European Emission Trading Scheme and competitiveness: A case study on the iron and steel industry

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Leslie Nielson Economics Section 20 August Types of emissions trading schemes Which approach for Australia? Scheme objectives Scheme design Comment. Over-allocation of permits Emissions reduction? Effect on emitters Market established Carbon prices Industrial competitiveness and impact on consumers.

What has Europe learned? Europe s response Some lessons for Australia? Windfall profits to renewable power generators Free allocation vs emission permits at a price Forfeiting the permits Coverage, measurement and administrative capacity Continuing with the cap and trade approach Preparation time Australian advantages in setting up an emissions trading scheme The best is the enemy of the good Australia, the EU ETS and international emissions trading.

The increased awareness of the impact of climate change has moved governments in many countries to consider an appropriate policy response. Australia is no exception to this trend and there has been considerable discussion to identify the appropriate economic mechanism for restricting greenhouse gas emissions, and eventually, reducing them.

There are two main categories of economic instruments useful for controlling these emissions:. The carbon tax approach is not the favoured way of dealing with emissions control in Australia. Emissions trading is perceived to have better prospects of achieving the required changes in greenhouse gas emissions at the least cost.

Further, such regimes are considered more flexible in there reaction to unforseen developments and offer better prospects for linking Australian emissions control policies to those of other countries or any evolving international scheme. Generally, there are two types of emissions trading schemes; the cap and trade and the base line and credit schemes. With the cap and trade approach, an aggregate cap or limit on emissions made within a particular area is established by the relevant government, usually through a specific emissions trading scheme regulator.

Often, this overall cap is progressively reduced over time. Individual emitters are assigned a limit within this overall cap and receive the requited number of emission permits. Alternatively, individual emitters bid for their required number of permits in an auction.

The total number of permits issued corresponds to their permitted level of emissions during that period. These permits must be surrendered to the regulator i. Emitters then trade their emission permits amongst themselves to either purchase additional permits to cover their emissions above their individual limits, or to sell their surplus emission permits. Third parties, such as financial institutions, may buy surplus emission permits to sell at a later date.

Once a permit for a particular period is sold it can be used by another emitter to acquit their own emissions. If the seller of the permits finds that they need additional permits at a later date they must buy those permits.

The permits cease to have any value once they are acquitted or the period for which they are valid expires. Emissions are reduced when the market regulator reduces the overall cap on emissions in a given area and individual firms respond by lowering their own emissions, or when individual firms reduce their own emissions in response to price signals provided by the price of the emission permits.

An alternative approach, but with important differences, is a baseline and credit system. With this approach emitters are not under an aggregate emissions cap. Rather, they are required to purchase offsetting emission credits. Many of the criticisms of emissions trading are aimed at baseline and credit programs and there is only one such operating scheme the New South Wales Greenhouse Gas Reduction Scheme. In a baseline and credit scheme, emissions are not formally reduced, european emission trading scheme and competitiveness much as increasingly offset.

The cost of offsetting the emissions, if it is high enough, may lead firms to reduce the relevant emissions. To date, the New South Wales scheme has created a large number of emissions credits. But their price appears not to have been sufficiently high enough to force a wholesale reduction in emissions. To date, Australian discussion and policy has favoured a cap and trade style solution.

A feature of this Protocol is european emission trading scheme and competitiveness enabling of the eventual international trade in emission permits and credits. The Rudd Government formally ratified the Kyoto Protocol in late and later participated in discussions regarding an agreement to take effect after the first Kyoto protocol commitment period in Instate and territory governments established the National Emissions Trading Taskforce to formulate and design a national emissions trading scheme, which recommend a cap and trade approach.

The Garnaut Climate Change Review notes that this taskforce s activity was very influential in promoting a cap and trade approach to emissions control in Australia. Australia is very firmly committed to a cap and trade approach for controlling its greenhouse gas emissions. However, despite the release of the above mentioned green paper the details of any national emissions trading scheme are still being worked out.

The eventual design of any new scheme can be informed by observing how existing cap and trade schemes are operating. The EU ETS is the largest current cap and trade european emission trading scheme and competitiveness now operating covering the emissions of european emission trading scheme and competitiveness large number of sovereign states. The following paper considers the lessons to be drawn from the design and operation of the EU ETS during its first trading period The European Union members have agreed to jointly fulfil their commitments to reduce greenhouse gas emissions caused by human activity under the Kyoto Protocol.

On 13 Octoberthe European Parliament and Council published a directive establishing a scheme for greenhouse gas emission trading between the member states. From this date, certain installations needed a greenhouse gas emissions permit to operate.

