2017 State of the EU ETS Report - Andrei Marcu, Emilie Alberola, Jean-Yves Caneill, Matteo Mazzoni, Stefan Schleicher, Wijnand Stoefs and ...
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2017 State of the EU ETS Report
Andrei Marcu, Emilie Alberola, Jean-Yves Caneill, Matteo Mazzoni,
Stefan Schleicher, Wijnand Stoefs and Charlotte Vailles
ii ERCST, Wegener Center, Nomisma Energia, I4CE & ICTSD
Disclaimer
The views expressed in this Paper are attributable only to the authors in a personal capacity, and
not to any institution, which they are associated with, or to the funders or supporters of the Paper.
This Paper has been the subject of stakeholder consultations, including a workshop convened
by the authors with stakeholders including NGOs, think tanks, academia, policy makers, market
participants and representatives of industry.
A grant was provided from the German Federal Ministry for the Environment, Nature Conservation,
Building and Nuclear Safety (BMUB) to disseminate this paper through a number of workshops in EU
Member State capitals.
Copyright © ICTSD, 2017. Readers are encouraged to quote and reproduce this material for
educational and non-profit purposes, provided the source is acknowledged. This work is licensed
under the Creative Commons Attribution-NonCommercial-NoDerivates 4.0 International License. To
view a copy of this license, visit: https://creativecommons.org/licenses/by-nc-nd/4.0/
ISSN 2225-6679
Image on the front page is credited to British History Online (http://www.british-history.ac.uk/
old-new-london/vol1/pp473-494)
The European Roundtable on Climate and Sustainable Transition (ERCST) is a Brussels
based initiative under the umbrella of the International Centre for Trade and Sustainable
Development (ICTSD), and is intended to provide a neutral space where policy-makers and
regulators can meet stakeholders, and discuss climate change policy and a sustainable
transition to a low GHG economy. While focused on European climate policy, this initiative
intends to fully recognize, and incorporate in its activities and thinking, the global dimension
of climate change policy. Established in 1996, ICTSD is a non-partisan, non-profit, Geneva-
based international organization, registered as an association in accordance with article 60
of the Swiss Civil Code.
The Wegener Center for Climate and Global Change is an interdisciplinary, internationally
oriented institute of the University of Graz, which serves as a core research center for pooling
the competences of the University in the areas climate change and the related issues in climate
physics, meteorology, and economics. An evidence based approach to the transformation
of energy systems, innovative analytical modeling concepts, and the design of energy and
climate policies are focal points of current research activities.
Nomisma Energia is an independent research company that deals with energy and
environmental issues, committed to understand energy markets and their short and long-
term trends. Nomisma Energia covers all issues concerning energy markets and environmental
policies, which extend from fossil fuels markets to renewable energies, from industrial and
market regulation to development of new technologies, from international politics to local
energy planning. Thanks to its independency, Nomisma Energia is able to provide objective
and reliable know-how for an in-depth comprehension of the energy sector.
I4CE is an initiative of Caisse des Dépôts and Agence Française de Développement. The Think
Tank provides independent expertise and analysis when assessing economic issues relating to
climate & energy policies in France and throughout the world. I4CE aims at helping public
and private decision-makers to improve the way in which they understand, anticipate, and
encourage the use of economic and financial resources aimed at promoting the transition to
a low-carbon economy I4CE benefits from a large network of partners.
2017 State of the EU ETS Report iii
TABLE OF CONTENTS
LIST OF ABBREVIATIONS iv
EXECUTIVE SUMMARY 1
1. BACKGROUND 2
2. A EU ETS “FIT FOR PURPOSE” 3
3. ENVIRONMENTAL DELIVERY 4
3.1 Delivery Against the Trading Period Target 4
3.2 Delivery Against EU Long-Term Domestic Environmental Commitments 5
3.3 Delivery Against International Commitments 6
3.4 Lessons Learned and Issues to Understand Better 7
4. ECONOMIC EFFICIENCY 9
4.1 Current Situation 9
4.2 Lessons Learned & Areas That Require Further Examination 16
4.3 Carbon Leakage 17
5. MARKET FUNCTIONING 29
5.1 Current Situation 29
5.2 Lessons Learned and Areas that Require Further Examination 31
6. BIBLIOGRAPHY 32
iv ERCST, Wegener Center, Nomisma Energia, I4CE & ICTSD
LIST OF ABBREVIATIONS
BMUB German Federal Ministry for the Environment, Nature Conservation, Building and Nuclear
Safety
CDP Carbon Disclosure Project
CHP Combined Heat and Power
CEER Council of European Energy Regulators
CER Certified Emission Reduction
CO2 Carbon Dioxide
COP Conference of the Parties
CSCF Cross-Sectoral Correction Factor
DG Directorate General
EC European Commission
EE Energy Efficiency
EEA European Environmental Agency
EEX European Energy Exchange
ERCST European Roundtable on Climate and Sustainable Transition
ERU Emission Reduction Unit
EU European Union
EUCO European Council Conclusion
EU TL European Union Transaction Log
EUA European Union Allowance
EU ETS European Union Emission Trading Scheme
GHG Greenhouse Gas
I4CE Institute for Climate Economics
IA Impact Assessment
ICAP International Carbon Action Partnership
ICE Intercontinental Exchange
ICTSD International Centre on Trade and Sustainable Development
INDC Intended National Determined Contribution
IPCC Intergovernmental Panel on Climate Change
LRF Linear Reduction Factor
MSR Market Stability Reserve
MWh Mega Watt hour
NDC National Determined Contribution
NE Nomisma Energia
NGO Non-Governmental Organizations
P2 Phase 2
PA Paris Agreement
p.a. per annum
RES Renewable Energy Sources
UK United Kingdom2017 State of the EU ETS Report 1
EXECUTIVE SUMMARY
Andrei Marcu, Emilie Alberola, Jean-Yves Caneill, Matteo Mazzoni,
Stefan Schleicher, Wijnand Stoefs and Charlotte Vailles*
The EU Emissions Trading System is important through its role as the “cornerstone” of EU climate
change policy as well as a “role mode”, and “pioneer” for carbon markets. It is important that, in
addition to the regulatory requirements, it be subjected to a thorough and independent review, to
discover if it delivers on explicit, as well as what have become “expected” objectives, as well as
discover any issues that need to be better understood.
