State of the EU ETS 2019 - ERCST€¦ · the EU ETS; UK setting its own carbon price; UK starting...

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StateoftheEUETS2019


StateoftheEUETS2019– Outline

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• Seven Chapters

1. Background 2. Introduction – EU ETS fit for purpose3. Changes in regulatory environment and implications for the EU ETS4. Environmental delivery5. Economic efficiency6. Market functioning7. Policy issues to monitor in the future

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Background

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• Independent contribution to the policy debate on the EU ETS

• Focus of the report: identifying issues and making assessments, providing a snapshot

• The “State of EU ETS” as a well-established project, which has been ongoing in different formats since 2015

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• Six Chapters1. Background 2. Introduction – EU ETS fit for purpose3. Changes in regulatory environment and implications for the EU ETS4. Environmental delivery5. Economic efficiency6. Market functioning7. Policy issues to monitor in the future

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EUETS‘fitforpurpose’

3 key deliveries

1. Environmental delivery. Does it deliver against absoluteenvironmental targets?

2. Economic delivery. Does it deliver macro-economic efficiency andfunction as a driver for cost-effective decarbonization, taking carbonleakage concerns into account?

3. Market functioning. It is worth having a market only if it functionswell and leads to good price discovery

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What do we expect the EU ETS to deliver?

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EUETS‘fitforpurpose’

2 additional deliveries:

1. A long-term (competitive) advantage for Europe?

• Generate sufficient investments to accelerate the transition

• Create the premises for a low-carbon product market, incentivising behavioural and system change

• Helping to address social impacts associated with the transition to a low-GHG economy, following the principles of a ‘just transition’

2. A role for the EU ETS in being a pioneer and promoting carbon markets as a tool for addressing climate change 6

What do we expect the EU ETS to deliver?

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• Six Chapters1. Background 2. Introduction – EU ETS fit for purpose3. Changes in regulatory environment and implications for the EU ETS

i. Relevant evolution in policy and governance issuesii. ‘Sentiment’ Market Survey

4. Environmental delivery5. Economic efficiency6. Market functioning7. Policy issues to monitor in the future

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Relevantevolutioninpolicyandgovernanceissues

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1. Evolution of the secondary legislation related to the EU ETS2. Aviation and CORSIA3. Clean Energy for All Europeans package4. Member States policies: coal phase-outs5. Brexit6. EU Long-term Climate Strategy7. International climate change policy

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1– EvolutionofthesecondarylegislationrelatedtotheEUETS

Carbon Leakage list

Amended Auctioning Regulation

Data collection via MSs

Update benchmarks

Free allocation adjustment

rules

Start of P4

MSR Review

Aviation review

PA Stocktake

LRF review

2018 2019 2020 2021 2023 2025

EU ETS Directive

for P4

Innovation Fund

State Aid Guidelines

Modernisation Fund

Revised rules for free

allocation

Amended Monitor and Reporting Regulation

Amended Verification and

Accreditation Regulation

EU Registry for P4

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1– EvolutionofthesecondarylegislationrelatedtotheEUETS

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Main takeaways from 2018• The revision of the Free Allocation rules for 2021-2030 was adopted, aiming to

create a closer link between production levels and free allocation compared with Phase 3

• The Carbon Leakage List for Phase 4 was published. Many sectors were excluded from the list compared with Phase 3 (from 165 to 63), however this is likely to not reduce the amount of free allocation given (94% of emissions are expected to be covered, down by only 4% compared to the 2015-2020 CLL)

• The Innovation Fund was established, which will invest up to 11 billion € to support innovation in low-carbon technologies and processes over the course of Phase 4

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2– AviationandCORSIA

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• Since 2014, the scope of EU ETS has been limited to flights within the European Economic Area (EEA), in order to ‘provide continued momentum to the international process of establishing a global scheme to curb aviation emissions’

• In 2016, the ICAO Assembly agreed on a resolution on the Carbon Offsetting and Reduction Scheme for International Aviation (CORSIA). The goal of this scheme is twofold:1. to cap aviation emissions at the average level of CO2 emissions from international

flights between 2019 and 2020;2. to establish a global market-based system mechanism (MBM) to offset CO2 emissions

exceeding that average through international credits, from 2021 onwards.

• Aviation emissions are increasing rapidly: intra-EEA flights airlines’ emissions covered under the EU ETS grew by 5.7% in 2018 (Refinitiv, 2019)

• Success or failure of CORSIA, and more broadly the future of the aviation sector under the EU ETS will have significant implications for the EU climate change policy


3– CleanEnergyforAllEuropeanspackage

8 legislative texts

2030 Targets

• The new 2030 EU Renewables target is 32%• The new 2030 Energy Efficiency target is 32,5%

• Each Member State has to submit an Energy&ClimatePlan by the end of 2019 including national measures aimed at reaching the PA target

Is this in line with the overall 2030 GHG target of 40%?

If not, what are the implications on the EU ETS?

