Next steps for the European Union Emissions Trading Scheme (EU ETS): Structural Reforms - Berlin Seminar on Energy & Climate Policy (BSEC) Dr ...
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Next steps for the European Union Emissions Trading Scheme (EU ETS): Structural Reforms Berlin Seminar on Energy & Climate Policy (BSEC) Dr. Felix Chr. Matthes, Johanna Cludius, Hauke Hermann Berlin, 11. February 2014
The European Union Emissions Trading Scheme
Where do we stand?
• Started in 2005
• A pilot phase (2005-2007): Learning
• The first phase (2008-2012): (very) mixed experiences
significant emission reductions trackable (from changing operation
patterns for the period of significant prices in 2008)
significant investments in high carbon assets: partly triggered by the
bet of (some) market players on significant revenues from free
allocation based on fuel-specific benchmarks (they however failed:
construction delays, low EUA prices, phase-in of auctioning)
price crash as a result of the financial & economic crisis as well as
the massive inflow of CERs/ERUs (marginal prices apply …)
• The third phase (2013-2020): major improvements but (heavy)
burdens from the past remain to be there
transition towards auctioning
long-term cap (linear reduction factor)
… but no price (paradox situation leading to no investments)European Union Emissions Trading Scheme
Historical allowance price trends
50
Early Release of EU climate Financial & EU directive
hedging and 2005 emissions & energy Spot
45 economic on Energy
speculation, data, long package 2020, crisis, weak Efficiency,
early price market, bullish commodity ongoing
40 discovery no banking commodity markets economic
to 2nd period markets & debt crisis Early
Futures
35
30 EUA 2007
€ / EUA
25
EUA 2012
20
15
EUA 2015
10
5 EUA 2020
0
01.2003 01.2005 01.2007 01.2009 01.2011 01.2013 01.2015European Union Emissions Trading Scheme
Dimension and determinants of Surplus
• Recent surplus approx. 2 bln EUA (incl. offset credits)
• Projection to 2020: comparable size
temporal decrease of surplus due to backloading: 1.7 bln EUA by mid
of this decade
more offsets to be surrendered (existing entitlements of approx. 500
mln credits)
reintroduction of backloaded allowances by the end of the decade:
surplus exceeds 2 bln EUA again
reminder: air traffic and its anticipated (net) demand disappeared
no scarcity by 2020 – and beyond (depending on baseline emissions)
• In fact the EU ETS is a inter-temporal hybrid stage
limits on quantities: existent but not relevant for price formation on the
short- and medium-term
recent price levels: speculation on long-term scarcity, based on
confidence that the system will survive for the next two decadesEuropean Union Emissions Trading Scheme
Emissions, allocation, credits & surplus
3,500
Surrendered ERUs
Surrendered CERs
EUAs sold&auctioned by gov
3,000 EUAs allocated for free
Scope correction
million emission units / Mt CO2
Verified emissions & scope cor.
2,500
2,000
1,500
1,000
500
0
2005 2006 2007 2008 2009 2010 2011 2012
1st trading period 2nd trading periodEuropean Union Emissions Trading Scheme
Projections for the surplus by 2020
2,500
2,000
mln EUA, CER or ERU
1,500
1,000
500
0
Hisorical use of Crisis Future use of Constant emissions Reference Total
CDM & JI credits CDM & JI credits Scenario surplus
2008 to 2012 2013 to 2020European Union Emissions Trading Scheme
Emerging adjustments and structural reforms
• Emerging consensus (of a majority): Activities to maintain (and save)
the EU ETS are needed
• Backloading as a first step: rebuilding confidence
• The broader framework for post-2020
2030 targets: the 40% GHG emission reduction proposal
respective adjustments of the (long-term) cap (linear reduction
factor): the proposed adjustment from 1.74% to 2.2% from 2021
onwards
• Structural reform of the EU ETS – beyond the linear reduction factor
removing the surplus
implementing measures to avoid similar situations – resulting from
macroeconomic and policy uncertaintyProposed GHG targets not on the long-term track
Will the EU ETS deliver too late?!
6.000
Aviation (national & international)
Non-ETS sectors
EU ETS (proxy data from 1990 to 2004)
5.000
2020 Goal
-20...-30%
compared to 1990
4.000
2030 Goal 2050 Goal
-40...-55% -80...-95%
mln t CO2e
3.000
EU ETS 2050: -75%
cap
2.000
Linear
1.000 Reduction
Back- Factor
loading 1.74%
2013/2020 2.20% (2021-)
0
1990 1995 2000 2005 2010 2015 2020 2025 2030 2035 2040 2045 2050
Öko-Institut 2013Modeling the impacts of different models
Key role of assumptions on baseline trends
• Öko-Institut (2012)
Energy & Climate Package modeling, adjusted for GDP and
expansion of renewables, no significant CO2 prices
• Constant 2012 emissions
scope adjustmens for new sectors and gases – and Croatia
(+118 Mt CO2)
• Constant 2012 emissions -100Mt
• Constant 2012 emissions +100Mt
• EC Reference Scenario (2013)
2020 targets for greenhouse gas emissions, renewables, energy
efficiency will be met
significant CO2 prices: 10€/t in 2020, 35€/t in 2030, 100€/t in 2050
(is this consistent to assess a surplus situation???)
