Our Common Future Under Climate Change

International Scientific Conference 7-10 JULY 2015 Paris, France

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Thursday 9 July - 15:00-16:30 UPMC Jussieu - ROOM 207 - Block 24/34

4420 (a) - How to price carbon for industry?

Parallel Session

Chair(s): K. Neuhoff (German Institute for Economic Research (DIW Berlin), Berlin, Germany)

Convener(s): R. Martin (Seeds of Opportunity, Blantyre, Malawi)

15:00

Introduction

K. Neuhoff (German Institute for Economic Research (DIW Berlin), Berlin, Germany)

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Introduction
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15:08

Carbon Pricing

M. Muuls (Grantham Institute, Imperial College London, London, United Kingdom), R. Martin (Imperial College London, London, United Kingdom), A. Dechezleprêtre (London School of Economics, London, United Kingdom)

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Carbon Pricing

M. Muuls (1) ; R. Martin (2) ; A. Dechezleprêtre (3)
(1) Grantham Institute, Imperial College London, Business School, London, United Kingdom; (2) Imperial College London, Business school, London, United Kingdom; (3) London School of Economics, Grantham institute on climate change and the environment/centre for economic performance, London, United Kingdom

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The EU Emissions Trading System is the EUs flagship climate policy, establishing since 2005 a carbon market across Europe with more than 12,000 plants in 31 countries regulated at present. With industry responsible for a large share of global carbon emissions, carbon pricing is seen as a central policy instrument for industry’s transformation towards more energy and material efficiency and for unleashing innovation processes. We will discuss what effect the carbon price had to date on industry.

We discuss the results of a research paper that uses comprehensive firm and plant level data for more than 4,500 French manufacturing firms. It examines the economic and environmental impact of the EU ETS. Our results suggest that ETS regulated manufacturing plants in France reduced emissions by an average of 15-20%, a significant amount. The most marked reduction in emissions occurs following Phase II of the EU ETS in 2008, though there is some evidence of emissions reductions occurring during Phase I (2005-2007). Further investigation provides evidence that while these emission reductions do not arise from reallocation within the firm there is some evidence that these reductions are, at least in part, the result of outsourcing carbon-intensive production. 

We also discuss recent research investigating the relative intensity of knowledge spillovers in clean and dirty technologies. In addition, a recently published paper by one of the co-contributors and his coauthor shows that the EU ETS has increased low-carbon innovation among regulated firms by as much as 10%, while not crowding out patenting for other technologies.  

Together, these provide a robust basis for discussion of the impacts of  carbon pricing, on emissions, economic performance and innovation by firms.

 

15:16

Assessment of Allowance Mechanism in China's Carbon Trading Pilots

L. Xiong (Wuhan University, Wuhan, Hubei, China)

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Assessment of Allowance Mechanism in China's Carbon Trading Pilots

L. Xiong (1)
(1) Wuhan University, Institute for International Studies, Wuhan, Hubei, China

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  Due to its rapid economic expansion over the last decade, China has become the world's largest energy consumer and greenhouse gases (GHGs) emitter. With growing resources and environmental constrains domestically and the need for meeting international commitment to GHGs abatement, China's National Development and Reform Commission (NDRC)launched a series of local carbon cap-and-trade pilots in seven provinces and cities including Shenzhen, Beijing, Tianjin, Shanghai, Chongqing, Guangdong, and Hubei, each of which has started its operation between 2013 and 2014.

  In this paper, we examines the allowance mechanism of China’s pilots from two aspects, one is the allowance allocation, and the other is the allowance distribution and make comparisons in the two aspects with EU Emissions Trading System (EU ETS) and CA CAT. Allocation determines how the carbon emission cap on the total number of emission allowances is set and how emission allowances are allocated among covered entities within the cap. Allowance distribution deals with distribution of allocated allowances to all covered entities as well as dynamic allowance management in post-distribution.

