The EU ETS: Perspectives for US Climate Policy A. Denny Ellerman - PowerPoint PPT Presentation

The EU ETS: Perspectives for US Climate Policy A. Denny Ellerman Massachusetts Institute of Technology Mission Climat, Caisse des Dépôts 7 th INFRADAY Conference Berlin, Germany October 10, 2008

Agenda • What did the EU ETS accomplish? • Positive lessons • Negative lessons • US Policy Outlook A. Denny Ellerman Page 2

A Technical Success • A mechanism in place to limit GHG emissions to whatever level desired • Supporting regulatory infrastructure is developed and functioning well • A market with ample trading has created the only unified price in the EU • Conditions for efficient abatement exist A. Denny Ellerman Page 3

Despite Great Odds • A new and unfamiliar regulatory instrument • Little experience and some hostility to emissions trading • Extremely rushed implementation • Very poor data on installations and ETS emissions A. Denny Ellerman Page 4

A Political Success • Triumph of Community institutions despite decentralized structure • Successfully played on strong public support and self-identification as an environmental leader • Now a source of considerable pride with no thought of its disappearance A. Denny Ellerman Page 5

Results • Modest but measurable abatement in the trial period • CO 2 price is being integrated into operational & investment decisions • Worldwide impact on project development • No transforming technological innovation A. Denny Ellerman Page 6

Agenda • What did the EU ETS accomplish? • Positive lessons • Negative lessons • US Policy Outlook A. Denny Ellerman Page 7

Economic Impact Is Imperceptible • No visible macro-economic effect –De-industrialization of Europe?? • Energy-intensive sectors more at risk –Here too little effect, so far • Why? CO 2 is but one price among many –All others as important now as before –True for investment, also? A. Denny Ellerman Page 8

Crude Steel Imports, EU25 2 1 0 ,0 0 0 5 ,0 0 0 2 0 0 ,0 0 0 0 1 9 0 ,0 0 0 -5 ,0 0 0 N e t Im p o rts 1 8 0 ,0 0 0 -1 0 ,0 0 0 000 tonnes C o n s u m p tio n 1 7 0 ,0 0 0 -1 5 ,0 0 0 1 6 0 ,0 0 0 -2 0 ,0 0 0 1 5 0 ,0 0 0 -2 5 ,0 0 0 1 4 0 ,0 0 0 -3 0 ,0 0 0 1 9 9 5 1 9 9 6 1 9 9 7 1 9 9 8 1 9 9 9 2 0 0 0 2 0 0 1 2 0 0 2 2 0 0 3 2 0 0 4 2 0 0 5 2 0 0 6 A. Denny Ellerman Page 9

Borrowing Works without Abuse • EU ETS is only cap-and-trade system with unrestricted year-ahead borrowing • An alternative compliance option that was used significantly in 2005-06 • All paid back in 2007 • Redistributed demand is a useful way • An alternative to a price cap in US A. Denny Ellerman Page 10

Evidence of Borrowing in the UK Net short Net imports Borrowing Carried over borrowing 80 s A U s E 70 illion Why? M 60 50 42 40 % 30 70 20 % 10 0 2005 2006 2007 A. Denny Ellerman Page 11

Recap on Borrowing • 3000 short installations in 2005 & 2006 – 475 show evidence of borrowing (16%) • Short positions of 409 Mt in 2005-06 – At least 63 Mt borrowed (15%) • Only foreign EUAs can be observed; no doubt domestic EUAs as well • Perhaps as much of 30% of short positions covered by borrowing A. Denny Ellerman Page 12

Multinational Systems can be created • EU is not the United States of Europe – Member States are sovereign nations • Successfully bridged very large gaps in eco- nomic circumstance, institutional prepared- ness, and commitment to climate policy • EU club benefits explain adherence as well as vital role of Commission • What could replace this on a world scale? A. Denny Ellerman Page 13

Agenda • What did the EU ETS accomplish? • Positive lessons • Negative lessons • US Policy Outlook A. Denny Ellerman Page 14

Coverage • Good reasons for partial coverage in EU – But expansion is proving difficult • Complicated by point of regulatory obliga- tion – Partial ⇒ downstream – Comprehensive ⇒ upstream • The link to free allocation • US system should be comprehensive A. Denny Ellerman Page 15

Allocation • Was free allocation a mistake? – Political practicalities and existing use – Unleashing the revenue-seekers – Windfall profits? What did you expect? • Trade-impact as a basis for allocation – Over-allocation and auction exemption • But a useful evolution to more auctioning A. Denny Ellerman Page 16

Agenda • What did the EU ETS accomplish? • Positive lessons • Negative lessons • US Policy Outlook A. Denny Ellerman Page 17

Pres. Bush is not the Problem • Next president will be favorably disposed – Pres. Clinton was too • Serious discussion under way – Action to date is disappointing – Revealing lack of consensus and of willingness to compromise • Will climate change be the real priority of the new president? A. Denny Ellerman Page 18

The EU ETS Effect • US action depends on finding resolution to internal differences • Remarkable attention being given to the EU ETS by all in US debate • This example counts for more than anything else said or done by Europe • One of many important issues engaging the EU-US relationship A. Denny Ellerman Page 19