Examining the Environmental Impact of EU-ETS Examining the Environmental Impact of European Union Emissions Trading Scheme (EU-ETS) - an Input Output Approach LAWAN Usman Ali CEPMLP – University of Dundee Lawan Usman Ali, CEPMLP - University of Dundee

Examining the Environmental Impact of EU-ETS Outline 1 Introduction 2 EU–15 Annual Carbon Emissions by Sector 3 Kyoto Protocol and the EU Emissions Target 4 EU–ETS : Mechanism and Operations 5 6 Methodology : The Input – Output Model 7 Results and Interpretation 8 EU-15 Energy & CO2 Intensity 9 Environmental Impacts 10 Conclusion Comments & Questions Examining the Environmental Impact of EU ETS: an Input Output Approach - Lawan Usman Ali Lawan Usman Ali, CEPMLP - University of Dundee

Examining the Environmental Impact of EU-ETS Introduction Global warming is defined as an increase in the Earth’s temperature and is triggered by a rise in greenhouse gas emissions. Most of the world’s emissions are attributed to mankind’s large scale use of fossil fuels Burning fuels such as Coal, Natural Gas, & Oil Produces GHGs to the atmosphere in excess amount. Leading to Climate Change manifestation – Increase harsh weather conditions, damaging storms, drought & other Global Warming Effects that cause increase economic & health problems for both man & animals Examining the Environmental Impact of EU ETS: an Input Output Approach - Lawan Usman Ali Lawan Usman Ali, CEPMLP - University of Dundee

EU – 15 Annual Carbon Emission by Sector Fig. 1: EU – 15 GHGs Emissions by Sector (2008) Fig. 2: EU – 15 GHGs Emissions by Gas Type (2008) Data Source: European Environment Agency (EEA) Data Source: European Environment Agency (EEA) The greenhouse gas most commonly produced by our activities is carbon dioxide (CO2) & is responsible for 63% of man-made global warming. In 2008, CO2 emissions was responsible for 83% of GHGs Emissions in the EU–15 while Methane, Nitrous Oxide & Others recorded the balance 8%, 7% & 2% respectively In 2008, Energy Sector is the highest emitter of GHGs with 28%. Followed by Transport 21% while Manufacturing, Agriculture and Industries have 13%, 10% and 7% respectively. Waste had 3% & Others 17%. Examining the Environmental Impact of EU ETS: an Input Output Approach - Lawan Usman Ali

The EU Kyoto Targets Kyoto Target: - The EU 15 member states has a Kyoto target to reduce their GHGs emissions by 8% in the period 2008-2012 compared to its base year (1990) level. Fig. 3: Trends in EU GHGs Emissions Compared to 1990/Base Yr EU-15 Total GHGs Emissions 1990 2009 Emission Reduction (1990-2009) Agriculture 441.171 378.864 -14.123095 Energy 1167.319 1061.136 -9.0963139 Industries 352.882 250.285 -29.074025 Manufact & Const 635.828 453.142 -28.731984 Transport 693.74 809.987 16.7565659 Waste 183.67 112.411 -38.7973 Others 790.301 657.889 -16.754629 Total Emissions 4264.911 3723.714 -12.689526 The emission level in the 'base year' is the starting point for tracking progress of domestic emissions for EU-15. The base year is a calculated emission level from which emission reductions will take place (4,247,409). In practice, EU-15 base-year emissions can be considered close to 1990 emissions. The EU-27 does not have a Kyoto target. Data Source: European Environmental Agency (EEA) Examining the Environmental Impact of EU ETS: an Input Output Approach - Lawan Usman Ali

