Energy Forum

Compensation arrangements for indirect EU ETS cost effects

Presented by Vianney Schyns

Brussels 9 June 2011

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• Free allocation for direct emissions carbon leakage list1. Sectors exposed to the risk of carbon leakage: 100% of benchmark

2. Non-exposed sectors: 80% of benchmark in 2013 down to 30% in 2020

• IFIEC proposes: financial compensation for indirect emissions should also be based on carbon leakage list– Otherwise: there would be competitive distortions between

installations with direct emissions and those with indirect emissions – We expect the European Commission, especially DG Competition, to

prevent such competitive distortions

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Financial compensation: Eligibility & Distortions

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Financial compensation: Eligibility & Distortions

• Carbon leakage is loss for economy and environment– Leakage of e.g. 100 Mton CO2 to same efficiency installations outside

Europe = 100 Mton loss for the global GHG balance because EU ETS cap remains unchanged

• Restricted compensation contrary to Europe 2020 Strategy– Strategy: not weakening but strengthening competitiveness– Competitive industry needed for growth and jobs, for European welfare,

to finance challenging climate change policies

• Real issues are: (1) global level playing field, (2) how to provide stability and predictability for European industry– IFIEC promoted indirect allocation of allowances

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Financial compensation: General considerations

• Electricity prices in Europe are (among) the highest globally– 21% higher than in USA and 197% higher than in China

(source: Commission 2020 Energy Strategy)

• CO2 cost impact on power prices comes on top and depends on marginal power plant– IFIEC regrets that the carbon leakage list is based on the average

emission of European power plants– The marginal effect is correct and well known in the Commission (DG

COMP a.o. sector inquiry, DG Climate Action)

• Any reduction factor is neither justified nor effective– Neither a general reduction factor nor a CO2-price reduction

– Environmental effectiveness is not ensured through a reduction factor but through the benchmarking approach

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Financial compensation: General considerations

• … electricity consumption benchmarks (BMs)– BMs give an incentive to lower electricity use: a) benefit of avoided

cost (if worse than BM) plus b) benefit of extra revenue (if - becoming - better than BM)

– Thus, a more stringent BM does not affect environmental effectiveness but affects competitiveness significantly (a + b always the same)

• … relevant CO2 factor– In general: the marginal CO2 factor

– Exception for existing contracts and existing self-generation units with a CO2 factor above the marginal: actual CO2 factor

– For new contracts and new self-generation: mechanism that maintains the ETS incentive for low-carbon technologies

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IFIEC proposal: Financial compensation shall be based on ...