While a significant amount of ETS data is accessible, and it is understood that there are strict
confidentiality provisions for commercial data, the issue of availability of public data has been
identified as an issue, especially that of aligning reporting of EU ETS and NACE data.
The governance of the EU ETS, defined as to “who makes decisions” and “how decisions are made”
in order to ensure a stable and predictable regulatory framework, resulting in long-term price signal
for investment, is critical. Yet, it is hardly discussed, and little understood.
The EU ETS can be seen as being expected to deliver in a number of different areas: environmental
targets in different timeframes, de-carbonization in an economically efficient way, protection
against the risk of carbon leakage, and good market functioning and price discovery.
There is no doubt that the EU ETS is delivering on short-term environmental targets. For the mid-to-
long term, it does not seem to be on the pathway outlined in the Paris Agreement and the EU 2050
Roadmap. The expected post-2020 LRF, 2.2%, is not putting the EU on a trajectory to reach -90% in
ETS sectors by 2050. In addition, EU ETS governance does not, so far, contain governance provisions
to align it with the review process of the Paris Agreement.
So far, the EU ETS has not played a major role in driving decarbonisation through its price signal
alone. The false expectation was created that the EU ETS price would be able to act alone. EUA
prices are making a certain level of contribution to decarbonisation, depending on the level of EUA
prices, which are driven, to some degree, by the link between short-term pricing, and long-term
scarcity. Regulatory uncertainty permeates the EU ETS, and includes the expectation of future
regulatory developments, which may again change the long-term scarcity, and deprive the EU ETS
price of its role of driving decarbonisation.
There is no question that policies other than EU ETS are needed, and will be introduced. The issue is
how do we provide for, and address, policy overlaps. Measures to address these overlaps have been
created, but have yet to become operational.
The impact of the current system of ex-ante, fixed free allocation, can be seen in lack of evidence of
carbon leakage, but also in its legacy of a now structural surplus of EUAs. It has levelled the playing
field in the EU, with the exception of provisions for indirect costs. Given that free allocation, due
to the declining number of free EUAs available, is likely to be a mid- term viable solution, what are
the other solutions that should be examined?
As a market, the EU ETS has largely worked well in terms measures of good market functioning such
as liquidity, spreads between bid and asked, and auction participation. Market function and good
price discovery should not be confused with reaching price levels that may be expected by different
stakeholders. The exit of many liquidity providers has not yet caused problems, but it is an issue
that should continue to be monitored closely, even if data is hard to come by.
* Andrei Marcu is the Director of the ERCST, Emilie Alberola is a Program Director at I4CE, Jean-Yves Caneill is Senior
Advisor to ERCST, Matteo Mazzoni is a Market Analyst at NE Nomisma Energia, Stefan Schleicher is Professor of Economics
at the Wegener Center on Climate and Global Change, Wijnand Stoefs is Researcher at ERCST, and Charlotte Vailles is a
Project Manager at I4CE.2 ERCST, Wegener Center, Nomisma Energia, I4CE & ICTSD
1. BACKGROUND
The EU Emissions Trading System (EU ETS) has It must also be remembered that the EU
passed its 10th anniversary, and is on its way ETS operates in a highly interconnected
to becoming a teenager, which for parents environment and is affected by climate
can be a challenging time. As any other change, and other, polices at different levels:
undertaking, it requires, periodically, an global, EU and EU Member State. It has to live
assessment regarding its well-functioning, and with that reality, and respond to it.
the delivery of its objectives. In this respect
the EU ETS is not different, and should not The prolonged economic slump that it has been
be treated differently from any other activity. subjected to, together with other factors, has
Article 10(5) of the EU ETS Directive provides created a systemic surplus, which is a reality. In
for such a yearly assessment. addition, the EU ETS was also created lacking
the mechanism to mimic reduced supply as a
The “State of the EU ETS” Report is not intended result of reduced demand. Both these issues
to duplicate or replace existing authoritative are being addressed, but the solutions will only
work. It aims to be an independent contribution become operational in the future.
to the policy debate, which is needed to ensure
that the EU ETS is “fit for purpose”. This report Meanwhile, the EU ETS has to continue
intends to discuss the current state of play in to internalize new developments that are
the EU ETS. While the temptation will always relevant. This includes Brexit, and the
be there, as a rule, it will try to abstain from outcome of the US election. COP21 in Paris
providing solutions. has brought the Paris Agreement and the
framework for an ever-increasing level of
While the EU ETS is a complex instrument, and ambition, as well as an upcoming IPCC special
for some a world in itself, it does not exist in report on 1.5°C. Finally, the EU is not the only
a vacuum. For all its faults, the EU ETS should jurisdiction pricing carbon anymore, it is now
not be compared to an ideal world, but the part of a growing movement towards carbon
real options that would be available to address pricing. Some jurisdictions may even have
climate change. prices higher that the EU ETS.2017 State of the EU ETS Report 3
2. A EU ETS “FIT FOR PURPOSE”
In order to assess whether the EU ETS is “fit In addition, two other deliverables could be
for purpose”, we first need to identify the seen as being implicit:
parameters which measure the success of the
EU ETS. Simply put, “what do we expect the EU 3. Does it function well as a market? It is
ETS to deliver?”. In many cases there are no clear worth having a market only if it functions
quantitative indicators for what the EU ETS may well and leads to good price delivery
be expected to deliver. Some of the assessments
will have a level of subjectivity and political 4. Does it provide effective, and proportional,
judgement attached to them. In other cases, protection against the risk of carbon
objective, quantitative indicators may emerge leakage?
gradually, as experience is gained with these
Right or wrong, other “deliverables” have
mechanisms, both in the EU, but also around the
come to be “expected. The good functioning
world. Finally, in some cases experience with
of the EU ETS has come to be equated,
other markets may provide benchmarks.
wrongfully, with the delivery of a “right price”
In this context we always need to remind to incentivize certain technologies or actions.
ourselves that Article 1 of the EU ETS Directive
One additional delivery is in the role that the
outlines its broad objectives:
EU ETS has in being a pioneer and promoting
“This Directive establishes a scheme for carbon markets as a tool for addressing
greenhouse gas emission allowance trading climate change. There have been many
within the Community in order to promote studies, including the ICAP Annual Report,
reductions of greenhouse gas emissions in which shows how carbon pricing has spread,
a cost-effective and economically efficient with carbon markets playing a prominent role.
