Carbon Leakage: Options for the EU post 2020 April 10, Brussels, European Parliament Andrei Marcu Senior Advisor CEPS 4/11/2014 Centre for European Policy Studies (CEPS) • Place du Congrès 1, 1000 Brussels, Belgium www.ceps.eu 1 Project overview • One of the two deliveries of CEPS project “Carbon Leakage: Options for the EU” • Co-funded by five EU member states and seven companies from different sectors of the economy. • First deliverable “Carbon Leakage: an Overview” • The project has two objectives: 1. To prepare options that can be used to address concerns regarding carbon leakage 2. To engage in a series of Outreach Workshops to stimulate an active debate on this topic in the EU 4/11/201 4 Centre for European Policy Studies (CEPS) • Place du Congrès 1, 1000 Brussels, Belgium www.ceps.eu 2 Carbon Leakage: Options for the EU Objectives: 1. Which factors determine carbon leakage risk? 2. How to determine if a sector is at risk of carbon leakage? 3. What can we do (what are the options) to mitigate the risk of carbon leakage? 4/11/201 4 Centre for European Policy Studies (CEPS) • Place du Congrès 1, 1000 Brussels, Belgium www.ceps.eu 3 Cause of carbon leakage • Competitiveness is affected by many factors, one of which is asymmetrical climate policies • Asymmetrical climate policies (ACP), i.e. imposing carbon constraints in one jurisdiction while other jurisdictions have less-stringent or no carbon constraints. • ACP one of the factors impacting competitiveness (leakage) – carbon leakage • ETS and carbon price a manifestation of ACP • ACP->Carbon leakage risk factors->carbon leakage 4/11/201 4 Centre for European Policy Studies (CEPS) • Place du Congrès 1, 1000 Brussels, Belgium www.ceps.eu 4 Impacts of carbon leakage • Environmental impacts – Carbon leakage might cause increases in emissions globally • Economic impacts – Loss of production, investment, exports etc • Social impacts – Job losses etc 4/11/201 4 Centre for European Policy Studies (CEPS) • Place du Congrès 1, 1000 Brussels, Belgium www.ceps.eu 5 Why is this an issue now? (1/3) • Carbon leakage list 2020 • Back loading • 2030 climate & energy framework – Stability reserve – 40% target • 2015 climate change agreement 4/11/201 4 Centre for European Policy Studies (CEPS) • Place du Congrès 1, 1000 Brussels, Belgium www.ceps.eu 6 Why is this an issue now? (2/3) • 2020 package addressed CL through CLL • Disconnect between ex ante and ex post CL – Real OR – Apparent? • Were risk mitigation measures effective? – Yes and/or – Circumstances helped 4/11/201 4 Centre for European Policy Studies (CEPS) • Place du Congrès 1, 1000 Brussels, Belgium www.ceps.eu 7 Why is this an issue now? (3/3) • 2030 package is asymmetrical – Has no post 2020 mitigation provisions – Measures will not result in price increase • Past may not tell the future – – – – More stringent caps Higher price for carbon in EU and internationally Economic recovery and growth A new international climate change regime with contributions from all – Carbon pricing at the domestic level in different jurisdictions – Evolution and prices in energy markets 4/11/201 4 Centre for European Policy Studies (CEPS) • Place du Congrès 1, 1000 Brussels, Belgium www.ceps.eu 8 Carbon leakage – Risk factors • Risk factor can trigger asymmetry in carbon policies to carbon leakage through: – Carbon cost – Ability to pass through carbon cost • Fundamental difference: carbon price vs. carbon cost – Carbon price signal in line with decarbonization – for all – Carbon costs – for some, depending on • Ability to pass through • Risk of carbon leakage 4/11/201 4 Centre for European Policy Studies (CEPS) • Place du Congrès 1, 1000 Brussels, Belgium www.ceps.eu 9 How to detect sectors/activities at risk of carbon leakage? • Identification of carbon leakage risk is an issue in all carbon pricing mechanisms • Quantitative tests: – Employed in the vast majority of CPM – What quantitative risks tests check: • Carbon-related (carbon cost or carbon intensity) • Trade exposure-related • Qualitative tests: – Cover criteria where figures of surrogates cannot easily be calculated 4/11/201 4 Centre for European Policy Studies (CEPS) • Place du Congrès 1, 1000 Brussels, Belgium www.ceps.eu 10 How to detect sectors/activities at risk of carbon leakage? Design features of risk tests: • Individual tests and/or combined tests • In/out or tiered approach • Flexibility – Changes in key parameters – Updating • Data availability and data aggregation 4/11/201 4 Centre for European Policy Studies (CEPS) • Place du Congrès 1, 1000 Brussels, Belgium www.ceps.eu 11 4/11/201 4 Centre for European Policy Studies (CEPS) • Place du Congrès 1, 1000 Brussels, Belgium www.ceps.eu 12 Assessment of risk tests: EU ETS • Using carbon costs (and not intensity) is more focused – Assumption: Long-term price of 30 Euros/ton – Put forward for an investment decision time frame • Broad list – Leakage list cover 95% of industrial emissions in EU ETS • Trade exposure as a stand-alone? • Carbon costs test captures outliers • In/Out approach – Higher pressure to be on the list: more politicized process – Too simplified? • Data collection is a complicated matter (NACE vs installations) 4/11/201 4 Centre for European Policy Studies (CEPS) • Place du Congrès 1, 1000 Brussels, Belgium www.ceps.eu 13 Risk tests EU ETS, some conclusions • • • • • Focusing the Leakage list can be accomplished – but the result will have