Carbon Pricing and Compe00veness - A European perspec0ve on the path - - PowerPoint PPT Presentation

Michael Themann

Carbon Pricing and Compe00veness - A European perspec0ve on the path to 2050

Conference on „Clean Energy and Climate Policy in Canada and the EU: An exchange of experiences, views, and visions for the future“ OGawa| February 9, 2018

09.02.2018 2 Carbon Pricing and Compe00veness - A European perspec0ve on the path to 2050

2020 climate & energy package Ø 2020: 20% cut in greenhouse gas emissions (from 1990 levels) Ø Also: 20% of EU energy from renewables; 20% improvement in energy efficiency 2030 climate & energy framework Ø 2030: 40% reduc0on (vs. 1990) = 43% EU ETS (vs. 2005) + 30% non-EU ETS (vs. 2005) Ø Also: at least 27% of EU energy from renewables; at least 27% improvement in energy efficiency Ø 2050: 80-95% reduc0on (vs. 1990)

EU climate policy framework

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Ø 45% of the EU's GHG emissions, 4% of global emissions: power, manufacturing Ø 55% not covered: housing, transport, agriculture, waste (na0onal “effort sharing”, EU car emission standards, etc.) Ø In 31 countries: 28 EU Member States plus Iceland, Lichtenstein and Norway Ø From more than 11,000 installa0ons

The EU Emissions Trading System (EU ETS)

Emissions by sector in 2013 (total: 1,925 Mt CO2e)

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2003 EU ETS Direc0ve

Ø Phase I: 2005-2007 (trial phase) Ø Phase II: 2008-2012 (Kyoto Protocol commitment period) Ø EU ETS was a decentralized system: sum of 25 individual Na0onal Alloca0on Plans Ø Allowances freely allocated based on historical emissions

2009 Revised Amended Direc0ve and 2030 climate and energy framework

Ø Phase III from 2013 to 2020 Ø Adop0on of an EU cap, declines annually by 1.74% p.a. (from 2021 on: 2.2%) Ø Es0mated 57% of all allowances to be auc0oned (manufacturing: 70% in 2020) Ø Excep0on: sectors at high risk of carbon leakage (0%)

EU ETS: Cap and Alloca?on

Learning by doing process

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Empirical Evidence on Benefits (Abatement, Innova0on) Empirical Evidence on Compe00veness and Carbon Leakage Outlook on 2030, 2050 and “lessons learned”

Outline

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Ø General consensus that the EU ETS has driven GHG abatement at least in Phase I and beginning of Phase II Ø Phase I, es0mates based on aggregate emissions: about 3% (Ellerman/Buchner 2008; Ellerman et al. 2010; Anderson/Di Maria 2011) Ø Phase II, studies based on firm data: 10-28% reduc0on of German and French EU ETS firms in early Phase II wrt non-regulated firms (Petrick/Wagner 2014; Wagner et

• al. 2013)

Ø 1% increase in low-carbon paten0ng (Calel and Dechezleprêtre, 2016) Ø Effects related to stringency in early Phase II (EUA price ~15€) Ø In late Phase II and early Phase III (emissions<cap), other reasons for reduc0ons: (i) effect of economic crisis (Bel et al. 2015) and (ii) renewables and energy efficiency (Alberola et al. 2014) Ø Environmental effec0veness of EU ETS is a given; emission target has in fact been

• verachieved.

Empirical Evidence: Abatement, Innova?on

• 1. Empirical Evidence on Benefits (Abatement, Innova0on)

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• 1. Mar0n et al. (2015): Interviews of 761 company managers

Ø average reloca0on risk for the near future clearly below a 10% reduc0on in produc0on/jobs

Empirical Evidence: Surveys

• 2. Empirical Evidence on Compe00veness and Carbon Leakage

[Scale: 1 = no impacts; 3 = >10% outsourced; 5 = plant closure]

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• 2. Dechezleprêtre et al. (2015): Data on emissions of mul0na0onal enterprises

within the Carbon Disclosure Project Ø no evidence for emission leakage from Europe towards the rest of the world (within a company structure)

Empirical Evidence: Emissions

• 2. Empirical Evidence on Compe00veness and Carbon Leakage

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• 3. Koch/Basse Mama (2017): FDI from 547 German EU ETS regulated companies

based on administra0ve data from Deutsche Bundesbank Ø On average -0.02% change compared to non-ETS companies Ø Curious: Investment leakage only for footlose companies in „clean“ industries