manner. This Directive also provides for the In a little more than 10 years, the coverage
reductions of greenhouse gas emissions to be of carbon prices has tripled, with China
increased so as to contribute to the levels of soon to have a nationwide carbon market.
reductions that are considered scientifically While this is not a domestic EU delivery, it is
necessary to avoid dangerous climate change.” nevertheless critical, given the importance of
having other operational carbon markets, and
Some objectives are clearly enunciated and the ability to deliver on EU ETS objectives,
identified, while some stakeholder may see without jeopardizing the competitiveness of
other objectives as implicit. As also mentioned EU industry.
in the 2016 State of the EU ETS report (Marcu
et al, 2016), the direct deliverables include: In examining these areas of delivery, the
report will focus on:
1. Environmental delivery. Does it deliver
against absolute environmental targets as a) What are the quantitative and qualitative
expressed in the EU ETS Directive? results for the EU ETS, put in the broader
context of interaction with the EU and
2. Cost effectiveness and economic effi- international policies with which it
ciency. This reference in Article 1 of the interacts?
EU ETS Directive could be interpreted as
b) What are the lessons learned, and issues,
referring to macro-economic efficiency and
which emerge?
cost effectiveness for compliance. Alterna-
tively, economic efficiency can be seen as
c) Areas that require further examination.
being dynamic while cost effectiveness as a
more snap shot view.4 ERCST, Wegener Center, Nomisma Energia, I4CE & ICTSD
3. ENVIRONMENTAL DELIVERY
If the EU ETS is to be considered successful, when compared to 2005 (EEA, 2016). As EEA
environmental delivery is key. However, official 2016 data is not available, preliminary
this delivery must be seen as being multi- 2016 data from DG Climate Action shows that
faceted, in that it needs to be examined for EU ETS emissions from stationary installations
direct achievement, as well as in ensuring were nearly 26% lower in 2016 compared to
that it achieves the long term climate change 2005 (EU TL, 2017). Verified emissions have
objectives to which the EU has subscribed. been under the target path since the start of
This later condition is not explicitly expressed, Phase 2 (P2) of EU ETS. It is expected that
and can be seen as being a political decision in the projected emissions will not rise over the
terms of the timing (milestones) of the effort target path until 2030, under the scenario of a
to reach the long-term EU de-carbonization 2% annual GDP growth after 2015 (see section
goals. 4.3 on Carbon Leakage).
3.1 Delivery Against the The market has been short only since 2014
Trading Period Target (demand exceeded the supply of all compliance
instruments), when back loading came into
In this case the issue is simple: does the EU effect and international credits became a
deliver against its trading period for 2020 of decreasing option for compliance. For long
-20% vs. 1990 emissions? periods of time the influx of international
credits has ensured short-term length in the
The EU ETS target for 2020 (-21% for ETS sectors market. Their perceived negative contribution
when compared to 2005) is being reached, in this context needs to be balanced against
ahead of time. The European Environment the international role that EU ETS has had in
Agency (EEA) figures showed that by the promoting market approaches and making
end of 2015, emissions from EU ETS covered carbon pricing one of the tools that countries
installations had already decreased by 24% must have in their toolbox.
Figure 1: Verified emissions, target path and projected emissions
2 500
2 084
2 000
1 784
Target path
Million tons
1 500 1 372
2% GDP
Projected 1% GDP
1 000 emissions 0% GDP
500
0
2005 2008 2010 2013 2016 2020 2025 2030
Verified emissions scope corrected
Source: Wegener center elaborations on EEA, 2017 and EU TL, 2017
Note: data for 2016 are based on the EUTL of April 3 missing gaps are estimated by Wegener Center2017 State of the EU ETS Report 5
Figure 2: Total supply of allowances and verified emissions
3000
2500
Million tons
2000
1500
1000
500
0
2005 2007 2008 2012 2013 2016
Freely allocated EUAs solid. Auctioned or sold EUAs
CERs and ERUs Verified emissions solid.
Source: Wegener center elaborations on EEA, 2017 and EU TL, 2017
Note: data for 2016 are based on the EUTL of April 3 missing gaps are estimated by Wegener Center
How much of this result is due to a decrease and is difficult to verify. Intensity data, even
in CO2 intensity, and how much it is due to a directionally, if based on value added, may
decrease in the level of economic activity, is show different trends, which may be attributed
an important issue. According to the “2050 to market fluctuations.
Roadmap” the EU wants all sectors to contribute
and decarbonize. Data from different sectors The issue of data availability was raised in the
(e.g. electricity, cement, pulp and paper, “2016 State of the EU ETS” report, and was also
chemicals) seem to indicate a decrease in repeatedly raised the during the discussions for
carbon intensity. In the case of the electricity the Phase 4 EU ETS review (Marcu et al, 2016).
industry, the increasing role of renewable Especially complex are the issues of separating
energy plays a critical role. The proportion of combustion and production emissions at
renewable electricity has continued to increase energy intensive installations, and separating
on average by 1.4% between 2005 and 2014, free allocation for Combined Heat and Power
and the EEA estimated that in 2015 more than plants between their clients. One of the major
28% of total electricity consumed was derived benefits that the EU ETS is seen as bringing
from renewable energy sources (EEA, 2016). is that of transparency. This lack of data may
negate some of that benefit, making it difficult
In absolute terms, the impact on emissions not only for researchers, but also for market
during the recession is clear. However, most actors, to have confidence in using the EU ETS
energy sectors show an increase in emissions as a hedging instrument for carbon compliance
towards pre-crisis levels. Cement seems to be obligations.
the exception, will levels that continue to be in
2016 well below pre-crisis levels. 3.2 Delivery Against EU Long-Term
Domestic Environmental Commitments
All these conclusions need to be tempered
by the availability of data for independent To what extent does the trading period target
research. Most of the data regarding carbon lead the EU to deliver on its longer terms goals
intensity comes from business associations and commitments? This is also relevant to the6 ERCST, Wegener Center, Nomisma Energia, I4CE & ICTSD
economic efficiency of the delivery of the EU’s below 2°C” (EC, 2014b), and translated this
long-term climate change objective. into GHG reduction targets for 2030 of 40%
compared to 1990.