adjusted baseline, aviation excluded, NO / IS / LI included
“worst case scenario” – from the surplus perspectiveLRF only strategies: Total cumulated surplus
(Existing) LRF of 1.74%
3,000
2,000
1,000
0
million EUA
2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030
-1,000
-2,000
Öko-Institut (2012)
Constant 2012 emissions
-3,000 Constant-100
Constant+100
European Commission (2013)
-4,000LRF only strategies: Total cumulated surplus
LRF of 2.2% from 2021
3,000
2,000
1,000
0
million EUA
2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030
-1,000
-2,000
Öko-Institut (2012)
Constant 2012 emissions
-3,000 Constant-100
Constant+100
European Commission (2013)
-4,000LRF only strategies: Total cumulated surplus
LRF of 2.6% from 2016 (100% in 2050)
3,000
2,000
1,000
0
million EUA
2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030
-1,000
-2,000
Öko-Institut (2012)
Constant 2012 emissions
-3,000 Constant-100
Constant+100
European Commission (2013)
-4,000European Union Emissions Trading Scheme
Structural reforms
• Adjustments of linear reduction factor will not be sufficient to solve
the surplus problem
• Proposal for a Market Stability Reserve (MSR)
introduction of a new indicator: “Allowances in circulation” (AiC)
Methodology for a year t (release of t-1 data in May of year t)
+ total number of EUA issued from 2008 to t-1
+ total number of CER/ERU surrendered from 2008 to t-1
‒ total verified emissions from 2008 to t-1
‒ number of allowances in the MSR
= allowances in circulation (formerly known as surplus …)
if AiC exceeds 833 mln. t CO2e, 12% of AiC are shifted to the MSR in
year t+1 (deducted from auctioning budget)
100 mln. allowances from the MSR will be released for auctioning
• if AiC is below 400 Mt CO2e
• if a price trigger is met (6 m 3 x avg price of two precending yrs)European Union Emissions Trading Scheme
The market stability reserve
• The idea behind the market stability reserve
the power sector represents a major share of the EU ETS-regulated
emissions and is subject to full auctioning
the power sector relies on conservative hedging strategies: sales and
purchases up to three years in advance (almost total annual
production is sold in futures markets)
hedging creates a demand for physical allowances (no cross-
commodity hedging) – even in a surplus situation (long market)
scarcity prices will be generated
MSR represents a tool to maintain a hedging corridor of 400 to 833
Mt CO2e (for a long period of time), the size of the corridor is based
on industry statements
• The concept of the MSR is a bet that the hedging corridor idea &
parameterization represents reality
at present
in future (especially in a lower carbon and/or high renewables world)MSR Commission proposal
LRF 2.2% (from 2021) & EC reference baseline
2,500
2,000
1,500
million EUA
1,000
500
0
-500
Total Cumulated Surplus
Market stability reserve
Total Cumulated Surplus with market stability reserve
-1,000MSR Commission proposal
LRF 2.6% (from 2016) & Constant 2012 baseline
2,500
2,000
1,500
million EUA
1,000
500
0
-500
Total Cumulated Surplus
Market stability reserve
Total Cumulated Surplus with market stability reserve
-1,000MSR (0-400 mln EUA hedging corridor)
LRF 2.2% (from 2021) & EC Reference baseline
2,500
2,000
1,500
million EUA
1,000
500
0
-500
Total Cumulated Surplus
Market stability reserve
Total Cumulated Surplus with market stability reserve
-1,000MSR (0-400 mln EUA hedging corridor)
LRF 2.6% (from 2016) & Constant 2012 baseline
2,500
2,000
1,500
million EUA
1,000
500
0
-500
Total Cumulated Surplus
Market stability reserve
Total Cumulated Surplus with market stability reserve
-1,000MSR from 2016 (0-400 mln EUA hedging corridor)
LRF 2.2% (from 2021) & EC Reference baseline
2,500
2,000
1,500
million EUA
1,000
500
0
-500
Total Cumulated Surplus
Market stability reserve
Total Cumulated Surplus with market stability reserve
-1,000MSR from 2016 (0-400 mln EUA hedging corridor)
LRF 2.6% (from 2016) & Constant 2012 baseline
2,500
2,000
1,500
million EUA
1,000
500
0
-500
Total Cumulated Surplus
Market stability reserve
Total Cumulated Surplus with market stability reserve
-1,000European Union Emissions Trading Scheme
Structural reforms
• The adjustment of the LRF is a must (long-term perspective!)
is an adjustment before 2021 a real option?
a more aggressive LRF than 2.2% is more consistent with the long-
term targets
• The MSR is an interesting concept (short- & medium-term perspective)
as a hybrid between quantity and price triggered mechanism (reflecting
macroeconomic and policy uncertainties)
its effects are strongly depending on the assumption of certain hedging
strategies in the power market
the MSR itself contains a hedging mechanism (the price trigger)
given this safety valve, the underlying hedging corridor could be
designed more dynamically and/or narrowed (over time?) or designed
on the basis of MSR vintages (which will be retired after a certain time)
the MSR could start earlier
scarcity around 2020 will only be possible with a mix of adjustments
• Retirement of surplus should still be reflected as an additional optionThank you
very much
Dr. Felix Chr. Matthes
Energy & Climate Division
Berlin Office
Schicklerstraße 5-7
D-10179 Berlin
f.matthes@oeko.de
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