Roundtable: Opportunities with climate policy development in China Theory & lessons learned from the EU ETS in practice Roundtable organised by the Ministry of Infrastructure and Environment, The Hague, 25 June 2012 Vianney Schyns, Utility Support Group 1

1.Chinese ETS – questions about support 2.Theory: absolute or relative or “hybrid” 3.The EU ETS regulatory framework 4.What were the purposes of free allocation? 5.What about these purposes – needed changes 6.Some references 2 Contents

USG (for a.o. DSM, SABIC, OCI) finds the emergence of a successful Chinese ETS of high importance – level playing field – sustainability EU ETS long-term –China is the biggest emitter, with high growth –No BRIC ETS was the argument for inaction in USA (Canada) –Chinese ETS may be the key for a successful COP-21 result Some USG action –Contacts (high level) about EU ETS experiences, about the theories of a robust and effective ETS (studies discussed, send to Beijing) –USG is invited to speak on BIT's 1st Annual World Congress of Greentech, Guangzhou, October Chinese ETS – questions about support (1)

Dutch support is important –We have (with Flanders) most experience with benchmarks, played important role in making EU ETS benchmarks, leading role of Ecofys –Other important issues in China: MRV (can we support here, NEa above average level) Market liberalisation, especially for electricity Support for the best possible theoretical ETS framework –Difficulty: agreement of experts unlikely within short notice –So: let the Chinese decide based on argumentation But, let us not forget India, Brazil, etc Chinese ETS – questions about support (2)

Most difficult subject, try to analyse via “elimination” Level 1: absolute gives certainty of environmental outcome, relative does not; expressed often, by e.g. –Koutstaal c.s. (CATEP, 2002), EU Commission e.g. Decision (2003) on Dutch NOx ETS, EU ETS Directive demands “absolute” for linking (but: position is softening) –However “absolute” is no guarantee, some targets “can’t be done”: Who could have foreseen the immense Chinese growth 10 years ago? If absolute would be guarantee: why not set -85% for 2020, or for 2025? –Canada (2007): “World Resources Institute noted in a 2006 report, ‘for environmental performance, what matters overall is that targets are set at reasonably stringent levels and subsequently are met. This may be achieved with absolute or intensity targets.’” 5 2. Theory: absolute or relative or “hybrid” (1)

Level 1: absolute gives no certainty of outcome –Illusion: supply-demand balance predictable for e.g. 10 years ahead –Will Europe recover from the crisis? Or remain depressed for 10 years? (like Japan, for a long time and may be still) 6 2. Theory: absolute or relative or “hybrid” (2)

Level 2: carbon price signal – carbon leakage – windfalls –Climate Strategies / Carbon Trust, Öko-Institut and others incl. Koutstaal and RUG: actual production is solution to avoid carbon leakage, but not acceptable because of loss of carbon price signal (meant: product carbon price signal), “with relative caps product prices are inefficient” (Koutstaal) – price elasticity of demand –However: avoidance of carbon leakage and avoidance of possibility of windfall profits (ref. CE Delft) and maintenance of product carbon price signal are conflicting objectives Leakage >> elasticity profit (Carbon Trust) Leakage is anyway inefficient and total loss for the environment 7 2. Theory: absolute or relative or “hybrid” (3)

Level 3: combining absolute with relative, one ‘hybrid” –Not studied very much, but by Carolyn Fischer (Resources of the Future), Philippe Quirion (CIRED a.o.), Loske / Schyns –“Ex-post” with guarantee of total cap is easy in present EU ETS: New entrants’ reserve (NER) can absorb growth, allowances to flow back if production is lower than assumed NER to be refilled from action volume, if depleted However, EU ETS cap > 2020 is problem in case of no global ETS by 2020 Level 3: another “hybrid”, with “Carbon Bank(s)” –Waxman-Markey idea: large strategic reserve, with price collar –Addresses long-term supply-demand uncertainty, avoids lock-ins 8 2. Theory: absolute or relative or “hybrid” (4)

Summary problems with EU ETS ex-ante allocation –Possibility of windfall profits –Over-supply during crisis (EU ETS only commodity market without supply response) – set-aside is questionable & no structural solution –Incentive for production carbon leakage (49%, partial cessation rules) –Under-allocation: major barriers and risks for growth, likelihood of investment carbon leakage Wide agreement on ideal system long-term –Auctioning, but then also global rules: what (not) to do with revenues –Probably also: some supply response – e.g. with carbon banks –Global cap – same ETS coverage – one single carbon price 9 2. Theory: absolute or relative or “hybrid” (5)

EU ETS Directive of 2003 –Revised, 23 April 2009 (OJ 5 June 2009), legally binding Commission Decision on Benchmarks and Allocation Rules –Comitology, adopted 27 April 2011, legally binding (the “CIMs” *) Guidance Documents on Benchmarks and Allocation Rules –Adopted 14 April 2011 and later, not legally binding –(1) General guidance, (2) allocation methodologies, (3) data collection, (4) verification NIMs baseline data reports, (5) carbon leakage, (6) cross boundary heat flows, (7) new entrants / closure rules, (8) waste gases, (9) sector specific guidance, PLUS guidance methodology report + Q&As (together 500+ pages) *) CIMs: Community-wide and fully-harmonised Implementation Measures The EU ETS regulatory framework

Globally –Avoid carbon leakage (e.g. recital 24, statement Barroso, EP, Council) Production leakage (lower production, import product & unemployment) Investment leakage –Protect competitiveness as good as possible (recital 25, Tajani) Europe (EU-27 plus Norway etc.): avoid distortions –“Harmonised ETS is imperative to avoid distortions in the internal market” (recital 8) through “Community-wide and fully-harmonised implementing measures” (Art. 10a(1)) –Environmental effectiveness (recital 20 old, Art. 1, Art. 10a, etc.), away from historical grandfathering What were the purposes of free allocation?

Avoid carbon leakage, protect competitiveness, support Europe 2020 Strategy for growth and jobs Ex-ante incentive to 49% lower production; should move to ex-post, eliminates barriers & risks for growth, creates recession-proof system NER limited (sufficient for 1.2% annual growth), should move to refill from auction volume if depleted and be defined also for after 2020 Unstable, unpredictable financial compensation, should move to indirect allocation, complementary to direct allocation Stringent top 10% immediately in 2013, should move to top 10% for 2025 or 2030 (‘sliding path’ allocation) Carbon Leakage List: assessments each 5 years, should move to: industry “exposed” by default (comparison EU ETS with ETSs outside EU) Abandon correction factors on allocation (“LRF”, “CSF”, “CLEF”) Abandon Guidance Docs, move to legally binding rules, simplify rules What about these purposes – needed changes

“Climate change challenges and the search for a sustainable policy”, Schyns (2005), a.o. about absolute or relative targets “The IFIEC method for the allocation of CO 2 allowances in the EU Emissions Trading Scheme”, by Ecofys (2008) Trilogy Study: “The benefits and feasibility of an ETS based on benchmarks and actual production”, Loske / Schyns (2008), about ensuring the cap in an intensity based scheme & about carbon leakage, possible windfall profits and the product- and the production carbon price signal “A reality check of the EU Emissions Trading Scheme; Does it allow growth – the major objective of the EU industry policy?”, Brouwers / Stalmans / Schyns (2012), a detailed analysis of CIMs & Guidance Documents: major barriers & risks for growth Some References