Ø machine building, electronics and automobiles Ø increased FDI significantly by 52% Ø represent 3% of German EU ETS emissions

Empirical Evidence: Foreign Direct Investments (FDI)

• 2. Empirical Evidence on Compe00veness and Carbon Leakage

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• 4. aus dem Moore / Großkurth / Themann (2017): fixed assets and firm

structure data from 1.677 European manufacturing firms based on administra0ve data from Bureau van Dijk Ø 11.1 – 14.8 % increase in EU assets compared to non-ETS companies Ø Less commiGment by „lightweight“ mul0na0onal enterprises (MNEs)

Ø increased asset base by only 1.3% Ø represent less than 4% of overall EU ETS emissions in 2002-2012

Empirical Evidence: Asset structure

• 2. Empirical Evidence on Compe00veness and Carbon Leakage

Verified emissions by firm type, 2012

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• 5. ~90% manufacturing emissions (2012) exempted from auc0oning (aus dem

Moore / Großkurth / Themann 2017) Mar0n et al. (2015) iden0fy three groups: Ø Main issue: reloca0on risk related with CO2-intensity, but not trade intensity

Empirical Evidence: Compensa?on

• 2. Empirical Evidence on Compe00veness and Carbon Leakage

09.02.2018 Carbon Pricing and Compe00veness - A European perspec0ve on the path to 2050

Carbon and trade intensiIes of four-digit industries Size of circles proporIonal to # firms in a given industry

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• 6. Themann/Koch (2018): growth in TFP from 3.911 EU ETS regulated companies

based on administra0ve sources compiled by provider Bureau van Dijk Ø % change compared to non-ETS companies (preliminary results) Ø Impact depends on the distance to the technology fron0er

Empirical Evidence: Total factor produc?vity (TFP)

• 2. Empirical Evidence on Compe00veness and Carbon Leakage

EsImated overall effect, with 95% confidence intervals

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In phases I+ II the EU ETS (so far)

• 1. helped to reduce GHG emissions
• 2. had some impact on investment
• 3. induced liGle investment into patented (!) low-carbon innova0ons

In terms of compe00veness

• 1. has not induced carbon leakage (reloca0on costs, cost pass-through,

compensa0on, lack of stringency)

• 2. has let to some produc0vity decreases for regulated (!) firms
• 3. has provided extensive, not cost-effec0ve protec0on from carbon leakage

But major uncertain0es Ø Effect of higher EUA-prices in the future? Ø Effect of increased auc0oning?

Lessons learned (I)

• 3. Outlook on 2030, 2050 and “lessons learned”

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• 7. Koch et al. (2014): Demand-side fundamentals related to abatement maGer

(Alberola et al. 2008, Mansanet-Bataller et al. 2007, Hintermann 2010), but explain less than 10% of EUA price dynamics

Empirical evidence: Prices are driven by expecta?ons (I)

• 3. Outlook on 2030, 2050 and “lessons learned”

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• 8. Koch et al. (2015): Event-induced price falls reflect a downward adjustment of

expecta0ons about the cap stringency

Ø Mere specula0on about the cap can influence market outcomes

Empirical evidence: Prices are driven by expecta?ons (II)

• 3. Outlook on 2030, 2050 and “lessons learned”

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• 9. Edenhofer et al. (2017): EUA price observed on the market and expected by

companies may remain below its economical benchmark level for several years to come

Ø lock-in of high-carbon capital stocks that remain profitable (steady EUA demand) Ø cap declining by 2.2% per year Ø prices and poli0cal costs of s0cking to the cap schedule will rise steeply

The path to 2030

• 3. Outlook on 2030, 2050 and “lessons learned”

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Carbon price needs to s0mulate demand for low-carbon technologies in all sectors (power, heat and mobility).