EU – ETS : Mechanism and Operations Emissions trading: - market based scheme for environmental improvement that allows parties to buy and sell permits for emissions or credits for reductions. EU Emissions Trading Scheme: - The EU ETS was launched in 2005 and is the EU's climate change policy tool which helps industries to cut their CO2 emissions. The EU ETS is considered a central instrument for reaching the EU-15 target under the Kyoto Protocol. Under the scheme, large emitters of CO2 are under an obligation to report their annual CO2 emission and to return an amount of emission allowance that is equivalent to their CO2 emission in that year. On the other hand, if an emitter is able to reduce its CO2 emissions then it is allowed to sell its emission credit and make a profit. The EU ETS currently covers more than 10,000 installations with a net heat excess of 20 MW in the energy and industrial sectors which are collectively responsible for close to half of the EU's emissions of CO2 and 40% of its total greenhouse gas emissions. The EU ETS aims to promote reductions of GHGs emissions in a cost-effective and economically efficient manner. The system operates through the allocation and trading of greenhouse gas emission allowances throughout the EU. One allowance represents one tonne of carbon dioxide equivalent. Examining the Environmental Impact of EU ETS: an Input Output Approach - Lawan Usman Ali

EU - ETS Con’t Mechanism: - The trading mechanism consists of matching emission buyers and sellers and then settling them by depositing a valid allowance in exchange for the agreed financial consideration. Just like the Stock Market, Companies and individuals can trade using brokers who are listed on the exchange. Allocation: - Free Allocation: An overall 'cap', is set by each Member State on the total amount of emissions allowed from the installations covered by the system. The allowances are then distributed by Member States to the installations in the system. Auctioning: From 2013 emission allowances will be traded on a common auction platform, this will replace the free allocation of allowances generally followed in the first (2005-2007) and second (2008-2012) trading periods. Pricing: - The actual carbon price is determined by market fundamentals – i.e too many allowances will result in a low carbon price and Vice Versa. For Instance, the average price of carbon was €22/tCO2 in the second half of 2008 but decreased to €13/tCO2 in the first half of 2009. EU – ETS Mechanism & Operations Examining the Environmental Impact of EU ETS: an Input Output Approach - Lawan Usman Ali

EU - ETS Con’t Examining the Environmental Impact of EU ETS: an Input Output Approach - Lawan Usman Ali

EU - ETS Con’t EU ETS PHASE Level of the cap Coverage Allocation rules Auctioning Kyoto credits Phase1 (2005-2007) Sum of caps in each country’s NAP based on negotiating processes between Member State governments and the European Commission playing the role of “enforcer of scarcity”. • CO2 only • Power stations, ferrous metals production, cement, refineries, pulp and paper, glass and ceramics, and all combustion facilities >20MW and some opt-outs • 42% of the European emission At discretion of Members States but there is common characteristics: • Auctioning is little used • Strong reliance on recent historical emissions • Expected shortage is allocated to the power sector • New entrant/closure provisions is made Maximum 5%, (only 4 Member States used auctioning, mostly to cover Administration costs) CDM and JI allowed excluding land use. Member States set caps on how many allowances can be imported Phase 2 (2008-2012) country’s NAP aimed at respecting Kyoto targets and governed by European Commission “anti-subsidy” rulings that prevent allocation exceeding. • CO2 with some N2O emitting facilities opt-in • Sectors: As of phase 1 without opt-outs. Some combustion facilities below 20 MW opt-in • Air travelling is proposed for inclusion in 2011 or 2012. • Possibly the maritime emissions related At discretion of Members States but there is common characteristics: • Strong reliance on recent historical emissions • New entrant/closure provisions benchmarked Maximum 13.4% (UK: 7%, Germany: 8.8%) As of phase 1 Phase 3 (2013-2020) Cap calculated for Europe as a whole decreasing by 1.74%/yr from phase 2 average annual allowances starting in 2010 and aimed to deliver 21% emission reduction in 2020 compared to 2005 level and continue thereafter at the same rate with a review in 2025 • CO2, nitrous oxide for acid production and PFCs for aluminium • Additional sectors: non-ferrous metals, rock wool, gypsum, various chemicals, CCS related emissions • Combustion facilities above 20MW with harmonized rules and derogations below 25MW • Fully harmonised across Member States • No free allocation for power generators • 80% free allocation for other sectors in 2013 declining to zero in 2020 unless identified as exposed to carbon leakage • 5% of the allocations set aside for new entrants 90% of the total allowances Auctioned revenue is given to countries in proportion to their verified 2005 emissions. The final 10% is redistributed according to GDP per capita. • No international agreement: CER/ERU banking from phase 2 under phase 2 qualifying rules • International agreement: New CER/ERU authorized limited to gap half of the effort between the 20% European objective of reduction and the 30% objective. Examining the Environmental Impact of EU ETS: an Input Output Approach - Lawan Usman Ali