As discussed in Marcu et al (2016a), EU domestic
climate change targets are expressed through a • The October 2014 EUCO Conclusions
number of documents. (European Council, 2014). It refers to
the well-known targets of “at least 40%
• The “2050 Roadmap for moving to a com- domestic reduction in [GHG] emissions by
petitive low-carbon economy” mentioned 2030 compared to 1990” and the Linear
a number of intermediate GHG reduction Reduction Factor (LRF) of 2.2%. It also refers
targets (40% by 2030, 60% by 2040, and 80% to the possibility that EUCO “will revert to
by 2050) (EC, 2011). this issue [contributions/targets to UNFCCC]
after the Paris Conference”. The EU has
• The 2030 Framework for Climate and Energy subsequently decided in March 2016 that
Policies (EC, 2014c) has a temperature there will be no revision of the EU INDC,
target to “limit global temperature rise to and decided to keep the same targets.
Figure 3: EU emission pathway and the long-term objectives
MtCO2 eq
6.000 2020 2030 2050
-20%
5.000
-40%
4.000 -24.4%
-40%
3.000
-45%
205
0R
oad
2.000 ma
pr
ang
ea
lign
ed -80%
to 0
1.000 2C
-95%
0
Source: ENEL (based on EEA 2016 and EC 2011)
While the Impact Assessment (IA) of the 2030 As an illustration, at first glance, one could
Framework notes that a 2.2 LRF is necessary argue that the Paris Agreement (PA) success
for reaching the 40% GHG reduction target, could have generated an increase in ETS short
it must be highlighted that it also notes that and medium term prices, and point to higher
a 2.2% LRF would not be sufficient for a 90% prices in the long-term. However, this did not
reduction compared to 2005 (in ETS sectors), happen: leading to COP 21 there was price
as this would require a LRF of 2.4%. It would increase, followed by a drop off of almost three
therefore seem that the 2.2% LRF is not putting euros at the start of 2016. This drop can be
the EU on a trajectory for reaching - 90% in ETS attributed to short-term changes in commodity
sectors by 2050 (EC, 2014c). prices, and expectations for higher demand
that did not materialize due to a mild winter
3.3 Delivery Against International
period.
Commitments
The market had already internalized a “success”
Impact of Paris Agreement
as the 2030 EU ETS target had already been
The impact of the Paris Agreement on EU ETS decided by the EU Council well ahead of COP
price behavior is a legitimate question, to 21. Similarly, events after the Copenhagen COP
the extent that the international process, and show no significant drop in EUA prices after
decisions, affects the behavior of EU ETS prices. failing to reach an agreement.2017 State of the EU ETS Report 7
The latter observations suggest that ETS the conclusions of the 5th IPCC report (working
spot and forward prices respond to short- group III) on the need for “negative emissions”.
term variations in demand, hedging needs,
and changes in the prices of other energy Nevertheless, it is unlikely that the report will
commodities. Long-term price expectation have a direct impact on EU ETS prices when it
will respond to domestic policies change will be published in 2018. This is similar to the
(announcement of changes in long-term target). conclusion reached in the section concerning
Consequently, for an international decision to the impact of the Paris Agreement.
impact these expectations, it is necessary that
Should EU domestic policies be aligned
the latter be translated as soon as possible into
with international developments through an
domestic policies.
effective adjustment of EU ETS targets, then,
This is suggested in the paper by S. Andresen together with a solid 2050 roadmap, they may
et al. (2016): “We have therefore focused have a significant impact on the EU ETS.
on the potential impact of the PA—on the
3.4 Lessons Learned and Issues
EU and carbon markets. We concluded that
to Understand Better
the dynamic structure of the agreement may
trigger a follow-up process in the EU that could
The EU ETS is delivering against its trading
lead to greater ambitions beyond 2030”.
period target. While the economic recession
has made a contribution, emissions have been
In the case of the Paris Agreement, there was
under the target path since 2009, and also
no subsequent impact on EU ETS targets at
under the available supply between 2009 and
the March 2016 EU Council, and therefore no
2013. The distance between verified emissions
impact on prices.
and the pathway decreased between 2014
Impact of “IPCC 1,5°C” special report and 2015 (234 million to 211 million tons), but
remained approximately constant up to 2016
At COP 21 the COP requested the IPCC to (212 million tons). This figure could however
produce a special report on the impacts of still change when final verified emissions for
global warming of 1.5°C above pre-industrial. 2016 are reported by the EEA.
This is intended to help Parties clarify the way
to take on board practically the Article 2 of The rate of decarbonisation of important
the PA: emitting industrial sectors is an important
element, but not well understood. There is little
“To hold increase in global average temperature doubt that electricity is decarbonizing at a rate
to well below 2°C and pursue efforts to limit higher than the current LRF, with the emissions
increase to 1.5°C and to aim to reach a global from electricity generation decreasing on
peaking of emissions “as soon as possible” average 2,51% between 2005 and 2014, largely
due to decreased use of lignite and hard coal
The impact of the IPCC Special Report on (EEA, 2016). However, doing an independent
the EU ETS, if any, is something that is not assessment on GHG intensity of electricity
yet understood. The recently agreed outline generation is necessary in order to analyze the
covers five chapters, which consider not only roles of fuel switching and decreased supply.
appropriate mitigation pathways to reach This is complex due to lack of available and
1,5°C but also their impacts on natural and recent data and this needs to be addressed.
human systems, together with describing
ways to strengthen and implement the global The EU ETS is not the only carbon pricing system
response to the threat of climate change, while in existence anymore. How its environmental
addressing sustainable development, poverty delivery compares with that in other jurisdictions
eradication, and reduction of inequalities. is important, especially as it will impact the
There is no doubt that this report will reinforce level of effort and impact on competitiveness.8 ERCST, Wegener Center, Nomisma Energia, I4CE & ICTSD
Translating the PA into domestic policies is The existence of predictable and stable
the way to impact the carbon market. After governance, to adapt and align the EU
Paris, the there was no adjustment in EU or ETS to the changes in its environment, be
EU ETS targets. There was no concrete market they changes in the EU NDC as a result of
signal to respond to, and, as such, no bullish international developments, is essential and
response. yet not currently present.2017 State of the EU ETS Report 9
4. ENVIRONMENTAL DELIVERY
4.1 Current Situation Monetary impact of EU ETS
The EU ETS has been, and continues to be Looking at the yearly net monetary position,
presented, as the main EU climate change calculated as the product of the yearly shortfall/
policy, and its mission as to “promote reductions surplus of allowances for different sectors, and
of greenhouse gas emissions in a cost-effective the EUAs yearly average spot price, Figure 4
and economically efficient manner”. This shows a market divided between the combustion
creates the expectation that the EUA prices of fuels, a large part of which is represented by
will drive decarbonisation, and ensure that electricity generation plants, and the industrial
it is done in the most economically efficient sector. The former has always exhibited an overall
way. This chapter looks at whether the EU ETS deficit in allowances, thus a cost, while the latter
delivers in this respect, as well as in other has overall benefitted from over allocation,
areas such as innovation. An important part of resulting, so far, in a direct subsidy for many
the discussion is how the EU ETS interacts with sectors. As in other chapters, the strong caveat
other EU policies, and how this interaction is of the lack of detailed emission data along the
managed. lines of industrial sectors needs to be repeated.