 China's carbon trading pilots formed its unique allocation mechanism, which includes the following four characteristics: rigid cap combined with elastic structure, historical emissions method combined with benchmarking, free distribution combined with the auction, pre allocation combined with post adjustment. However, due to the short preparation time and lack of sufficient emissions data, there are many problems in the pilot design of the allocation mechanism, such as the loose cap, whipping the fast ox, double counting, and too small proportion of benchmarking and auction.

 

15:24

Emission Trading Scheme and competiveness:the tricky equation of free allocation for the EU ETS through to 2030

M. Jalard (CDC CLIMAT, Paris , France), E. Alberola (CDC Climat, Paris , France)

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Emission Trading Scheme and competiveness:the tricky equation of free allocation for the EU ETS through to 2030

M. Jalard (1) ; E. Alberola (1)
(1) CDC CLIMAT, Research, Paris , France

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One of the central debates surrounding the design of the European Union Emissions Trading Scheme is the approach to address carbon leakage concerns. In preparation of its phase 4, new design settings proposals of the European Commission in January 2014 have revived the debate. Based on the European Commission’s communication on the 2030 Energy and Climate framework, in October 2014, the European Council approved a new target to reduce CO2 emissions by 43% in EU ETS sectors by 2030 in addition to the implementation of a market instrument for stability. These two measures are likely to induce the emergence of a more robust carbon price signal, and the Council committed to the continuation of free allocation for industry after 2020.

From 2005 to 2012, all installations were eligible for free allowances which were allocated using installations’ historical CO2 emissions data. Since 2013, free allowances have been allocated according to EU harmonized rules on the basis of benchmarks (carbon intensity target) and historical production levels. These have been adjusted by a coefficient of exposure to the risk of carbon leakage and finally adjusted to the free allocation cap by a Cross Sectorial Correction Factor (CSCF). In this new context, the paper assesses the robustness of the expansion of the 2020 mechanism to define free allocations by 2030 regarding three criteria. Firstly, free allocations are assumed to mitigate carbon leakage risks efficiently and sustainably; secondly to minimize sectorial distortions; and thirdly to maintain the environmental and economic efficiency.

In a first section, based on a literature review and on estimations from industry data, the paper examines the phase III experiences which provide useful insight into the necessary considerations for phase IV of the EU ETS. Then, in the second section, the paper presents three modeling scenario to define the amount of free allocation for the European industry: a scenario of the expansion of the 2020 mechanism by 2030, a scenario with the output based mechanism and three alternative scenarios based on the output based mechanism with additional measures to mitigate the uncertainty of an ex-post adjustment.

We conclude that, by extending the current mechanism, the amount of free allowances remains higher than the free allowance cap, which should mechanically decrease from roughly 800 million in 2013 to 500 million by 2030. It would thus be necessary to gradually reduce the amount of freely allocated allowances using a Cross Sectorial Correction Factor (CSCF) from 94% in 2013 to 82% by 2020 and 66% by 2030. The implementation of the output based allocation, based on actual industrial production (rather than historical), using up to date benchmarks in line with technological progress, would induce an annual correction coefficient of 71% in 2030. However, depending on the annual aggregate activity level, a new uncertainty would arise concerning the value of the CSCF coefficient. According to our estimates, this coefficient would be comprised between 62% and 82% in 2030, which would imply an uncertainty on the net carbon cost of the magnitude of 10% of the added value  in the cement sector and 6% for in the steel sector, under the assumption of a 30€/tCO2 price.

There are three potential avenues which can be explored to mitigate this uncertainty and facilitate investment in low carbon technologies. Firstly, a reserve of free allowances could be established to offset yearly deficit / surplus between free allowances cap and the quantity of freely allocated allowances.  Secondly, by removing the free allowances cap, the need to apply the correction factor is eliminated. However, this may reduce the amount of auctioned allowances, which was already decreased by the market stability reserve (MSR). Finally, the definition of a more targeted list of sectors at risk of carbon leakages could reduce the number of free allowances by identifying and gradually allocating allowances according to sectors exposure. This would deem it unnecessary to apply the correction factor, and therefore eliminate all associated uncertainty. The method of dynamic allocation combined with a more targeted list would thus be an adequate solution to the tricky equation of free allocation through to 2030.

