EU ETS - Last call before the doors close on the negotiations for the post-2020 reform

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1 CLIMATE BRIEF N 49 EU ETS - Last call bfor th doors clos on th ngotiations for th post-22 rform Paris, Sptmbr 217 Authors: Charlott Vaills Emili Albrola Cyril Cassisa Jérémy Bonnfous Paula Coussy. Enrdata intllignc + consulting SUMMARY A window of opportunity to rform th EU ETS is currntly opn but closing soon: th EU ETS dirctiv is currntly bing rvisd for its Phas IV (221-23), and trilogu ngotiations btwn EU institutions, startd in April 217, will probably succd in th fall. W find that th rform proposals from th EU Parliamnt and th EU Council ar not sufficint to crat an ffctiv ETS in Phas IV (221-23). Indd, GHG missions rductions coming notably from nrgy fficincy and rnwabl nrgy policis ar sufficint to rspct th EU ETS targt, and thus th EU ETS is not a drivr of dcarbonisation in industry and nrgy sctors ovr its Phas IV. In spit of th doubling of its withdrawal rat in th first yars of its functioning (until 221 for th Parliamnt and 223 for th Council), th Markt Stability Rsrv is not abl to mitigat th ffct of complmntary policis on th EU ETS whil absorbing th historical surplus of allowancs. On th contrary, from th arly 23s, furthr missions rductions ar ndd and th cost of abatmnts to achiv th EU ETS targt incrass suddnly. Th EU ETS currnt trajctory is alignd with th low nd of EU long-trm climat ambition. Long-trm EU climat objctivs and th EU ETS trajctory should now b updatd to intgrat th objctivs of th Paris Agrmnt, and should aim at nt-zro missions by th scond half of th cntury. Anticipating th EU ETS long-trm targt is ncssary to hav a sustainabl and politically accptabl dcarbonisation pathway. In that contxt, an EU-wid pric corridor on th EU ETS could b on solution to th lack of anticipation of ETS oprators and would lad to arlir mitigation fforts in ETS sctors. A possibl xit of th UK from th EU ETS adds to th uncrtainty of th currnt rvision of th EU ETS dirctiv. In that cas, carful attntion should b paid to th adaptation of th missions cap and th MSR paramtrs. This climat brif provids a synthsis of ky rsults from th rsarch program COPEC II (COordination of EU Policis for Enrgy and CO 2 by 23). Launchd in April 217, this rsarch program is jointly conductd by I4CE Institut for Climat Economics, Enrdata and IFPn - Institut français du pétrol t ds énrgis nouvlls. It aims at prparing policymakrs for th rvision of th 23 climat and nrgy packag. Th authors tak sol rsponsibility for findings or idas prsntd in this rport as wll as any rrors or omissions. This rport dos not rflct th opinion of any govrnmnts or privat companis. Th authors would lik to thank th sponsors of this rsarch program for thir financial support. EU ETS Last call bfor th doors clos on th post-22 rform - Sptmbr 217 I4CE 1

2 Finally, th framwork for fr allocation to prvnt carbon lakag risks in industrial sctors is a focal point in th ngotiations on th EU ETS rform. W find that th positions of th Council and th Parliamnt on th EU ETS rform will probably rsult in a Cross-Sctoral Corrction Factor (CSCF) triggrd at th nd of Phas IV, undr consrvativ assumptions for bnchmark dcras rats in major sctors covrd by th EU ETS (rfinry, cmnt, aluminum, stl). Quantifying th impact of EU ETS dsign paramtrs on fr allocation nabls to try and match th supply and th dmand and thus avoid triggring th CSCF, kping in mind that fr allocation should not rsult in windfall profits and was mant to b a transitional tool. If th framwork for th compnsation of indirct costs in lctro-intnsiv sctors wr harmonizd across th EU ETS, w find that around 24% of EUAs auctioning volums would b rquird ovr Phas IV to compnsat indirct costs in th main ligibl sctors. Unlss an unxpctd proposal coms out of th