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EU ETS: Examining Success

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Artoun Festekjian

on 19 June 2014

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Transcript of EU ETS: Examining Success

What is the EU-ETS?
The Basics
Phase I
: 2005 - 2007
Phase II
: 2008 - 2012
Has the ETS been Successful?
3-year Pilot Program
Power Generators & Energy Intensive Industrial Sectors
Penalty for non-compliance = 40 euro/ton
Succeeded in:
Establishing price for carbon
Established free trade in emission allowances across the EU
Established infrastructure for monitoring, reporting and verifying actual emissions from the businesses covered
Caps set on basis of guesses
Total allowances exceeded demand by a sizable margin
By 2007 Phase 1 allocation prices fell to zero
Phase 1 allowances could not be banked towards Phase 2
Iceland, Liechtenstein and Norway joined EU ETS
The proportion of general allowances given away for free fell slightly to at least 90%
The penalty for non-compliance was increased to €100 per ton
Several member states held auctions
Businesses were allowed to buy CDM and JI credits totaling around 1.4 billion ton of CO2-equivalent (Except business for nuclear facilities and agricultural and forestry activities)
Let's Take a Look!
Phase II
European Commission tightened the cap by cutting the total volume of emission allowances by some 6.5% compared with the 2005 level
The economic crisis that began in late 2008 depressed emissions, and thus demand for allowances, by an even greater margin
This led to a large and growing surplus of unused allowances and credits which weighed heavily on the carbon price throughout the second trading period
For 2012 the cap on aviation allowances was set at a level equivalent to 97% of aviation emissions in the 2004-2006 reference period
85% of allowances were given to aircraft operators for free → travel
European Union Emissions
Trading Scheme

What is Emissions Trading?
Cap & Trade

What Happened?
Economic Collapse
The Result:
"Another criticism is of non-existent emission reductions produced in the Kyoto Protocol due to the surplus ("hot air") of allowances that some countries have. For example, Russia has a surplus of allowances due to its economic collapse following the end of the Soviet Union. Other countries could buy these allowances from Russia, but this would not reduce emissions. Rather, it would simply be a redistribution of emissions allowances. In practice, Kyoto Parties have as yet chosen not to buy these surplus allowances."

"HFC23 is a by-product of HCFC-21, a refrigeration gas which is controlled by the Montreal Protocol because it is blasting a hole in the ozone layer. The Protocol allowed for the continued new build for HCFC-21 in the developing world until 2015. HFC-23 destruction is dirt cheap (less than €0.01 per tonne). The ‘guide price’ of the EUA was around €15-€20 pmt, so to destroy mass numbers of CERs from HFC-23 destruction was a golden opportunity. The process was so profitable that it actually paid for developers to build new HCFC-21 facilities just to get the HFC-23 by-product and flare it off and take the CERs. The lack of any caps in China and India made this an absolute goldmine. It is estimated that this created a €30 billion windfall for the two main host countries. And the power consumer paid."
What this means
: In China some companies started artificial production of greenhouse gases with sole purpose of their recycling and gaining carbon credits. Similar practices happened in India. Earned credit were then sold to companies in US and Europe.
A New Emphasis:
Phase III
: 2013 - 2020
Phase IV
: 2021 - 2030
European Commission Proposed Changes in 2014
The linear reduction factor, at which the overall emissions cap is reduced, from 1.74% (2013-2020) to 2,2% each year from 2021 to 2030 thus reducing 43% of EU CO2 emissions in the ETS sector as compared to 2005.
The creation of a 12% "automatic set-aside" reserve mechanism of verified annual emissions (at least a 100 mln CO2 permit reserve) in the fourth ETS period from 2021 to 2030, thus creating a quasi carbon tax or carbon price floor with a price range set each year by the European Commission's Directorate General for Climate Change.
A single, EU-wide cap on emissions applies in place of the previous system of national caps;
Auctioning, not free allocation, is now the default method for allocating allowances. In 2013 more than 40% of allowances will be auctioned, and this share will rise progressively each year;
For those allowances still given away for free, harmonised allocation rules apply which are based on ambitious EU-wide benchmarks of emissions performance;
Some more sectors and gases are included.
Evolution of the European Carbon Market
In 2005, the EU ETS's first year of operation, some 321 million allowances, with a value of US $7.9 billion, were traded
Trading volume rose to 1.1 billion allowances in 2006 and 2.1 billion (worth $49.1 billion) in 2007
Trading volume in EU allowances jumped from 3.1 billion in 2008 to 6.3 billion in 2009 and 6.8 billion in 2010 (when EU allowances accounted for 84% of the value of the total carbon market)
In 2011, 7.9 billion allowances were traded, with a value of $147.9 billion