It is the largest cap european emission trading scheme and competitiveness trade scheme in the world. The second stage of this scheme commenced on 1 January The overall aim of the EU ETS is to reduce greenhouse gas emissions in an economically efficient manner. However, the design of the first trading period was driven by the wish to create the critical mass for a liquid and well-functioning carbon market. The first trading period was always intended to be a learning by doing phase for all the parties involved.

These arrangements were, perhaps, implemented with indecent haste. The EU ETS participants had to submit their national emission allocation plans by the end of Marchonly a short time after the final EU Directive outlining the plan took effect on 25 October Not only was this task taken with limited if any current emissions data available to participating governments, but they were also unclear over the precise type of emitting facilities to be covered by their separate country plans.

What were the outcomes over this period? A number of participating countries allocation plans had permitted emissions some 25 per cent above their recent emissions levels. Other countries allocation plans featured increases in permitted emissions.

Further, the methods each country used to estimate its emissions differed from those of other countries. Only Germany and Slovenia submitted plans that had emissions targets lower than their emissions before The collective result was an overall allocation target of 3 to 9 per cent above emissions levels prior to There were other factors in the scheme s design that contributed to this over-supply:.

While the european emission trading scheme and competitiveness s design was not the only factor creating an over-supply of permits compared to actual emissions other factors are discussed below it was a necessary condition for this to over-supply to occur.

Based on an analysis of the emissions data from the first year of operation, emissions reported under the EU ETS were about 4 per cent lower than the amount of emissions covered by the number of emission permits distributed to various installations and facilities for The group making these estimates was careful to note that this outcome was based on an uncertain estimate of what business as usual emissions may have been in european emission trading scheme and competitiveness, and european emission trading scheme and competitiveness uncertainties about the data used, in coming to this tentative conclusion.

The uncertainty of these conclusions was confirmed by the european emission trading scheme and competitiveness small rise in CO2 emissions during following a european emission trading scheme and competitiveness small decline in emissions inbased on an analysis of most of the emissions data for these two years.

A pleasing if unexpected benefit of the EU ETS first trading period was that emissions reductions european emission trading scheme and competitiveness in unexpected places. Initially, it was expected there would be increased use of natural gas for power generation. This did not occur to the extent expected in the first two years. However, a degree of fuel substitution was observed in Germany away from brown coal to the comparatively less polluting hard black coal.

Further, the CO2 efficiency of the UK power generation sector increased i. The importance of emissions trading in business decisions continues to be a significant factor in the operating and investment decisions of companies. By any measure, the EU ETS established a viable carbon market for the European Union, as indicated in the growth of total trading volumes and values. The following graph shows the growth in permit trading volumes.

Too high a price and emitters european emission trading scheme and competitiveness not use this market to buy additional emission permits. Too low a price and those with spare emission permits will not offer them for sale. The right range of prices will encourage both buyers and sellers to trade. Those who can reduce their emissions at the lowest cost are given the extra incentive to do so by the extra income gains from selling their surplus emission permits.

Those who need to buy additional emission permits are able to do so without going out of business and innovation in emissions-saving technology is encouraged. The following graph Figure 2 shows the price of carbon emission permits between January and March for both spot emission european emission trading scheme and competitiveness the lower line and forward contracts the upper line for emission permits for acquittal in December State and Trends of the Carbon Market [34].

A spot price is the price for an emission permit that can be used immediately. In the first trading period emission permits were surrendered to the scheme regulator each December. So, the spot price is the price for EU ETS emission permits that could be surrendered to the regulator in each December from to The forward price is the price for an emissions permit that could be surrendered in December after the close of the first trading period.

After having increased to over 30 at its peak in Aprilthe EU ETS permits for the first trading period lost two thirds of their value following the uncoordinated leak and later official release of verified emissions data for The inability to carry forward or bank unused emission permits from the first to the second trading period contributed to making the first trading period s emission permits almost worthless at the end ofas market participants put all their unused european emission trading scheme and competitiveness un-bankable emission permits on the market in This produced a sharp fall in permit prices for that year.

There were other factors acting on the permit market in and Mild winter weather across Europe in resulted in lower power demand, while the gas price fell as coal prices stayed steady. As the price of gas fell, power companies increasingly switched to gas, and in so doing needed fewer emission permits because burning gas produces substantially fewer carbon dioxide emissions than burning coal. This further increased the oversupply of european emission trading scheme and competitiveness permits in this year.

This is the reverse of market conditions in the early days of where a cold snap across the continent and a decision by Russia to turn off its gas export pipelines saw gas prices soar.

The initial regulation of the market was also influential. Init was revealed that more emission permits were probably issued for the first trading period than were needed by industry to cover emissions. This added to the supply of emission permits in the trading market at precisely the wrong time and moved the overall perception of the market from one of scarcity i. As Figure 1 above illustrates monthly volumes have increased. However, to the end of trading volumes did not exceed 1.

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