• MS long-term strategies with minimum 30 years perspective to be submitted by Jan. 2020 (Art.15, Governance of the Energy Union)

2030 GHG Target = -40%?

EE 32.5%

RED Recast

32%

National Energy-Climate Plans

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3– NationalEnergyandClimatePlans(NECPs)

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• The new Regulation on the Governance of the Energy Union requires MS to submit NECPs for the period 2021-2030

• Draft plans were to be submitted by the end of 2018 • The EC will assess the draft plans between January-June 2019• Final, integrated NECPs to be submitted by MS by the end of 2019

• Potential impact on EU ETS for those MS who might take additional actions in sectors covered by the EU ETS

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3– Renewableenergytargetsfor2030

0

5

10

15

20

25

30

35

2004

2006

2008

2010

2012

2014

2016

2018

2020

2022

2024

2026

2028

2030

[%]

EU-RES share in final energy consumption • The RES target is likely to be the most impacting for the EU ETS in Phase 4

• Modelling of emission reductions expected to 2030 as a consequence of a higher share of RES on electricity consumption (e.g. 50%)

• RES deployment speed will have an impact on ETS during Phase 4

20%

32%

Source: ICIS elaboration on data from the European Commission

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4–MemberStatepolicies:CoalPhase-Outs

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• Coal Phase-Outs gained momentum in 2018• Germany, Spain and Hungary started to discuss plans to exit coal, joining

10 other MS who had already announced phase-out strategies• Coal still 37% of ETS emissions in 2018 (Sandbag & Agora): potential for

significant oversupply if coal gets replaced by other energy sources• In absence of voluntary cancellation, MSR severely put to the test• Changes in coal consumption might also lead to new hedging strategies

• Should the MSR key parameters be re-adjusted to this new landscape?

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Country Capacity* (MW) Phase-out date

UK 11,160 2025

Italy 7,806 2025

Netherlands 4,692 2030

Denmark 2,776 2030

France 2,335 2021

Finland 1,693 2029

Portugal 1,677 2030

Ireland 855 2025

Austria 644 2025

Sweden 130 2022

Germany 42,409 2038

Spain 9,486 -

4– CoalPhase-Outs:OverviewofEUETScountries

*Capacity refers to 2018

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4–BREFlimits

• Put restrictions on the NOx and SO2 emissions from plants

• Plants will have to abide by regulations from 2021 or close

• Estimates that up to a third of Europe’s coal-fired capacity affected

• Will countries be able to obtain derogations?

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4– AnnouncedCoalPhase-OutsandBREFlimits:EUCoal/lignitecapacityforecast2018-2030• Coal/lignite capacity expected to decline from 139GW in 2018 to 88GW in

2025 and 58GW in 2030

0

20,000

40,000

60,000

80,000

100,000

120,000

140,000

160,000

2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030

MW

EU coal & lignite capacity by country 2018-2030 (MW)

Germany Poland UK Czech Republic Spain Italy Netherlands Greece Bulgaria Romania Denmark

France Finland Portugal Hungary Slovenia Ireland Austr ia Slovakia Croatia Sweden

Source: ICIS

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5– Brexit

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• The UK is scheduled to leave the EU on 31 October 2019 • In October 2018, the British government issued a technical note on the implications

of Brexit on the EU ETS: in a no-deal scenario, the UK is set to leave the EU ETS• All UK installations would drop out of the system, and no flight landing or departing

from the UK will be cover by the ETS• Facing this outlook, the EC presented a Contingency Action Plan suspending the free

allocation and auctioning of emissions allowances in the UK during Q1 2019

• All potential scenarios for the EU ETS post-Brexit are still on the table: UK staying in the EU ETS; UK setting its own carbon price; UK starting an independent UK ETS (linked or standalone)

• The UK government has declared that a UK ETS linked to the EU ETS would be the preferred option (May, 2019)

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6– 2050Long-termClimateStrategy

• In November 2018, the Commission presented its strategic long-term vision towards 2050

• 8 scenarios presented, 2 leading to net-zero carbon emissions• The EC’s strategic vision is meant to pave the way for the EU to adopt an ambitious long-

term strategy by 2020, as referred to in Art.4 (19) of the Paris Agreement• The two net-zero scenarios will definitely require additional efforts from ETS sectors

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7– Internationalclimatechangepolicy

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• The IPCC special report on the impact of global warming of 1.5 °C above pre-industrial levels was released in October 2018• It has reinforced conclusions of IPCC FAR, highlighting the need for negative

emissions and portraying again a sense of urgency, arguing that there is stilltime to act but this time is short

• Katowice COP-24 has achieved its work on the PA Rulebook and completed the political side of the Talanoa Dialogue. The module on Article 6 is still to be approved

• The UN Secretary General called for a Climate Summit to take place in New York on 23 September 2019 – UN 2019 Climate Summit “A Race We Can Win”

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7– Internationalclimatechangepolicy

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• Pressure on the EU to increase its climate ambition. This global push might influence the EU to submit its second NDC, leading to a potential increase in the GHG reductions targets from ETS sectors

• Possible increase in international ambition could impact carbon leakage concerns in the EU

• However, the PA and IPCC 1.5°C S.R. still need to be translated into domestic policies before they can impact price expectations. More clarity waited from the EU long-term decarbonisation strategy put forward in November 2018 and the new MS energy plans

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7– CoverageofETSglobally-mapofexplicitcarbonprices

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Source: I4CE – Institute for Climate Economics with data from ICAP, World Bank, government officials and public information, April 2018

The EU ETS no longer alone in the world

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• Six Chapters1. Background2. Introduction – EU ETS fit for purpose3. Changes in regulatory environment and implications for the EU ETS

i. Relevant evolution in policy and governance issuesii. ‘Sentiment’ Market Survey

4. Environmental delivery5. Economic efficiency6. Market functioning7. Policy issues to monitor in the future

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‘Sentiment’MarketSurvey

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• Short survey, 7 statements on EU ETS, its functioning and outlook• Sent out to selected stakeholders and experts working on the EU ETS

