WG1/2 27 th April 2007 CCA23 lessons learned in M3 in the glass sector –Analysis of pass/fail scenarios in M3 –What should be a ‘Satisfactory Outcome’? –Result after CCA23 CCA target changes Tonnes CO2 taken/given –What Actually Happened –Analysis of CCA23 Situation –A Way Forward Prepared by John Stockdale & Jenni Staves British Glass

5 out of the 13 were in EUETS Ph1 Only 4 survived to M3 Fail: Fail Fail: Pass Pass: Fail Pass: Pass EUETS CCA No. of cases 2011

Summary of Glass Sector Double Counting in 2006 Analysis of total of 13 EUETS installations Fail: Fail Fail: Pass Pass: Fail Pass: Pass EUETS CCA No. of cases %

SectorNo of TUs involved in Double Counting TUs in either fail – pass or pass-fail situation (36/114) Aerospace4 ? Cement4 ? Ceramics - non-fletton13 6 Chemicals49 14 Dairy Industry7 1 Food & Drink16 7 Glass4 1 Lime3 ? Malting3 ? Motor Manufacturers12 3 Steel4 2 Textiles3 2 Wood Panel4 0 All sectors with fewer than 3 TUs15 ? Of the sectors for which there was information, over 30% of opted in TUs ended up with mixed P/F results. What would have been the ratio for all EUETS eligible TUs? How many mixed results in M3 double counting participants?

What is a satisfactory outcome? DEFRA draft review paragraph 3: “It was necessary to avoid the situation where the TU would be able to benefit from a surplus arising from the same emission reduction in both schemes, or alternatively be penalised in both schemes to cover the same shortfall. CCA23, and a subsequent addendum for CHP, describe the methodology that was used to avoid this double counting of emissions for TP3.” Because of potential for mixed outcomes glass suggestion for a better approach was: CCA23 method prevents a company from double trading without changing the CCA pass/fail outcome. Contained a “logic” step. Other industry methodologies also aimed at reducing extremes.

Co. EUETSEUETS CCACCA CCA23CCA23 Effect of DEFRA Double Counting in 2006 All EU ETS companies * Those in EUETS & applying CCA23 in M3 Conclusion: DEFRA: 13 satisfactory Glass: 4 satisfactory 1* →Not penalised twice but not pushed into a CCA passSatisfactory 2 →Not penalised twice but not pushed into a CCA passSatisfactory 3* →Not penalised twice but not pushed into a CCA passSatisfactory 4 → Could never double trade but can now ringfence more greatlyUnsatisfactory 5 → Could never double trade but can now ringfence more greatlyUnsatisfactory 6 → Could never double trade but can now ringfence more greatlyUnsatisfactory 7 →Could never double trade but now forced to buy yet more CO2 to be CCA compliant. Unsatisfactory 8 →Could never double trade but now forced to buy yet more CO2 to be CCA compliant. Unsatisfactory 9 →Could never double trade but now forced to buy yet more CO2 to be CCA compliant. Unsatisfactory 10 →Could never double trade but now forced to buy yet more CO2 to be CCA compliant. Unsatisfactory 11* →Could never double trade but now forced to buy yet more CO2 to be CCA compliant. Unsatisfactory 12* → Company passes both but is forced into a CCA fail and has to purchase CO2Unsatisfactory 13→ Company passes both but is not pushed into a CCA failSatisfactory

Co. EUETSEUETS CCACCA C C A 23 O ut co m e Effect of CCA23 Double Counting in 2006 Opted in companies Conclusion: 9 out of 13 unsatisfactory 1 →Not penalised twice but not pushed into a CCA pass Satisfactory 3 →Not penalised twice but not pushed into a CCA pass. Satisfactory 11 →Could never double trade but is now forced to buy more CO2 to be CCA compliant Unsatisfactory 12 →Company passes both but is forced into a CCA fail and has to purchase CO2 Unsatisfactory EUETS Opt ins surviving to end M3

CCA deficit increased by ~28,000 tCO2e 51 → 11 → → → C C A 23 O ut co m e EUETS adjusted target as %age of original target EUETSEUETS CCACCA CCA surplus reduced by ~7,500 tCO2e to create a deficit 12 CCA deficit reduced by ~1,500 tCO2e 3 CCA deficit reduced by ~10,000 tCO2e 1 Effect of EUETS adjustment on the C02e tonnage to be ringfenced or purchased Co. EUETS Opt ins surviving to end M3

CCA23 and Phase Balancing In 2008 CCA23 requires no sale of 2007 allowances. But residue in 2007 is reduced by previous borrowing. What happens?

