1. 1 Proposal new EU ETS directive Announced 23 January 2008 Vianney Schyns Manager Climate & Energy Efficiency Utility Support Group Utility provider for a.o. DSM and SABIC

2. 2 No surprises on the scope Extension with aviation as from about 2011 Extension with big emitters –Ammonia – including the process emissions – aluminium including PFCs (perfluorocarbons) and N 2 O from nitric-, adipic-, glyoxal- and glyoxylic acid –Extension about 145 Mton/year (7%) Exclusion of small emitters possible –Provided measures with similar reduction result –Criteria are rated thermal input capacity < 25 MW and < 10,000 ton/year GHG emissions –Exclusion can be 15 Mton/year (0.7%) and up to 5,000 sites of the present 12,000 –Re-entry if GHG emission 10,000 ton or more Net addition: 130 Mton/year excl. aviation

3. 3 Total cap Allocation 2008-2012: 2,083 Mton/year –Shortage 6.5% of verified 2005 emissions –2,220 Mton 2005 is 43% of 5,177 Mton GHG EU-27 –With net addition 130 Mton/year: 2,350 Mton in 2005 45% EU-27 EU-27 is in 2005 at -6% of -8% Kyoto target EU-27 2020 target -20%: so -14% remains, “but” –ETS sectors: -21% compared with 2005; but electricity goes down faster due to much more renewables (est. +300 (min) – 500 TWh; 400 TWh x 0.7 Mton (modern coal) 280 Mton = 13% of 2005 ! –Non-ETS sectors -10% ETS sectors: –-21% of 2,220 = 1,754, but Commission says 1,720 –Cap linear down from 1,974 in 2013 to 1,720 in 2020 –With addition 130 Mton: cap 2020 1,820 Mton (excl. aviation)

4. 4 Use of CERs and ERUs Allowed in 2 nd period: 1,400 Mton = 280 Mton/year Allowed in 3 rd period 2013-2020 in absence of a global agreement: zero extra –Unused credits can be banked –Allowed 1400/13 = 108 Mton/year Allowed with global agreement: 50% of extra reduction –Assume extra reduction 200 Mton/year –Allowed then 100 Mton/year in 2020, so 50 Mton/year average –Total then: (1,400 + 400)/13 = 138 Mton/year Fortis modeled € 48/ton in absence of global agreement

5. 5 Proposal of the allocation Electricity: 100% auctioning as from 2013 Industry: phase-in of auctioning, 20% in 2013 and 100% in 2020, unless: –Industry is exposed to global competition; –Then up to 100% free allocation, or –Border Adjustments: importers buy allowances, exporters get refund of allowances Who is exposed –Commission will present report not later than mid 2011 to EP and Council who is exposed and who not

6. 6 Positions about allocation Industry is against auctioning Germany wants free allocation for industry, supported (more or less) by France, UK and probably Poland and others –So no discussion about who is exposed and who not Border Adjustments –Mandelson, UK, USA opposed; Sarkozy (was) in favour

7. 7 Auctioning seems ideal  facts tell different story 1 st trading period, € 12/ton CO 2 –Higher electricity cost: 2,750 mln MWh x € 5/MWh ~ € 14 billion/year –Cost of allowances: ~ zero (EU as a whole) –Economic rents electricity: ~ € 14 billion/year 2 nd trading period, € 30/ton CO 2, electricity typically 25% short –Higher electricity cost: 3,000 mln MWh x € 21/MWh ~ € 63 billion/year –Cost of allowances: 25% x 1,250 Mton x € 30/ton ~ € 9 billion/year –Economic rents electricity: ~ € 54 billion/year 3 rd trading period, € 35/ton CO 2, assume full auctioning –Higher electricity cost: 3,300 mln MWh x € 25/MWh ~ € 82 billion/year –Cost of allowances: 100% x 1,070 Mton x € 35/ton ~ € 37 billion/year –Economic rents electricity: ~ € 45 billion/year Auction revenues only 45% of total economic effect Auctioning reduces economic rents with only 17%

