Managing Allowance Prices with Different EU Member State Ambitions - - PowerPoint PPT Presentation

Managing Allowance Prices with Different EU Member State Ambitions in Emissions

Dallas Burtraw Resources for the Future

Outline 1.Price histories in other trading programs and in the EU 2.Factors affecting price formation 3.Reform efforts in the EU 4.The North American approach

Evolution in atmosphere resource markets

History of allowance prices….

Recognizing gravity as the strong force in atmosphere emissions markets….

5

Illinois Emissions Reduction Market System VOC Allowance Prices

Note: Auction prices are used as market prices are not available. Source: Illinois EPA.

10 20 30 40 50 60 70 80 1-Jan-99 1-Jan-03 1-Jan-07 1-Jan-11 1-Jan-15

ERMS VOC Allowance Prices

Dollars, nominal

6

US SO2 Allowance Prices

Sources: Cantor Fitzgerald; T. Huetteman.

200 400 600 800 1,000 1,200 1,400 1,600 1-Aug-94 1-Aug-98 1-Aug-02 1-Aug-06 1-Aug-10

US SO2 Allowance Prices

Dollars, nominal

CAIR Proposed Rule CAIR Final Rule Projected Prices

7

US NOx Allowance Prices

Source: G. Hart.

2,000 4,000 6,000 8,000 1-Jan-02 1-Jan-04 1-Jan-06 1-Jan-08 1-Jan-10

US NOx Allowance Prices

Dollars, nominal

NOx SIP Call

8

RGGI Carbon Allowance Prices

Note: Auction prices are used where market prices are not available. Sources: Thomson Reuters; RGGI.

1 2 3 4 5 6 7 8 9 10 1-Oct-08 1-Oct-10 1-Oct-12 1-Oct-14 1-Oct-16

RGGI CO2 Allowance Prices

Dollars, nominal

RGGI reduces cap by 45% Supreme Court Suspends CPP Price Floor CCR Price

9

California and Quebec Carbon Allowance Prices

Note: Auction prices are used where market prices are not available. Sources: Thomson Reuters; California ARB; Quebec MDDELCC.

5 10 15 20 25 1-Jun-11 1-Jun-12 1-Jun-13 1-Jun-14 1-Jun-15 1-Jun-16 1-Jun-17

California and Quebec CO2 Allowance Prices

California California-Quebec Joint Auction Price Floor Dollars, nominal

Price Floor

EU ETS: Intention

“The EU emissions trading system (EU ETS) is a cornerstone of the EU's policy to combat climate change and its key tool for reducing greenhouse gas emissions cost-effectively. It is the world's first major carbon market and remains the biggest one.”

• When the EU ETS was launched in 2005, the

Commission was projecting allowance prices in the range of €30/ton CO2

11

EU Emissions Trading System Carbon Allowance Prices

Source: Thomson Reuters.

5 10 15 20 25 30 35 1-Sep-05 1-Sep-07 1-Sep-09 1-Sep-11 1-Sep-13 1-Sep-15 1-Sep-17

EU ETS CO2 Allowance Prices

Dollars, nominal

Phase 1, 2005-2007 Phase 2, 2008-2012 Phase 3, 2013-2020

History of allowance prices….

Recognizing gravity as a strong force in atmosphere emissions markets. Why?

• Over-allocation – political economy, who is in the room?
• Incentives work to find ways to lower costs
• Companion policies, serving additional concerns:

– air quality, job creation, economic development strategy, and good old fashioned fighting for rents.

• Sub-jurisdictional efforts, and the powerful force of federalism
• Program related spending
• But, a fixed supply of allowances

may create a waterbed effect

2 4 6 8 10 12

$/ton Allowances Sold in Auction

A Supply Schedule: RGGI Example

$2.15 $10

Intended Cap

DExpected DLow

The waterbed effect: Prices fall. Regional emissions don’t change.

CCR (10 mty)

Economy-wide CO2 pricing would constitute the largest distribution of a federally-enforced property right since the 19th century American west.

Evolution in atmosphere resource markets

• Public finance goals – tax swaps (not observed)
• Compensation & Environmental Justice
• Combating leakage
• Program related spending
• Efficiency
• Equity
• Efficacy

16

RGGI Distribution of Asset Value

Note: Auction prices are used where market prices are not available. Sources: Thomson Reuters; RGGI. 100 200 300 400 500 600 700 2009 2010 2011 2012 2013 2014 2015 2016 2017

Asset Value, RGGI

Million $, nominal

Clean Energy Energy Efficiency Direct Bill Assistance GHG Abatement and Admin

Initial Distribution of Allowance Value, RGGI

RGGI State Programs *This figure shows distribution of allowances for 2012-2014. State set-aside allowances and allowances unsold at auction are not included. Source: Hibbard, et al., 2015

17

California Distribution of Asset Value

1,000 2,000 3,000 4,000 5,000 6,000 2013 2014 2015 2016 2017

Asset Value, California

Million $, nominal

Note: Auction prices are used where market prices are not available. Sources: Thomson Reuters; California ARB.