1. EU Member States2. NGO, Industry and business representatives 3. Analysts and researchers4. …

• Comparison with 2018 results

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• In its current architecture, including changes for P4

1. The EU ETS governance will provide a stable and predictable framework for an investment signal

2. The EU ETS Phase 4 parameters will lead to price patterns in 2020-2030 which are commensurate with investment trajectory necessary for 80-95% reduction by 2050

3. The EU ETS will provide a first mover advantage for the EU business community 4. The EU ETS will require significant changes to the MSR after the 2021 review 5. The mechanisms in place in the EU ETS can address the impacts of MS policies that will

overlap with the EU ETS6. The new mid-century EU decarbonisation strategy will strongly impact the EU ETS7. The EU ETS should continue to play the same role in the EU climate change policy post

2030

Survey Questions 2019

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1. The EU ETS governance will provide a stable and predictable framework for an investment signal.

3%

30% 29%

25%

13%

1%

46%

21%

25%

6%

Strongly Agree Agree Neither Agree norDisagree

Disagree Strongly Disagree

2018 2019



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2. The EU ETS Phase 4 parameters will lead to price patterns in 2020-2030 which arecommensurate with investment trajectory necessary for 80-95% reduction by 2050.

1%

13%

29%

38%

19%

6%

18%15%

42%

19%



2018 2019



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3. The EU ETS will provide a first mover advantage for the EU business community.

8%

28% 28%

24%

12%

4%

39%

31%

22%

3%



2018 2019



30

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4. The EU ETS will require significant changes to the MSR after the 2021 review.

16%

39%

21% 20%

4%

25%

37%

16% 16%

4%



2018 2019



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5. The mechanisms in place in the EU ETS are able to address the impacts of Member Statepolicies that will overlap with the EU ETS.

3%

17%

23%

45%

12%

4%

28%

21%

39%

7%



2018 2019



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6. The new mid-century EU decarbonisation strategy will strongly impact the EU ETS.

24%

41%

17%15%

3%

36%

45%

12%

7%

0%



2018 2019



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7. The EU ETS should continue to play the same role in the EU climate change policy post 2030.

2019

19%

36%

18%14% 13%





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t• Six Chapters1. Background2. Introduction – EU ETS fit for purpose3. Changes in regulatory environment and implications for the EU ETS4. Environmental delivery5. Economic efficiency6. Market functioning7. Policy issues to monitor in the future


EnvironmentalDelivery

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1. Delivery against the trading period target

2. Emission and decarbonisation trends

3. Delivery against EU long term domestic climate objectives

4. Lessons learned and issues to understand better

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2.084

1.768

1.333

0

500

1.000

1.500

2.000

2.500

2005 2008 2013 2018 2020 2025 2030

Mill

ion

tons

2% GDP

0% GDP

Projectedemissions

Target path

Verifiedemissions

DeliveryagainstthetradingperiodComparisonofemissionsagainstthetargetcap

Source: Wegener Center elaborations on EEA, 2018 and EU TL, 2018

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• Overall emissions so far were well below the cap of the target path.

• According to the currently observed dynamics, emissions will hit the target path only in the case of sustained high economic growth and disruptions in the ongoing decline of emission intensities

*2018 is an estimate based on preliminary data


0

500

1000

1500

2000

2500

2013 2014 2015 2016 2017 2018 2019 2020

Annual decrease in cap = 38MtCO2e

DeliveryagainstthetradingperiodComparisonoftherateofdecarbonisationwiththedecreaseoftheEUETScap

37Interpretation of the graph: between 2013 and 2014, the decrease in emissions was equivalent to 2.5 the decrease in the cap

Source : I4CE, with data from the EEA

Between 2017 and 2018, emissions decreased 1.8 times faster than the cap

Annual cap

Annual emissions

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EU ETS cap and emissions in Phase III

2.5

0.3

1.4

-0.1

1.8

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

3.0

2013-2014 2014-2015 2015-2016 2016-2017 2017-2018

Ratio of the annual variation in emissions to the annual variation in the cap


Emissionanddecarbonisation trendsAnnualvariationinEUETSemissionsbysector

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Source : EU TL, 2019

Annual variation in EU ETS emissions between 2017 and 2018 : - 4%

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Sectorial GHG emissions under the EU ETS in Phase IIIAnnual change in emissions between

2017 and 2018

-75.0

-65.0

-55.0

-45.0

-35.0

-25.0

-15.0

-5.0

5.0

1

MtCO2e

Combustion Refining SteelCement Other activities all installations

Total change : -70 MtCO2e

-4%

-65.9 MtCO2e

+2 MtCO2e

-1.7 MtCO2e

-1.4 MtCO2e-3 MtCO2e0

200

400

600

800

1,000

1,200

1,400

1,600

1,800

2,000

2013 2014 2015 2016 2017 2018

MtCO2e

Combustion Refining Steel Cement Bulk �Cement Other activities


39• Overall emissions declined since 2013 until 2018 by about 10%• Emissions are being decoupled from activity levels• The combustion sector reduced emissions by about 15%, while the industry sector was flat

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Emissionanddecarbonisation trendsCombustionandIndustryIndexofemissionsandindexofvolumesofproduction


Source: Wegener Center and ERCST elaborations on EEA, 2019, EU TL, 2019, Sandbag & Agora,2019 and Eurostat, 2019

80

85

90

95

100

105

110

115

120

2013 2014 2015 2016 2017 2018

Inde

x (2

013=

100)

