Wake up! Reforming the EU Emission Trading Scheme (ETS): - PowerPoint PPT Presentation

E N E R G Y Wake up! Reforming the EU Emission Trading Scheme (ETS): Comparative evaluation of the different options Launch event presentation 08/11/2016

Table of Contents I. Context, objectives and key messages of the study 2 II. Key issues with the current EC proposal for EU ETS reform 9 III. Fixing the EU ETS: Possible approaches for reform 15 IV. Conclusions and policy recommendations 22 V. Appendix 25 2 E N E R G Y

E N E R G Y I. Context, objectives and key messages of the study

Context & objectives Issues with proposal Fixing the ETS Conclusion Appendix Introduction to FTI-Compass Lexecon Energy FTI-Compass Lexecon Energy is a collaboration of energy experts from Compass Lexecon and FTI Consulting. Compass Lexecon is a wholly Strategy owned subsidiary of FTI Consulting. Policy and Regulation CLIENTS INCLUDE: ■ Electricity Utilities, including generation, transmission, distribution and customer businesses M&A and Due Diligence ■ Gas Utilities, including upstream, midstream and downstream businesses ■ Technology and OEM providers Competition Economics & State Aid ■ Regulators ■ Lawyers Disputes (economical, commercial ■ Governments, including at the national and European level and technical) ■ Lenders and investors ■ Trade Associations We support clients across the energy value chain Corporate Forensic and Strategic Technology Economic and Finance Litigation Consulting Communications Financial Consulting Provides e-discovery software, Independent dispute advisory, Provide strategic, operational, Analysis of complex economic, One of the world’s largest investor investigative, data services and expertise to deliver financial and capital needs of regulatory and finance issues to relations businesses specialising in smart solutions for clients. acquisition/analysis and forensic businesses. Address complete assist clients in understanding the advising companies in critical accounting services. spectrum of financial and issues and opportunities they face. situations. transactional challenges. 4 E N E R G Y

Context & objectives Issues with proposal Fixing the ETS Conclusion Appendix A series of economic and political factors have led to a significant surplus of ETS allowances which requires urgent and decisive action EU ETS emissions (stationary installations), 2005 – 2015 The EU established a pioneering CO 2 Emissions Trading Scheme (ETS) in 2003 as the cornerstone of its climate change strategy Yet a series of economic and political factors have led to an imbalance of supply and demand and depressed carbon prices This risks increasing the costs of mitigating climate change as the ETS does not support investment in clean technologies The mere existence of the ETS is threatened as another decade of low prices would likely undermine its credibility and lead to the implementation of national policies Source: http://www.eea.europa.eu/data-and-maps/data/data-viewers/emissions-trading-viewer 5 E N E R G Y

Context & objectives Issues with proposal Fixing the ETS Conclusion Appendix ETS reform options are currently discussed Context of the study A current window of opportunity to reform the EU ETS, but closing in a few months  Ongoing codecision process in Parliament and Council following proposal from Commission 2015-  Urgent action required before ETS loses credibility and national policies get implemented 2017 Proposal from the Commission being discussed, supporting 3 structural reforms  An increase in the speed of decline of the annual emissions cap from -1.74%/year to -2.20%/year  A Market Stability Reserve (MSR) which could park annually 12% of the surplus allowances accumulated in the previous years (i)  An enhanced carbon leakage framework to preserve the competitiveness of the European industry Changed context since Commission tabled proposals  Paris climate Agreement committing EU to pursue efforts towards a more ambitious +1.5°C target  Spread of uncoordinated Member States interventions to decarbonise their national electricity sector, displacing the EU ETS as the central tool to decarbonise the EU ETS sectors (i) MSR enacted through an EU decision – Not part of Directive revision 6 E N E R G Y

