climate Strategies
Impact on Gross Value Added :
• at € 20/ton CO2 and € 10/MWh*
• at € 40/ton CO2 and € 20/MWh
• at € 60/ton CO2 and € 30/MWh
120%
80%
90%
60%
60%
40%
30%
20%
12%
6%
8%
4%
The 4% “danger line” drops significantly at the expected CO2 price of € 50-70/ton
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*The impact on power price is more like about 60%-65% than 50 %
Carbon Leakage – Negative in any case !
Misunderstanding
 of NGOs:
Carbon leakage beneficial and no problem if production outside
EU is more efficient.
 of EU Commission:
Definition of carbon leakage in draft Directive: „loss of market
share to less carbon efficient installations outside the
Community“
BUT:
Any contribution to EU reduction target achievement from carbon
leakage is detrimental and directly minimises the EU climate change
target, thus its global contribution!
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Carbon Leakage – Negative in any case !
What does carbon leakage mean to the CO2 reduction target
achievement and to global reduction effect?
CO2 emissions to be reduced until 2020
with
auctioning
RES
acc. to EU 20 %
target
(separate support)
JI/CDM
remainder
from 2nd
trading
period
Carbon leakage
Efficiency
improvement,
fuel shift,
innovation
CO2 emissions actually reduced until 2020
global effect
RES
acc. to EU 20 %
target
(separate support)
JI/CDM
remainder
from 2nd
trading
period
Efficiency
improvement,
fuel shift,
innovation
Carbon leakage
= emissions
elsewhere
with dynamic
benchmarking =
decrease of EU
contribution
minimized
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RES
acc. to EU 20 %
target
(separate support)
JI/CDM
remainder
from 2nd
trading
period
Carbon
leakage
CO2 emissions to be reduced until 2020
Efficiency improvement, fuel
shift, innovation
Intelligent Benchmarking is the better way
Benchmarks for the major emitters
 Total quantity of allowances is the same as under auctioning
 Is not a free ride, but gives challenging objectives
 Efficiency improvements directly stimulated
 A more realistic path towards a global scheme, on the way to
global auctioning in the future
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Intelligent Benchmarking is the better way
For allocation: what activity level – production – to be used?
 Historic production (2005 or 2005-2007)
 No reliable indicator for the
future
 Means auctioning for growth
and suppresses market share
growth of innovative producers
 Will not avoid potential carbon
leakage
 New entrants reserve: source of
distortions  thresholds
suppress efficient growth by
Source Entec-NERA
debottlenecking, anyway
uncertainty for growth
 Closure rule: wrong principle -100% is loss of allowances, -x% no consequence!
Historic production: source of distortions, unfairness and carbon leakage!
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Intelligent Benchmarking is the better way
For allocation: what activity level – production – to be used?
 Actual production: allowed & effective, minimising leakage
• Is permitted: Court of First Instance refuted Commission‘s worry that “ex-post
adjustments would create uncertainty for operators, and be detrimental to
investment decisions [to reduce emissions] and the trading market”
• Ex-post corrections are normal in economic life
 Income tax
 CERs and ERUs
• Provide clear certainty on trading position
 Benchmark set ex ante
 Production level and specific emissions known to installations
 Currently: uncertainty by guessing how long the granted allowances will
really last
• Dynamic system for a dynamic world: rewarding efficient market share
winners
• Gives no incentives for lowering production in EU – avoiding carbon leakage
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Dynamic Benchmarking and Guarantee of the Cap - 1
 Dynamic benchmarking: equal assurance on achieving the cap as auctioning
 Whereas: No allocation method can guarantee an unrealistic cap!
Method 1 for overall benchmarking system
• If necessary: possible adjustment of the benchmarks ex-ante for the future to
guarantee the total cap
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Dynamic Benchmarking and Guarantee of the Cap - 2
Method 2 for a mixed system (benchmarking for industry / auctioning for electricity)
• If necessary: correcting the electricity auction volume
• Not unfair: reflects the normal additional shortage as in a full auctioning
system while protecting industry for carbon leakage
Method 3: Applying a rolling average production
• Instead of actual production, e.g. last three year rolling average
• Approximation to a good system, however with remaining distortions
• Growing company must buy additional allowances once (competitive
distortions vs. other companies remain)
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Dynamic Benchmarking – analysis of criticisms:
Not valid, not based on facts
 Market transparency and liquidity not at all harmed
• Benchmarks are always ex-ante benchmarks
• Good knowledge of trading position (deviation from the benchmark x production)
 No need for additional benchmarks (compared to proposed Directive)
• Benchmarks for the vital few (Pareto rule) covering 80+% of emissions
• Generous treatment of the trivial many necessary
 No source for lobby pressure – it is an ex-ante determined system
• In contrast: determination of „exposed“ every 3 years, with vague criteria
 Avoidance of potential windfall profits for electricity / industry
• Historic frozen basis for benchmarking is the very source of windfall profits
 Equal scarcity of allowances
• Ex-post correction system allows some borrowing from the future, however:
borrowing from future years also allowed in auctioning
• Unnecessary NER in dynamic benchmarking eases scarcity
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Thank you for your attention !
Annette Loske
IFIEC Europe
Chairwoman Working Party “Climate and Efficiency“
Member of the Management Team
 [email protected]
+49-201-8108 422
For further details see
“The benefits and feasibility of an ETS based on benchmarks and actual production“
27 October 2008, at www.ifieceurope.org
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