Assessing the ENVI report

02 March 2017

This document provides summary material and charts examining the report adopted by ENVI on reform of the EU ETS in the period 2021-2030.

Preliminary data shows emissions in 2016 down 2.7% compared to LRF of 1.74% - structural surplus above 3Bt for the first time

• Structural surplus have built in EU ETS (available to the market and destined to the MSR)

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• Emissions have been consistently below the cap

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Sandbag forecast 1754Mt

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Reductions to date due to power sector policies – no incentive for economy wide decarbonization due to persistent surplus and low price

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Power Non-power Total EUETS

Changes of EU ETS emissions (stationary sources) 2011–2016

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ENVI proposal has no meaningful impact on system by 2020

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Base Case MSR ENVI MSR Base Case Surplus ENVI Surplus

• Only impact is moving 211Mt of surplus available to market into MSR, but over 1.5Bt still remain

By 2030, after initial increase in withdrawal rate, MSR design ensures that supply-demand balance is similar to base case

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Base Case MSR ENVI MSR Base Case Surplus ENVI surplus

Increasing the LRF to 2.4% has only a minor impact on the market before 2030

• Increasing the LRF to 2.4% only decreases the cumulative surplus in 2030 by 242Mt during Phase 4 (3-5% of cumulative surplus in 2020, 1.6% of cumulative cap for Phase 4). In 2030, the cap difference is 44Mt.

5• Assuming the same rates, the cumulative cap difference

is over 2Bt by 2050

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2.2% cap 2.4% cap

3% (44Mt) difference in 2030

Cancellation of 800Mt from MSR becomes relevant in 2050s

• Cancellation will not have an impact because the MSR will contain 3.7 – 5.4Bt by 2030 and it only returns 100Mt/yr. Effect will be felt in 30 years

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MSR volumes in 2030 by decade of return

3,581 Mt Total

Cancellation of 800Mt

Effect of all reform proposals does not restore EU ETS functionality

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• By 2030, difference in surplus is 200Mt, difference in MSR volume is only 39Mt

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Base Case MSR ENVI report MSR Base Case Surplus ENVI report surplus

Rebasing the cap has immediate impact from 2021, because it addresses the surplus at source

• A surplus is no longer being generated in Phase 4 and the existing surplus will immediately start decreasing

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*Average 2016-2018 emissions, reduced by 3*Ph3 LRF used as the new cap starting point

• Increasing the LRF in addition to rebasing further increased stringency.

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Cumulative surplus Cumulative MSR Cap Emissions Forecast

Because rebasing aligns to actual emissions it is robust to different outcomes over the remainder of Phase 3

• If emissions fall faster or slower than anticipated to 2020, rebasing would still ensure that the surplus does not continue to grow throughout Phase 4

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• In the highly unlikely case of emissions above the cap in 2020 the existing cap would be an upper limit.

* Average 2016-2018 emissions, reduced by 3*Ph3 LRF used as the new cap starting point

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Cumulative surplus Cumulative MSR Cap Emissions Forecast

Rebasing will not induce application of CSCF under current ENVI proposals, including the import inclusion mechanism (IIM)

• Cumulative headroom is a negative 370Mt in this scenario. However, up to 660Mt would be available from the proposed conditional reduction of the auctioning share.

10* Benchmark reductions at 0.25%, 0% emissions growth, cement/lime subject to IIS

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total FA ceiling for industry applicationannual headroom cumulative headroomCSCF for those who get it (secondary axis)

Price impact is moderate, in part because the existing surplus provides a large cushion. Even rebasing has only a moderate impact with prices reaching the expected Phase 3 level of €30/t only around 2030.

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Note: Price scenarios are indicative only, based on analysis of the supply demand balance and abatement costs. They are for the purposes of comparing reform options only.

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Historical Price SB Base PriceSB Higher MSR Rate Rrice SB 2.4% LRF PriceSB Rebasing Price SB Low Emissions PriceTR Base Price TR MSR PriceICIS Base ICIS MSRICIS LRF

Rebasing will increase the value of funds by up to 50% as price increases outweigh the effect of reductions in the number of allowances.

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• The expected increase in the carbon price, will grow the value of funds, despite volume reduction (and there is no volume reduction from the innovation fund).

• Average price over Phase 4 still averages below €30/t

• Prices used here are consistent with the price charts in the previous slide.

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€ 12,239

€ 6,233 € 6,026

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€ 10,035

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Modernisation fund Solidarity Fund Innovation Fund

Value BAU Value Rebasing