strong political undertones. Moving away from a binary model to detect carbon leakage risk could contribute to focus the Leakage list. Multi-level or linear risk-rating could be an option to examine, since it can provide a more realistic way to measure risk of carbon leakage One approach is to adjust leakage risk tests or the thresholds Other options: – – – 4/11/201 4 Less use of qualitative tests Additional quantitative tests Revisiting the trade-intensity criteria Centre for European Policy Studies (CEPS) • Place du Congrès 1, 1000 Brussels, Belgium www.ceps.eu 14 How to mitigate carbon leakage risk for sectors found at risk of CL? Carbon leakage mitigation measures need to: 1. Address carbon leakage risk: carbon cost and the ability to pass through cost 2. Not undermine environmental integrity of the climate change policy/carbon pricing mechanism 3. Allow for good functioning of the market 4. Meet the general goals and criteria of any sound policy 4/11/201 4 Centre for European Policy Studies (CEPS) • Place du Congrès 1, 1000 Brussels, Belgium www.ceps.eu 15 Carbon leakage mitigation measures • Current carbon leakage mitigation measures in EU, California and Australia is free allocation but with variations: – – • Ex-post allocation Dynamic allocation EU ETS: free allocation and compensation for indirect emissions Other options: • • • • 4/11/201 4 ETS in different speeds Border adjustments Targeted access to international offsets Centre for European Policy Studies (CEPS) • Place du Congrès 1, 1000 Brussels, Belgium www.ceps.eu 16 A number of issues are emerging in need of examination: 1. 2. 3. 4. 5. 6. 7. 8. 9. 4/11/201 4 The number of allowances available for free allocation is decreasing Unfocused coverage – too many sectors covered Likely increase in EUA prices, due to a number of provisions planned and economic circumstances Recognition of increase/decrease in production Coverage of carbon costs from indirect emissions Uneven effort required from different sectors due to different sectoral spread around the benchmark All sectors are treated the same, but are not the same (different margins, varying abilities to pass through, sectoral distribution around the benchmark) Emergence of new global climate change regime will impact risk mitigation measures Interaction (within the EU e.g. carbon reserve and between the EU ETS and other policies) Centre for European Policy Studies (CEPS) • Place du Congrès 1, 1000 Brussels, Belgium www.ceps.eu 17 Overall direction (1/2) • • • • BCA interesting but faces barriers from a trade, political and administrative perspective Free allocation is likely to remain centerpiece, but with modifications Free allocation is positive if there is an opportunity to negotiate linking with other ETSs, as provisions may be similar across systems There is no ‘silver bullet’, a menu of approaches will have to be used 4/11/201 4 Centre for European Policy Studies (CEPS) • Place du Congrès 1, 1000 Brussels, Belgium www.ceps.eu 18 Overall direction (2/2) • Balance between the breadth and the depth of coverage – Increase the focus. This implies focusing on those sectors that are a bigger risk, and provide them with as many free allowances as the available free allocation allows (i.e. those at high risk will receive what they need). – Increase coverage, without focusing. This implies the introduction of measures that will provide enhanced risk coverage to all those at risk – this may result in an increase in the number of free allowances (i.e. all those at risk will receive what they need). – Increase coverage. This implies providing allowances to those deemed at risk to the level of free allocation allowable under the cap. This implies that there will be an increasing effort for those on the CLL (i.e. all sectors at risk will receive something, but likely not enough). • Changes that may be considered are linked to the process of EU structural reform 4/11/201 4 Centre for European Policy Studies (CEPS) • Place du Congrès 1, 1000 Brussels, Belgium www.ceps.eu 19 Policies for risk mitigation (1/2) • Direct emissions – Examination of plusses and minuses with dynamic production-based allocation system is needed Learn from other approaches (California and Australia use a ‘trueup’ allocation) However, requires new level of effort and resource implementation Such approach could lead to a risk of the overall EU ETS cap. The risk can be addressed in a number of ways: – – – • • • – 4/11/201 4 Greater burden on other ETS sectors Greater burden on non-ETS sectors Purchases of credits in the international markets Other tool could be targeted availability of ‘cheaper-than-EUA’ international offsets. Centre for European Policy Studies (CEPS) • Place du Congrès 1, 1000 Brussels, Belgium www.ceps.eu 20 Policies for risk mitigation (2/2) • Indirect emissions – – – 4/11/201 4 Current approach is causing serious concern Addressing these concerns could be done at the EU level through free allocation, instead of monetary compensation This would ensure equal treatment across member states and provide compensation to electricity-intensive sectors. Centre for European Policy Studies (CEPS) • Place du Congrès 1, 1000 Brussels, Belgium www.ceps.eu 21 Thank you for your attention [email protected] 4/11/201 4 Centre for European Policy Studies (CEPS) • Place du Congrès 1, 1000 Brussels, Belgium www.ceps.eu 22
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