1. |1 Interaction between incentives for carbon abatement The end of Emissions Trading? A.J. Mulder (arnold.mulder@rug.nl)

2. | Introduction ›EU ETS is key incentive to reach deep CO2 reduction in the industry in an cost-effective manner ›Yet, many other ‘parallel incentives’ for carbon abatement are in place ›Literature* suggests: merely a more costly substitute of the EU ETS and undermines the carbon price ›A quantitative analysis of the full system is needed to better understand interactions with the EU ETS * e.g. Unger and Ahlgren, 2005; Smith and Sorrell, 2001; Sorrell and Sijm, 2004; Rathmann, 2007; De Jonghe et al., 2009; Hepburn, 2006; Morris et al., 2010

3. | Methodology ›Stochastic Simulation Model of the EU ETS (Mulder and Jepma, 2013) ›Check marginal effect on carbon price and emission level before and after expiration of parallel incentives  Distinguish between two types…

4. | Estimating the combined effect Attribute / Type Type 1 Type 2 Sectoral ScopeETS sectors (e.g. power, steel, oil, cement sector) End-use sectors (e.g. Houeholds, small business) AimEfficiency improvements, greater share of renewables, direct carbon abatement Decentralized renewables, efficiency improvements, recycling Effect on ETS-Reduction of CO2 emissions in ETS sectors (lower carbon intensity of production) -Use of abatement potential from ETS merit- order (proportionately) -Reduction of CO2 emissions in ETS sectors (lower production levels) ExamplesCCS subsidies, feed-in- tarriffs, biomass co-firing mandate, etc. Incentives for solar panels, heat pumps, insulation, emission standards for road transport, etc.

5. | Methodology ›We run multiple scenarios, each time assuming a greater annual impact of either type of parallel incentive: between 0 and 30 MtCO2/yr of abatement (0 - 1,6% per annum) ›Simulation horizon is 2030 ›Parallel incentives take effect between 2012-2025

6. | Results – Carbon Price ›Carbon Price over time assuming 30 MtCO2/yr impact Type 1 Type 2

7. | Conclusion on carbon price ›Type 2 incentives have greatest depreciating effect on the carbon price ›Type 1 incentives do depreciate the carbon price, but rebound fairly quickly after these incentives have expired/phased-out. ›  Low carbon prices could trigger policy-makers to introduce extra parallel incentives!!

8. | Results Complementarity of abatement Sensitivity to Economic Growth Average = 16%

9. | Conclusion on Emissions ›Complementarity is generally low (~30%) but can be higher, although this would signal the silent death of emissions trading (if impact > 40 MtCO2/yr). ›This treshold level could be lower if economic growth projections are grim ›Current market conditions are alarming! (low prices, low economic growth) ›Policy-makers could end up in deadly spiral and unwillingly pull the plug on emissions trading