Figure 4: Yearly net monetary position for combustion of fuels plants (top) and industrial plants
(bottom), mln €
50
Net supply of free allowances
Combustion of fuels
(Percent of emissions)
25
0
-25
-50
-75
-100
2005
2007
2008
2012
2013
2016
50
Net supply of free allowances
Industrial sectors
(Percent of emissions)
25
0
-25
-50
-75
-100
2005
2007
2008
2012
2013
2016
Source: Elaboration on EEA data10 ERCST, Wegener Center, Nomisma Energia, I4CE & ICTSD
Looking at the EU ETS as a whole, the overall bear a cost. The switch from grandfathering to
net monetary position of the economic sectors auctioning for a great part of the power sector
market was positive in almost all the years of in Phase 3, and the introduction of back-loading,
Phase 1 and Phase 2, with 2007 and 2008 being turned the overall impact negative, with the
the only years when EU ETS operators had to overall cost rising to 7 billion € in 2015.
Figure 5: Yearly net monetary position for the EU ETS
Billions €
3
2
1
0
2011
2013
2005
2015
2012
2009
2006
2008
2016
2010
2014
2007
‐1
‐2
‐3
‐4
‐5
‐6
‐7
‐8
Source: Elaboration on EEA and ICE data
This dynamic has provided limited incentives of the EU ETS, the number of patents
for industries to invest in low carbon grew exponentially, with the highest share
technologies and innovation. In this respect, registered by EU-ETS firms. This trend then
it is useful to analyze the dynamic of low reached a peak in 2012, then falling constantly
carbon technologies patents registered in in the course of the last 4 years, following the
Europe. Data shows that after the introduction dynamic of carbon prices.
Figure 6: ETS and low carbon technology patents
Share of low carbon patents by companies falling under the ETS and companies not falling under
the ETS (start of the ETS: 2005)
5 EU ETS
Share of patents (in %)
4
3
non-EU ETS firms
2 EU ETS firms
1
0
1980 1985 1990 1995 2000 2005 2010
Year2017 State of the EU ETS Report 11
Figure 6: Continued
Nr. of low-carbon technology patents vs EUA
12,000 30
10,000 25
Nr of patents
8,000 20
Nr Patents
€/ton
6,000 15
EUA €/ton
4,000 10
2,000 5
0 0
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
Source: Calel and Dechezleprêtre (2012) and NE elaborations on Espacenet and ICE data
It must be stressed that we cannot find a provides incentives for the deployment of
direct correlation between the price of EUAs different low carbon technologies, as shown
and the number of low carbon technology by comparing the cost of allowances, and
patents, as the number of patents is also the marginal abatement costs of different
dependent on several other factors, such as technologies. These numbers change, and we
incentives for renewable energy and energy are aware that there is a time-dimension to it.
efficiency. However, considering a delay in They need to be regarded as directional, and
patent registration, which is connected to the this is a dynamic that needs to be treated with
time lag of technology development, a degree caution, as other elements, and incentives, play
of correlation between the recent low EUA a role in the decision to deploy technologies. In
prices, and the decrease in the number of this respect, we could also conclude that the EU
patents, could be assumed. ETS, and EUA prices, do make a contribution to
the deployment of certain technologies, but that
Another element in the role of the EU ETS as that contribution is not sufficient on its own.
a driver for change, is the degree to which it Nevertheless, it is an important contribution.
Figure 7: Estimates for Marginal Abatement Cost for different technologies (€/ton)
Fuel Switch* (NatGas) 16
EUA Avg 2016
EE – Alternative fuel substitution 25
EE – Compressed air 25 EUA Avg 2008–16
Wind Onshore 37
EE – HE Motors 40
EE – Heat Recovery System 55
EE – White Certificates 80
Hydro 109
CCS 110
PV 115
Wind Offshore 174
0 50 100 150 200
Marginal Abatement cost are calculated on the basis of an average EU wholesale price for electricity of 40 €/MWh
(130 €/MWh retail price for industries) and an average EU carbon emission factor of fossil generation of 700 gCO2/kWh
Source: NE elaborations on ICE, IEA, IRENA, Platts and surveys12 ERCST, Wegener Center, Nomisma Energia, I4CE & ICTSD
The costs for reducing a ton of CO2 currently One significant conclusion is that that the
ranges from an average 16 €/tCO2 for switching price of EUAs only came close to the coal to
electricity generation from coal to natural gas, gas switching point in 2008 and 2010. The
to an average 174 €/tCO2 for offshore wind combination of low carbon prices, low coal
power plants. Comparing these costs to the prices and relatively high natural gas prices
2016 average price of EUAs, or the 2008-2016 generated a perverse effect, making highly
average price, we conclude that the EU ETS is carbon-intensive coal generation, more
not able to drive innovation on its own. profitable than gas natural generation.