trilogu ngotiations, th rvisd EU ETS dirctiv will not b sufficint to dal with ovrlapping policis. Th ngotiations on othr pics of th climat and nrgy framwork, and in particular on th proposd Govrnanc Rgulation, thus appar as an opportunity to crat a consistnt policy mix and manag th intractions btwn th diffrnt policy instrumnts. Introduction Twlv yars aftr th EU ETS was introducd as th cornston of EU climat policy to promot rductions of grnhous gas (GHG) missions in a cost-ffctiv way, continud dprssd prics ar qustioning its crdibility. A window of opportunity to rform th EU ETS is currntly opn but closing soon: th EU ETS dirctiv is currntly bing rvisd for its Phas IV (221-23). Following a proposal for a rvisd dirctiv by th Europan Commission in July 215, trilogu ngotiations btwn EU institutions startd on April 4, 217, with a focus in th ngotiations on th strngthning of th EU ETS and on carbon lakag. Givn th divrgnc of opinion on a numbr of lmnts, thr is still uncrtainty on th possibl outcom of th trilogu ngotiations, probably to b rachd in autumn 217. This rform is th last chanc for th EU ETS: with anothr dcad of dprssd prics, th EU ETS would los what is lft of its crdibility and would b rplacd with fragmntd national policis. Following th adoption by th EU Parliamnt and th EU Council of thir rspctiv positions on th post- 22 EU ETS rform proposal in Fbruary 217, I4CE, Enrdata and IFPEN provid a nw qualitativ and quantitativ assssmnt of ths positions. Two othr possibl volutions of th EU ETS during its Phas IV (221-23) ar also analyzd: th implmntation of carbon pric corridor on th EU ETS and an xit of th UK from th EU ETS. Th analysis considrs th EU ETS with a long-trm prspctiv until 24 (Figur 1), considring th implmntation of othr pics of th EU Climat and Enrgy packag. This policy brif provids a synthsis of ky rsults from a rport that will b publishd latr in Sptmbr 217. EU Parliamnt and Council rform proposals ar not sufficint to crat an ffctiv ETS in Phas IV (221-23) Th proposals on th tabl today to strngthn th EU ETS fail to mak it a drivr of dcarbonisation in nrgy and industry sctors ovr its Phas IV Th rform of th EU ETS for th post-22 priod will probably b mor ambitious than with th initial proposal from th Commission, with th Parliamnt 2 I4CE Sptmbr Point Climat n 49

3 and th Council both in favor of a doubling of th Markt Stability Rsrv (MSR) intak rat in th first yars and of a cancllation of allowancs in th MSR. (Tabl 1) Howvr, nor th Council proposal nithr th Parliamnt s vn with an incras of th Linar Rduction Factor (LRF) of th cap to 2.4% in 224- lads to an ffctiv EU ETS during its Phas IV, dspit th implmntation of th MSR. Indd, in Phas IV, GHG missions rductions notably coming from nrgy fficincy and rnwabl nrgy policis ar sufficint to rspct th EU ETS targt, and thus th EU ETS is not a drivr of abatmnt. FIGURE 1. THE EU ETS CAP AND GHG EMISSIONS IN THE THREE SCENARIOS Nots: Phas III Phas IV Phas V ETS CAP - Parliamnt (Baslin) and Council ETS missions - Sc. Council ETS missions - Sc. LRF+ ETS cap in 24 Parliamnt and Council: 851 LRF+: ETS CAP - Sc. LRF+ ETS missions - Sc. Parliamnt (Baslin) ETS missions - Sc. No Policy Sourc: Enrdata, 217 Th rport analyss scnarios which rprsnt possibl outcoms of th trilogu ngotiations on th EU ETS rform: 1. Th Parliamnt scnario which rprsnts th Parliamnt s amndmnts on th EU ETS rform; 2. Th Council scnario rprsnting th Council gnral approach on th EU ETS rform; and 3. LRF + scnario which also rprsnts th Parliamnt s amndmnts on th EU ETS rform but taks into account an incras of th LRF to 2.4% in 224. Th EU ETS cap rprsntd in th graph dos not tak into account th ffct of th MSR, xcpt for th transfr of backloadd allowancs. No Policy: countrfactual scnario without any objctivs for GHG missions rductions, rnwabl nrgy sourcs and nrgy