Climate protection: Inaction carries a cost

06.11.2012

More ambitious emission reduction targets of the European Union and an ambitious design for the European Union Emissions Trading Scheme (EU ETS) lead to higher revenues from the auctioning of emission allowances for all EU Member States. If the EU, for example, raises its GHG reduction target to 25 % compared to 1990 levels, the revenues of the Member States increase by 62 billion Euro compared to today; if the reduction target is increased to 30 %, the revenues rise by 78 billion Euro or 91 %. This is the finding made by Oeko-Institut in a recent study conducted on behalf of WWF and Greenpeace Germany.

EU emissions trading needs more ambitious targets

Currently the EU ETS faces serious challenges: the massive surplus of emission allowances on the market has reduced the price signal substantially. The reason for this is chiefly lower production as a result of the global economic crisis. Since 2011, CO2 prices have dropped to € 7 per ton of CO2. These prices are too low to trigger investments in climate-friendly technologies, calling into question the effectiveness of the CO2 price signal in terms of climate protection and thereby also emissions trading.

Scarcity means higher revenues for climate protection

Oeko-Institut has therefore addressed the question of how the EU Emissions Trading Scheme needs to be designed so that a scarcity of emission allowances can produce significant price signals again. At the same time the researchers analysed the effects this would have on the Member States’ revenues from the auctioning of emission allowances.

In four scenarios the following results are reached. The totals shown are the total revenues from the auctioning of emission allowances for all Member States participating in the EU ETS:

1. The back-loading scenario (the auctioning of 1.2 billion European Union Allowances (EUAs) is postponed by 5 years, until 2018-2020): The auctioning revenues rise by eight per cent compared to the reference scenario without such measures. This was due to the back-loaded allowances being re-introduced to the market after 2017. The experts assume that the CO2 price will increase again. This proposal made by the European Commission is currently being discussed by the Member States.

2. The long-term set-aside scenario (1.4 billion EUAs are removed from the market for at least 10 years): The auctioning revenues increase by fourteen per cent or 12 billion Euro. Germany alone would accrue an additional 2.8 billion Euro in revenues.

3. The 25% scenario (the reduction of EU-wide GHG emissions by 25% below 1990 levels by 2020): The auctioning revenues rise significantly. The total revenues from 2013 to 2020 amount to 148 billion Euro, i.e. 62 billion Euro or 73 per cent more than in the reference scenario. Germany would accrue additional revenues of approx. 13 billion Euro in revenues.

4. The 30% scenario (the reduction of EU-wide GHG emissions by 30% below 1990 levels by 2020): The total auctioning revenues increase to 163 billion Euro, i.e. 78 billion Euro or 91 per cent more than in the reference scenario. Germany alone would receive additional revenues of approx. 17 billion Euro.

No substantial negative effects on industry

The researchers at Oeko-Institut assume that the effects of a higher reduction target on the industrial sector will be small. For example, in the 25% per cent scenario the EUA price reaches a level that is comparable with the price expectations held when the ETS Directive was revised in 2008 as well as the price expectations used in the assessment of risk of carbon leakage (approx. 30 Euro per EUA).

The experts at Oeko-Institut emphasise that the stabilisation of CO2 prices increases planning security in the industrial sector and remunerates those operators that have already invested in emission-saving measures.

Further information

Oeko-Institut’s study “The Cost of Inaction. Auctioning revenues under different climate ambition scenarios under the EU Emissions Trading Scheme” is available here.

Contact at Oeko-Institut

Hauke Hermann
Researcher in the Energy & Climate Division
Oeko-Institut, Berlin office
Phone: +49 30 405085-362
Email: h.hermann--at--oeko.de

Verena Graichen Researcher in the Energy & Climate Division
Oeko-Institut, Berlin office
Phone: +49 30 405085-370
Email: v.graichen--at--oeko.de