8. 8 Historical grandfathering historical mistake Historical grandfathering  historical mistake EU Commission will come with a proposal for revised EU ETS Directive in January 2008, then co-decision EU Parliament & Council –Takes 1.5-2 years, is no decision for single Member State Allocation rules Historical grandfathering was a historical mistake –Finally recognised by EU Commission, March 2007 3 rd Trading period: perhaps auctioning for electricity & (partial?) auctioning and/or benchmarking for industry Benchmarking for allocation to operators –Ex-ante: based on historical production latest of 2006  2 nd historical mistake? –Ex-post: based on actual production

9. 9 Leakage danger underestimated Leakage analyses show serious flaws –Assumption low CO 2 -price, e.g. € 20/ton both in Ecfin and Climate Strategies; most analysts predict much higher prices as consequence of the stringent targets, e.g. Deutsche Bank in de 2 nd period € 35/ton, Fortis € 48/ton in absence of global agreement, CBI/McKinsey € 60-90/ton by 2020. –Assumption “only few sub-sectors” exposed to global competition  most sectors affected –Assumption electricity “not exposed”  industry pays 40% of bill =Detrimental for especially aluminium, electrolysis, etc. –Assumption (prosperous) recent added value, recent import and export balances  no guarantee for the long period to 2020 –Assumption added value hardly relevant  relevant is trade-off direct + indirect CO 2 -cost against transportation in Europe

10. 10 Border Adjustments: not feasible in practice Border adjustments –Border obligation for only most CO 2 -intensive part of each sector – e.g. clinker for cement, blast furnace steel for steel, crackers for petrochemical industry  no remedy for value chain optimisations –Thousands of products affected, example chemicals and polymers until their application in final consumer goods (cars, electronic equipment, etc.) –Check on importer data  enormous work/bureaucracy –Import: buy allowances  how much, how many products? –Export: refund of allowances  how much, how many products?  Results –Hole in the total cap! –Huge bureaucracy, can never be effective

11. 11 Recent legal cases (1) Germany against EU Commission (judged 7 Nov 2007) –Germany contested the prohibition of the EU Commission to apply ex-post adjustments (also in 1 st & 2 nd guidance note) –Germany asserted that the whole Directive – also art. 10 and Annex III – does not forbid ex-post, provided total cap ensured –Court of First Instance fully confirmed German case –Findings of the Court a.o.: =“…, neither the incentive for operators to reduce their emissions nor the certainty in respect of investments made for this purpose is affected by the ex-post adjustments, quite the reverse.” (para 128) =“The Commission was wrong in asserting at the hearing that this recital [20] did no more than “record” a desirable future effect … only a “subordinate objective” … “whether the ex-post adjustments at issue are compatible with … recital 20 … the Directive “will encourage the use of more energy-efficient technologies … producing less emissions per unit of output.” (para 139)

12. 12 Quality of historic data for operators Variations in annual load factors over five years, found in UK by consultant NERA for UK government … with climate change instruments based on history? Historic production tells nothing about the future Link to actual production:  Avoids distortions  Avoids windfall profits  Solves problems new entrants and closures

13. 13 Recent legal cases (2) What means a historic cap: many new plants enter the market? –Many new power plants in Italy around 2009.. Germany.. NL What means a historic cap: import or export of product? –More electricity import NL from Germany – Is NL then doing well? –New CHP in Luxembourg – Is Luxembourg doing badly? Nine new legal cases running now –What means a historic cap: economy is strongly recovering? –Forecast of growth in central Europe, 8 legal cases European Court of Justice against EU Commission: Czech Republic, Estonia, Hungary, Latvia, Poland, Slovakia, Lithuania and Malta, Slovakia withdrew. –Rumania and Bulgaria followed –Influence Burden Sharing on allocation is perverse Solution: benchmarks linked to actual production

14. 14 Transition for a global trading scheme Benchmark: Specific energy use or CO 2 emission 2012201720222027 Benchmark EU-Japan Transition period (with 3 or more BMs for same product) avoids high cost in case of auctioning for regions with higher emissions per unit of product (vital: BMs without differentiation new/old plants) 2032 Incentive low carbon technologies the same in global trading scheme 2008 Benchmark USA-Canada Benchmark China-India Global benchmark