Climate change policy as today’s driver for energy policy

IFIEC Europe’s suggestions for EU ETS post 2012

AEM XI. Autumn Conference, Prague11 September 2008Hans GrünfeldPresident IFIEC Europe

Ingredients effective CO2 policies

Unconstraint CO2-emission growth

scenario

Sustainable Emission growth scenario

CO2-emission Cap

CO2-inefficient production

CO2-efficient production

Emission volume =100+X

X

Strong carbon price signal

Emission volume =100+X

Global agreement•Efficiency improvement

•Fuel shift

•Innovation

•Global emission reduction

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Auctioning is the costly way

High ETS cost causes threat of carbon leakageHigh 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 investmentscauses carbon leakagedelays 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 IFIEC method – benchmarking based on actual production – would be the better way!production – would be the better way!

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Benchmarks for the major emitters Total quantity of allowances is the same as under auctioning Same guarantee of the total cap

For allocation: what activity level – production – to be used?Historic production (2004-2006 or 2005-2007) means auctioning for growth and suppresses market share growth of innovative producers

What about low production in new Member States?

New entrants reserve: very cumbersome thresholds suppress efficient growth by debottlenecking, anyway uncertainty for growth

Closure rule: Principle is wrong: -100% is loss of allowances, -x% no consequence! Practice is: often more plants on a site no loss of allowances

Ecofys study and also 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”

Actual production: allowed & effective, minimising leakage

Intelligent Benchmarking is the better way

Impact carbon pricing methods

Auctioning IFIEC-method

CO2-inefficient production

CO2-efficient production

CO2-allowancesEfficiency benefit

CO2-inefficient production

Benchmark

Auctioning and IFIEC-method have identical CO2-efficiency incentive, at very different costs

Benchmark

Findings of ECOFYS study on the IFIEC method, April 2008

Cost saving potential IFIEC method

Total EU-27 consumers

IFIEC method vs auctioning applied to electricity costs (€ bn/a)*

32-48

55-83

23-35

Households & services

Industry

* CO2-price € 40-60/tonne

Findings of ECOFYS study on the IFIEC method, April 2008

Such cost savings resulting from a power price lower by 20 to 30 €/MWh as compared to auctioning

Carbon pricing and risk leakage

Source: Carbon Trust

€ 40-60/tonne CO2 price under auctioning causes considerable leakage problems

Impact of cost difference

Leakage threatens realisation of prime CO2 policy objectives

withauctioning

with IFIEC-method

Fossil fuel replaced by

RES acc. to EU 20 % target (separate support)

JI/CDM remainder from 2nd trading period

Carbon leakage

CO2 emissions to be reduced until 2020

Fossil fuel replaced by

RES acc. to EU 20 % target (separate support)

JI/CDM remainder from 2nd trading period

Efficiency improvement, fuel shift, innovation

Efficiency improvement, fuel shift, innovation

IFIEC-method and cap

Projected production scenario

Benchmark

Emission reduction objective secured through adjusting benchmarks

Cap

Actual production growth

t1 t2 t3t0

Source: Ecofys

Overall emission reduction objective

… and international agreement

Different benchmark paths provide flexible approach towards global level playing field

t1 t2 t3t0

EU US China

Transition period towards global level playing field

t4

IFIEC proposition

Power To avoid unnecessarily high power costs:Free allocation based on benchmarks and actual production

Industry

Effective carbon price signal which minimises risk of carbon leakage

Free allocation based on benchmarks and actual production

Compensate for high power prices:Indirect allocation and allocation to CHPallowances for indirect emissions from electricity use in addition to allocation of direct emissions to industry (from auction volume to power)

based on electricity benchmark

(1) that gives fair compensation of the ETS‘ power price effect

(2) that is incorporated in product benchmarks to set incentive for efficient electricity use

(3) that maintains effectiveness of the scheme

or

Summary: Benchmarking method

Aims at core business of worldwide manufacturing operations

Allocates allowances ex-post, based on actual production with efficiency correction– Transparent– Fair– No externalities

Provides flexible instrument for application under uncertainty conditions