Figure 8: Price switch, €/ton
70
60
50
Price
€/ton
40
Switch EU
30
EUA (€)/ton
20
10
0
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
Source: NE elaboration on ICE and Platts data
Credibility CO2 prices to trade in the future. These
expectations are enshrined in the futures
The long-term price signal is an essential element contracts traded on the different exchanges.
in creating the credibility that will lead to low Currently Dec EUA contracts traded on the
carbon innovation and investment. In 2008 the
ICE, the most liquid exchange for EUAs, show
EUA was trading at a level above € 20/ton. It has
the price of CO2 increasing only marginally in
dropped since, and has now stabilized between
the next nine years. Currently Dec 25, which
4.5 and 6.5, a level insufficient to drive, by
has no open interest, shows a value of € 5.6/
itself, neither innovation, nor a fuel switch.
ton. The scarcity operators currently perceive
The long-term credibility is reflected through changes only marginally from the present,
the forward curve; the price operators expect which is not in line with what models show.2017 State of the EU ETS Report 13
Figure 9: Dec EUA forward curve, €/ton
5.8 5.7
5.7 5.6
5.6 5.6
5.5 5.5
5.4
5.4
5.3
€/ton
5.3 5.2
5.2 5.2
5.1
5.1
5.0
4.9
4.8
2017
2019
2021
2023
2025
2027
2029
Source: ICE
This shows two things. Firstly, that given the The second element, the stability of the
current price and expected scarcity in 2025, regulatory framework, is also reflected in the
as well as the discount factor, there is a clear price dynamic of the market. Market volatility is
misalignment between short-term and long- one indication of uncertainty: a high volatility is
term prices. Secondly, there is also a strong related to a higher uncertainty surrounding the
misalignment between what the market market, while a lower volatility is expression of
expects and what companies are using in their more stable market conditions. We must however
investment decisions. The shadow prices used distinguish between day-to-day volatility and
by several companies in their investment plans volatility triggered by specific events, such as
are significantly higher that what the market is regulatory events. The latter is more concerning
as it influences investment decisions.
currently pricing.
During the period 2010-2013 the day-to-day
As highlighted by CDP (2016) the number of
volatility of the carbon market has been much
companies adopting internal carbon prices has
higher than that of other energy commodities.
been growing over the last years, and Europe
However, it decreased after the introduction of
is the region with the majority of companies
back loading, and then of the MSR.
doing so, with respectively 38% in 2015 and
47% in 2016 of total companies that disclosed It is also important to underline that industry
adopting internal carbon prices. Furthermore, and power utilities react differently to price
European companies have higher shadow prices volatility. Industry is generally less prone to
than companies with headquarters in other manage volatility and hedge forward, and this
regions. However, as the CDP reporting builds is especially true for small industries. Managing
on a voluntary sample, it is difficult to arrive at volatility is far more common for utilities as
a definitive judgment. they hedge their price risk.14 ERCST, Wegener Center, Nomisma Energia, I4CE & ICTSD
Figure 10: Day-to-day volatility of: CO2, Crude oil, Coal, Natural Gas, Electricity
6% For great part of the period, EU ETS day-to-day
volatility has been constantly higher than that
of other energy commodities (almost 3-time
5% higher than the Brent volatility)
4%
EUA Dec
Brent FM
3%
CIF ARA Cal
2% TTF Cal
EEX Cal
1%
EU ETS Day-to-day volatility
0% decreased in correspondence of the
double overhaul (backloading + MSR)
2010
2011
2012
2013
2014
2015
2016
while the other energy commodities
experienced an opposite trend.
Source: NE elaborations on ICE, Platts and EEX data
Interaction with national measures measures, in the form of incentives for renewable
energy sources (RES), have been the main reason
The power sector has so far been the main for these reductions. Energy efficiency policies
contributor to the reduction of CO2 emissions. also played a role in reducing CO2, while the
However, so far, the EU ETS has only contributed missed opportunity for switching fuels from coal
partially to the decrease in emissions. National to natural gas has resulted in higher emissions.
Figure 11: Reduction of emissions due to other measures
100
Mton
50
0 increase due to higher coal
reduction due to EE
-50
reduction due to RES
-100
-150
-200
-250
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
Source: NE elaborations on Eurostat and EEA data2017 State of the EU ETS Report 15
The introduction of other environmental objectives beyond carbon reductions, including
policies, such as renewable energy and energy security as well as other environmental
energy efficiency incentive schemes in many and health co-benefits.
EU Member States has, to a certain degree,
contributed to the limited impact of the EU ETS. In this context, it is useful to compare the
Another important contributor was the EU ETS economic efficiency of the EU ETS with national
Linking Directive, which provided for the use of incentive for RES incentives put in place in
international credits for EU ETS compliance. the last decade. It must be stated that this
comparison only takes the cost of CO2 reduction
ETS, RES incentives and energy efficiency into account, and not the other benefits from
measures are considered “overlapping RES and EE. The cost of CO2 reduction from EU
measures” in that they all contribute to ETS was compared to the cost of reductions
reducing carbon emissions. It must be noted induced by RES incentive schemes put in place
that RES and EE have helped meet other EU in 5 European countries.
Figure 12: National measures: average RES incentives expressed in €/MWh (left axis) and €/ton
(right axis)
€/M Wh €/ton
300 600
250 500
Avg RES
200 400 incentive
150 300 EUA (right)
Avg EU RES
100 200
incentive in
ton (right)€
50 100
0 0
France
Germany
Italy
UK
Spain
Source: CEER, 2017
The level of support varies across countries, the low level of EUAs price. This includes the
from a maximum of € 180/MWh in Italy, UK carbon floor, which was adopted in 2013.
followed by France and Germany. By using The carbon floor was to have an ascending
the EU average carbon intensity in the power trajectory, with prices reaching £ 30 /ton (€
sector, the unit price per energy is converted 38 /ton) by 2020. Despite the fact that there
into unit price per ton of CO2 abated. The range has been no increase in the last 2 years, the
of values obtained varies from roughly € 550 / UK experienced a steep decrease in the use
ton in Italy, to a minimum of € 230/ton in UK. of coal for electricity generation and has, in
These values are significantly higher than the 2016, reached the lowest level of coal use,
EUA prices in 2015, which was € 7.7/ton. and resulting emissions, since the start of the
industrial revolution (Carbon Brief, 2017).
Other national policies also contributed to
the decrease of CO2 emissions, and therefore16 ERCST, Wegener Center, Nomisma Energia, I4CE & ICTSD
Figure 13: EU ETS vs UK Carbon Floor (top graph), UK electricity generation mix (bottom graph)
EU ETS vs UK Carbon Floor
€/ton
35
30
25
20
UK FP
15
EUA
10
5
0
2012
2013
2014
2015
2016
2017
2018
2019
2020
Electricity Generation Mix UK, 2005-2015
100% Net import
90% Other
80% Solar
70% Wind
60% Bioenergy
50%
Hydro
40%
Nuclear
30%
Gas
20%
Oil
10%
Coal
0%
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
Source: NE elaborations on Eurostat, BEIS, ICE
4.2 Lessons Learned & Areas that factor to other primary drivers, primarily
Require Further Examination national incentives for RES.
