Views on post-2020 carbon-leakage criteria

Views on post-2020 carbon leakage criteria

Bram Borkent

02/07/2015

© ECOFYS | |

Storyline

> The need to improve the current Carbon Leakage framework

> Ways forward:

– Vivid / Ecofys report for DECC 2013

– Leaked ETS impact assessment

– Leaked draft ETS Directive

– “Neelis proposal”

02/07/2015 Bram Borkent2

https://www.gov.uk/government/publications/carbon-leakage-prospects-under-phase-iii-of-the-eu-ets-and-beyond

http://www.ecofys.com/en/blog/a-simpler-and-more-robust-free-allocation-in-the-eu-ets-post-2020/

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Factors affecting Carbon costs and Carbon leakage in

post-2020 ETS


Post-2020 ETS design

Compensation for

direct emissions

Compensation for

indirect emissions

Benchmarks:

- Stringency of benchmarks/best performers- Amount of product benchmarks

Carbon Leakage list:

- Choice and combination of criteria- Eligibility thresholds

- Design of assistance level (progressive or not)- Separate or integrated treatment of indirect costs?

Activity levels: current or dynamic

Height of industry cap

© ECOFYS | |

The carbon leakage criteria today

Two quantitative criteria used:

> Carbon cost intensity =

> Trade intensity =

In addition, qualitative criteria can be used e.g. abatement potential, market

characteristics, impact on profit margins.


Export value + Import value

Annual turnover + Import value

(Direct emissions x auctioning factor + Indirect emissions) x CO2 price

Gross Value Added

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Quantitative criteria are used stand alone and in

combination


Source: Ecofys

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Current criteria put all large sectors on the list


Source: Ecofys

© ECOFYS | |

Largest sectors below thresholds are added based on

qualitative arguments: bricks & tiles, industrial gases


Source: Ecofys

© ECOFYS | |

> Top-26 most emitting sectors are all or partially on the carbon leakage list

Consequences:

> High administrative costs to exclude just 3-4% of emissions from CL

compensation

> Best performers suffer from undue carbon costs resulting from cross-

sectoral correction factor

As a result, current Carbon Leakage list is unfocused:

97% of industrial emissions is on the list


62%18%

15%

1%4%

Eligibility for carbon leakage list

Combined criteria

Carbon intensity only

Trade intensity only

Qualitative

Not on listSource: Ecofys

© ECOFYS | |

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Focusing the list may not be easy

8 largest sectors > 80% of industrial emissions


Source: Ecofys

© ECOFYS | |

Proposals on the table to improve the CL policy

> Ecofys / Vivid recommendations 2013

> Leaked ETS impact assessment

> Leaked ETS Directive (received: 01 July 2015)

> “Neelis proposal”


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Vivid / Ecofys recommendations from 2013

> Revoke the trade-only intensity; always assess in combination with carbon

cost

> Use carbon price closer to the future carbon price

> Improve sources for carbon cost (NACE identification, indirect emissions)

> Align scope of emissions (ETS) and GVA (ETS & non-ETS) in carbon cost

intensity

> Use market rather than administrative boundaries set by Eurostat

> Include carbon intensity of trading partners

> Use marginal emission factor for indirect cost


© ECOFYS | |

Leaked ETS impact assessment

> Ten year trading period (2021 – 2030)

> CL list options:

– Same treatment for all (e.g. 90%)

– Two groups (combination of current criteria, slightly adapted thresholds)

– Four groups (based on combination of current criteria:

● Very high = 100%

● High = 80%

● Med = 60%

● Low = 30%

> Critique: Thresholds and level of compensations not clearly justified


© ECOFYS | |

Leaked ETS Directive shows minor changes

Changes

> Carbon cost intensity criterion emission intensity

> Only assessed in combination: Trade intensity x emission intensity > 0.2

> No qualitative assessment criteria

> No exclusion of trade with countries with comparable efforts

> Compulsory financial compensation for indirect emissions

No changes

> Black-white approach

– 100% for exposed sectors, 30% for non-exposed

> Capped allocation (auctioning share = 57%) and thus need for cross-

sectoral correction factor

> Compensation for indirect via state aid rules

> No cost pass-through taken into account


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Leaked ETS Directive – other changes

> Updated benchmark levels:

– Default :-1.0% per year

– If proven: +/- 0.5% per year

> NER filled with 250 million from MSR + unallocated allowances ?

> 400 million + 50 million from MSR for industrial innovation


© ECOFYS | |

Impact of leaked EC Directive on Carbon Leakage list

composition

> Preliminary analysis`:

– Much shorter list (50 sectors vs 152 now),

– with no increased admin costs, but …

– 94% of industrial emissions on the list

> Open questions:

– Impact of cross-sectoral correction factor

– Exclusion of countries with comparable climate action in trade intensity


© ECOFYS | |

Out of the box proposal (Maarten Neelis)

> High-level concept for a more focused and simpler ETS

1. Focus CL list on emission-intensive, low value added basic materials

2. CL list defined at product rather than sectoral level

3. Extend product benchmarks to all products on the list

4. Get rid of fuel and heat benchmarks

5. Apply a more dynamic allocation methodology

6. Cover compensation for indirect in a similar manner

For more details: http://www.ecofys.com/en/blog/a-simpler-and-more-robust-

free-allocation-in-the-eu-ets-post-2020/


http://www.ecofys.com/en/blog/a-simpler-and-more-robust-free-allocation-in-the-eu-ets-post-2020/

© ECOFYS | |

Conclusions

> Draft ETS proposal shows minor changes, with some simplifications, but no

structural improvements

– Updated benchmarks

– Obligation to compensate indirect emissions via state aid

– Symmetric NER (give-and-take) possibly based on production changes

instead of capacity changes

– Large coverage CL list > large impact of CSCF

– No regularly updated activity levels

– Current issues associated with definition of CL criteria seem to persist


© ECOFYS | |

For more information, please contact

> Bram Borkent, Ph.D.

Market-based Mechanisms

[email protected]

Ecofys

Kanaalweg 15-G

3526 KL Utrecht

The Netherlands

www.ecofys.com


mailto:[email protected]

http://www.ecofys.com/en/home/

Views on post-2020 carbon-leakage criteria

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