Climate change policy as today’s driver for energy policy IFIEC Europe’s suggestions for EU ETS post 2012 AEM XI. Autumn Conference, Prague 11 September 2008 Hans Grünfeld President IFIEC Europe

Ingredients effective CO 2 policies Unconstraint CO 2 - emission growth scenario Sustainable Emission growth scenario CO 2 -emission Cap CO 2 -inefficient production CO 2 -efficient production Emission volume =100+X X Strong carbon price signal Emission volume =100+X Global agreement Efficiency improvement Fuel shift Innovation Global emission reduction

3 Auctioning is the costly way High ETS cost causes threat of carbon leakage Auctioning causes high ETS costs – direct & indirect through electricity No signal from major players (India/China/US) to accept auctioning as general method Auctioning in EU alone therefore too big risk, because it:  distracts financial resources from industry for making investments  causes carbon leakage  delays global agreement: auctioning in EU = cost advantage abroad / global auctioning = cost advantage of efficient EU over USA, China, India IFIEC method – benchmarking based on actual production – would be the better way!

4 Benchmarks for the major emitters  Total quantity of allowances is the same as under auctioning  Same guarantee of the total cap  For allocation: what activity level – production – to be used?  Historic production ( or )  means auctioning for growth and suppresses market share growth of innovative producers  What about low production in new Member States?  New entrants reserve: very cumbersome  thresholds suppress efficient growth by debottlenecking, anyway uncertainty for growth  Closure rule: Principle is wrong: -100% is loss of allowances, -x% no consequence! Practice is: often more plants on a site  no loss of allowances  Ecofys study and also Court of First Instance refuted Commission‘s worry that “ex-post adjustments would create uncertainty for operators, and be detrimental to investment decisions [to reduce emissions] and the trading market”  Actual production: allowed & effective, minimising leakage Intelligent Benchmarking is the better way

Impact carbon pricing methods AuctioningIFIEC-method CO 2 -inefficient production CO 2 -efficient production CO 2 -allowances Efficiency benefit CO 2 -inefficient production Benchmark Auctioning and IFIEC-method have identical CO 2 -efficiency incentive, at very different costs Benchmark Findings of ECOFYS study on the IFIEC method, April 2008

Cost saving potential IFIEC method Total EU-27 consumers IFIEC method vs auctioning applied to electricity costs (€ bn/a)* Households & services Industry * CO 2 -price € 40-60/tonne Findings of ECOFYS study on the IFIEC method, April 2008 Such cost savings resulting from a power price lower by 20 to 30 €/MWh as compared to auctioning

Carbon pricing and risk leakage Source: Carbon Trust € 40-60/tonne CO 2 price under auctioning causes considerable leakage problems

Impact of cost difference Leakage threatens realisation of prime CO 2 policy objectives with auctioning with IFIEC- method Fossil fuel replaced by RES acc. to EU 20 % target (separate support) JI/CDM remainder from 2 nd trading period Carbon leakage CO 2 emissions to be reduced until 2020 Fossil fuel replaced by RES acc. to EU 20 % target (separate support) JI/CDM remainder from 2 nd trading period Efficiency improvement, fuel shift, innovation Carbon leakage

IFIEC-method and cap Projected production scenario Benchmark Emission reduction objective secured through adjusting benchmarks Cap Actual production growth t1t1 t2t2 t3t3 t0t0 Source: Ecofys Overall emission reduction objective

… and international agreement Different benchmark paths provide flexible approach towards global level playing field t1t1 t2t2 t3t3 t0t0 EUUSChina Transition period towards global level playing field t4t4

IFIEC proposition PowerTo avoid unnecessarily high power costs: Free allocation based on benchmarks and actual production Industry Effective carbon price signal which minimises risk of carbon leakage Free allocation based on benchmarks and actual production Compensate for high power prices: Indirect allocation and allocation to CHP  allowances for indirect emissions from electricity use in addition to allocation of direct emissions to industry (from auction volume to power)  based on electricity benchmark (1)that gives fair compensation of the ETS‘ power price effect (2)that is incorporated in product benchmarks to set incentive for efficient electricity use (3)that maintains effectiveness of the scheme or

Summary: Benchmarking method   Aims at core business of worldwide manufacturing operations   Allocates allowances ex-post, based on actual production with efficiency correction – –Transparent – –Fair – –No externalities   Provides flexible instrument for application under uncertainty conditions