Examining the Environmental Impact of EU ETS: an Input Output Approach - Lawan Usman Ali 2 1 1 Introduction 2 2 EU–15 Annual Carbon Emissions by Sector

Examining the Environmental Impact of European Union Emissions Trading Scheme

(EU-ETS) - an Input Output Approach

LAWAN Usman AliCEPMLP – University of Dundee

2

Outline

Examining the Environmental Impact of EU ETS: an Input Output Approach - Lawan Usman Ali

1 Introduction

2 EU–15 Annual Carbon Emissions by Sector

3 Kyoto Protocol and the EU Emissions Target

4 EU–ETS : Mechanism and Operations

5

6

Methodology : The Input – Output Model

7

Results and Interpretation

8

EU-15 Energy & CO2 Intensity

9

Environmental Impacts

10

Conclusion

Comments & Questions

3

Introduction


Global warming is defined as an increase in the Earth’s temperature and is

triggered by a rise in greenhouse gas emissions.

Most of the world’s emissions are attributed to mankind’s large scale use

of fossil fuels

Burning fuels such as Coal, Natural

Gas, & Oil Produces GHGs to the atmosphere in

excess amount.

Leading to Climate Change manifestation – Increase harsh weather conditions, damaging storms, drought & other Global

Warming Effects that cause increase economic & health

problems for both man & animals

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Fig. 1: EU – 15 GHGs Emissions by Sector (2008)


EU – 15 Annual Carbon Emission by Sector

Agriculture10%

Energy29%

Indus-tries7%

Manufact & Const13%Transport

21%

Waste3%

Others17%

EU - 15 GHG Emissions by Sector (2008)

Agriculture Energy Industries Manufact & Const TransportWaste Others

Carbon Dioxide83%

Methan

e8%

Nitrous Oxide7% Others

2%

EU - 15 GHG Emissions by Gas Type (2008)

Carbon Dioxide Methan Nitrous Oxide Others

Fig. 2: EU – 15 GHGs Emissions by Gas Type (2008)

Data Source: European Environment Agency (EEA) Data Source: European Environment Agency (EEA)

The greenhouse gas most commonly produced by our activities is carbon dioxide (CO2) & is responsible for 63% of man-made global warming. In 2008, CO2 emissions was responsible for 83% of GHGs Emissions in the EU–15 while Methane, Nitrous Oxide & Others recorded the balance 8%, 7% & 2% respectively

In 2008, Energy Sector is the highest emitter of GHGs with 28%. Followed by Transport 21% while Manufacturing, Agriculture and Industries have 13%, 10% and 7% respectively. Waste had 3% & Others 17%.

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Kyoto Target: - The EU 15 member states has a Kyoto target to reduce their GHGs emissions by 8% in the period 2008-2012 compared to its base year (1990) level.


The EU Kyoto Targets

Fig. 3: Trends in EU GHGs Emissions Compared to 1990/Base Yr

Data Source: European Environmental Agency (EEA)

19901991

19921993

19941995

19961997

19981999

20002001

20022003

20042005

20062007

20082009

70

75

80

85

90

95

100

105

110

EU-15 Total Greenhouse Gas Emissions

87.30

Index base year =100, EU-15

EU-15 Total GHGs Emissions 1990 2009

Emission Reduction (1990-2009)

Agriculture 441.171 378.864 -14.123095Energy 1167.319 1061.136 -9.0963139Industries 352.882 250.285 -29.074025Manufact & Const 635.828 453.142 -28.731984Transport 693.74 809.987 16.7565659Waste 183.67 112.411 -38.7973Others 790.301 657.889 -16.754629Total Emissions 4264.911 3723.714 -12.689526

The emission level in the 'base year' is the starting point for tracking progress of domestic emissions for EU-15. The base year is a calculated emission level from which emission reductions will take place (4,247,409). In practice, EU-15 base-year emissions can be considered close to 1990 emissions. The EU-27 does not have a Kyoto target.