Lessons to be Learned
Over-allocation of allowances occurred during Phase I, allowance prices consequently dropped sharply
Recent News
: Models 'grossly underestimate' costs of global warming, Nicholas Stern says
June 16, 2014

Economic Impact
: Will the ETS affect European Competitiveness?
Carbon Prices
Phase II
in the first half of 2008
The average price was
in the second half of 2008, and
in the first half of 2009
Reason for decrease
: less abatement required to meet the cap, lowering the carbon price
Prices for EU allowances for December 2010 delivery dropped 8.7% to
12.40 euros
a tonne
The permit price had been persistently under
per tonne
compared to nearly
€30 per
in 2008
The market had been oversupplied with permits
June 2012, EU allowances for delivery in December 2012 traded at
6.76 euros
each on the ICE Futures Europe exchange
61 percent decline compared with previous year
The 2012 closing price for an EU allowance with a December 2013 contract ended the year at
6.67 euros
a metric tonne
In late January 2013, the EU allowance price fell to a new record low of
2.81 euros
After the energy and industry committee of the European parliament opposed a proposal to withhold 900 million future-dated allowances from the market
2020 Predictions:
Most market commentators project a price around or below
30 Euro/tCO2
Carbon price projections are subject to great uncertainty
Future fossil fuel prices, and predicting business-as-usual emissions
Globally Coordinated Carbon Price at $32-$103 per tonne of emissions is needed as soon as 2015
"Within two decades, the carbon price will need to almost triple in real terms to $US82-$US260 a tonne" -
The Economic Journal

"I have long been concerned that the (existing) model greatly underestimates the costs of extreme global warming of 4 degrees or more, which remains likely unless stronger global action is taken to reduce CO2 emissions." -
Professor John Quiggin, University of Queensland
Criticisms of Emissions Trading
Carbon Tax?
Auction System?
Form of Colonialism

Questionable Level of Sustainable Development

Surplus (non-existent emissions)


Structuring Issues
Cap and Share?
"The EU ETS and other carbon control measures out
to 2020 will have negligible impact on the international
competitiveness of more than 90% of UK manufacturing
activities. Overall, the EU ETS can extend with deeper
emission cutbacks in Phase III (post 2012), without
damaging UK or European competitiveness, but issues
around a few key activities do merit policy attention. "

Welsh Local Government Association
If you're
Impacts of the EU ETS on competitiveness and employment are

Impacts are
than the impacts of alternative regulation scenarios
ETS can have
competitiveness effects
ETS prime prime purpose and justification is to
Ensure that Europe’s CO2 emissions are brought

targets are reached at minimal costs
EU ETS should be justified on
Important that modifications to the system due to economic considerations do not
the environmental goals associated with this policy instrument
Will not be responsible for a significant reduction of EU
or a
"job killer"

Significant emission reductions at minimal cost

Policy stability created by longer-term targets --> durable investments in reducing emissions and deploying low carbon strategies

Companies/entrepreneurs responded with complementary policies with a diverse range of profitable investments in low-carbon solutions
Windfall profits (China) occurred in some member states but can be avoided using a variety of policy tools
Reforms have improved elements of the EU ETS that allow emitters to tender credits earned from projects that reduce emissions in developing countries (“offsets”)
Further reforms would be useful
Significant progress in preventing tax fraud and theft of allowances
http://www.scientificamerican.com/article/carbon-credits-system-tarnished-wikileaks/ http://euobserver.com/china/31347
French Figures
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