The UK position on ETS reform Dan Doherty 1 Key policy issues for - PowerPoint PPT Presentation

The UK position on ETS reform Dan Doherty 1

Key policy issues for Phase IV 1. Carbon leakage 2. Innovation Fund 3. Modernisation Fund 4. Article 10 c 5. Simplification

Principles of Carbon Leakage Reform In order for carbon leakage policy in EU ETS to remain credible and effective, the system must: Not decrease the share of allowances auctioned on the open market – this is 1. critical to drive cost-effective abatement and innovation and to ensure sufficient liquidity in the marketplace. 2. Recognise that the risk of carbon leakage varies greatly between industrial sectors – the Phase III system and the Commission’s Proposal for Phase IV treats all exposed industrial sectors as though they are all equally at risk; this is not borne out by the evidence. 3. Focus free allocation according to the evidence of carbon leakage risk facing each industrial sector – this is critical to ensure support is targeted at those sectors in greatest need, while providing an appropriate level of support to sectors at relatively lower risk. 4. Minimise and if possible remove the need to rely on blunt mechanisms which apply to all industrial sectors (for example the Cross-sectoral Correction Factor) – these do not take into account differing degrees of carbon leakage risk and unfairly expose some sectors to competitive disadvantage. EU ETS Phase IV - Analysis of the European Commission’s Proposal 3

Carbon Leakage risk varies by industry • Two criteria proposed to assess carbon leakage risk in PhIV: carbon intensity and trade intensity. • Sectors with high trade intensity and carbon intensity at highest risk. • Distribution of current carbon leakage sectors shows wide disparities between sectors on both metrics. • Not all sectors at equal risk of carbon leakage. EU ETS Phase IV - Analysis of the European Commission’s Proposal 4

Cross-Sectoral Correction Factor • The carbon leakage list in Phase III is too long: 97% of industrial emissions. • Introduction of Cross-Sectoral Correction Factor, which removes a fixed proportion of allowances from all installations. • Minimising the need to apply a CSCF vital for the continued credibility of EU ETS and to ensure that industries at greatest risk of carbon leakage remain competitive. EU ETS Phase IV - Analysis of the European Commission’s Proposal 5

Cross-Sectoral Correction Factor 40% 35% 30% 25% 20% 15% 10% 5% 0% 2013 2015 2017 2019 2021 2023 2025 2027 2029 Indicative cross-sectoral correction factor assuming the current CSCF methodology, length of the carbon leakage list and industrial emission levels are held constant: 6 EU ETS Structural Reform Stakeholder Event, January 2014

Commission’s Proposal for Phase IV • Binary distinction carried over from Phase III: sectors can either be deemed at risk or not at risk. • Reduction in number of sectors deemed at risk to 50%. • 94% of industrial emissions still produced by carbon leakage sectors (compared to 97%). • ~300m more allowances available under manufacturing cap than if old NER rules had continued. • “Recycling” of unused free allocation from early years of Phase IV at end of Phase. EU ETS Phase IV - Analysis of the European Commission’s Proposal 7

Not enough to avoid CSCF EU ETS Phase IV - Analysis of the European Commission’s Proposal 8

The Solution: Tiered Free Allocation • Classify sectors as at (for example) high-, medium-, low- or no-risk. • Sectors at highest risk should receive free allocation at as close to 100% of benchmark as possible. Remainder of manufacturing cap should be divided between lower risk tiers proportionately to their level of risk. • Ensures a more efficient distribution of free allowances than under the current system, ensuring free allocation is targeted at industries with the greatest need, while avoiding over-allocation to some sectors, which is a risk under current rules. • Feasible within current framework: no need to change e.g. carbon leakage metrics EU ETS Phase IV - Analysis of the European Commission’s Proposal 9

Carbon leakage: benchmarks • Concern that fixed ‘ratcheting’ of benchmarks may not be reflective of genuine differences in abatement potential between sectors. • Fixed benchmark reductions may also unfairly impact sectors with very high process emissions. • UK supports a more evidence-based approach to updating benchmarks. EU ETS Phase IV - Analysis of the European Commission’s Proposal

Carbon leakage: indirect compensation for electricity-intensive industries • A centralised system at the EU level could not be implemented without negatively impacting Member State fiscal sovereignty; • Disparity of energy prices across the EU make a centralised system for compensation difficult to implement. • The current discretionary system is therefore the most satisfactory viable option for compensating indirect costs.

Innovation Fund • The UK supports the aims of the Innovation Fund; • The Fund should be focussed on innovative and breakthrough technologies; • The UK supports creating a ‘bridge’ fund between the NER300 and the Innovation Fund.

Simplification • The proposal contains little about simplification of the EU ETS; • The UK would like to see a greater focus on measures to reduce the administrative burden on ETS installations, particularly on small emitters. EU ETS Phase IV - Analysis of the European Commission’s Proposal