fficincy. TABLE 1. POSITIONS IN THE TRILOGUE ON OPTIONS TO STRENGTHEN THE EU ETS EU Commission s proposalmsr dcision EU Parliamnt s amndmnts EU Council Gnral Approach Linar Rduction Factor (LRF) ,2% 2,2% 2,2% Rviw of th LRF Possibility to incras th LRF aftr 224 to 2,4% Withdrawal rat of th Markt Stability Rsrv (MSR) 12% 24% until 221(incl.) 24% until 223 (incl.) Cancllation of allowancs in th MSR 8 million in 221 Yarly cancllation of allowancs aftr 224 abov th numbr of allowancs auctiond th prvious yar Cancllation of allowancs by Mmbr Stats Possibility to cancl a volum of allowancs corrsponding to th closur of lctricity gnration capacity in thir trritory du to national masurs Sourc: I4CE from EU Parliamnt, EU Council documnts, 217. EU ETS Last call bfor th doors clos on th post-22 rform - Sptmbr 217 I4CE 3

4 During Phas IV, th Markt Stability Rsrv is not sufficint to mitigat intraction ffcts btwn th EU ETS and rnwabl nrgy and nrgy fficincy policis In spit of th doubling of its withdrawal rat in th first yars of its functioning (until 221 for th Parliamnt and 223 for th Council), th MSR is not abl to mitigat th ffct of complmntary policis on th EU ETS whil absorbing th historical surplus of allowancs, undr th assumption that spcific policis ar implmntd to mt th 23 targts for rnwabl nrgy and nrgy fficincy. Th scarcity of allowancs is only rstord by th nd of Phas IV in th thr scnarios. (Figur 2) Furthrmor, ths rsults on th MSR do not tak into account th possibl implmntation of national climat policis nor unxpctd conomic downturns or an ovrachivmnt of Europan rnwabl nrgy and nrgy fficincy objctivs, which would incras th surplus of allowancs. Howvr, th MSR may hav a psychological ffct on th anticipations of stakholdrs, which is not accountd for in th modlling. Long-trm climat targts nd to b anticipatd for a sustainabl low-carbon transition EU long-trm climat ambition should b incrasd to intgrat th objctivs of th Paris Agrmnt As currntly discussd in th trilogu ngotiations, th EU ETS trajctory is alignd on th low nd of long-trm EU climat ambition. Indd, a LRF of 2.2% from 221 corrsponds to an 85% rduction of GHG missions in 25 compard to 25, whil th Roadmap for moving towards a comptitiv low carbon conomy in 25 projctd an avrag rduction of 9% for ETS sctors1. Incrasing th LRF to 2.4% in 224 would cumulativly rduc th cap by around 1,66 until 25 and would b consistnt with a 9% rduction in ETS missions in 25 compard to 25 missions. (Figur 3). Furthrmor, th Roadmap, draftd in 211, dscribs a pathway only alignd with an 8% rduction in total GHG missions in 25 compard to 199 lvls. Long-trm EU climat objctivs and th EU ETS trajctory should now b updatd to intgrat th objctivs of th Paris Agrmnt, and should aim at nt-zro missions by th scond half of th cntury. From th arly 23s, furthr missions rductions ar ndd to achiv th EU ETS long-trm targt Evn though its trajctory is alignd on th low nd of EU 25 climat ambition, th EU ETS still rquirs a drastic dcras of GHG missions in th long trm. Th cost of abatmnts rquird to rspct th EU ETS targt (taking into account th constraint st by th cap and th surplus on th markt) bcoms xtrmly significant in th arly 23s, undr th assumption that supports for rnwabl nrgy and nrgy fficincy dcras aftr 23. If th constraint is not anticipatd from today, EU ETS markt prics would b too low to giv th right lowcarbon invstmnts during Phas IV, and on th contrary would risk bcoming socially unaccptabl in Phas V, lading policy-makrs to allviat th constraint st by th EU ETS, and thus dcras its ambition. With a propr anticipation of th EU ETS long-trm targt, th nd for furthr GHG missions rductions would appar from today and would rsult in a sustainabl and politically accptabl dcarbonisation pathway. Rducing th myopia of EU ETS stakholdrs byond 23 is ncssary for an