Total Emissions Industry (emissions) Industry (Production)

Combustion (emissions) Combustion (Production)


Emissionanddecarbonisation trendsEmissionintensitydata

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Paper and pulp (left axis): ton of CO2/ton of product. Source: CEPIGrey clinker (left axis): ton of CO2/ton of grey clinker. Excludes on site power generation Source: GNRElectricity (right hand axis): gCO2/kWh ratio of CO2 emissions from public electricity production (as share of CO2 emissions from public electricity and heat production related to electricity production), and gross electricity production. Source: EEA

0

50

100

150

200

250

300

350

400

450

0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.8

0.9

1

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017Paper and Pulp Grey clinker Electricity


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DeliveryagainstEUlongtermdomesticclimateobjectivesTwowaystoreachnetzeroGHGemissions:1.5TECH;1.5LIFE

Source: In depth analysis in support of COM(2018) 773 “A Clean Planet for All”.

Power goes to zero emissions by 2040; sharp decrease also for industry


DeliveryagainstEUlongtermdomesticclimateobjectivesReachingnetzeroemissionsrequiresadrasticdecreaseinEUETSemissions

-500

0

500

1000

1500

2000

2500

2013

2014

2015

2016

2017

2018

2019

2020

2021

2022

2023

2024

2025

2026

2027

2028

2029

2030

2031

2032

2033

2034

2035

2036

2037

2038

2039

2040

2041

2042

2043

2044

2045

2046

2047

2048

2049

2050

LRF =1,74%

LRF =2,2%

-500

0

500

1000

1500

2000

2500

2005

MtC

O2e

Adjustment to reflect Phase III scope

1.5 LIFE :-95%1.5 TECH :-102%

Phase III

2005 verified emissions

• Keeping a LRF of 2.2% until 2050 would result in a 85% decrease in EU ETS cap compared to 2005 emissions. • 1.5 scenarios prepared by the Commission in its long-term strategy – 1.5 LIFE and 1.5 TECH- respectively

achieve a reduction of 95% and 102% in EU ETS emissions in 2050 compared to 2005.• If the EU ETS cap were to decrease linearly to these levels, it would respectively require increasing the LRF to

2.83% and 2.57% from 2021.

Source: I4CE with data from the Commission

-85%/2005

EU ETS theoretical long-term cap

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EnvironmentaldeliveryConclusion

EU ETS is delivering against trading period target

• Emissions are under target path since 2009• Emissions decreased again in 2018 after a minor increase in 2017, down by

4% in 2018 compared to 2017• Decarbonisation trends vary significantly in the different sectors• The EC proposed a strategic long-term vision towards 2050 and presented

8 scenarios, which would have different impacts on the EU ETS• All require a drastic departure from the past

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Economicefficiency

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1. Is the EU ETS a driver for change? I. Interaction with other policies; II. Decarbonization in the power sector; III. Deployment of new low-carbon technologies; IV. Use of auction revenues.

2. Monetary impacts and carbon leakage I. Direct costsII. Indirect costs

NOT FOR CITATION OR DISTRIBUTIONNOT FOR CITATION OR DISTRIBUTION

Interactionwithotherpolicies

• The effects of policy overlap create negative impacts on the economic efficiency of EU ETS

• RES/EE targets set at the EU level have implications on the decarbonisation of EU ETS sectors. The EU ETS also interacts with the effort sharing regulation (ESR) and other EU policies for GHG emissions reduction

• Similar implications stemming from national policies, as in the case of coal-phase outs

• The MSR was put in place to partially reconcile the effects of policy overlaps and the EU ETS – deeper analysis included in Chapter 6

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InteractionwithEU-levelpolicies

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Source: I4CE and Enerdata, 2018, based on a visual concept by Ecologic


Decarbonisation inthepowersector

48

CO2 emissions from the power sector and carbon content of power generation (2005-2016)

0

50

100

150

200

250

300

350

400

450

0

200

400

600

800

1,000

1,200

1,400

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

gCO

2/kW

h

MtC

O2

CO2 emissions from power generation (left axis) Carbon content of power generation (right axis)

Source : I4CE based on data from Eurostat and the IPCC

§ Between 2005 and 2016, CO2 emissions from the power sector decreased by almost 350 MtCO2 (27%).

§ In the same period, the carbon content of power generation decreased by 24%.

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49

Drivers of emissions variations in the power sector in the EU (2005-2016)


§ The deployment of renewable sources of energy was the most important driver in decreasing CO2 emissionsin the power sector over 2005-2016: -365 MtCO2e over the period

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50

Annual drivers of emissions variations in the power sector in the EU (2005-2016)


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-140-120-100

-80-60-40-20

020406080

100

2005

-200

6

2006

-200

7

2007

-200

8

2008

-200

9

2009

-201

0

2010

-201

1

2011

-201

2

2012

-201

3

2013

-201

4

2014

-201

5

2015

-201

6

MtC

O2

Carbon content

Transformation efficiency

Fossil fuels mix

Renewables

Nuclear

Power generation

Annual variation in CO2emissions


IstheEUETSadriverforchange?ComparisonofEUETSpricewithCO2 switchingprice inthepowersector

51

In 2018, the EU ETS price was above minimumswitching price levels 100% of the time*In 2017 and 2016, this proportion was respectively 53% and 5%

CO2 switching price for different coal and gas power plants efficiencies, in comparison with EU ETS price

Source : I4CE, with data provided by ICIS (EU ETS prices, CIF ARA API2 prices, and TTF prices). Other data sources are : Banque de France for the conversion dollars/euros, IPCC Guidelines and Eurostat for the CO2 content of gas and coal used for power generation in the EU.Average efficiencies of power plants are based on WEC database of energy efficiency indicators, minimum and maximum values on JRC study.