Context & objectives Issues with proposal Fixing the ETS Conclusion Appendix This study aims at assessing the impact of potential ETS reform options, and their effect on the power sector Objectives of the study Study committee members  Identify the different underlying issues with the EU ETS  Use proprietary model of the ETS market to evaluate the impact of the EC’s proposed reform  Identify and model the impact of alternative approaches for ETS reform  Use proprietary power sector model to evaluate impact of the different options for ETS reform on the power sector  Provide fact-based evidence by modelling the impact of different approaches for ETS reform  Derive policy recommendations and disseminate the study results with key stakeholders 7 E N E R G Y

Context & objectives Issues with proposal Fixing the ETS Conclusion Appendix Our impact assessment is based on an in-house ETS and EU power market model calibrated based on a robust set of assumptions Our baseline scenario is based on the recent EC Reference Scenario 2016 , and our power sector model is based on the latest announcements from TSOs, regulators and market participants FTI-CL EU ETS model factors in the inter-temporality and anticipations from the different market participants actually observed in the ETS market (myopic agents with 3-5 years horizon) Note: The EU ETS modelling approach is inspired from the ZEPHYR model developed by Raphaël Trotignon & Boris Solier (Paris Dauphine University, Chaire Economie du Climat : http://www.chaireeconomieduclimat.org) 8 E N E R G Y

E N E R G Y II. Key issues with the current EC proposal for EU ETS reform

Context & objectives Issues with proposal Fixing the ETS Conclusion Appendix The reform needs to be more ambitious if it is to tackle the different ETS issues and rebuild the credibility of the ETS Synthetic assessment of the issues identified for ETS reform Short-term Long-term 1  X Emissions Emissions below target – largely Not in line with the goal of limiting global driven by complimentary policies warming to 2°C, and a fortiori, with the CO 2 ambition of limiting it to 1.5°C ETS market 2 3 Too low to provide efficient Too low to drive investment in clean X X Prices signal for carbon abatement via technologies leading to continuation of coal-gas switching, and driving need for targeted support for specific lock-in of fossil plants technologies 4 ETS robustness Policies X Vulnerability to market shocks and overlap with complimentary policies overlap  Overlapping low carbon policies achieve mandated abatement at a high cost and Other low displace ETS-driven efficient abatement carbon policies: RES, EE, mandated plant closures, etc. 10 E N E R G Y

Context & objectives Issues with proposal Fixing the ETS Conclusion Appendix The current emissions trajectory is not in line with the objective of 1 limiting global warming to +2°C ETS emissions, 2015 – 2040 The EU ETS proposal is not in line with CO 2 the EU 2050 objective of 80%-95% emissions reduction to stay below 2°C … “ In order to set the cap equal to this level [90% emissions reduction by 2050], the LRF in the ETS would need to further increase to -2.4% until 2050 ” (EC, Impact Assement 2014) … and a fortiori, with the ambition of limiting it to 1.5°C as suggested by the Paris agreement Source: European Commission, ”Impact assessment 2014 - A policy framework for climate and energy in the period from 2020 up to 11 E N E R G Y 2030“, p. 105

Context & objectives Issues with proposal Fixing the ETS Conclusion Appendix ETS prices do not support investment in clean technologies, 2 supporting an inefficient decarbonisation path EU ETS carbon price (real 2015), 2015 – 2040 The EU ETS carbon price level is too low to drive investment in clean technologies (RES, nuclear, etc.) and avoid investments in fossil fuels technologies  Estimates of the social cost of carbon (i) range from about 20-70 € /t in 2020, and 40-110 € /t in 2030 The EU ETS carbon price level is too low to provide a reliable short-term economic signal for switching to low carbon technology in the power sector(ii)  It only reaches the CO 2 coal / gas breakeven price in the 2030s (ii) Note: (i) It is the marginal global damage costs of carbon emissions for Europe. Estimated as the NPV of climate change impacts in the long-term of one additional tonne of carbon emitted today. 12 (ii) Given the range of efficiencies of existing plants, the fuel switch would be triggered between a range of CO 2 price. E N E R G Y Source: Knopf (2013), “The EMF28 Study on Scenarios for Transforming the European Energy System”.