fficint carbon pric to appar from today and mak th dcarbonisation sustainabl. In this contxt, an updatd 25 EU roadmap, intgrating th objctivs of th Paris Agrmnt, would b ncssary to giv mor visibility to all. This roadmap would nd to b laboratd in a bottom-up way to account for th diffrnt sctors spcificitis and to facilitat its accptanc. Attntion should b paid to th nvironmntal intgrity of th MSR on th long run With th Parliamnt proposal, vn with an incras of th LRF in 224, thr ar still mor than 2 billion allowancs in th MSR in 24, which could consquntly rlas allowancs until th 26s, jopardizing th nvironmntal intgrity of th EU ETS in th long run. As an ordr of magnitud, rlasing 1 million allowancs in 25 corrsponds to a 27% incras in th EU ETS cap with an LRF of 2.2% from 221 and 41% if th LRF incrasd to 2.4% in 224. With th Council proposal, mor than 3 billion allowancs ar canclld in total, and th MSR is mpty in SC15&from=EN, nots 55 and I4CE Sptmbr Point Climat n 49

5 FIGURE 2. MSR STOCK AND EU ETS SURPLUS MSR stock: Evolution of th MSR rsrv stock EU ETS surplus Evolution of th surplus of allowancs PARLIAMENT 35, 3, 25, 2, 15, 1, 5,, Total amount of canclld allowancs: 8 238: MSR 1 st rlas COUNCIL 35, 3, 25, 2, 15, 1, 5,, Total amount of canclld allowancs: 3,46 238: MSR 1 st rlas LRF+ 3 5, 3, 2 5, 2, 1 5, 1, 5,, FIGURE 3. THE EU ETS CAP FOR FIXED INSTALLATIONS (213-25) Phas III LRF = 1.74% MSR uppr thrshold LRF = 2.2% LRF incrasd to 2.4% in 224 Total amount of canclld allowancs: 8 236: MSR 1 st rlas Th cap is rducd cumulativly by 1,663 until 25 if th LRF is incrasd to 2,4% in 224. MSR lowr thrshold Sourc: I4CE & Enrdata, % rduction 9% rduction Adjustmnt to rflct Phas III scop 25 vrifid missions Intrprtation of th graph: Th gry ara rprsnts th EU ETS missions cap in th cas whr th LRF is incrasd to 2.4% in 224. Th rd ara rprsnts additional missions in th cap in th cas whr th LRF is qual to 2.2% from 221. Sourc: I4CE, 217 EU ETS Last call bfor th doors clos on th post-22 rform - Sptmbr 217 I4CE 5

6 An EU-wid pric corridor on th EU ETS could b on solution to th lack of anticipation of ETS oprators and would lad to arlir mitigation fforts in ETS sctors A pric corridor implmntd through an additional rsrv on th EU ETS Th analysis of th potntial outcom of th ngotiations on th EU ETS rform concludd that options currntly discussd in th trilogu would not mak th EU ETS a drivr of missions rductions in its Phas IV, unlss its long-trm trajctory is anticipatd. Th implmntation of a pric corridor on th EU ETS is on of th possibl solutions to th lack of anticipation of ETS oprators. In this scnario, th objctiv is to lad th EU ETS carbon valu2 into a spcific intrval (Figur 4) through th implmntation of a nw rsrv on th EU ETS, th Pric Corridor Rsrv (PCR). Auctions ar canclld until th ETS carbon valu rachs th floor and corrsponding allowancs ar transfrrd to th PCR. Allowancs ar rlasd from th PCR whn th carbon valu is highr than th ciling. Th implmntation of a pric corridor lads to arlir mitigation fforts in EU ETS sctors Th implmntation of a pric corridor lads to arlir mitigation fforts in EU ETS sctors until 24, and in total rducs cumulativly GHG missions by FIGURE 4. TRAJECTORY OF EU ETS CORRIDOR PRICE tco Pric ciling Pric floor Sourc: I4CE and Enrdata, from Canfin P., Grandjan A., Mstrallt G. (216) 846 in Phas IV and by 781 in Phas V. Mor than half of additional missions rductions compard to th Parliamnt scnario ar achivd in th powr sctor. (Figur 5) Th implmntation of th carbon pric corridor lads to th transfr of a significant numbr of allowancs in th ddicatd rsrv and th surplus of allowancs is thus vry quickly absorbd. In 22, du to th joint ffct of th pric corridor rsrv and of th MSR, all auctions ar canclld, and in 24, thr ar 4 billion allowancs in th pric corridor rsrv. In th sam way