* Calculated over working days

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Deploymentofnewtechnologies• Great part of the new

technologies in industrial sectors are still at an early stage of their developments

• Their availability will come at a later stage

• Carbon prices will hardly be the main driver in supporting the mass deployment of these technologies

52

Hydrogen-based steel making

CO2 Hydrogenation to ethanol + CO2

storageCO2 usage: Enhanced Oil

Recovery

Gasified Biomass CHP

Hydrogen production with

Alkaline Electrolysis

0

50

100

150

200

250

2015

2020

2025

2030

2035

2040

EUR

/tonn

e

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Source: ICIS (2019)


IstheEUETSadriverforchange?Morerevenuesfromauctions=moremoneyforclimateaction?

53

3.6 3.2

4.93.8

5.5

14.2

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

16.0

2013 2014 2015 2016 2017 2018

Billi

on €

Total auction revenues

X 2.5

• In 2018, total revenues from the auctioning of allowancesreached 14.2 billion €

• It represents an increase of more than 150 % comparedto the previous year

• Over 2013-2017, around80% of auction revenues were spent for climate and energy purposes, mainly in the EU

Source: I4CE, with data from EEX and ICE

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IstheEUETSadriverforchange?Morerevenuesfromauctions=moremoneyforclimateaction?

54Source: Report From The Commission To The European Parliament And The Council {SWD(2018) 453 final}

RevenuesfromtheauctioningofEUETSallowances UseofrevenuesfordomesticclimateandenergypurposesfromauctioningofETSallowances,2013-2017(EURbillion)

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Monetaryimpactsandcarbonleakage

• Direct costs• Indirect costs

55

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MarketbalanceinEUETS

56

Source: Wegener Center (2019)


0

500

1000

1500

2000

2500

3000

2005 2008 2013 2018

Emiss

ion

allo

wan

ces (

mill

ion

t CO

2)

CAP vs. verified emissionsActual supply vs. verified emissions

Cumulative Surplus (TNAC)

Cumulative Surplus - TNAC Freely allocated EUAs solid. Auctioned or sold EUAs CERs and ERUs Verified emissions solid. CAP

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OverallfreeallocationvsemissionsinEUETS

57• Net supply of free allowances, defined as (free allowances/emissions – 1)*100

measures the stringency of sectors and installations

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-100

-75

-50

-25

0

25

50

2005 2008 2013 2018

Net

supp

ly o

f fre

e al

low

ance

s(P

erce

nt o

f em

issio

ns)

Deficit

Surplus

All sectorsSectoral stringency

Net supply offree allowances



-100

-75

-50

-25

0

25

50

2005 2008 2013 2018

Net

supp

ly o

f fre

e al

low

ance

s(P

erce

nt o

f em

issio

ns)

Combustion of fuels

StringencyinEUETS:combustionandindustry

58

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-20

0

20

40

60

2005 2008 2013 2018

Net

supp

ly o

f fre

e al

low

ance

s(P

erce

nt o

f em

issio

ns)

Deficit

Surplus

Industrial sectors

Sectoral stringencyNet supply of

free allowances



59

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Netcostsofallowances:combustionandindustry


-15,000

-11,000

-7,000

-3,000

1,000

2005 2008 2013 2018

Net

val

ue o

f allo

wan

ces

(Mill

ion

€)

Deficit

Surplus

Installations for Combustion of fuels

-1,000

1,000

3,000

2005 2008 2013 2018

Deficit Surplus

Industrial installations


60

Sectoralstringency:refiningofmineraloil

• For refineries, the net surpluses cumulated in P2 were quickly used up by net deficits during P3


• Activity 21

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-50

-25

0

25

50

75

100

2005 2008 2013 2018Net

supp

ly o

f fre

e al

low

ance

s(P

erce

nt o

f em

issio

ns) Deficit Surplus

Refining

-100

0

100

200

300

2008 2013 2018

Allo

wan

ces (

mill

ion

t CO

2)

Refineries



61

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Eco

Act

Sectoralstringency:cementclinker• Activity 29

• The cement industry still holds about270 million tons of CO2.

-25

0

25

50

75

100

2005 2008 2013 2018

Net

supp

ly o

f fre

e al

low

ance

s(P

erce

nt o

f em

issio

ns)

Deficit

Surplus

Cement clinker

-100

0

100

200

300

2008 2013 2018Emiss

ion

allo

wan

ces (

mill

ion

t CO

2)

Cement clinker




62

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Sectoralstringency:steel• Activity 22, 23, 24, 25 and flue gas

• For steel, the considerable net surplus of free allowances in P2 is still sufficient to compensate for the net deficits in the allocation of free allowances in P3.

