Towards an effective and efficient carbon price signal minimising leakage How to combat climate change while preserving Europe’s competitiveness European Parliament EU ETS roundtable 10 June 2008 Hans Grünfeld President IFIEC Europe

The IFIEC ETS-method: smart auctioning  Total emission cap guaranteed, by free allocation of allowances, based on actual production, corrected by an efficiency benchmark.  The associated costs** are significantly lower Power price at least 20 – 30 €/MWh lower = possible savings  30% – 50% Electricity cost savings households & services € bn / year Electricity cost savings for industry € bn / year Total EU-27 consumers € bn / year Example: Fuel shift incentive maintained *) The IFIEC method for the allocation of CO 2 allowances in the EU ETS, Ecofys, March 2008 **) Assumption: CO 2 -price 40 – 60 €/ton, higher prices now predicted e.g. Deutsche Bank € 67/ton ECOFYS 2008*: IFIEC method - effective and efficient carbon price signal

 Allocating allowances for electricity use, corrected for efficiency benchmark  Possibility to stimulate CHP, combination with indirect allocation  Benchmarks for the major industrial emitters regulate the efficiency of the use of fuel, heat and electricity Indirect EU ETS-effect of higher electricity prices: 1. Avoid price effect - IFIEC method... or 2. Compensate price effect for industry – indirect allocation Leakage minimisation through smart carbon price signal Choice for smart carbon price signal combines effective carbon policies with clarity to investors

Appendix IFIEC method for industry – same smarter free allocation Higher ETS cost fosters threat of carbon leakage IFIEC proposal in more detail No division exposed vs. non-exposed sectors

Benchmarks for the major emitters  Total quantity of allowances is the same as under auctioning  Same guarantee of the total cap  What activity level – production – to be used?  Historic production  means auctioning for growth and suppresses market share growth of innovative producers  What about companies in Poland & other new Member States?  New entrants reserve: very cumbersome  thresholds suppress efficient growth by debottlenecking, uncertainty for growth  Closure rule ineffective, -100% is lost of allowances, -X% no consequence !  Ecofys study and also Court of First Instance refuted Commission 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 IFIEC method for industry – the same smarter, free allocation 5

6 What does carbon leakage mean to the CO 2 reduction target achievement? CO 2 emissions to be reduced until 2020 with auctioning with IFIEC- method Fossil fuel replaced by RES acc. to EU 20 % target (separate support) Fossil fuel replaced by RES acc. to EU 20 % target (separate support) JI/CDM remainder from 2 nd trading period Carbon leakage Further efficiency improvement, fuel shift, innovation CO 2 emissions to be reduced until 2020 High ETS cost fosters threat of carbon leakage Auctioning causes high ETS costs – direct & indirect through electricity distracts financial resources from industry for making investments delays global agreement: auctioning in Europe = cost advantage abroad / global auctioning = cost advantage of Europe over USA, China, India

7 IFIEC proposal for electricity Indirect ETS-effect of higher electricity prices must be: 1. Avoided - IFIEC method Benchmarking based on actual production of electricity Zero opportunity cost for free-of-charge allowances means zero windfall profits (incl. those of nuclear) Guarantee of the total cap through benchmark adjustment in subsequent years, if needed 2. Or compensated for industry – indirect allocation By allocation of allowances for indirect emissions from electricity use on top of normal allocation to industry Based on electricity benchmark (1)that gives fair compensation of the ETS‘ power price effect (2)that reflects efficient use of resources (true benchmark) Possibility to stimulate CHP, combination with indirect allocation These solutions fully maintain incentive to reduce emissions, including the efficient use of electricity

8 8 No division exposed vs. non-exposed sectors  All sectors involved in EU ETS selected because of carbon intensity  Any criterion for exposed vs. non-exposed is arbitrary (e.g. CO 2 price level, changing market dynamics, etc.)  Existing expert studies: all non-conclusive whether leakage will not occur to the contrary, loss of competitiveness and profits  loss of carbon price signal, profits and/or carbon leakage are highly likely  Are new studies worthwile? Commission (DG Ecfin/DG Enterprise) studied already extensively Why would we know more after another two years?  IFIEC presented alternatives – tested by Ecofys  Lisbon Strategy: Growth and Jobs