as with th MSR, allowancs stord in th PCR will hav to b managd carfully, in ordr to nsur longtrm climat targts ar mt. 2 On of th outputs of POLES modlling is th carbon valu in th diffrnt scnarios, which is not an EU ETS markt pric. Th carbon valu rprsnts th cost of missions rductions rquird to rspct th constraint st by th EU ETS considring a sliding carbon budgt. FIGURE 5. SECTORIAL EU ETS EMISSIONS REDUCTIONS IN THE PRICE CORRIDOR SCENARIO COMPARED TO THE PARLIAMENT (BASELINE) SCENARIO Sc. Parliamnt (Baslin) Sc. Corridor Elctricity Gnration Industry Not: Othr transformation includs th rfining of minral oil and th production of cok. 6 I4CE Sptmbr Point Climat n % % 43 ; 5% Cum Total: % % 62 ; 8% Cum Total: 781 Othr transformation Sourc: Enrdata, 217

7 A possibl xit of th UK from th EU ETS adds to th uncrtainty of th currnt rvision of th EU ETS dirctiv Uncrtaintis around th Brxit and th EU ETS Th possibl xit of th UK from th EU ETS raiss many qustions, which cannot b answrd through modlling. It is not known yt whthr th UK is actually xiting th EU ETS, and a fortiori it is not known whn this transition would tak plac and how th EU ETS dsign paramtrs- such as th missions cap or th MSR withdrawal and rlas rats and thrsholdswould b adjustd. Th bhavior of markts participants which hold allowancs in th UK, is also an unknown, as wll as th amount of allowancs that may com back suddnly to th markt. Finally, without th UK voic, th balanc in nrgy and climat ngotiations will probably b modifid. In cas of a Brxit, carful attntion should b paid to th adaptation of th missions cap and th MSR paramtrs To dsign a Brxit scnario, som assumptions had to b mad. In this scnario, th UK is considrd to b no longr part of th EU ETS from th bginning of Phas IV and th ambition in th EU ETS is assumd to rmain similar as with th currnt missions rduction targts. Th EU ETS missions cap is adaptd consquntly. This nw EU ETS missions cap dfind in th Brxit scnario corrsponds to highr mitigation fforts for th rst of th EU ETS in th priod post-22. As a consqunc, th Brxit impacts th dcras of th surplus and th MSR functioning. Indd, th surplus is rsorbd fastr than in th Parliamnt scnario and th MSR thrsholds ar rachd soonr. As th MSR starts rlasing allowancs soonr in th Brxit scnario, and as th incras of th EU ETS supply by 1 has a mor significant impact in a smallr markt, th constraint st by th EU ETS bcoms lss stringnt than in th Parliamnt scnario from 236. Rsulting ETS missions in th Brxit scnario ar 4% highr than in th Baslin scnario in 24. Th rsults of th Brxit scnario cannot b dissociatd from th assumptions mad for th adjustmnt of th EU ETS paramtrs. In cas th UK lavs th EU- ETS, carful attntion should b paid to th adjustmnt of th missions cap and MSR dsign paramtrs. Th framwork for fr allocation to industrial sctors is a focal point in th ngotiations on th EU ETS rform 3 In th trilogu, positions diffr on a numbr of EU ETS dsign paramtrs which impact fr allocation Options to rform th EU ETS currntly discussd in trilogu ngotiations ar not likly to lad to a stringnt EU ETS in Phas IV, and th mrgnc of a pric signal will b conditiond on th anticipation of long-trm prspctivs. Howvr, th issu of carbon lakag and th comptitivnss of EU industris is a major concrn to dcision-makrs and is calling particular attntion in th dbats. Th currnt approach of frly allocating allowancs to industrial sctors dmd to b xposd to carbon lakag will go on. Bsids, along with th EU ETS missions cap, th fr allocation cap will dcras. In this contxt, industris ar worrid that a cross-sctoral corrction factor (CSCF) might nd to b triggrd, to adjust th total fr allocation to th fr allocation cap. Such a factor would rduc uniformly fr allocation in all sctors, a concrn for thos most xposd to carbon lakag. A numbr of paramtrs discussd in th trilogu ngotiations influnc ithr th fr allocation cap or th calculation of th bottom-up prliminary fr allocation and thus dtrmin whthr a CSCF will b ncssary. Post-22 EU ETS rform proposals from th EU Commission, th Parliamnt and th Council diffr on a numbr of paramtrs which impact fr allocation, as dscribd in Tabl 2. 3 I4CE has built an onlin simulation tool to stimat fr allocation in Phas IV dpnding on paramtrs discussd in th trilogu ngotiations: https: EU ETS Last call bfor th doors clos on th post-22 rform - Sptmbr 217 I4CE 7

