1. Avoiding the threat of competitiveness disadvantage through benchmarking Integer/EII Conference “Energy Intensive Industries & Climate Change” Brussels, 25-27 November 2008 Annette Loske Chairwoman Climate and Efficiency

2. 2 Auctioning is the costly way High ETS cost causes threat of carbon leakage  Auctioning causes high ETS costs – direct & indirect through electricity  No signal from major players (India/China/US) to accept auctioning as general method  Auctioning in EU alone therefore too big risk, because it:  distracts financial resources from industry for making investments  causes carbon leakage at any meaningful CO 2 -price  delays global agreement: auctioning in EU = cost advantage abroad global auctioning = cost advantage of efficient EU over USA, China, India IFIEC method – benchmarking based on actual production, also for electricity – is advocated as the better way forward! 2

3. 3 Auctioning is the costly way  Additional indirect costs for consumers through electricity price (as compared to dynamic benchmarking) Total EU-27 consumers Dynamic benchmarking vs. auctioning for the electricity costs (€ billion/a)* 32-48 55-83 23-35 Households & services Industry * CO 2 -price € 40-60/tonne Such cost savings resulting from a power price lower by 20 to 40 €/MWh as compared to auctioning Source: ECOFYS 2008

4. Carbon Leakage - Prove for high risk 80% 60% 40% 20% 8% 4% 120% 90% 60% 30% 12% 6% *The impact on power price is more like about 60%-65% than 50 % Impact on Gross Value Added : at € 20/ton CO 2 and € 10/MWh* at € 40/ton CO 2 and € 20/MWh at € 60/ton CO 2 and € 30/MWh The 4% “danger line” drops significantly at the expected CO 2 price of € 50-70/ton 4 Findings of Climate Strategies

5. 5 Carbon Leakage – Negative in any case ! BUT: Any contribution to EU reduction target achievement from carbon leakage is detrimental and directly minimises the EU climate change target, thus its global contribution! Misunderstanding  of NGOs: Carbon leakage beneficial and no problem if production outside EU is more efficient.  of EU Commission: Definition of carbon leakage in draft Directive: „loss of market share to less carbon efficient installations outside the Community“ 5

6. What does carbon leakage mean to the CO 2 reduction target achievement and to global reduction effect? CO 2 emissions to be reduced until 2020 with auctioning with dynamic benchmarking = decrease of EU contribution minimized RES acc. to EU 20 % target (separate support) JI/CDM remainder from 2 nd trading period Carbon leakage Efficiency improvement, fuel shift, innovation CO 2 emissions to be reduced until 2020 Carbon Leakage – Negative in any case ! RES acc. to EU 20 % target (separate support) CO 2 emissions actually reduced until 2020 global effect RES acc. to EU 20 % target (separate support) JI/CDM remainder from 2 nd trading period Carbon leakage = emissions elsewhere Efficiency improvement, fuel shift, innovation 6

7. 7 Benchmarks for the major emitters  Total quantity of allowances is the same as under auctioning  Is not a free ride, but gives challenging objectives  Efficiency improvements directly stimulated  A more realistic path towards a global scheme, on the way to global auctioning in the future Intelligent Benchmarking is the better way 7

8. 8 For allocation: what activity level – production – to be used?  Historic production (2005 or 2005-2007)  No reliable indicator for the future  Means auctioning for growth and suppresses market share growth of innovative producers  Will not avoid potential carbon leakage  New entrants reserve: source of distortions  thresholds suppress efficient growth by debottlenecking, anyway uncertainty for growth  Closure rule: wrong principle -100% is loss of allowances, -x% no consequence! Source Entec-NERA 8 Historic production: source of distortions, unfairness and carbon leakage! Intelligent Benchmarking is the better way

9. 9 For allocation: what activity level – production – to be used?  Actual production: allowed & effective, minimising leakage Is permitted: Court of First Instance refuted Commission‘s worry that “ex-post adjustments would create uncertainty for operators, and be detrimental to investment decisions [to reduce emissions] and the trading market” Ex-post corrections are normal in economic life  Income tax  CERs and ERUs Provide clear certainty on trading position  Benchmark set ex ante  Production level and specific emissions known to installations  Currently: uncertainty by guessing how long the granted allowances will really last Dynamic system for a dynamic world: rewarding efficient market share winners Gives no incentives for lowering production in EU – avoiding carbon leakage 9 Intelligent Benchmarking is the better way

10. 10 Dynamic Benchmarking and Guarantee of the Cap - 1  Dynamic benchmarking: equal assurance on achieving the cap as auctioning  Whereas: No allocation method can guarantee an unrealistic cap! If necessary: possible adjustment of the benchmarks ex-ante for the future to guarantee the total cap Method 1 for overall benchmarking system 10

11. 11 Dynamic Benchmarking and Guarantee of the Cap - 2 If necessary: correcting the electricity auction volume Not unfair: reflects the normal additional shortage as in a full auctioning system while protecting industry for carbon leakage Method 2 for a mixed system (benchmarking for industry / auctioning for electricity) Method 3: Applying a rolling average production Instead of actual production, e.g. last three year rolling average Approximation to a good system, however with remaining distortions Growing company must buy additional allowances once (competitive distortions vs. other companies remain) 11

12. 12 12 Dynamic Benchmarking – analysis of criticisms: Not valid, not based on facts  Market transparency and liquidity not at all harmed Benchmarks are always ex-ante benchmarks Good knowledge of trading position (deviation from the benchmark x production)  No need for additional benchmarks (compared to proposed Directive) Benchmarks for the vital few (Pareto rule) covering 80+% of emissions Generous treatment of the trivial many necessary  No source for lobby pressure – it is an ex-ante determined system In contrast: determination of „exposed“ every 3 years, with vague criteria  Avoidance of potential windfall profits for electricity / industry Historic frozen basis for benchmarking is the very source of windfall profits  Equal scarcity of allowances Ex-post correction system allows some borrowing from the future, however: borrowing from future years also allowed in auctioning Unnecessary NER in dynamic benchmarking eases scarcity

13. 13 Thank you for your attention ! Annette Loske IFIEC Europe Chairwoman Working Party “Climate and Efficiency“ Member of the Management Team  a.loske@vik.de  +49-201-8108 422 For further details see “The benefits and feasibility of an ETS based on benchmarks and actual production“ 27 October 2008, at www.ifieceurope.org