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The EU-ETS : Lessons from an 8 years experience
Christian de Perthuis Paris-Dauphine University
Dublin, September 2013
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This presentation is inspired by the working paper written in collaboration with Raphaël Trotignon : Governance of CO2 markets :Lessons from the EU ETS This paper can be downloaded on the Climate Economic Chair website : http://www.chaireeconomieduclimat.org
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EU-ETS ex post evaluation :From the 1st to the 2nd period
Three main conclusions of “Pricing Carbon” (based on the 1st period) : – “CO2 emissions are no longer free” (P.287) – “A liquid and sophisticated market emerged” (P.289) – “Abatement occurred” (P.290)
Three main interrogations in 2013 : – Do economic players still consider the EU CO2 price in their decisions? – Why do non-obliged players leave the market ? – Can we attribute any abatement to the ETS since mid-2011 ?
In our view the revival of the EU-ETS implies : – A credible commitment of the EU governments on emission targets ; – The creation of an Independent entity with the mandate of managing
the ETS in order to reach these targets in the covered sectors.
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The goals of the EU-ETS : back to basis
Short term goal : to achieve abatement resulting from the cap at lowest cost in the EU
Medium and Long term goal : the path toward a low carbon trajectory (2020, 2030, 2050)
Function of the market : Reveal the price required to reach both of the targets (quantitative regulation)
In a context of great uncertainty regarding : – Current and future abatement costs – Economic conditions – Possible overlap with other policies
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Initial expectations and ex post observations
Unexpected schocks : – Weakening growth – Interactions with other policies – Offsets
Beginning of 2005 Beginning of 2008 Beginning of 2012
0
500
1 000
1 500
2 000
2 500
3 000
3 500
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020M
illio
ns
Total cap (free+auction+offsets)
Cap (free+auction)
Baseline as in 2005
- 2 GtCO2
- 350 MtCO2
0
500
1 000
1 500
2 000
2 500
3 000
3 500
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020M
illio
ns
Total cap (free+auction+offsets)
Cap (free+auction)
Verified Emissions
Baseline as in 2008
- 500 MtCO2 - 5 GtCO2
0
500
1 000
1 500
2 000
2 500
3 000
3 500
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020M
illio
ns
Total cap (free+auction+offsets)
Cap (free+auction)
Verified Emissions
Baseline as in 2010
- 850 MtCO2+ 1,2 GtCO2
+ 225 MtCO2
Source: Trotignon (2012)
• Strong overestimation of the constraint and of the risk of high carbon price at the beginning of the 1st and 2nd periods
• This seems to be a common lesson from “cap & trade” experiences (US SO2 market, RGGI, KP markets, CCX, …)
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A brief evaluation of the EU Commission proposals
• A back-loading is not useful unless it leads to a credible change in the cap
• Only the options that change the long term cap have a lasting effect on the price
• The proposals are limited by a taboo on governance issues, which makes a dynamic management of the supply impossible in the short term (auctions) and in the medium and long term (adjustments to the cap)
Scenario Prix en 2015 Prix en 2020 EU auction revenus in P3
Reference 6 €/tCO2 13 €/tCO2 78 G€
Backloading only 16 €/tCO2 3 €/tCO2 92 G€
(a) -34% in 2020 17 €/tCO2 27 €/tCO2 187 G€
(b)+(c) Retirement in Phase 3 and revision of the linear reduction factor in Phase 4 compatible with Roadmap
16 €/tCO2 24 €/tCO2 176 G€
Source : CEC, ZEHYR-simulations
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The parallel with a central bank
Source: De Perthuis & Trotignon (2013)
Monetary Market Carbon Market
Final target Growth path without inflation Emission reductions at least cost
Primary issuance Supply of money Supply of allowances (free allocation + auctions)
Economic signal Interest rates Carbon price
Arbitrage over time
Short term growth medium term inflation
Short term carbon lock-in high future costs
Interactions
Convertibility of money through exchange rates Reaction to external policies (budgetary policy)
Offsets, international allowances Reaction to external factors (policy overlap)
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An Independent Carbon Market Authority
Function Associated actions
Continuous monitoring and information transparency
• Collect, analyze and share data on market transactions and prices, emission trajectories, compliance behaviors, low carbon investments, competitiveness effects
• Motivate and justify its decisions
Liquidity and market functioning in the short term
• Primary market: dynamic management of auctions • No need for secondary market interventions
Credibility of the medium to long term constraint over time
The public authority determines the emissions target, and the policy tools to achieve this target The ICMA implements the political target in the covered sectors and it can dynamically adapt the EU ETS cap in two cases: • Ensure consistency with other policy instruments over time • Control unexpected effects of offsets and non-EU allowances
Accountability • Periodic hearings by EU bodies • Public reporting
Source : De Perthuis & Trotignon (2013)
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Is there a need for a price floor or a price collar ?
Intermediate objective under the responsibility of the ICMA : – Avoid market instability through dynamic management of
supply (auctions) ; – Adapt the cap in case of overlap with other policy tools and
unexpected shocks ; – Linking with other markets (Offsets and Cap and Trades).
The issue of a price floor : – No explicit need in our vision – In some cases, it could be useful (e.g. when combining the EU-
ETS with national carbon taxes in non-covered sectors) – If the public authority decides to set up such a price, impossible
without an ICMA
Thank you for your attention
www.ChaireEconomieDuClimat.org
Dublin – September, 2013
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Annex : ZEPHYR-flex model presentation
Sour
ce: T
rotig
non
(201
2)
Total Allowances for Year Y (annual cap)
MACCs
Market exchanges: Supply/Demand equilibirum for Year YThe price starts from zero and goes up as long as ∑Buy +/- ∑Hedging-Spec > ∑Sales + ∑Auctions + ∑Offsets
Verified EmissionsYear Y
Free Allocation Auctions
Installation 1 Installation 2 Installation 10,000Installation 3 …
EUA Stock Baseline Emissions
AnticipatedFuture price
Buying Selling Banking Borrowing Hedging/Speculation
Position for Year Y
Anticipated position over the period
Year N+1
Use of Kyoto offset for Year Y (exogenous)
Emission ReductionsYear Y
EUA equilibrium price Year Y
EUA Price
Bought/SoldYear Y
Banking/BorrowingYear Y
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Annex :The risk of market instability on a cap & trade
Supply Demand Price
Quantity
Demand change on a standard Market:
Supply Demand
Price
Quantity
Demand change on a cap and trade market:
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Annex : Managing the risk of overlap between policies
EMISSIONS CAP 30% BELOW BAU
BAU EMISSIONS
Reductions from: energy efficiency policestechnology policiesprice response in trading scheme
10 %
15 %
SUPPLEMENTARY POLICIES UNDERACHIEVE
(a)
5 %
SUPPLEMENTARY POLICIES OVERACHIEVE
(b)
Source : Baron (2012)
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Annex : A predictable carbon price signal ?
Sour
ce: C
limat
e Ec
onom
ics C
hair
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d ( à ' dé b )
Efficacitéénergétique
Fukushima
Crise économique et financière
Nouvel équilibre dans un contexte de reprise molle
Crise de la dette et dégradation des perspectives de croissance
Discussion des objectifs 2020 et du Paquet Energie Climat
Publication des premières données d'émission
Proposition de "backloading"
puis rejet
Carb
on p
rice
(€/t
CO2)
