Avoiding the threat of competitiveness disadvantage through benchmarking Integer/EII Conference “Energy Intensive Industries & Climate Change” Brussels,

Avoiding the threat of competitiveness disadvantage through benchmarking

Integer/EII Conference“Energy Intensive Industries & Climate Change”Brussels, 25-27 November 2008Annette LoskeChairwoman Climate and Efficiency

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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 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, IFIEC method – benchmarking based on actual production, also for electricity – is advocated as the better way forward!also for electricity – is advocated as the better way forward!

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33

Auctioning is the costly way

Additional indirect costs for consumers through electricity price (as compared to dynamic benchmarking)

Total EU-27 consumers

Dynamic benchmarking vs. auctioning for the electricity costs (€ billion/a)*

32-48

55-83

23-35

Households & services

Industry

* CO2-price € 40-60/tonne

Such cost savings resulting from a power price lower by 20 to 40 €/MWh as compared to auctioning

Source: ECOFYS 2008

Carbon Leakage - Prove for high risk

80%

60%

40%

20%

8%4%

120%

90%

60%

30%

12%6%

*The impact on power price is more like about 60%-65% than 50 %

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

The 4% “danger line” drops significantly at the expected CO2 price of € 50-70/ton

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Findings of Climate Strategies

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Carbon Leakage – Negative in any case !

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!

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“

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What does carbon leakage mean to the CO2 reduction target achievement and to global reduction effect?

CO2 emissions to be reduced until 2020

withauctioning

with dynamic benchmarking = decrease of EU

contribution minimized

RES acc. to EU 20 % target

(separate support)

JI/CDM remainder from 2nd trading period

JI/CDM remainder from 2nd trading period

Carbon leakage

Efficiency improvement,

fuel shift, innovation

Efficiency improvement, fuel shift, innovation

CO2 emissions to be reduced until 2020

Carbon Leakage – Negative in any case !

RES acc. to EU 20 % target

(separate support)

CO2 emissions actually reduced until 2020

global effect RES acc. to EU 20 % target

(separate support)

JI/CDM remainder from 2nd trading period

Carbon leakage = emissions elsewhere

Efficiency improvement,

fuel shift, innovation

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77

Benchmarks for the major emittersTotal quantity of allowances is the same as under auctioningIs not a free ride, but gives challenging objectivesEfficiency improvements directly stimulatedA more realistic path towards a global scheme, on the way to global auctioning in the future

Intelligent Benchmarking is the better way

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88

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 debottlenecking, anyway uncertainty for growth

Closure rule: wrong principle -100% is loss of allowances, -x% no consequence!

Source Entec-NERA

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Historic production: source of distortions, unfairness and carbon leakage!Historic production: source of distortions, unfairness and carbon leakage!

Intelligent Benchmarking is the better way

99

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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Intelligent Benchmarking is the better way

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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!

• If necessary: possible adjustment of the benchmarks ex-ante for the future to guarantee the total cap

Method 1 for overall benchmarking system

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Dynamic Benchmarking and Guarantee of the Cap - 2

• 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 2 for a mixed system (benchmarking for industry / auctioning for electricity)

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)

1111

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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 EuropeChairwoman 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