Ø Only 45% of emissions covered by EU ETS Ø Very different price signals across sectors (ineffec0ve sectoral policies)

• 10. German Academies of Science (2017): -85% reduc0on scenarios for Germany

in 2050 using an universal carbon price across all sectors

Ø 2030 cri0cal juncture: risk of lock-in effects (technical life0mes, investment cycles) Ø Electricity demand can double (1000 TWh in 2050) Ø 5-7 0mes higher wind and solar capacity than today (500-600 GW) Ø Investments into energy efficiency, grids, backup capaci0es (100 GW), s. gases, fuels Ø Systemic costs around 1-2 % of GDP in 2017 (125 bio. € yearly, 1.500 bio.€ total)

The path to 2050

Costs projec?ons for a universal carbon price

• 3. Outlook on 2030, 2050 and “lessons learned”

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Ø Carbon price (EU ETS) needs to be cross-sectoral, consistent, effec0ve

Ø Carbon price floor star0ng at 30€ in 2020 (Canada Proposal: ~32 € / 50 CAD) Ø Establish credible price path to 2050 as soon as possible Ø Commitment to the (short-run) costs and long-term benefits Ø Compensa0on only if necessary

Ø Support policies

Ø Technology development and adap0on (produc0vity and innova0on) Ø Revamp system of energy taxes, levies, subsidies to reduce distor0ons and costs Ø Regulatory policies in case of market failure (infrastructure, adop0on…)

Ø Also: measure causal effects wrt benefits: “green” value added, employment…

Policy op?ons and shared learning

• 3. Outlook on 2030, 2050 and “lessons learned”

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acatech/Leopoldina/Akademienunion (German Academies of Science), 2017: Coupling of Energy Sectors – Op0ons for the next phase of the German Energy Transi0on (Series on science based policy advice),

• 2017. ISBN: 978-3-8047-3672-6.

aus dem Moore, N., Großkurth, P., Themann, M. (2017) : Mul0na0onal corpora0ons and the EU Emissions Trading System: Asset erosion and creeping deindustrializa0on? Ruhr Economic Papers, No. 719. Calel, R. and Dechezleprêtre, A., 2016. Environmental policy and directed technological change: Evidence from the european carbon market. Review of Economics and Sta0s0cs, 98(1): 173–191. Edenhofer, O., C. Flachsland, C. Wolff, L. K. Schmid, A. Leipprand, N. Koch, U. Kornek, M. Pahle. 2017: Decarboniza0on and EU ETS Reform: Introducing a price floor to drive low-carbon investments. MCC Policy Paper, 24.11.2017. Koch, N., Basse Mama, H. (2016): European climate policy and industrial reloca0on: Evidence from German mul0na0onal firms, SSRN Working Paper, 2868283. Koch, N., Grosjean, G., Fuss, S., Edenhofer, O., 2015: Poli0cs maGers: Regulatory events as catalysts for price forma0on under cap-and-trade, Journal of Environmental Economics and Management, 78, 121-139. Koch, N., Fuss, S., Grosjean, G., Edenhofer, O., 2014: Causes of the EU ETS price drop: Recession, CDM, renewable policies or a bit of everything? New evidence, Energy Policy , 73, 676-685. Mar0n, R., Muûls, M., Preux, Laure B. de, Wagner, U. J., 2014. Industry compensa0on under reloca0on risk: A firm-level analysis of the eu emissions trading scheme. American Economic Review, 104(8):2482– 2508. Mar0n, R., Muûls, M., de Preux, Laure B., Wagner, U. J., 2015. On the empirical content of carbon leakage criteria in the EU Emissions Trading Scheme. Ecological Economics, 105:78–88. Mar0n, R., Muûls, M., Wagner, U. J., 2016. The impact of the European Union Emissions Trading Scheme

• n regulated firms: What is the evidence a|er ten years? Review of Environmental Economics and Policy,

10(1): 129–148 Themann, M., Koch, N (2018): Catching up and falling behind: Cross-country evidence on the impact of the EU ETS on produc0vity growth, mimeo.

For more informa?on

09.02.2018

Carbon Pricing and Compe??veness - A European perspec?ve on the path to 2050

Thank you!

Michael Themann

RWI – Berlin Office Research Group Sustainability & Governance

Michael.Themann@rwi-essen.de

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Based on Mar0n et al. (2014a, 2014b) Ø Improvement 1: modify trade intensity threshold

Ø Exemp0ons only for A+B2: 100.3 Mio. less free EUAs p.a. Ø Revenue: 500 Mio. € (EUA price = 5€) – 3 Bio. € (EUA price = 30€) p.a.