Double counting opt-ins for Ceramics Co m pa ny EU ETS CCACCA CC A 23 O ut co m e Effect of EUETS adjustment on the C02e tonnage to be ringfenced or purchased Conclusions DEFRA: 13 satisfactory? Ceramics: 10 out of 13 unsatisfactory 1  CCA deficit decreased by150tCO 2 eSatisfactory 2  CCA deficit increased by50tCO 2 eUnsatisfactory 3  CCA deficit increased by1000tCO 2 eUnsatisfactory 4  CCA deficit increased by21500tCO 2 eUnsatisfactory 5  CCA deficit increased by9000tCO 2 eUnsatisfactory 6  CCA deficit increased by5500tCO 2 eUnsatisfactory 7  CCA deficit increased by150tCO 2 eUnsatisfactory 8  CCA surplus reduced to deficit of750tCO 2 eUnsatisfactory 9  CCA surplus reduced to deficit of50tCO 2 eUnsatisfactory 10  CCA surplus reduced to deficit of1350tCO 2 eUnsatisfactory 11  CCA surplus reduced to deficit of1500tCO 2 eUnsatisfactory 12  CCA surplus reduced by300tCO 2 eSatisfactory 13  CCA surplus reduced by350tCO 2 eSatisfactory

Effect of EUETS CCA23 adjustment on performance relative to target - All EU ETS companies Extreme changes to target values are recognised in last column of Table 2 of DEFRA review

Effect of EUETS CCA23 adjustment – Opted in Co.s

What actually happened? In glass most of the eligible TUs fell into the mixed result scenario for which, glass would argue, CCA23 is not designed. Many TUs in other sectors did the same. CCA23 changes to TU CCA target values were often greatly out of proportion to what could realistically be achieved. The resulting deficit or surplus was often out of proportion to the actual performance against target. In 5/13 cases there was no surplus to trade in CCA because there had been failure in any case and yet the deficit was increased. In 3/13 cases the surplus of a passing CCA company was increased. The financial damage/windfall was only limited due to what will most likely prove to be in the long term an exceptionally low market price.

Analysis of CCA23 situation Analysis and decision making process on hold since July 2006 with the result that now short of time for M4 Proposal for use in M4 only tolerable because it relies on very low EUETS price due to closure of Phase 1 market and excess MS allowances 1. Will not be repeated at M5. Current DEFRA review incomplete: –awaiting further information on categories of performance i.e. P/P, F/F, P/F, F/P. This is important because CCA23 is designed to deal with P/P & F/F scenarios and need to know extent of anomalies in P/F and F/P. (How many out of 140? 30%? E.g. actually 18/19 ceramics, 8/13 glass). –shows no thorough analysis of the alternative proposals and no other methodology has been put forward by government. –no financial analysis; results in tonnes CO2, yet recommendation for M4 relies entirely on market prices remaining as they are. –review (table 2 col. 6) suggests that sector balancing removes financial damage – not always the case as TUs not necessarily pooled and individual target swings can be extreme. –Opt in data skews picture as represents only those who opted to go in or couldn’t avoid it. Those at a disadvantage stayed out – sectors could provide complete opt out and opt in analysis. 1/ Paragraph 1 - A proposal for TP3 and TP4: “assuming there is no significant change to the EU allowance value, it is likely that double counting will have no adverse impact”

A Possible Way Forward: a compromise Given –Lack of time now left before M4 –Low price and closure of Ph1 EUETS –Limited number Opt ins (and ignoring individual TU issues) Do the following –As a backstop: use CCA23 for M4 –Comprehensively complete the review including points given above –Redefine the double counting objectives for all circumstances under Phase 2 conditions and reformulate CCA23 –Where appropriate develop split target regimes for those sectors/TUs capable of using them AND NOT “one size fits all”. End