Inclusion of Consumption of carbon intensive materials in emission trading systems An option for carbon pricing post 2020 Roland Ismer/Karsten Neuhoff/Manuel Haussner/Vera Zipperer/…
1 Motivation 2 The mechanism 3 Technical Implementation 4 Conclusion Inclusion of Consumption of carbon intensive materials in emission trading systems
1. Industrial emissions dominated by production of carbon intensive materials Industrial activities with the highest cost increase from carbon pricing (Assumption: carbon price 20 € /t CO 2 and electricity price increase 10 € /MWh) Production of cement and steel alone accounts for 38% of European industry emissions: Important to realize mitigation opportunities of selected carbon intensive materials Production and use of these materials justifies focused attention Inclusion of Consumption of carbon intensive materials in emission trading systems
1. Three groups of emission reduction opportunities for carbon intensive materials Example Cement Group 2: Group 1: Group 3: Carbon focused Fuel shifting and Material efficiency and By what percentage can cement process production efficiency subsitution sector reduce its emissions innovation 60% 40% 20% 0% Biomass Pre-treated Efficiency (waste) Substitution Energy Substitution/ Capture and Cement Based Efficient Use (waste) of Cement Clinker Innovative Storage Carbon Materials IEA (low demand scneario) Ecofys/WWF UK Committee on Climate Change Cembureau Mineral Products Association WBSD/ECRA Technology Report Porftfolio of mitigation options to achieve deep decarbonisation (G7) with 80-95% reductions (EU) Similar picture for other material sectors like steel To date only progress on Group 1: fuel shifting and some process efficiency Group 3 largely unexplord (materials efficiency and substitution) and no progess in Group 2 (CCS) Inclusion of Consumption of carbon intensive materials in emission trading systems
1. Carbon pricing can in principle create incentives for all mitigation opportunities Global Full Emissions Group Role of carbon pricing Auction- reductions through ing Incentives for improving Fuel shifting and carbon efficiency of 1 production efficiency materials production Consistent mechanism Carbon focused including clarity on costs 2 process allocation innovation Makes efficient material Material efficiency 3 use / low carbon material and substitution competitive With global converging carbon pricing, all allowances can be auctioned also in materials production. In such a scheme carbon price creates the full incentive for all Groups of mitigation options. Note: Additional need for strategic (public) innovation investment and programs or policies to overcome inertia (outside of scope of this presentation). Inclusion of Consumption of carbon intensive materials in emission trading systems
1. Free allocation for carbon leakage protection limits incentives from carbon price Incentive: Basis of free allowance allocation 3. Recent Full 2. Historic 4. Recent Emissions production Group production 1. Historic production Role of carbon pricing and historic reductions and and emissions intensity Some through benchmark benchmark dynamic Small Incentives for improving Fuel shifting and carbon efficiency of 1 production efficiency materials production Consistent mechanism Carbon focused including clarity on costs 2 process allocation innovation Makes efficient material Material efficiency 3 use / low carbon material and substitution competitive No matter how allowances are allocated for leakage protection, significant distortions remain: • If based on historic emission (intensities) discourages efficiency improvements -> Can be improved with use of benchmarks (2 & 4) • If based on historic output, then allocation can deviate significantly from emissions -> Can be avoided with use of recent production volumes (3 & 4) ->But further limits price pass through for materials efficiency & substitution (3 & 4) • If consumers don’t pay carbon, no business case for large scale use of CCS type technologies Inclusion of Consumption of carbon intensive materials in emission trading systems
1. Adding inclusion of consumption can restore the carbon price and incentives Basis of free allowance allocation Recent Recent Recent Historic Recent Emissions production production Group production production Historic production Role of carbon pricing and historic and reductions and and and emissions intensity benchmark + through benchmark benchmark benchmark IoC dynamic Incentives for improving Fuel shifting and carbon efficiency of 1 production efficiency materials production Consistent mechanism Carbon focused including clarity on costs 2 process allocation innovation Makes efficient material Material efficiency 3 use / low carbon material and substitution competitive Free allocation based on recent production and benchmark eliminiates price pass through. Can be corrected with a consumption charge on carbon intensive materials at benchmark rate. Thus full incentives for Mitigation Opportunities in Group 2 and 3 are restored. Inclusion of Consumption of carbon intensive materials in emission trading systems
1 Motivation 2 The mechanism 3 Technical Implementation 4 Conclusion Inclusion of Consumption of carbon intensive materials in emission trading systems
2. The mechanism and its incentives Process action How IoC strenghtens incentives for mitigation Creation of liability Group 2: per ton of e.g. steel Credible perspective for carbon (benchmark rate times capture: extra costs allocated to carbon times ton of steel) consumers, not (cross-) subsidized Passing on liability Group 3: Increases profitability of Liability suspended materials efficiency and substitution with charge on Release for consumption: carbon intensive materials Suspended liability becomes due Companies can inform Information on embedded consumers about level of carbon engages consumers charge to enhance awareness Follows model of existing consumption charges (excises) on fuel, tobacco, alcohol etc. Restores incentive for mitigation opportunities in group 2 and 3. Inclusion of Consumption of carbon intensive materials in emission trading systems
2. No double charging (illustrative example cement) Consumption Free allocation Cost of emission charge added compensates allowances to product allowance cost price Product price Production cost Production cost Production cost With global Free allowance Consumption carbon price, cost allocation at charge at of acquiring benchmark per benchmark allowances added (recent) output restores product to product price. reduces cost and price as if product price. Level playing field maintained, as charge applies to all steel (irrespective of origin). Consumption charge volume equivalent to revenue if allowances are auctioned to industry. Consumers face same cost as in world of global carbon price and full auctioning. Inclusion of Consumption of carbon intensive materials in emission trading systems
2. The case of import and export Process action Process action Foreign territory Creation of liability Acquittal of per ton of e.g. steel liability upon (benchmark rate times export carbon times ton of steel) Passing on liability Creation of liability upon Liability suspended import Release for consumption: Suspended liability becomes due Companies can inform consumers about level of charge to enhance awareness No differentiation how and where product was produced No effect on competitiveness of the European steel sector because imports are charged as well Inclusion of Consumption of carbon intensive materials in emission trading systems
2. The effect of combining benchmark based allocation with IoC • Ensures full carbon price incentive for all groups of mitigation options. • Clarity on allocation at full benchmark level because no need to trade off with incentive in value chain Enhances long-term investment framework • No competitive disadvantage for companies because all competitors (also close substitutes) are treated the same. • With free allocation at full benchmark level robust leakage protection also for high carbon prices and therefore long-term clarity for decarbonisation. Inclusion of Consumption of carbon intensive materials in emission trading systems
1 Motivation 2 The mechanism 3 Technical Implementation 4 Conclusion Inclusion of Consumption of carbon intensive materials in emission trading systems
3. Administrative Implementation: Domestic case Domestic Process action Quarterly reporting territory to national authority: Creation of liability Liability held per ton of e.g. steel + Liability created (benchmark rate times - Liability passed with carbon times ton of products steel) Passing on liability Liability held Liability suspended + liability received - Liability acquitted Release for (lodging of consumption: declaration) Suspended liability becomes due Companies can inform consumers about level of charge to enhance awareness Reporting to existing national authorities, e.g. BAFA (DE), Environment Agency (UK) Inclusion of Consumption of carbon intensive materials in emission trading systems
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