International Energy Workshop June, Paris Gernot Klepper & Sonja Peterson Kiel Institute for World Economics The EU Emissions Trading Scheme Efficient Climate Policy or a Danger for the European Competitiveness?

Motivation European Emissions Trading Scheme (ETS) is very controversial -Proponents: ETS contributes to meeting the European Kyoto targets at minimal cost -Opponents: ETS leads to negative competitiveness effects Speculations sprout about winners & losers, costs, sellers & buyers and allowance prices National Allocation Plans (NAPs) are crucial for outcome

Aim of the study Use the DART Model to simulate the key features and key impacts of the EU ETS by scanning the range of likely allocation plans

DART regions BEN: Belgium, Luxemburg, Netherlands DEU: Germany FRA: France GBR: Great Britain ITA: Italy SCA: Denmark, Finland, Sweden REU: Austria, Ireland ACC: Accession countries 7 other world regions

DART sectors ETS: OIL: Refined oil products EGW: Electricity IMS: Iron, Metal,Steal (including Cement Industry) PPP: Pulp & Paper Products Non-ETS Energy: COL, GAS, CRU Non-energy: CEP, AGR, MOB, TRN, Y

How to determine the overall amount of emissions allocated to the ETS? Historical approach (HIS): multiply Kyoto target with emission share of ETS sectors in some historical year (e.g. 2000) Forecasting approach (FUT): multiply Kyoto target with emission share of ETS sectors in some future year (e.g. 2012) Least cost approach (LC): recognizes difference in abatement costs  Allocation to ETS determines necessary reductions in sectors outside the ETS!!

DART Policy Scenarios Central Scenario: ETS with EU25, no hot-air, LC targets (determined from unilateral optimal action) Variation of NAPs: HIS (emission shares from 2000) and FUT (emission shares from 2012) Variation of role of accession countries: HA (full hot-air included), EU15 trading Reference scenarios: Kyoto targets with -unilateral CO2 taxes (UNI) -equalization of MAC across Europe (equiv. to full EU emissions trading) (OPT) Analyze outcome when ETS is in full force: 2012

Targets and BAU emissions in ETS sectors

Allowances prices in OPTLCHISFUTEU15LCHA €/t CO2 ( All for LC targets)

Emission weighted average tax rates outside the ETS compared to the allowance price FUTHISLCOPTAllowance €/t CO2

Allowance net imports in ITAFRADEUGBRSCABENSEUREUACC Mt CO2 OIL EGW PPP IMS -130

Sectoral output losses in the EU relative to BAU -12% -10% -8% -6% -4% -2% 0% Energy-ETSEnergy not ETS Energy- intensive ETS Energy- intensive not ETS All sectors change rel. to BAU UNI LC

Welfare losses in the EU -1,1% -0,4% -1,1% -1,2% -1,1% -0,9% -0,7% -0,9% -1,4% -1,2% -1,0% -0,8% -0,6% -0,4% -0,2% 0,0% UNIOPTLCHISFUTEU15LCHA (All LC targets)

Conclusion 1 Important role of the accession countries they will be the only net sellers of allowances even without hot-air included in the simulations their participation in the ETS alone drives down the costs of meeting the Kyoto targets considerably participation matters more then the inclusion of hot-air

Conclusion 2 Division of costs of reaching Kyoto between ETS & non-ETS sectors matters! Efficiency gains of the ETS depend on the NAPs -If it is not based on abatement costs, but on historical or expected emissions, the potential efficiency gains trading can not be realized. -Least-cost allocation implies considerable emission reductions in the ETS sectors. -Current NAPs are too generous to ETS sectors.

Conclusion 3 Competitiveness effects Not ETS imposes new restrictions but the Kyoto targets itself If designed correctly ETS is means to achieve Kyoto targets at lower costs Compared to unilateral action, all sectors gain through trade Competitiveness effects of ETS are overall quite small

Thank you for your attention!

Welfare gains through emissions trading

CO2 taxes under unilateral action