8 TABLE 2. OPTIONS ON FREE ALLOCATION DISCUSSED IN THE TRILOGUE NEGOTIATIONS Paramtrs EU Commission s proposal EU Parliamnt s amndmnts EU Council Gnral Approach Linar Rduction Factor (LRF) % 2.2% and possibility to incras th LRF aftr 224 to 2.4% 2.2% Supply of fr allowancs Funds fd with allowancs from th FA shar 4 million for th Innovation Fund 4 million for th Nw Entrants Rsrv + 1% of allowancs for a fund to compnsat for indirct costs 4 million for th Innovation Fund Incras of FA shar to avoid triggring CSCF No adjustmnt Rduction of up to 5 prcntag points of th shar of allowancs to b auctiond by Mmbr Stats ovr Rduction of up to 2 prcntag points of th shar of allowancs to b auctiond by Mmbr Stats ovr Proportion of bnchmarkd-basd allocation frly allocatd 1% for sctors on CL list; 3% for sctors not on CL list 1% for sctors on CL list; 3% for district hating; % for othrs 1% for sctors on CL list; 3% for sctors not on CL list Dmand for fr allowancs Annual bnchmarks dcras rat (upprlowr limits) Fr allocation for lctricity gnration with wast gas 1%yar (1.5%.5%) Basd on actual improvmnt rats (1.75%.25%) Full carbon contnt of wast gas usd for lctricity production takn into account in bnchmark calculations Basd on actual improvmnt rats (1.5%.2%) Eligibility to CL list (limit for qualitativ assssmnt) Intnsity of trad* missions intnsity >.2 (.18) Intnsity of trad* missions intnsity >.2 (.12) Intnsity of trad* missions intnsity >.2 (.16) Othr Application of CSCF To vry sctor Only to sctors with an intnsity of trad with third countris blow 15% or a carbon intnsity blow 7Kg CO 2 Euro of GVA To vry sctor Implmntation of a bordr carbon adjustmnt If ndd, this option will b assssd aftr th first rviw of th EU ETS FA = fr allocation; CL = carbon lakag; CSCF = cross-sctoral corrction factor; GVA = gross valu addd. I4CE, 217 d après Parlmnt, Consil t Commission uropénn Th positions of th Council and th Parliamnt on th EU ETS rform will probably rsult in a Cross-Sctoral Corrction Factor (CSCF) triggrd at th nd of Phas IV W stimat that with th Parliamnt amndmnts, a CSCF of 64.2% would b triggrd in 23 for all sctors which mt th application critrion (an intnsity of trad with third countris blow 15% or a carbon intnsity blow 7 kg CO 2 ). (Figur 6) With th configuration of th Council gnral approach, w stimat that th CSCF would b triggrd from 228 and would b qual to 76.3% in 23, rducing uniformly fr allocation in all sctors. (Figur 7) Ths rsults should b considrd with caution, as projctions on fr allocation ar vry snsitiv to assumptions on futur growth rats in industry and vn mor to assumptions on th allowd bnchmark dcras rats by sctor. It should b notd that in this study, th lowst possibl bnchmark dcras rats hav bn usd in ach scnario (.25% in th Parliamnt scnario and.2% in th Council scnario) for major sctors covrd by th EU ETS (rfinry, cmnt, aluminum, stl). Figur 8 illustrats th opposit ffcts of th assumptions on futur growth rats and bnchmark dcras rats and shows th maximum avrag annual activity growth rat for which no CSCF is ndd, as a function of th avrag bnchmark annual dcras rat. 8 I4CE Sptmbr Point Climat n 49