More than a decade after the introduction of the There is no question that policies other than EU
EU ETS, the picture that emerges with respect ETS are needed, and will be introduced. The
to its contribution to the decarbonisation of inefficiencies in decarbonisation introduced by
the EU, and the economic efficiency of this these policies are a political decision, the result
effort, shows that, so far, the EU ETS has not of priorities other than decarbonisation, as well
played a major role in driving decarbonisation as market failures that need to be addressed.
through its price signal alone. The issue is not whether these policies will be
introduced, but rather the trade-off between
While the EU ETS price could, in principle, economic efficiency and political priorities,
drive de-carbonization in a cost-effective and more importantly, how do we provide for,
and economically efficient way, other and address, these policy overlaps.
policies that were introduced, together with
design deficiencies, and an off-the-scale With the scaling down of RES incentives, the
economic recession, have prevented that from pace of innovation seems to have slowed down.
happening. For the power sector, we can say Through the current price level, and the lack of
that carbon price worked as a complementary connection between the short-term prices and2017 State of the EU ETS Report 17
long-term scarcity, the EU ETS cannot provide changes, such as coal shut down, or changes
an incentive to drive innovation and long-term in Industrial Emission Directive standards.
investment. The EU ETS may have helped some
sectors to minimize the impact of the economic In order to cope with these uncertainties, and
crisis. What needs to be carefully monitored is set the most effective ETS mechanism for the
the risk that low EUA prices may provide the next trading phase, it is necessary to better
wrong incentives and lead to the lock-in of understand several issues.
carbon intensive technology and processes.
First and foremost, we should include all
If this was the whole truth, and it is unfortunately costs in the calculation of the comparison of
becoming the generally accepted view, it would different approaches. That is why the cost and
be rather harsh in terms of lessons learned and benefits derived from other policies ought to
judgment of the EU ETS contribution. But this be calculated.
is not a complete, and accurate reflection, of
Secondly, it is important to quantify the new
the EU ETS contribution. In fact, the EU ETS
measures that will be put in place to reach
retains a key role. This key role stems from the
the 2030 targets and their impact on the
provision of a baseline price-signal and from
carbon market. Will the MSR, on its own,
the observation that all reforms are moving in
under the current parameters, be sufficient to
the direction of tighter scarcity, which shows a
coordinate the effect of further overlapping
degree of political commitment.
policies? Or will it be able to address only
The false expectation was created that the EU those policies that are foreseen, but not
ETS would be able to act alone. But rarely a abrupt changes?
decision is made, in business, and elsewhere,
Thirdly, we need to understand how the
on one factor only. It must be accepted that
allocation surplus has been used, or may
the price of EUAs is just one driver, and factor,
be used. Was it banked, used for economic
in making economic decisions. A number
survival purposes, used for decarbonisation
of other inputs will drive and contribute to
efforts? Innovation happens when funds are
decarbonisation in the real world. EUA prices
available and correctly used.
are making a certain level of contribution,
depending, on the level of EUA prices, driven, Fourthly, we need to understand what is the
to some degree, by the link between short- impact of events with long-term implications,
term pricing, and long-term scarcity. and how to increase awareness of long-term
price signals and scarcity among market
This is mainly due to the regulatory uncertainty
operators. The relationship between short-
that permeates the EU ETS, and what seems
term prices and long-term regulatory scarcity
like the expectation that future regulatory
is critical to understand. The power sector
developments will again deprive the EU ETS
has showed a higher degree of adaptability
price of that role. The existence of predictable
to changing conditions, while industry, which
and stable governance, to adapt and align the
faces higher external competition, may suffer
EU ETS to the changes in its environment,
from higher CO2 prices. Will industries be
including the impact of overlapping policies, is
able to cope with higher prices? What will the
essential, and yet not currently present. impact of higher be?
The introduction of the MSR is expected to 4.3 Carbon Leakage
cope with the current surplus, and address
many of these problems. Although the MSR Providing protection against the risk of carbon
will add a useful flexibility to the supply side leakage, and implicitly addressing competitive
of the market, it is questionable whether issues for EU industry exposed to international
it will always be able to deal with flows of competition, is an area where EU ETS must
allowances that may originate from sudden deliver.18 ERCST, Wegener Center, Nomisma Energia, I4CE & ICTSD
The potential for relocation of production and also trying to rectify the lack of flexibility in
investment from countries with climate change free allocation, which is one of the causes of
policies to countries with less stringent, or the current surplus in the EU ETS. Current
no climate change policies, is a continuing provisions, as well as on-going discussions for
concern for the energy-intensive industries, the post-2020 period, focus on free allocation
which currently account for about a quarter of as the solution.
emissions in the EU ETS. While carbon leakage
should refer to environmental concerns, in The discussion on protection against carbon
EU ETS day-to-day parlance it is now mostly leakage focuses on the amount of EUAs that
interpreted as addressing competitiveness installations may have to purchase, and
concerns. consequently around the volume of free
allowances they will receive. A substantive
The evidence is not definitive at this point, discussion requires a comprehensive analysis of
but there is limited evidence that carbon cost effects, the impact on value added, and
leakage has happened in the EU. This can be the operating surplus, of installations.
attributed to a number of things, including
the effectiveness of the carbon leakage Figure 14 indicates that these costs impacts
protection measures that that EU has put in result from complex interactions, which need
place to 2020, as well as the severe economic to consider, besides free allocation, the price
recession. The discussions that are now on- of EUAs, and direct costs, as well as indirect
going focus on the post-2020 period, with a costs, and the ability to pass-through costs.
number of provisions being considered. They From a long-run perspective, even the costs of
try to address the concerns of industry, while abatement would need to be added.