-50

-25

0

25

50

75

100

2005 2008 2013 2018Net

supp

ly o

f fre

e al

low

ance

s(P

erce

nt o

f em

issio

ns)

Deficit Surplus

Steel total

-100

0

100

200

300

2008 2013 2018Emiss

ion

allo

wan

ces (

mill

ion

t CO

2)

Steel




63

Monetaryimpactsandcarbonleakage

• Direct costs• Indirect costs

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64

IndirectCosts• No harmonized approach

approach• only a third of Member States

provide compensation, creating a distortion across Europe

• Compensation schemes of Luxembourg and Wallonia were approved in 2018

• State aid guidelines up for revisionfor Phase 4 à how might itchange? Implications? ER

CST,

Weg

ener

Cen

tre,

ICIS

, I4C

E &

Eco

act


IndirectCostsMember State Compensation

paid for 2016 (€ million)

Auction revenues 2016 (€ million)

Percentage Compensationpaid for 2017 (€ million)

Auction revenues 2017 (€ million)

Percentage

Flanders 46.75 56.92 82.14% 31.72 76.14 41.67%

Netherlands 53.59 142.61 37.58% 36.9 190.71 19.35%

Germany 288.72 850.39 33.95% 202.21 1,146.82 17.63%

UK 19 424.33 4.48% 17.16 566.48 3.03%

Spain 71.44 369.46 19.34% 66.64* 493.55 13.50%

France 135.15 234.68 57.59% 98.73 313.40 31.50%

Slovakia 10 65.05 15.37% 10 87.06 11.49%

Finland 37.91 71.22 53.22% 26.75 95.26 28.08%

Latvia 1.04 11.5 8.70% 0.24 15.39 1.54%

Greece 12.4 148.05 8.38% 12.44 198.03 6.28%65

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Source: Member States reports on indirect costs compensation

*Note: For Spain only the preliminary data is available, the final amount is expected to be slightly higher



66

• Six Chapters1. Background2. Introduction – EU ETS fit for purpose3. Changes in regulatory environment and implications for the EU ETS4. Environmental delivery5. Economic efficiency6. Market functioning

i. 9 Indicators ii. Price forecasts scenariosiii. MSR functioning

7. Policy issues to monitor in the future

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Volumes

67

Daily average

Source: ICE, 2019

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0

10,000,000

20,000,000

30,000,000

40,000,000

50,000,000

60,000,000

Jan-08

May-08

Sep-0

8Jan

-09

May-09

Sep-0

9Jan

-10

May-10

Sep-1

0Jan

-11

May-11

Sep-1

1Jan

-12

May-12

Sep-1

2Jan

-13

May-13

Sep-1

3Jan

-14

May-14

Sep-1

4Jan

-15

May-15

Sep-1

5Jan

-16

May-16

Sep-1

6Jan

-17

May-17

Sep-1

7Jan

-18

May-18

Sep-1

8


Volumes

68

quarterly and annual

Source: Trayport, 2019Volumes include: EEX and ICE executed, broker bilateral, broker cleared

Quarterly (bars): left hand axisAnnual (line): right hand axis

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0

2

4

6

8

10

12

0.0

0.5

1.0

1.5

2.0

2.5

3.0

2011 2012 2013 2014 2015 2016 2017 2018

Billi

ons

Billi

ons


Openinterestcontracts(prev.day)

69

Source: ICE, 2019

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0

200,000

400,000

600,000

800,000

1,000,000

1,200,000

1,400,000

1,600,000

Jan 201

0

Apr 201

0

Jul 2010

Oct 20

10

Jan 201

1

Apr 201

1

Jul 2011

Oct 20

11

Jan 201

2

Apr 201

2

Jul 2012

Oct 20

12

Jan 201

3

Apr 201

3

Jul 2013

Oct 20

13

Jan 201

4

Apr 201

4

Jul 2014

Oct 20

14

Jan 201

5

Apr 201

5

Jul 2015

Oct 20

15

Jan 201

6

Apr 201

6

Jul 2016

Oct 20

16

Jan 201

7

Apr 201

7

Jul 2017

Oct 20

17

Jan 201

8

Apr 201

8

Jul 2018

Oct 20

18

Ton


Auctionparticipation(EEX)

70

Monthly average auction participation

Source: EEX, 2019

10.00

12.00

14.00

16.00

18.00

20.00

22.00

24.00

26.00

28.00

30.00

Jan-

15

Feb-

15

Mar

-15

Apr-

15

May

-15

Jun-

15

Jul-1

5

Aug-

15

Sep-

15

Oct

-15

Nov

-15

Dec

-15

Jan-

16

Feb-

16

Mar

-16

Apr-

16

May

-16

Jun-

16

Jul-1

6

Aug-

16

Sep-

16

Oct

-16

Nov

-16

Dec

-16

Jan-

17

Feb-

17

Mar

-17

Apr-

17

May

-17

Jun-

17

Jul-1

7

Aug-

17

Sep-

17

Oct

-17

Nov

-17

Dec

-17

Jan-

18

Feb-

18

Mar

-18

Apr-

18

May

-18

Jun-

18

Jul-1

8

Aug-

18

Sep-

18

Oct

-18

Nov

-18

Dec

-18

Auction Participation Linear (Auction Participation)

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Auctioncoverage(EEX)

71

Monthly auction coverage

Source: EEX, 2019

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0.00

2.00

4.00

6.00

8.00

10.00

12.00

14.00

Jan-13

Mar-

13

May

-13Jul-1

3

Sep-13

Nov-13

Jan-14

Mar-

14

May

-14Jul-1

4

Sep-14

Nov-14

Jan-15

Mar-

15

May

-15Jul-1

5

Sep-15

Nov-15

Jan-16

Mar-

16

May

-16Jul-1

6

Sep-16

Nov-16

Jan-17

Mar-

17

May

-17Jul-1

7

Sep-17

Nov-17

Jan-18

Mar-

18

May

-18Jul-1

8

Sep-18

Nov-18

Monthly average auction coverage


Auctionvs.Spotspread(EEX)