9 FIGURE 6. EU ETS PHASE IV FINAL FREE ALLOCATION BY SECTOR IN THE PARLIAMENT SCENARIO FIGURE 7. PHASE IV FINAL FREE ALLOCATION BY SECTOR IN THE COUNCIL SCENARIO Stl Rfinry Fr allocation cap Cmnt Chmistry Aluminium Othr Stl Rfinry Fr allocation cap Cmnt Chmistry Aluminium Othr Sourc: I4CE, 217 Sourc: I4CE, 217 FIGURE 8. LIMIT VALUES OF THE AVERAGE ANNUAL ACTIVITY GROWTH RATE AND THE AVERAGE BENCHMARK DECREASE RATE FOR WHICH THE CSCF IS NOT TRIGGERED 8.% Avrag annual activity growth rat 6.% 4.% 2.%.% -2.% -4.% -6.%.%.2%.4%.6% Parliamnt Council Intrprtation of th graph: With an avrag.8% bnchmark dcras rat, no CSCF is triggrd if th avrag growth rat is blow: 1.7%y in th Parliamnt scnario, or.5%y in th Council scnario..8% 1.% 1.2% 1.4% 1.6% Avrag annual bnchmark dcras rat Not: In this graph, bnchmark dcras rats and activity growth rats ar uniform across sctors. Sourc: I4CE, 217 Quantifying th impact of EU ETS dsign paramtrs on fr allocation nabls to try and match th supply and th dmand, kping in mind that fr allocation should not rsult in windfall profits and was mant to b a transitional tool Th positions of th Council and th Parliamnt on th EU ETS rform diffr on a numbr of lmnts which impact th fr allocation cap or th calculation of th bottom-up prliminary fr allocation. Howvr, all in all, th ffcts of th diffrnt dsign paramtrs on th calculation of th bottom-up prliminary fr allocation balanc out and th dmand for fr allowancs is similar in th Council and th Parliamnt scnarios. (Figur 9) On th othr sid, th Parliamnt s position rsults in a highr amount of fr allowancs for industry than th Council s, vn if th LRF is incrasd to 2.4% in 224. (Figur 1) Th quantification of th impact of EU ETS dsign paramtrs on fr allocation nabls to try and match th supply and th dmand and thus avoid triggring th CSCF. To this nd, EU Council policy objctivs rgarding fr allocation should b kpt in mind: avoiding undu carbon cost for most fficint installations whil prsrving th incntiv to rduc CO 2 missions and not giving ris to windfall profits and distortions. EU ETS Last call bfor th doors clos on th post-22 rform - Sptmbr 217 I4CE 9

10 FIGURE 9. CUMULATIVE IMPACT OF EU ETS DESIGN PARAMETERS ON THE DEMAND FOR FREE ALLOWANCES (221-23) Eligibility critrion dcrasd to.12 Diffrnt rang for bnchmark dcras rats Eligibility critrion dcrasd to.16 Fr allocation to wast gas usd for lctricity production 3% of bnchmarkdbasd allocation for sctors non xposd to CL Parliamnt with sctors ligibl for CL qualitativ assssmnt PARLIAMENT COUNCIL Council with sctors ligibl for CL qualitativ assssmnt FIGURE 1. CUMULATIVE IMPACT OF EU ETS DESIGN PARAMETERS ON THE SUPPLY OF FREE ALLOWANCES (221-23) Incras of th LRF to 2.4% in Nw ntrants rsrv -4 Fund for th compnsation of indirct costs 3 Incras of th FA 1 shar by 3 additional pp 2 for th Parliamnt (1 pp = 155 Mt) 3 Innovation fund Parliamnt with rviw of LRF PARLIAMENT COUNCIL Nots: 1. FA: Fr allocaion. 2. pp: prcntag points. 3. For a LRF qual to 2.2% from 221 to 23. Sourc: I4CE, 217 Around 24% of EUAs auctioning volums would b rquird ovr Phas IV to compnsat indirct costs in th main ligibl sctors Ovr Phas IV, with an aid intnsity of 75% harmonizd ovr th EU ETS, an stimatd 1,67 million allowancs would b rquird to compnsat indirct costs in th main ligibl sctors. (Figur 11) It rprsnts around 12% of total allowancs supply in Phas IV and 24% of auctioning volums - taking into account th EU ETS dsign paramtrs of th Parliamnt amndmnts. Fr allocation and compnsation of indirct costs wr mant to b transitional tools. W should stard prparing th post compnsation priod for a smooth transition. FIGURE 11. INDIRECT CO 2 EMISSIONS ELIGIBLE FOR COMPENSATION BY SECTOR (221-23) Aluminium Stl and Chmicals Papr frro-alloys & Pulp Sourc: I4CE, I4CE Sptmbr Point Climat n 49

