1. IFIEC EUROPE – International Federation of Industrial Energy Consumers The way forward to a more efficient and effective EU-ETS IFIEC Europe‘s views Brussels, April 17 th 2008

2. IFIEC EUROPE – International Federation of Industrial Energy Consumers Lessons from the ECOFYS report:  Not just the alternative: Windfall Profits or Auctioning  But: Free allocation is possible without windfall profits! With the IFIEC method: Achieving the reduction targets by setting same low-carbon incentives By guaranteeing the total cap Thus reaching same CO 2 -price level Setting necessary price signal for evaluating investments in efficiency improvements Avoiding carbon leakage At significantly lower costs for all consumers With the windfall profits problem completely solved Avoiding knowledge, job and wealth leakage Economical Efficiency Climate Policy Effective- ness 2

3. IFIEC EUROPE – International Federation of Industrial Energy Consumers Economical Efficiency 3 Small adaptation of current system – actual but not historical production level is what counts – allows to limit the price effect to the costs for abatement requirements For the power price that makes a huge difference: Power price with IFIEC method Power price uplift by auctioning  Possible cost savings: For all consumers:€55 bn/yr Thereof for industry:€23 bn/yr 20,60 €/MWh

4. IFIEC EUROPE – International Federation of Industrial Energy Consumers Economical Efficiency 4 Solving the windfall profits problem with auctioning? Extra cost for all consumers auctioning vs. IFIEC method Thereof windfall profits for nuclear power  Windfall profit problem only partly solved by auctioning  Windfall profit problem solved completely by IFIEC method  Effect of auctioning for the functioning of the electricity market: Huge funds in the hands of a small group of large generators for further consolidating the market CO 2 -price 40 €/t, Benchmark 0.515

5. IFIEC EUROPE – International Federation of Industrial Energy Consumers Effect of lower electricity price in the IFIEC method on households – assessment of a trade-off Households save electricity costs of € 32 bn / yr*  Households will use more electricity and save less CO 2  But: households‘ electricity consumption is very price inelastic  Assumption: 10 % price increase leads to 1 % less consumption  That means: With IFIEC method 7.7 Mt CO 2 not saved Targeted reduction measures for households at realistic 40 €/t CO 2 would cost € 308 Mio = about 1 % of the cost saved in households *) Assumption: CO 2 -price 40 €/t, Benchmark 0.515 Economical Efficiency 5

6. IFIEC EUROPE – International Federation of Industrial Energy Consumers Ecological Effectiveness 6 For an investment decision the possible cost advantage reached through an efficiency improvement is what counts  In auctioning: - having to buy less  In IFIEC-method:- having to buy less, and/or - having something to sell  Two calculations with identical outcome !  The underlying, additional costs for auctioning do not change this calculation!  Same low-carbon investment incentives ! But is an investment really equally realistic in both systems???

7. IFIEC EUROPE – International Federation of Industrial Energy Consumers High auctioning cost basis is distracting financial means from industry for making investments makes other global locations much more attractive  Auctioning is stimulating relocation of production Relocation of production means: Carbon leakage Job leakage Knowledge leakage Wealth leakage Ecological Effectiveness 7 The option of relocation means: Auctioning makes investments less realistic

8. IFIEC EUROPE – International Federation of Industrial Energy Consumers Ecological Effectiveness 8 What does carbon leakage mean to the CO 2 reduction target achievement? CO 2 emissions to be reduced until 2020 How to reach the target? with auctioning with IFIEC- method Fossil fuel replaced by RES acc. to EU 20 % target (separate support) Fossil fuel replaced by RES acc. to EU 20 % target (separate support) JI/CDM remainder from 2 nd trading period Carbon leakage Further efficiency improvement, fuel shift, innovation CO 2 emissions to be reduced until 2020

9. IFIEC EUROPE – International Federation of Industrial Energy Consumers Ecological Effectiveness What does carbon leakage mean to the CO 2 reduction target achievement?  More carbon leakage results in lower incentives for efficiency improvement, fuel shift and innovation  Lowering production is not a positive measure  Real carbon efficiency improvements are  EU industry wants to contribute to high CO 2 -reductions within the EU 9

10. IFIEC EUROPE – International Federation of Industrial Energy Consumers 10 Allow EU Industry to remain the global low-carbon leader ! Develop EU-ETS in a way that  Reaches the challenging targets at reasonable cost  Saving € 20-80 bn of costs to consumers annually  Cuts windfall profits of fossil fuel generation plus up to €30 bn annual windfall profits also of nuclear power producers  Builds on efficiency improvements and innovative technologies rather than on lowering production  Counts on the high quality contributions of EU industry within the EU  The IFIEC method can provide for that! Can the EU afford to ignore an option for EU-ETS which delivers the same CO 2 reductions by setting equal incentives for low- carbon technologies, but at significantly lower costs for all electricity consumers?