Dividends Ratepayer Assistance Energy Efficiency, Clean Energy Unspecified Low-Carbon Transit High-Speed Rail Low-Income Housing, etc. Clean Energy, Energy Efficiency, Natural Resources

Initial Distribution of Allowance Value, California

California Programs Free Allocation to Electricity and Natural Gas Suppliers Free Allocation to Industry

*This figure shows distribution of allowance value for 2013-2017. Allowances held in reserve (not issued) are not included. Source: California ARB

18

Quebec Distribution of Asset Value

Note: Auction prices are used where market prices are not available. Sources: Quebec MDDELCC. 100 200 300 400 500 600 700 800 900 2013 2014 2015 2016 2017

Asset Value, Quebec

Million $, nominal

Free Allocation to Industry

Agriculture and Natural Resources Clean Energy Transportation

Initial Distribution of Allowance Value, QC

Green Fund Programs

*This figure shows distribution of allowancevalue for 2013-2017. Source: Quebec MDDELCC

19

EU ETS Distribution of Asset Value

Source: Thomson Reuters. 2,000 4,000 6,000 8,000 10,000 12,000 14,000 16,000 18,000 2013 2014 2015 2016 2017

Asset Value, EU ETS

Million $, nominal

Free Allocation to Industry Free Allocation to Electricity

Energy Efficiency Renewable Energy Low-Carbon Transportation Other Climate and Energy Non-Climate and Energy

Initial Distribution of Allowance Value, EU

Member States Programs

*This figure shows distribution of allowances for 2015. Source: Löfgren et al. (2015, 2017)

Post-2020 (2030+) climate targets in EU states

• M. Pahle, Research Domain III, Potsdam Climate Institute

Source: National factsheets

• n the State of the

Energy Union / Climatechangenews.com Missing: Sweden: net zero (2045)

EU: -40%

Pledge to build no new plants from 2020 on by producers in all member states except Poland & Greece (Eurelectric)

Coal phase-out plans in EU member states

Illustration based on information from Politico & Eurostat *share of coal in electricity production The Kopernikus Project ENavi & Michael Pahle

EU ETS Reform Efforts

• Accumulation of a substantial bank of allowances sparked

several concerns.

• Fundamentally, is the price sufficient to incent innovation?
• Is the program a block to mitigation efforts through the waterbed

effect?

• Regulatory risk: Why invest if the program might be overturned?
• The European Commission has conducted repeated

administrative reviews with various outcomes including:

• (Modestly) strengthening the cap over time
• Backloading of allowances, delaying issuance of new allowances
• Market Stability Reserve, linking issuance of new allowances to the

size of the bank

Current EU Market Stability Reserve  900 million backloaded allowances from 2014-2016 and unallocated allowances will be transferred to the reserve  Allowances held from or released to auction based on Total Number of Allowances in Circulation

– TNAC = Supply – (Demand (including cancelled allowances) + allowances in the MSR) – 12% added to reserve if TNAC > 833 million – Released from reserve if circulation < 400 million

2018 Reform

This week the European Parliament approved a more substantial effort, after two years of negotiation. (Now to member states for approval.)

• Emission reduction target of 40% under 1990 levels.
• 57% of allowances to be auctioned.
• Doubled the annual withdrawal rate for allowances going

into the Market Stability Reserve.

• Tighten supply by cancelling allowances if the MSR exceeds

the previous year auction quantity.

• Allow voluntary cancellations by member states to address

the waterbed effect.

North American Program Design has Price Controls

• Widespread use of auctions (including consignment)
• Reserve prices in those auctions provides a price floor (and

soft and hard ceilings)

• RGGI’s new design introduces an emissions containment

reserve

Auction reserve prices

• Set a minimum price below which allowances

will not be sold

• Reduce the variance in allowance prices
• Increase their expected value

Auction reserve prices are common

Is a minimum price viable in the EU?

Opponents to a reserve price have argued

• 1. It would interfere with economic operations in the

market that is otherwise efficient

• The price would be set administratively rather than

by markets

• The reserve price might be “too high” in case of a

breakthrough technology

• 2. It would set the price or be tantamount to a tax,

which would trigger the unanimity rule among members states.

The premise of EU ETS efficiency (1)

 Efficient market equalizes abatement costs across sources

• Overlapping policies require higher-cost abatement

activities, driving down the price

The premise of EU ETS efficiency (2)

 Price revelation: the market reveals the costs of meeting the target

• Overlapping policies raise abatement costs while

driving down allowance prices

The premise of EU ETS efficiency (3)

 Market should send consistent price signal to reduce emissions, incentivize low-carbon investment

• Prices are well below notions of the SCC or

pathways to decarbonization

Prices needed to meet Roadmap 2050

Knopf et al. 2013, Edenhofer et al. 2017

The premise of EU ETS efficiency (3)

 Market should send consistent price signal to reduce emissions, incentivize low-carbon investment

• Prices are well below notions of the SCC or

pathways to decarbonization

• Requires cap to be set efficiently in the first

place

The premise that an auction reserve price might be a tax

• Legal analysis was not commissioned
• Our analysis rejects this premise (Fischer et al.)
• The EU ETS did not require unanimity when it was

introduced, and the same should hold for any envisaged amendments aimed at strengthening the overall structure of the system.

• Reverse price mechanism can therefore be either

(1) adopted by an amendment of the Auctioning Regulation, which is based on the EU ETS Directive, or (2) through an amendment of the EU ETS Directive directly.

2 4 6 8 10 12

$/ton

RGGI’s price floor innovation. Now an “adaptive cap.”

CCR

Intended Cap

DLow

Pmin

DExpected

Savings are “shared” with the environmental goal. This quantity is not sold.

ECR

RGGI’s new design is a big deal

It further infuses economic ideas into environmental policy (Quantities with Prices!) Relevance to the discussion of price supports in the EU setting? As RGGI is effectively a program that “links” nine states there is implied transfer to the two states that will not implement the price step Further relevance for implied transfers in the EU?

Conclusion

• There is strong downward pressure on prices in

trading programs.

• The emissions cap is an emissions floor unless

the waterbed effect is addressed explicitly in program design.

• The EU approach has differed from the North

American approach, and seems less effective so far.

• Both approaches have improved over time. The

new RGGI innovation may offer an enduring model.