Milan Elkerbout – IVL, Stockholm & CEPS, BrusselsProject Link meeting UN DESA, 18 June, New York

The changing role of carbon pricing in EU climate policy

IVL |

Emissions trading as main pillar, cornerstone, or building block?

Dominance of carbon pricing in early EU climate policy 2008-13: climate policy meets the EU polycrisis 2013-18: reform, revision, revival with an eye to 2030 Integration of climate, energy, and industrial policies Long-term strategy: Energy Union & industrial strategy

EU PROCESSES & MISTRA CARBON EXIT

IVL |

EU carbon market: allowance prices

EU PROCESSES & MISTRA CARBON EXIT

Source: EEA and EEX

IVL |

In the Kyoto world, carbon pricing is everything for the EUTop-down architecture and global governance EU emissions trading and Kyoto compliance linked AAU trading and linked carbon markets Decentralised EU ETS architecture

Modest short-term targets, long-term targets with significant residuals

EU PROCESSES & MISTRA CARBON EXIT

IVL |

Polycrisis: challenges to governance and to climate policy designFinancial turmoil, banking, economic, political crisis Top-down climate governance fails at Copenhagen Targets start to deepen, economic scope to widen EU ETS faces structural imbalances due to supply rigidity Carbon leakage and competitiveness dominate EU ETS faces credibility issue

EU PROCESSES & MISTRA CARBON EXIT

Policy questions:• Can the carbon market

regulator, legislator, and the supply-side be the same actor?

• Are low carbon prices a problem or are they the point?

• Credible commitment: how fixed is the cap?

IVL |

A carbon price isn’t the same to all sectorsHow to allocate: theoretically easy, practically difficult Auctioning better? Polluter pays? Static & dynamic efficiency Power: auctioning (windfall profits) Industry: free allocation (carbon leakage risk) Which mitigation options?

EU PROCESSES & MISTRA CARBON EXIT

IVL |

A carbon price isn’t the same to all sectors

EU PROCESSES & MISTRA CARBON EXIT

Electricity48%

CHP7%

Steel8%

Cement6%

Refining8%

Chemicals4%

Fertilisers2%

Other industry17%

EU ETS: 2017 GHG EMISSIONSElectricity

4% CHP4%

Steel21%

Cement16%

Refining12%

Chemicals9%

Fertilisers4%

Other industry30%

EU ETS: 2017 FREE ALLOCATION

IVL |

EU ETS emissions & prices

EU PROCESSES & MISTRA CARBON EXIT

800,000,000

850,000,000

900,000,000

950,000,000

1,000,000,000

1,050,000,000

1,100,000,000

1,150,000,000

1,200,000,000

1,250,000,000

2005GHG

2006GHG

2007GHG

2008GHG

2009GHG

2010GHG

2011GHG

2012GHG

2013GHG

2014GHG

2015GHG

2016GHG

2017GHG

2018GHG

EU ETS - Power sector GHG emissions

80,000,000

100,000,000

120,000,000

140,000,000

160,000,000

180,000,000

200,000,000

2005GHG

2006GHG

2007GHG

2008GHG

2009GHG

2010GHG

2011GHG

2012GHG

2013GHG

2014GHG

2015GHG

2016GHG

2017GHG

2018GHG

EU ETS - large industrial GHG emissions

Steel Refineries Cement

IVL |

EU ETS emissions & prices

EU PROCESSES & MISTRA CARBON EXIT

80,000,000

100,000,000

120,000,000

140,000,000

160,000,000

180,000,000

200,000,000

2005GHG

2006GHG

2007GHG

2008GHG

2009GHG

2010GHG

2011GHG

2012GHG

2013GHG

2014GHG

2015GHG

2016GHG

2017GHG

2018GHG

EU ETS - large industrial GHG emissions

Steel Refineries Cement

0

10,000,000

20,000,000

30,000,000

40,000,000

50,000,000

60,000,000

70,000,000

2005GHG

2006GHG

2007GHG

2008GHG

2009GHG

2010GHG

2011GHG

2012GHG

2013GHG

2014GHG

2015GHG

2016GHG

2017GHG

2018GHG

EU ETS - smaller industrial GHG emissions

Inorganic chemicals Organic chemicals Aluminium Lime Pulp

IVL |

Mid-term efficiency vs long-term radical transformation: the last 10-15% makes all the differenceParis Agreement: everything changes, moreurgency, 80-95% GHG emissions reduction range:more people starting to look at the higher number

What does this new reality mean for carbonpricing?

EU PROCESSES & MISTRA CARBON EXIT

IVL |

The future role for carbon pricing: supporting and managing interactions between numerous climate policies?

What does a carbon price signal do? Disincentives vs incentives Long-term industrial decarbonisation requires breakthrough technology Abatement costs & carbon prices are always set to change (depend on time

horizon, changes in capital stock) Technology needed at scale to bring down costs through learning, also

requires a market for low-carbon products – otherwise no investment case Does the ETS price help you get H2-based steel-making or cement

production with carbon capture and storage?

EU PROCESSES & MISTRA CARBON EXIT

IVL |

Challenges of deep decarbonisationCould high prices at first, lower prices later be realistic or desirable?Everyone needs abundant, cheap low-carbon electricity, but electricity

generators need to make money (wholesale?)Low-carbon basic materials may be a lot more expensive, but the share

of final product prices can be tiny Circular economy and demand reduction can help if carbon prices push

up costs, but do shrinking markets help with investment? (specialisation)Interactions and integration between sectors facing different (carbon)

policy regimes continue to grow

EU PROCESSES & MISTRA CARBON EXIT

IVL |

Market failure & political economyETS based on classical economic efficiency & a Coasean framework that underestimates transaction costsMarket failures/imperfections:

• Principal agent problems• Economies of scale• Incomplete markets• Network externalities• Innovation externalities• Information asymmetry

EU PROCESSES & MISTRA CARBON EXIT

Political economy:• Pigouvian outcome through

Coasean tools?• Collective action problems• Credible commitment• Distribution: concentrating costs

while diffusing benefits

Thank you@ milan.elkerbout@ivl.se Twitter: @MilanElkerbout

IVL |

Backup: EU Long-term Strategy

EU PROCESSES & MISTRA CARBON EXIT

IVL |

Backup: ETS Reform, revision, revival? 2012: backloading – ad-hoc supply management 2015: Market Stability Reserve – structural supply management 2015: start of Phase IV rulebook discussion – competitiveness! 2017: Phase 4 revision: some tighter free allocation

But also: MSR made stronger, dynamic cap adjustments

2018-19: long-term strategy update: net-zero?

EU PROCESSES & MISTRA CARBON EXIT