11 Conclusion Th ngotiations on th EU ETS rvision for its Phas IV ar taking plac at th sam tim as th ngotiations on th othr pics of th EU 23 climat and nrgy framwork. In particular, th EU Commission publishd in Novmbr 216 lgislativ proposals on rnwabl nrgy, nrgy fficincy, th organization of th lctricity markt and th govrnanc of th Enrgy Union which ar now undr discussion both in th EU Parliamnt and th EU Council. This study concludd that th rvisd EU ETS dirctiv will not b sufficint to mitigat th intractions of rnwabl nrgy and nrgy fficincy policis with th EU ETS, unlss an unxpctd proposal coms out of th trilogu ngotiations. Th rvision of othr EU lgislations thus appars as an opportunity to crat a consistnt policy mix and manag th intractions btwn th diffrnt policy instrumnts. In particular, th Govrnanc Rgulation, which, as proposd by th EU Commission, aims at nsuring th achivmnt of EU targts whil nsuring policy cohrncy, could b nhancd to spcifically addrss ovrlapping policis with th EU ETS. 4 4 Th rsarch program COPEC II will now focus on intractions btwn th diffrnt pics of th 23 climat and nrgy framwork. A spcific rport on this issu will b publishd in arly 218. Bibliography Barth, P., Chaugny, M., Roudir, S., & Dlgado Sancho, L. (215). Bst Availabl Tchniqus (BAT) Rfrnc Documnt for th Rfining of Minral Oil and Gas Canfin P., Grandjan A., Mstrallt, G. (216). Propositions pour ds prix du carbon alignés avc l Accord d Paris Couch, K. A., & Bll, L. E. (26). Concpts for an Ovrall Rfinry Enrgy Solution Through Novl Intgration of FCC Flu Gas Powr Rcovry Coussy, P., & Jalard, M. (216). Panorama 216: Ovrviw of th rfining industry in th Europan Union Emissions Trading Systm (EU ETS) CONCAWE. (212). Dvloping a mthodology for an EU rfining industry CO 2 missions bnchmark CONCAWE. (213). Oil rfining in th EU in 22, with prspctivs to 23 Ecofys. (216). Indirct carbon missions Impact of a hybrid compnsation approach Europan Commission. (214). Impact assssmnt accompanying th documnt - A policy framwork for climat and nrgy in th priod from 22 up to 23 Europan Commission. (215). Proposal for a Dirctiv of th Europan Parliamnt and of th Council amnding Dirctiv 2387EC to nhanc cost-ffctiv mission rductions and low-carbon invstmnts EU Council. (217). Proposal for a Dirctiv of th Europan Parliamnt and of th Council amnding Dirctiv 2387 EC to nhanc cost-ffctiv mission rductions and lowcarbon invstmnts - Gnral approach EU Parliamnt. (217). Amndmnts adoptd on 15 Fbruary 217 on th proposal for a dirctiv of th Europan Parliamnt and of th Council amnding Dirctiv 2387EC to nhanc cost-ffctiv mission rductions and low-carbon invstmnts EU Parliamnt and EU Council. (215). Dcision (EU) of th Europan Parliamnt and of th Council of 6 Octobr 215 concrning th stablishmnt and opration of a markt stability rsrv for th Union grnhous gas mission trading schm and amnding Dirctiv 2387 EC I4CE. (215). Exploring th EU ETS byond 22 Kitous, A., Criqui, P., Bllvrat, E., Chatau, B. (21). Transformation Pattrns of th Worldwid Enrgy Systm Scnarios for th Cntury with th POLES Modl FulsEurop. (214). Statistical Rport 214 IMO. (216). Sulphur oxids (SOx) Rgulation 14 Hart Enrgy. (214). Global Crud Oil, Rfining & Fuls Outlook to 235 Marion, P., & Saint-Antonin, V. (216). Panorama 216: Prspctivs du raffinag à l horizon 235 Mima, S.; Criqui, P. (215). Th Costs of Climat Chang for th Europan Enrgy Systm: an Assssmnt with th POLES Modl Szklo, A., & Schaffr, R. (26). Ful spcification, nrgy consumption and CO 2 mission in oil rfinris Solomon Associats. (213). Rport on CWT-CWB for California Rgulatory Support Spight, J. (212). Visbraking: A tchnology of th past and th futur. Scintia Iranica, 19 (3), Création-réalisation : SophiBrlioz.fr I4CE - Institut for Climat Economics 24 avnu Marcau, 758 Paris contact@i4c.org Lctur d ctt not sur > i4c.org Association régi par la loi du 1 r juillt 191. R.C.S. Paris SIREN P APE 9499 Z EU ETS Last call bfor th doors clos on th post-22 rform - Sptmbr 217 I4CE 11