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International Energy Workshop 22-24 June, Paris
The EU Emissions Trading Scheme
Efficient Climate Policy or a Danger for the
European Competitiveness?
Gernot Klepper Sonja Peterson Kiel Institute
for World Economics
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Motivation

• European Emissions Trading Scheme (ETS) is very
  controversial
• Proponents ETS contributes to meeting the
  European Kyoto targets at minimal cost
• Opponents ETS leads to negative competitiveness
  effects
• Speculations sprout about winners losers,
  costs, sellers buyers and allowance prices
• National Allocation Plans (NAPs) are crucial for
  outcome

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Aim of the study
Use the DART Model to simulate the key features
and key impacts of the EU ETS by scanning the
range of likely allocation plans
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DART regions

• BEN Belgium, Luxemburg, Netherlands
• DEU Germany
• FRA France
• GBR Great Britain
• ITA Italy
• SCA Denmark, Finland, Sweden
• REU Austria, Ireland
• ACC Accession countries
• 7 other world regions

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DART sectors

• ETS
• OIL Refined oil products
• EGW Electricity
• IMS Iron, Metal,Steal (including Cement
  Industry)
• PPP Pulp Paper Products
• Non-ETS
• Energy COL, GAS, CRU
• Non-energy CEP, AGR, MOB, TRN, Y

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How to determine the overall amount of emissions
allocated to the ETS?

• Historical approach (HIS) multiply Kyoto target
  with emission share of ETS sectors in some
  historical year (e.g. 2000)
• Forecasting approach (FUT) multiply Kyoto target
  with emission share of ETS sectors in some future
  year (e.g. 2012)
• Least cost approach (LC) recognizes difference
  in abatement costs
• Allocation to ETS determines necessary
  reductions in sectors outside the ETS!!

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DART Policy Scenarios

• Central Scenario ETS with EU25, no hot-air, LC
  targets (determined from unilateral optimal
  action)
• Variation of NAPs HIS (emission shares from
  2000) and FUT (emission shares from 2012)
• Variation of role of accession countries HA
  (full hot-air included), EU15 trading
• Reference scenarios Kyoto targets with
• unilateral CO2 taxes (UNI)
• equalization of MAC across Europe (equiv. to
  full EU emissions trading) (OPT)
• Analyze outcome when ETS is in full force 2012

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Targets and BAU emissions in ETS sectors
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Allowances prices in 2012
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Emission weighted average tax rates outside the
ETS compared to the allowance price
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Allowance net imports in 2012
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Sectoral output losses in the EU relative to BAU
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Welfare losses in the EU
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Conclusion 1 Important role of the accession
countries

• they will be the only net sellers of allowances
  even without hot-air included in the simulations
• their participation in the ETS alone drives down
  the costs of meeting the Kyoto targets
  considerably
• participation matters more then the inclusion of
  hot-air

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Conclusion 2 Division of costs of reaching Kyoto
between ETS non-ETS sectors matters!

• Efficiency gains of the ETS depend on the NAPs
• If it is not based on abatement costs, but on
  historical or expected emissions, the potential
  efficiency gains trading can not be realized.
• Least-cost allocation implies considerable
  emission reductions in the ETS sectors.
• Current NAPs are too generous to ETS sectors.

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Conclusion 3Competitiveness effects

• Not ETS imposes new restrictions but the Kyoto
  targets itself
• If designed correctly ETS is means to achieve
  Kyoto targets at lower costs
• Compared to unilateral action, all sectors gain
  through trade
• Competitiveness effects of ETS are overall quite
  small

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Thank you for your attention!
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Welfare gains through emissions trading

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CO2 taxes under unilateral action