72

Auction price minus secondary market price (€)

Source: EEX, 2019

Auction: auction priceSpot: Mean of best bid/best ask before 11 AM on auction day

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t

-1

-0.8

-0.6

-0.4

-0.2

0

0.2

0.4

0.6

0.8

1

1.2

Jan-15

Mar-

15

May

-15Jul-1

5

Sep-15

Nov-15

Jan-16

Mar-

16

May

-16Jul-1

6

Sep-16

Nov-16

Jan-17

Mar-

17

May

-17Jul-1

7

Sep-17

Nov-17

Jan-18

Mar-

18

May

-18Jul-1

8

Sep-18

Nov-18

Monthly averages

Monthly max

Monthly min


Ask-Bidspread

73

Best ask minus best bid (€)

Source: EEX, 2019

Bid: best bid at secondary market before 11 AMAsk: best ask at secondary market before 11 AM

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t

0.0

0.5

1.0

1.5

2.0

2.5

Jan-

15

Feb-

15

Mar

-15

Apr-

15

May

-15

Jun-

15

Jul-1

5

Aug-

15

Sep-

15

Oct

-15

Nov-

15

Dec-

15

Jan-

16

Feb-

16

Mar

-16

Apr-

16

May

-16

Jun-

16

Jul-1

6

Aug-

16

Sep-

16

Oct

-16

Nov-

16

Dec-

16

Jan-

17

Feb-

17

Mar

-17

Apr-

17

May

-17

Jun-

17

Jul-1

7

Aug-

17

Sep-

17

Oct

-17

Nov-

17

Dec-

17

Jan-

18

Feb-

18

Mar

-18

Apr-

18

May

-18

Jun-

18

Jul-1

8

Aug-

18

Sep-

18

Oct

-18

Nov-

18

Dec-

18

Monthly averages Monthly max Monthly min


CostofCarry

74

5year-front year spread

Source: ICE, 2019

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0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

05/2015

07/2015

09/2015

11/2015

01/2016

03/2016

05/2016

07/2016

09/2016

11/2016

01/2017

03/2017

05/2017

07/2017

09/2017

11/2017

01/2018

03/2018

05/2018

07/2018

09/2018

11/2018


CostofCarry

75

EUA vs AAA 5year-EU Bonds

Source: ICE, 2019

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-5.0%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

May 2015

Jul 2015

Sep 2015

Nov 2015

Jan 2016

Mar 2016

May 2016

Jul 2016

Sep 2016

Nov 2016

Jan 2017

Mar 2017

May 2017

Jul 2017

Sep 2017

Nov 2017

Jan 2018

Mar 2018

May 2018

Jul 2018

Sep 2018

Nov 2018

Cost of Carry

AAA 5year-EU bond


Impactofvolatilityoneconomicefficiency

76

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

20102011

20122013

20142015

20162017

2018

Day-to-day volatility

EUA Dec

Brent FM

CIF ARA Cal

TTF Cal

EEX Cal

EU ETS Day-to-day volatilitydecreased in correspondence of thedouble overhaul (backloading +MSR) while the other energycommodities experienced anopposite trend

EUA’s day-to-day volatility remains aboveall other energy commodities

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Marketfunctioningtracker

77

Indicator 2017/2016 2018/2017Volumes

Open Interest

Auction participation

Auction coverage

Auction vs Spot spread

Bid-ask spread

Cost of carry

Volatility

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78


i. 9 Indicators ii. Price forecasts scenariosiii. MSR functioning


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Priceforecastsscenarios

79

• 2018 forecasts:- Thomson Reuters- ICIS- Nomisma Energia

• 2019 forecast:- Energy Aspects - Bloomberg New Energy Finance- ICIS

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Priceforecastsscenarios

80

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81


i. 9 Indicators ii. Price forecasts scenariosiii. Market Stability Reserve


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OverviewoftheMSR

82

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tThe total number of allowances in circulation (TNAC) drives the MSR mechanism: TNAC = Supply – (Demand + allowances in the MSR)

• If TNAC > 833 mt:To MSR 24% (12% after 2023) subtracted from auctioning

• If TNAC < 400 mt:From MSR 100 mt added to auctioning

• From 2023, yearly invalidation of allowances above the number of allowances auctioned the year before, to cancel part of the cumulative surplus of EUAs held in the MSR


83

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AssessingtheperformanceoftheMSR

Potential sources of market imbalance?• MS policies (e.g. coal phase-outs without voluntary cancellation);• New 2030 RES/EE targets;• Economic shocks

Ability of the MSR to cope with excessive market imbalance• ERCST elaborations on EC data – Wegener center modeling • ICIS• Sandbag


AssessingtheperformanceoftheMSR- 3models

84

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Ability of the MSR to cope with excessive market imbalance?• TNAC shows upward trajectory towards the end of Phase 4• MSR is expected to fall short of fulfilling its long-term goal of making the

EU ETS more resilient to future sources of imbalance.