15:32

Energy market regulation and leakage: implications for industry

S. Weishaar (University of Groningen, Groningen, Netherlands)

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Energy market regulation and leakage: implications for industry

S. Weishaar (1)
(1) University of Groningen, Law and Economics, Groningen, Netherlands

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Electricity markets are crucial for addressing climate change. Electricity generation accounts for vast amounts of greenhouse gas emissions and electricity costs are an important concern for industries and thus a prominent topic in leakage discussions. This contribution focuses on electricity leakage (the avoidance of emission costs when generating electricity through relocation or importation) and its implications for industry. Following a comparative economic and a legal analysis it highlights 1) the carbon pricing implications for industry in terms of incentives for innovation and investments and 2) compare different regulatory approaches in various emissions trading systems such as e.g. the EU ETS, RGGI, and Korea.

15:40

Inclusion of Consumption in Carbon Pricing Systems

K. Neuhoff (German Institute for Economic Research (DIW Berlin), Berlin, Germany)

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Inclusion of Consumption in Carbon Pricing Systems

K. Neuhoff (1)
(1) German Institute for Economic Research (DIW Berlin), Berlin, Germany

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Climate protection is a global challenge that all countries have a common but differentiated responsibility to address. The UNFCCC Lima outcome reconfirmed that pricing carbon remains important. However, not all governments are willing to commit to targets of equal stringency. Moreover, countries may have different views on the choice of policy mix. Some countries may put a stronger emphasis on the carbon price and see a higher carbon price in the policy mix whereas other countries may make more use of other regulatory instruments. Carbon prices may thus continue to differ over longer time horizons. Without additional measures, this difference in the carbon price threatens a shift in production volumes to regions with lower carbon prices, which would undermine the effectiveness of carbon pricing.

 

Carbon leakage protection measures have therefore been and most likely will continue to be taken that complement carbon pricing in the production of carbon intensive materials. As  leakage protection measures , all emission trading mechanisms thus offer free allowance allocation and all carbon tax schemes have implemented some exemptions for materials production. As a result, the carbon price signal is largely eliminated for mitigation opportunities in the materials sector other than efficiency improvements within the primary production process. In our studies of the cement and steel sector we found that only 10 to 20% of emission reduction potential exists through further efficiency improvements. The majority of future mitigation opportunities are linked to break-through technologies, the use of higher value products and thus lower weight and carbon intensity, alternative materials and more tailored use of materials. Thus the current approach to leakage protection cannot support the realization of the majority of mitigation options in these sectors. The reform options for leakage protection currently discussed for the European Union Emissions Trading System (EU ETS), dynamic allocation and abandoning the linear adjustment factor, would further reinforce this effect and undermine incentives for mitigation along the value chain. This puts at risk the low-carbon transformation of our economies because materials production comprises the largest share of industrial emissions.

 

Hence for post 2020 a new philosophy for leakage protection is necessary. We therefore propose to introduce a scheme (Inclusion of Consumption) for high-carbon commodities that:

  1. continues to ensure leakage protection by (benchmark based) free allowance allocation or corresponding tax exemptions
  2. includes the domestic consumption of selected carbon intensive materials in carbon pricing schemes.

 

The scheme, which would replicate systems that are already in place for the consumption of electricity in emission trading mechanisms of Chinese provinces and the Republic of Korea, would thereby restore the carbon price signal for the value chain which is broken where leakage protection motivates free allocation or tax exemptions. Thus the carbon price could contribute to set the incentives necessary for a low-carbon transformation of production and use of carbon intensive commodities.

15:48

Panel discussion

T. Sterner (Univ of Gothenburg, 40530 Gothenburg, Sweden), C. Fischer, H. Trollip (University of Cape Town, Cape Town, South Africa)

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