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EU – ETS : Mechanism and Operations


Emissions trading: - market based scheme for environmental improvement that allows parties to buy and sell permits for emissions or credits for reductions.

EU Emissions Trading Scheme: - The EU ETS was launched in 2005 and is the EU's climate change policy tool which helps industries to cut their CO2 emissions. The EU ETS is considered a central instrument for reaching the EU-15 target under the Kyoto Protocol.

Under the scheme, large emitters of CO2 are under an obligation to report their annual CO2 emission and to return an amount of emission allowance that is equivalent to their CO2 emission in that year. On the other hand, if an emitter is able to reduce its CO2 emissions then it is allowed to sell its emission credit and make a profit.

The EU ETS currently covers more than 10,000 installations with a net heat excess of 20 MW in the energy and industrial sectors which are collectively responsible for close to half of the EU's emissions of CO2 and 40% of its total greenhouse gas emissions.

The EU ETS aims to promote reductions of GHGs emissions in a cost-effective and economically efficient manner. The system operates through the allocation and trading of greenhouse gas emission allowances throughout the EU. One allowance represents one tonne of carbon dioxide equivalent.

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EU - ETS Con’t


EU – ETS

Mechanism &Operations

Mechanism: - The trading mechanism consists of matching emission buyers and sellers and then settling them by depositing a valid allowance in exchange for the agreed financial consideration. Just like the Stock Market, Companies and individuals can trade using brokers who are listed on the exchange.

Allocation: -• Free Allocation: An overall 'cap', is set by each Member

State on the total amount of emissions allowed from the installations covered by the system. The allowances are then distributed by Member States to the installations in the system.

• Auctioning: From 2013 emission allowances will be traded on a common auction platform, this will replace the free allocation of allowances generally followed in the first (2005-2007) and second (2008-2012) trading periods.

Pricing: - The actual carbon price is determined by market fundamentals – i.e too many allowances will result in a low carbon price and Vice Versa. For Instance, the average price of carbon was €22/tCO2 in the second half of 2008 but decreased to €13/tCO2 in the first half of 2009.

8Examining the Environmental Impact of EU ETS: an Input Output Approach - Lawan Usman Ali

EU - ETS Con’t


EU - ETS Con’tEU ETS PHASE

Level of the cap Coverage Allocation rules Auctioning Kyoto credits

Phase1(2005-2007)

Sum of caps in eachcountry’s NAP basedon negotiating processes between Member Stategovernments and theEuropean Commission playing the role of “enforcer of scarcity”.

• CO2 only• Power stations, ferrousmetals production,cement, refineries, pulpand paper, glass andceramics, and all combustion facilities >20MW and some opt-outs• 42% of the European emission

At discretion of Members States but there is common characteristics:• Auctioning is little used• Strong reliance on recent historical emissions• Expected shortage isallocated to the power sector• New entrant/closure provisions is made

Maximum 5%, (only 4 Member States used auctioning, mostly to coverAdministration costs)

CDM and JI allowed excludingland use. Member States set caps on how many allowances can be imported

Phase 2(2008-2012)

Sum of caps in eachcountry’s NAP aimedat respecting Kyototargets and governedby European Commission “anti-subsidy” rulings thatprevent allocation exceeding.

• CO2 with some N2Oemitting facilities opt-in• Sectors: As of phase 1 without opt-outs. Somecombustion facilitiesbelow 20 MW opt-in• Air travelling is proposed for inclusion in 2011 or 2012.• Possibly the maritime emissions related

At discretion of MembersStates but there is commoncharacteristics:• Auctioning is little used• Strong reliance on recenthistorical emissions• Expected shortage isallocated to the power sector• New entrant/closure provisions benchmarked

Maximum 13.4%(UK: 7%, Germany: 8.8%)

As of phase 1

Phase 3(2013-2020)

