1 Decarbonsing the European Power Sector: is there a role for the EU ETS? Brussels, 31 May 2011 Jos Delbeke DG Climate Action European Commission

2 What the EU is doing already: 2020 targets  Reduce GHG emissions by 20% (compared to 1990)  EU Emissions Trading System reducing overall emissions from industrial installations  National emission targets cover other sectors: e.g. buildings, services, agriculture, transport (except aviation)  Increase share of renewables in EU’s energy mix to 20%  National targets agreed  Improve energy efficiency by 20% compared to business as usual projections – not on track  Current policies are not sufficient to achieve the long-term target of -80 to -95% GHG emissions by 2050

3 Energy Efficiency Plan  EU Heads of State on 4 Feb 2011 committed to “Take determined action to tap the considerable potential for higher energy savings of buildings, transport and products and processes.”  European Commission adopts new Energy Efficiency Plan with additional measures in order to reach 20% target by 2020  Public sector to give the good example: binding targets for refurbishing public buildings + highest energy-efficiency criteria for public procurement  Industry: energy efficiency requirements for industrial equipment, energy audits, energy management systems  Improve efficiency of power and heat generation  Roll out smart power grids and smart meters

Roadmap The first extensive global and EU analysis on how the long term target can be reached: identifies cost-effective pathway, with intermediate milestones identifies key technologies guiding R&D identifies investments needs and benefits identifies opportunities and trade-offs guides EU, national and regional policies gives direction to private sector and private households for long term investments

5  Ensure the achievement of 20% energy efficiency target by 2020, and in this context use the role of the emissions trading system  Give clarity for long term investments, especially in ETS sectors  Define policy framework  Upward review of 1.74% linear reduction to be considered to achieve -80% GHG emissions by 2050  Measures to protect vulnerable industries against carbon leakage in the case of fragmented action Policy challenges and future work

6 Efficient pathway: -25% in % in % in 2040 A cost-efficient pathway towards % domestic reduction in 2050 is feasible  with currently available technologies,  with behavioural change only induced through prices  If all economic sectors contribute to a varying degree & pace.

Power sector: technologies and investments Almost completely carbon-free by 2050  from 45% low-carbon technology today to 60% by 2020, 75% in 2030 (-54 to 68% CO2)  RES, fossil fuels with CCS, nuclear EU-ETS key driver  Linear factor not sufficient to reach 2030 milestone Further investment needs in power generation and smart grids: € 30 bn annually  Up to 2020 already significant investment in reference If CCS is delayed: still feasible, but higher costs

ETS – the corner stone of the EU climate policy  ETS – a cost-effective and stable instrument in a rapidly changing energy landscape  Currently the EU ETS covers some 11,000 power stations and industrial plants in 30 countries.  The number of allowances is reduced over time so that total emissions fall. In 2020 emissions will be 21% lower than in  ETS should become the main incentive for the EU-wide deployment of CCS, which plays a central role for the decarbonisation of the European Power Sector

9 As from 2013: A Broader Scope  New sectors  Aluminium  Basic chemical production  Aviation as from 2012  internal, incoming and outgoing flights  On basis of equivalent measures in 3 rd countries, incoming flights can be exempted  More gases (nitrous oxide, PFCs)

Auctioning and Registry Security  As from 2013, full auctioning for electricity sector: More than half of all allowances will be auctioned Potentially some transitional free allocation to electricity producers in up to 10 new Member States  Use of Auction Revenue Member States should use at least 50% of revenues for climate and energy related purposes Revision of Monitoring Mechanism Decision will include provisions for Member States to report on use of auction revenues  Registry Security is now under control Amendment of the Registries Regulation in 2011 In the wake of organised cyber attacks on national ETS registries, strands of action pursued Move to single registry in 2012 will allow harmonisation of security measures

Benchmarking  Main principle: one product – one benchmark no modification based on which fuel is used, which technology is used, which inputs are used 52 benchmarks cover ~80% industrial emissions in the EU ETS  Starting point for benchmark values: EU-wide average performance of 10% most efficient installations in (sub)sector hence an allocation methodology that “rewards” the best performers  Commission adopted Decision in April 2011

Enhanced market oversight  Next challenge – an appropriate market oversight regime  The carbon market has undergone significant growth over the last years  A market oversight framework appropriate for the current and future market size is needed  Communication in December 2010 on enhanced market oversight  A comprehensive study ongoing looking at levels of market oversight and implications of introducing new measures  Several options under consideration incl. full coverage of the European carbon market by financial markets legislation (e.g. via classification of allowances as financial instruments)

Milestones over time: ETS and non-ETS sectors Reductions compared to Overall -35 to -40%-77 to -81% ETS sectors -43 to -48%-88 to -92% Non-ETS sectors -24 to -36%-66 to -71% Reductions compared to 1990 in % Overall-7%-40 to -44%-79 to -82%  Cost-effective distribution between sectors: (ranges reflect variation across scenarios)

Key driver: carbon prices  Delayed climate action increases carbon price  Higher oil price red- uces carbon price

Alternative Measures  Additional tax (UK)  Emission Performance Standards (EPS)  Study of the Commission shows EPS would have little impact  Energy efficiency standards/ Renewables targets at national level  The EU ETS is the preferred instrument compared to other alternative measure because of its stability and cost-effectiveness

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