85

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Outlineofchapter7

1. Implementation of secondary legislation related to the EU ETS

2. Implications of EU elections on climate change policy

3. Brexit

4. Future of the aviation sector under EU ETS – CORSIA

5. Preparing the MSR review

6. Cancellation of allowances in the event of closure of electricity generation capacity

7. Operationalising Article 30 of the EU ETS Directive

8. The role of market mechanisms in achieving negative emissions

• This chapter will discuss a number of issues that need to be monitored in the coming years to ensurethat the EU ETS is ‘fit for purpose’ and is prepared for future reviews and challenges

86

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1.Mid-termEUETS regulatory evolution

Carbon Leakage list

Amended Auctioning Regulation

Data collection via MSs

Update benchmarks

Free allocation adjustment

rules

Start of P4

MSR Review

Aviation review

PA Stocktake

LRF review

2018 2019 2020 2021 2023 2025

Innovation Fund

State Aid Guidelines

Modernisation Fund

Revised rules for free

allocation

Amended Monitor and Reporting Regulation

Amended Verification and

Accreditation Regulation

EU Registry for P4

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87

EU ETS Directive

for P4


2. Implicationsof EUelectionson climate changepolicy

• Climate change policy issues and legislation, including EU ETS provisions, will be

managed by a new European Parliament (EP) and Commission

• A breakthrough by more nationalist and non-establishment Parties will have significant

policy impacts, as they generally give less priority to climate change ambition

• The ongoing work on the EU ETS Directive implementation for its Phase 4, and more

broadly on the climate change actions, will be suspended until the Autumn, pending

the inauguration of the new EP and the nomination of the new EU Commission 88

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2.Brexit

• Brexit creates uncertainties regarding its impacts on the EU ETS.

• The UK is scheduled to leave the EU on 31 October 2019

• Implications on the EU ETS will be different according to the final decision:

• Scenario 1 : no deal-Brexit : If the UK leaves the EU without a deal, the UK will replace the EU ETS with a domestic carbon tax.

• Scenario 2 : with Deal : 1. New UK ETS (linked or standalone) 2. UK exits the EU ETS and replace it with a UK carbon tax

89

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2.Brexit

• Impacts of Brexit? • Adjustment of EU ETS cap?• Recalculation of benchmarks? • Impact on the Innovation and Modernisation Funds?

• If the ambition of the EU ETS without the UK remains similar to the current 2030 target, thenBrexit will have a moderate impact on the EU ETS market balance

• Even though a disorderly Brexit would result in high price volatility, the absolute effect onprices would only be moderately bearish as the MSR counteracts the effect (ICIS, 2017)

• The overlap of Brexit-related supply and MSR operation should trigger a discussion whetherthe MSR thresholds should be adjusted.

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4. Futureof theaviation sectorunderEUETS–CORSIA

• Aviation under ETS subject to review - the LRF could be applied to the aviation sector from 2021 onwards (European Union, 2017).

• In the absence of a new amendment, the EU ETS would revert back to its original full scope from 2024

• Within 12 months of the adoption by the ICAO, the EU Council requested that the Commission presents a report on the adequacy, ambition and environmental integrity of CORSIA + any needed legislative amendment

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5.PreparingtheMSRreview

• Two reviews scheduled in 2021 and 2026. • The forecasts of the MSR functioning

• The number of allowances put in reserve over Phase 4 • The total number of allowances in circulation (TNAC)

• Potential changes around its functioning over Phase 4 : • Demand of hedging from the power sector • The 2030 RES and EE targets and its impacts on the EU ETS demand• The Brexit-related supply and demand• Member States policies (with and without voluntary cancellation)• Economic crisis

• Key question : whether or not to change the parameters, and if so, how ? • 3 parameters : thresholds (400 mt and 833 mt); intake rate (24% until 2023 then 12%); cancellation mechanisms• Objectives : How to get a more resilient EU ETS or a more aligned EU ETS with the EU long-term climate strategy ? • Results of ERCST Paper on the review of the MSR 92

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6.ManagingpolicyoverlapswithauctioncancellationbyMS

• “In the event of closure of electricity generationcapacity “, Article 12.4 of the EU ETS Directive foreseesthe cancellation of allowances to be auctioned as avoluntary decision by MS.

• Clarifications about the amount and timing ofcancellation decided by MS will be needed to estimatethe potential impact on the EU ETS.• In the case of the German coal phase-out, the EU ETS

impact will depend on whether and how much the effectgets compensated (ICIS, 2019) :• None or very limited cancellations of the coal phase-out

effect would have a impact on EUA prices with a decreaseof €3-5/tonne

• A scenario assuming a five year cancellation have a morelimited impact on EUA prices. 93

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Source: ICIS, 2019


7.OperationalisingArticle 30of theEUETSDirective

• Article 30 of the EU ETS Directive states that the Directive:

“shall be kept under review in the light of international developments and efforts undertaken to achieve the long-term objectives of the Paris Agreement”

and “in light of climate policy measures in other major economies”

• This Article has not been operationalized. However, it could become increasingly important given: • the pressure to increase EU ambition to meet the goals of the Paris Agreement• the impact that this may have on competitiveness, as well as on the level of

ambition of other Parties to the Paris Agreement 94

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8.Theroleofmarketmechanismsinachievingnegativeemissions

• One of the key objectives in the Paris Agreement is achieving net carbon neutrality by the second half of the century

• This is translated in two of the EC’s “strategic long-term vision” scenarios (1.5 LIFE and 1.5 TECH), which make it clear that there will be a need for technologies that have negative emissions

• Their development needs to start now, if they are to be available by the second half of Phase 4: possible interactions with the EU ETS?

• Ideas for the creation of a new tradable asset class specific to CCS 95

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State of the EU ETS 2019 - ERCST€¦ · the EU ETS; UK setting its own carbon price; UK starting...

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Transcript of State of the EU ETS 2019 - ERCST€¦ · the EU ETS; UK setting its own carbon price; UK starting...