Cap calculated for Europe as a whole decreasing by1.74%/yr from phase2 average annual allowances starting in2010 and aimed todeliver 21% emissionreduction in 2020 compared to 2005level and continuethereafter at the samerate with a review in 2025

• CO2, nitrous oxide foracid production andPFCs for aluminium• Additional sectors:non-ferrous metals, rockwool, gypsum, variouschemicals, CCS relatedemissions• Combustion facilitiesabove 20MW withharmonized rules andderogations below 25MW

• Fully harmonised acrossMember States• No free allocation for powergenerators• 80% free allocation for other sectors in 2013 declining to zero in 2020 unless identified as exposed to carbon leakage• 5% of the allocations set aside for new entrants

90% of the total allowancesAuctioned revenue is givento countries in proportion to their verified 2005 emissions. The final 10% is redistributed according to GDP per capita.

• No internationalagreement: CER/ERU banking from phase 2 under phase 2qualifying rules• International agreement: NewCER/ERU authorized limitedto gap half of the effort between the 20% Europeanobjective of reduction and the 30% objective.

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Methodology : The Input – Output Model

In matrix notation, the basic equation is

Eq. (1)

Where: = the total output required = the final demand/consumption = the matrix of technological coefficient, that represent the input required by another sector to produce its monetary output. Thus, = the n-vector of intermediate demand.


The input-output analysis was first devised by Wassily Leontief in 1936 to describe how industries are interrelated through producing and consuming intermediate industry outputs in an economy.

is given by solving Eq. (1):

-1 Eq. (2)

Where: denotes the mm matrix &-1 = the Leontief inverse

An environmental extension of the basic IO model can be obtained by introducing a qm matrix B to show the amount of pollutants emitted to produce one unit output of each industry.

M = B-1 Eq. (3)Where:M = the multiplier matrix which shows the total direct and indirect pollutants intensity of each sector. The variation of physical units of energy

and CO2 equivalent in final demand is:

m = M Eq. (5)

m = total environmental impact produced by the change in the final demand.


The price rises resulting from carbon emission trading are given by:

P = u Eq. (4)Where:u = the energy-related CO2 intensities = the carbon price on CO2 emissionsP = n-vector with the derived carbon price rate on the goods produced.

Methodology & Data Preparation

Data Preparation

Following the information provided by Eurostat’s ESA 95 input-output tables, the study analyse 22 producing sectors and six types of fossil fuels (Lignite, Peat, Lignite Coke, Natural Gas, Liquid Fuels and Diesel Oil) in the EU-15 member countries.

• Figures refer to the year 2005 input-output table and corresponding emission data available for all 15 countries.

• Primary energy-use by input-output sector referring to 2005, used in the data base is derived from ESDS/IEA beyond 20/20 web data set (2010 Edition).

• The ratio of CO2 emissions to fuel use by sector are easily obtained by dividing the amount of fossil fuel use by the carbon emission from each sector.

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EU 15 Energy and CO2 Intensity


CO2 Emissions Intensities by IO sectors and fuel sources.

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Environmental Impact of the EU ETS


Price Effect & Environmental Impact of Emissions Trading on the EU 15 Economic Sectors


EU – 15 Gap to Kyoto Target

Source: EEA Report – Tracking Progress Towards Kyoto & 2020 Targets in Europe

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Conclusion


The study suggests a number of policy adjustments for future EU climate change policy.

Future policy actions should avoid focusing on the actual CO2 emitters but instead adopt strategies that help modify the behaviour of those responsible for CO2 emissions.

Governments must therefore reach their Kyoto targets through emission reductions from policies and measures addressing the sectors not covered by the EU ETS and/or through flexible mechanisms.

The results also signify the need to improve the overall efficiency of the EU energy system, and not only focus on the actual CO2 emitters.


Comments & Questions:

Documents

Examining the Environmental Impact of EU ETS: an Input Output Approach - Lawan Usman Ali 2 1 1 Introduction 2 2 EU–15 Annual Carbon Emissions by Sector