The European Trading Scheme: Overlap with complementary policies

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Gilbert Bridges
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1 The European Trading Scheme: Overlap with complementary policies Fabien Roques 13th IEA-IETA-EPRI Annual Workshop on Greenhouse Gas Emission Trading Putting climate policy into practice Paris, 11 September 2013

2 Agenda ETS has turned into a residual market that compounds policy and regulatory uncertainty from complementary policies Quantifying the effect of complementary policies: EU ETS allowance demand destruction by type Research directions for a supply management mechanism dealing with complementary policies

3 The ETS has turned into a residual market Key issue: the supply of allowances (the cap) is fixed in advance, but the demand is modified by any subsequent change in the parameters used to define the baseline. The key parameters supporting the baseline projection of emissions are: Economic growth and structural evolution of the economy Technological progress e.g. rate of production efficiency improvement by sector Complementary environmental and energy efficiency policies These complementary policies are largely determined by national governments Policies in support of renewables have been the prime drivers of power sector investments and carbon abatement over the past decade in Europe; Emissions standards for local pollutants under the Large Combustion Plant Directive will drive more than 30 GW of coal and oil plants retirements by 2015 more to come with the IED The ETS supply / demand balance depends on changes to and effectiveness of complementary policies. The ETS market compounds policy and regulatory uncertainties associated with these complementary policies.

4 Quantifying the effect of complementary policies: EU ETS allowance demand destruction by type Million metric tons of CO ETS allowance demand destruction by type Energy efficiency CO2 reductions EUA demand displacement from offsets Reference case EUA demand EU ETS cap Economic crisis CO2 reductions 2007 BAU emissions without renewable additions Reference case EUA demand including offsets Source: IHS CERA 4

5 Guiding principles for a supply management mechanism dealing with complimentary policies Linkage of REN support policies by computing implied implicit carbon abattement cost? Encourage designs of REN support policies that lead to a predictable /controllable capacity deployment and therefore of carbon abatement (e.g. volume caps) Growing interventionism Compute as part of ex ante impact assessment of national complimentary policies the equivalent carbon abatement compared to the baseline Ex post adjustment of the ETS cap in a predictable and automatic way to compensate for changes compared to the baseline emission forecast (e.g. mandatory nuclear plant closures, or change in support for renewables).

6 /tco Carbon Abatement Costs of RES Implicit and Explicit Carbon Prices Outlook for EUA Prices and EU27 Integrated Carbon Abatement Cost for Wind (Integrated LCOE adjusted with different Capex learning rates) High learning Planning Scenario Low learning Solar PV 200 EUA Price Scenarios: 150 EUA Price (Planning Scenario) EUA Price (-30% target and Phase 4) 100 EUA Price (1.2 Gt set-aside returned P3) Onshore Wind 50 High learning Low learning Offshore Wind 0 High learning Low learning 2012 Source: IHS CERA Solar PV Offshore Wind Onshore Wind 6

7 Conclusion: Key messages The EU ETS has turned into a residual market that compounds regulatory and policy uncertainty stemming from complimentary policies. Key objective of structural reform of ETS should be to address the overlap with complimentary policies through a predictable and automatic supply management mechanism. Two caveats: Mechanism for supply management should not be used to address all ETS issues: e.g. inconsistency with EC climate targets, definition of phase 4, etc. Mechanism for supply management should not be used to address issues with complimentary policies: lack of consistency (stop and go approaches), unsustainable cost burden, etc.. 7

8 Thank you for your attention Fabien Roques direct mobile

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