Figure 14: Cost impacts relevant to carbon leakage
Emissions
Direct
Carbon
carbon
price
price
Indirect
Free
Effective carbon costs carbon
allowances
costs
Value added
Source: Wegener Center2017 State of the EU ETS Report 19
4.3.1 The current evidence Table 1 and Figure 15 show the share of
free allocations by sectors. There is a
The share of free allowances in relation to significant difference between combustion
emissions for the EU ETS covered installations, installations (which account for 71 percent
provides evidence of the protection that the EU of total emissions), and the industry sectors.
industrial sector received from the asymmetry Combustion includes electricity and heat
in the global climate change regime. The (and combined heat and power - CHP), but
current systems of fixed ex-ante free allocation also industrial combustion installations with
had a strong counter-cyclical effect, and a rated thermal input of more than 20 MW.
reduced costs in times of recession, based on Combustion installations were short during all
resulting lower EUA prices. trading periods.
Table 1: Share of free allowances in emissions
Verified emissions (mt CO 2) 2008 2009 2010 2011 2012 2013 2013 2015 2016
All stationary installations 2.120 1.880 1.939 1.904 1.867 1.908 1.814 1.800 1.763
Share of free allowances 92% 105% 103% 106% 110% 53% 52% 48% 42%
All combustion of fueld 1.511 1.380 1.415 1.385 1.372 1.332 1.237 1.225 1.020
Share of free allowances 83% 91% 90% 94% 97% 28% 27% 23% 16%
All industrial sectors 609 500 524 520 495 576 576 575 574
Share of free allowances 116% 143% 137% 138% 146% 110% 105% 102% 101%
All refining of mineral oil 145 135 133 133 127 130 127 130 130
Share of free allowances 98% 106% 111% 111% 118% 83% 83% 79% 77%
All production of pig iron or
122 84 105 104 100 107 108 106 107
steel
Share of free allowances 143% 209% 167% 167% 174% 139% 135% 132% 132%
All production of cement
157 126 124 122 114 111 116 114 114
clinker
Share of free allowances 111% 139% 142% 144% 155% 125% 109% 110% 109%
Production of bulk chemicals 31 28 29 28 27 35 35 35 35
Share of free allowances 118% 135% 129% 135% 141% 121% 121% 117% 113%
All production of paper or
28 24 26 25 24 23 22 22 22
cardboard
Share of free allowances 120% 140% 132% 138% 150% 121% 123% 119% 113%
All manufacture of ceramics 18 13 13 13 12 16 15 16 16
Share of free allowances 128% 181% 182% 175% 192% 114% 105% 100% 95%
Other activities 108 90 94 96 91 154 153 153 151
Share of free allowances 144% 177% 169% 169% 179% 116% 111% 108% 89%
Source: Wegener Center elaboration on EEA 201720 ERCST, Wegener Center, Nomisma Energia, I4CE & ICTSD
Figure 15: Free allocations for combustion and industrial sectors
Net supply of free allowances 50
Combustion of fuels
25
(Percent of emissions)
0
-25
-50
-75
-100
2013
2005
2012
2016
2008
2007
50
Industrial sectors
25
Net supply of free allowances
(Percent of emissions)
0
-25
-50 Deficit Surplus
-75
-100
2013
2005
2012
2016
2008
2007
Source: Wegener Center elaboration on EEA 2017
Currently data availability makes extremely since 2016. The cement industry shows an
challenging to assess how the surplus of each accumulation, in particular during Period 2,
sector is split between industrial emissions, of large surpluses of free allowances - almost
and on-site combustion emissions and/or CHP 300 million EUAs. The surpluses for paper and
plants. As such, this data needs to be seen as cardboard installations are over double their
directional. It is important to note that this annual emissions.
analysis is based on sectors as defined in the
EU Transaction Log, which means that a facility The particular high surpluses of free allowances
could be split into one or more combustion for ceramics installations in P2 have accumulated
installations, and industrial installations. to three times of its annual emissions. Note that
this sectoral picture could change dramatically
Based on the data discussed above, refinery if it was possible to allocate the emissions (and
installations balanced their Phase 3 deficits surplus/deficit) from combustion installations to
with Phase 2 surpluses, but have been short the various industry sectors.2017 State of the EU ETS Report 21
Installations in the ‘Pig iron and steel’ category of a few eurocents per ton of product for
have accumulated more than 500 million EUAs, various sectors and installation sizes (Source:
which continues to increase. However, these Egenhofer et al, 2014, Renda et al, 2013a and
assessments are based on publically available Renda et al, 2014b).
data from EEA and the EU TL. As expressed
throughout the paper, there are concerns Indirect costs – the cost of compliance
related to the availability and quality of data. for electricity generators passed on to
As an illustration, data from Eurofer indicates a their customers in electricity bills – are,
very different picture. Their assessment of the however, far more relevant, especially for
total number of allowances allocated to, and the electricity intensive industries. Based
surrendered by, the steel industry (including on the current EU approach, only partial and
both industrial installations and combustion regressive compensation is available and it is
of fuels) indicates that the cumulative surplus left at the discretion of Member States. This
for the entire steel industry peaked in 2012 is an unpredictable model, and creates the
at nearly 250 million EUAs, but has since then potential for significant, and uneven costs for
decreased significantly, reaching an estimated best performers.
180 million EUAs by 2016 (Ecofys, 2016).
Table 2 gives an overview of estimates for
Bulk chemicals have an accumulated surplus indirect costs from a study on energy prices
of EUAs that is close to twice of its annual for energy intensive industries.
emissions when using EU TL sectoral data.
Estimating indirect costs is an imprecise
CEFIC indicates that only half of bulk chemical
science at best, and depends on how
emissions and allocations are covered by the
electricity producers will pass costs through,
sectoral activity codes presented in EU TL.
and the estimates for the carbon intensity of
These differences in results are problematic as electricity generation. The estimates below
should be considered conservative and are
it shows that it is currently challenging to do an
likely to be an overestimation of indirect
independent assessment of this issue.
costs. However, it is apparent that indirect
The previous paragraphs dealt with direct ETS costs are not significant for non-electricity
costs – the cost of buying allowances at auction, intensive sectors, for example bricks and roof
or in the secondary market, to cover emissions. tiles. More electricity intensive sectors, such
For installations under the EU ETS two other as primary aluminum, are however impacted
cost categories need to be considered: indirect by high indirect costs, and it can be in a
and administrative costs. material way. Around 3% -14% (depending of
EUA prices) of total production costs for the
Studies of EU ETS costs indicate that admini- primary aluminum sector can be attributed to
strative costs are relatively small, in the order indirect costs.You can also read