Ø Improvement 2: Refining the defini0on of trade intensity

Ø Trade intensity with less developed countries: 14.4 Mio. less free EUAs p.a. Ø Revenue: 71 – 430 Mio. p.a. Ø Share of free alloca0on op0mal < 40%

Reform example: improve permit alloca?on

• 3. Outlook on 2030, 2050 and “lessons learned”

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Projected Development of Electricity Demand (-85% CO2)

09.02.2018 Carbon Pricing and Compe00veness - A European perspec0ve on the path to 2050

German Academies of Science (2017)

200 400 600 800 1000 1200 2015 2020 2030 2040 2050 2015 2020 2030 2040 2050 electricity demand in TWh

• rig. electr. aplica0ons

sector coupling

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Projected Installa?on of Wind and Solar Power

09.02.2018 Carbon Pricing and Compe00veness - A European perspec0ve on the path to 2050

German Academies of Science (2017)

100 200 300 400 500 600 Installed capacity in GW EEG 2017 ohne Deckel EEG 2017 mit Deckel

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Projected Costs of the Energy Transi?on in Germany

2000 4000 6000 8000 reference 60% 75% 85% 90% cumula?ve systemic costs un?l 2050 in bilion € fossil and biogenic energy ressources

• pera0on and maintenance costs

investment and capital costs

09.02.2018 Carbon Pricing and Compe00veness - A European perspec0ve on the path to 2050

German Academies of Science (2017)

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Final Energy Consump?on in Germany by Energy Carrier (2016)

09.02.2018 Carbon Pricing and Compe00veness - A European perspec0ve on the path to 2050

Federal Ministry for Economic Affairs and Energy (2017)

9 % 9 % 86 % 76 % 10 % 99 % 5 % 16 % 90% 1 % 200 400 600 800 low temperature heat process heat

• rig. electricity

applica0ons transport final energy consump?on in TWh district heat fuels electricity

1990 2010 2030 2050 4 – Final de-fossilisa?on

Replacement of fossil fuels RE and SF imports Final transforma0on of energy supply

3 – Synthe?c fuels (SF)

High nega0ve residual loads Large-scale electrolysis SF for transport and industry

2 – System integra?on

Flexibilisa0on, digitalisa0on Direct use of electricity, storage Development new energy market

1 – Fundamental technologies

Development RE First deployment RE Development of efficiency techn.

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Stages of the Energiewende

Con?niuous technology development and increasing energy efficiency Increasing integra?on of energy sectors

• 25 %
• 25 - 55 %
• 55 - 85 %
• 85 - 100 %

Integrated Energy System

CO2 CO2 CO2

CO2

German Academies of Science (2017)

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Projected Use of Electricity (-85% CO2)

09.02.2018 Carbon Pricing and Compe00veness - A European perspec0ve on the path to 2050

German Academies of Science (2017)

200 400 600 800 1000 1200

• 85% b
• 85% a
• 60%

electricity consump?on in TWh

• rig. electr. applica0ons

heat direct transport direct electrolysis

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Main goal of the ‘Energiewende’: reduce emissions

• 80 %
• 20 %
• 40 %
• 55 %
• 70 %
• 95 %

200 400 600 800 1000 1200 1400 1990 2000 2010 2020 2030 2040 2050 greenhouse gas emissions in Mt CO2 equ.

• ther emissions

energy-related emissions 09.02.2018 Carbon Pricing and Compe00veness - A European perspec0ve on the path to 2050

German Academies of Science (2017)

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Implicit German CO2 prices for power, transport and heat

Agora Energiewende (2017)

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Carbon Price floor in UK

09.02.2018 Carbon Pricing and Compe00veness - A European perspec0ve on the path to 2050

BEIS (2017)

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The energy transi0on causes addi?onal systemic costs. In Germany, the addi0onal costs per year will be around 1 – 2 % of the GDP (although these calcula0ons are always subject to significant uncertain0es, they can help to es0mate the order of magnitude) The systemic costs considered here include: investments for all infrastructures (e.g. power plants, grids, cars, energy storage), financing costs, expenses for energy resources, opera0on and maintenance costs, costs for renova0on of buildings. Not included are: economic effects like local value added, employment effects, export opportuni0es. However, technology exper0se and export is paramount for Germany.

Projected Costs of the Energy Transi?on in Germany

09.02.2018 Carbon Pricing and Compe00veness - A European perspec0ve on the path to 2050

German Academies of Science (2017)