After 15 years the ETS may finally start to bite

Luc Werring, a former senior Commission expert, analyses the latest Brussels package on energy and climate change in the run-up to COP21 in Paris and comes up with some surprising findings.

On 15 July the Commission published its Energy/Climate summer package which it says is the first step towards achieving the Energy Union strategy (2014) and a building block of the EU’s pledge for COP21 in Paris later this year.

This package consists of a communication, a public consultation and two legislative proposals:

  • The first proposed law is a change in the ETS system mainly by introducing a steeper cut    in the amount of allowances in the period 2021-2030.
  • The second is transformation of the energy efficiency labeling system for 12 types of household appliances such as refrigerators/washing machines. The current range of labels which run from D to the most efficient A+++ will be replaced by a range from G to A.

Concentrating on these legislative proposals, the first thing that strikes one is the enormous amount of studies, public consultations and figures that accompany them. Not only is each of the impact studies of both proposals more than 200 pages, but they also refer to many other sub studies and monitoring reports. Who can read all of this and be against such well-documented proposals?

Better regulation as now promoted by the Commission is certainly not leaner regulation or less paperwork. ETS alone has become an obvious “industry “ with carbon traders, consultants and scientific experts and, according to the impact assessment, a turnover of €48 billion a year.

The directives on labeling and Eco design for energy consuming products are relatively simple and have been extremely successful from the start.
However, we are now already at A+++ in some products and it is indeed time to rescale everything back to A to G.
According to the impact study, both directives deliver 175 Mtoe saving per year which is 10 % of EU energy consumption! The new proposal also includes better market surveillance and says this will add an annual 42 Mtoe savings on top. The impact study correctly states that these rather straightforward policy tools now deliver 40 % of the efficiency target of the EU in 2020!

The impact study also states on page 12: “By reducing electricity consumption of products, Ecodesign and Energy labelling have a direct effect on the demand for electricity, which is part of the ETS sector. Because Ecodesign and Energy labelling reduce the demand for electricity, less effort is needed under the ETS.” This observation is important for assessing the real impact of ETS and its amendment in the legislative proposal.

The EU’s ETS is considered its cornerstone policy to combat climate change. It covers more than 11,000 power stations and industrial plants, which account for around 45% of the EU’s emissions. It is a ‘cap and trade’ system: a ‘cap’, or limit, is set on the total amount of greenhouse gas that can be emitted by the factories, power plants and other installations in the system. The cap is reduced annually over time so that total emissions fall: in 2020, emissions from sectors covered by the EU ETS should be 21% lower than in 2005.

However, following last year’s agreement in principle on a 40 % reduction of overall GHG in 2030, the annual cut in the cap has to be deeper from 2021 to 2030 in order to reach an emission level for the ETS sector 43% lower then than in 2005. That is the core of the new proposal.

Nevertheless, one issue is missing in the impact study: What has been the effect of ETS until now or better still what will its effect be by 2020? In other words, how would the GHG situation in the EU have been, ceteris paribus, had this ETS system not started in 2003?

Initially, the ETS went through some learning phases but, in the 20/20/20 package adopted in 2009, the ambitious targets for 2020 were stated clearly: the targeted cuts for the ETS sector from 2005 until 2020 were fixed at 460 Mt (million tons) CO2eq in order to arrive at a yearly emission by the ETS sector of 1720 Mt CO2eq in 2020.
What does this mean for those 11000 installations if we take into account the other measures that had a reduction effect on the same sector?

We have seen that the Ecodesign Directive and the Labelling Directive should save 175 Mtoe by 2020. Assuming that this is 90 % electricity and that every tonne of Mtoe is worth around two Mt CO2eq this would imply that around 300 Mt CO2eq less is emitted because of the efficiency measures imposed on refrigerators etc.

That’s not all. In the 2020 target there was also a target set for 20 % renewable energy and that means that the renewable electricity share will increase from 14.9 % in 2005 to 34 % in 2020. That is a difference of 60 Mtoe according to Euro statistics. So another 120 MtCO2eq less is produced because of the replacement of fossil generated electricity by carbon free or low carbon renewable electricity. Of course there is also the increase of energy consumption by the economic growth to be compensated, but for this rough calculation it is assumed that this is off-set by the autonomous decrease of energy intensity, the crisis of 2008, free allocations and the impact of other policies such as co-generation and energy services.
This rough calculation leaves not more than 460-300-120= 40 MtCo2 to be achieved by the 11000 installations covered by the ETS. But that is probably still too high an estimate.

An important change in the original Commission proposal in the climate package finally agreed in 2009 occurred in the co-decision process between the Council and the European Parliament. This change saw the possibility to use CDM (clean development mechanism) credits that are obtained by undertaking measures outside the EU. According to the final text, 50% of the allowances needed by installations in the ETS could be covered by these CDM credits.

That leaves theoretically not more than 20 MtCO2eq for ETS generated measures in the EU from 2005 to 2020. So, for climate change mitigation up to 2020, energy efficiency for household appliances is as a contribution in the EU 15 times more important than the “cornerstone policy” ETS. The extremely low prices for allowances in the ETS market can be considered as an additional proof for the above calculation.

However, this does not mean that the current revision makes no sense. Au contraire.

Now, from 2021 onwards, we will accelerate the cap’s annual reduction from 1,74 % to 2.2 %. But, at the same time, the low hanging fruit in electric efficiency may have disappeared and the penetration of renewable electricity, which is intermittent, may have reached its limits for networks. So the contribution of these policies may be much less than what it used to be.

This could mean that the combined effect of the lower cap and the lower contribution from other policies ensures that after 2020 the ETS will finally bite very hard – and make good the expectations attached to it 15 years after start-up. It could then indeed be a model for the world and that will be the EU’s message at Paris. Industries that secretly thought that this system works well because they hardly noticed and backed this “market-based” system it may be in for a rude awakening in the not-too-distant future.

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