Methodology : The Input – Output Model The input-output analysis was first devised by Wassily Leontief in 1936 to describe how industries are interrelated through producing and consuming intermediate industry outputs in an economy. In matrix notation, the basic equation is 𝔁 = 𝜜𝔁 + 𝛄 Eq. (1) Where: 𝔁 = the total output required 𝛄 = the final demand/consumption 𝚨 = the matrix of technological coefficient, that represent the input required by another sector to produce its monetary output. Thus, 𝚨𝔁 = the n-vector of intermediate demand. An environmental extension of the basic IO model can be obtained by introducing a q×m matrix B to show the amount of pollutants emitted to produce one unit output of each industry. M = B(𝚰 − 𝚨)-1 𝛄 Eq. (3) Where: M = the multiplier matrix which shows the total direct and indirect pollutants intensity of each sector. 𝓍 is given by solving Eq. (1): 𝔁 =(𝚰 − 𝚨)-1 𝛄 Eq. (2) Where: Ι denotes the m×m matrix & (𝚰 − 𝚨)-1 = the Leontief inverse The variation of physical units of energy and CO2 equivalent in final demand is: m = M 𝛄 Eq. (5) m = total environmental impact produced by the change in the final demand. Examining the Environmental Impact of EU ETS: an Input Output Approach - Lawan Usman Ali

Methodology & Data Preparation The price rises resulting from carbon emission trading are given by: P = 𝝁u Eq. (4) Where: u = the energy-related CO2 intensities μ = the carbon price on CO2 emissions P = n-vector with the derived carbon price rate on the goods produced. Data Preparation Following the information provided by Eurostat’s ESA 95 input-output tables, the study analyse 22 producing sectors and six types of fossil fuels (Lignite, Peat, Lignite Coke, Natural Gas, Liquid Fuels and Diesel Oil) in the EU-15 member countries. Figures refer to the year 2005 input-output table and corresponding emission data available for all 15 countries. Primary energy-use by input-output sector referring to 2005, used in the data base is derived from ESDS/IEA beyond 20/20 web data set (2010 Edition). The ratio of CO2 emissions to fuel use by sector are easily obtained by dividing the amount of fossil fuel use by the carbon emission from each sector. Examining the Environmental Impact of EU ETS: an Input Output Approach - Lawan Usman Ali

EU 15 Energy and CO2 Intensity CO2 Emissions Intensities by IO sectors and fuel sources. Examining the Environmental Impact of EU ETS: an Input Output Approach - Lawan Usman Ali

Environmental Impact of the EU ETS Price Effect & Environmental Impact of Emissions Trading on the EU 15 Economic Sectors Examining the Environmental Impact of EU ETS: an Input Output Approach - Lawan Usman Ali

EU – 15 Gap to Kyoto Target Source: EEA Report – Tracking Progress Towards Kyoto & 2020 Targets in Europe Examining the Environmental Impact of EU ETS: an Input Output Approach - Lawan Usman Ali

Conclusion The study suggests a number of policy adjustments for future EU climate change policy. Future policy actions should avoid focusing on the actual CO2 emitters but instead adopt strategies that help modify the behaviour of those responsible for CO2 emissions. Governments must therefore reach their Kyoto targets through emission reductions from policies and measures addressing the sectors not covered by the EU ETS and/or through flexible mechanisms. The results also signify the need to improve the overall efficiency of the EU energy system, and not only focus on the actual CO2 emitters. Examining the Environmental Impact of EU ETS: an Input Output Approach - Lawan Usman Ali

Comments & Questions: Examining the Environmental Impact of EU ETS: an Input Output Approach - Lawan Usman Ali