Policy Options to Improve the EU Emissions Trading System:
a Multi-Criteria Analysis
Stefano Clò, Università degli Studi di Milano
Susan Battles and Pietro Zoppoli, Ministry of Economics and Finance
Villa Mondragone- Roma, 25 June 2013
Climate and long term policy view
Climate issue increasing political relevance during last decades
• Earth Summit and Rio Declaration, Kyoto, EU ETS, EU Climate Package
Recent Slowdown
• Failure of international negotiations (no post-Kyoto deal)
• Failure of the EU ETS mechanism to promote emissions reduction
Reasons
• Long term policies replaced by current emergencies (economic recession,
unemployment, sovereign debt crisis) in the political agenda
• Current certain costs and investments against long term effects
• carbon pricing perceived to increase cost on industry and to further obstacle
economic recovery
2
Background on ETS
Data on verified emissions
reveal overallocation
Financial crisis
EU restrictive
policy on cap
EU economic recession
30€/tonn expected
4.3€/tonn average May 2015 future price
End of phase I no bankability
with phase II
Source: Point Carbon
3
ETS: do we need corrective intervention?
No  no need for correcting intervention to adjust prices
• ETS works : given rigid supply, price reacts correctly to uncertain demand fluctuation
• Environmental goal achieved: limit to emissions is respected
• ETS is pro-cyclical (low price with recession), opposite case would damage the
economy
• Market players can deal with market uncertainty, but not with regulatory uncertainty
• Ex-post intervention would increase regulatory uncertainty
• regulator cannot anticipate economic dynamics; political interference on market
instrument anytime market outcome differs from expectation would negatively affect
players’ confidence on ETS
4
ETS: do we need corrective intervention?
YES  need for correcting intervention to adjust prices
• Why EU ETS  asymmetric commitments, industrial and innovation goal (green
economy) superior to environmental goal
• Emissions reduction because of the crisis not because of innovation induced by ETS
• Long-term goal: decarbonization of EU economy by 2050
• investments required nowadays to achieve long-term goal
• High and stable carbon price in the long run to support low carbon economy
• if investments postponed, overall mitigation costs increase in the long-run
• Short-term vs long-term view: improve ETS makes sense under a long-term
perspective, while is seen as detrimental in the short term
5
Why this paper
• Why intervene Political will to revive ETS and for a high and stable carbon price
• How intervene Different policy options to correct the ETS and support carbon price
• Impact on ETS not assessed; no full understanding of their consequences
• Develop a comparative analysis of different policy options against a plurality of
environmental, economic and procedural criteria
• Understand how each policy option impacts on ETS price and emissions
• Determine the most appropriate policy option according to political priorities
6
ETS policy options
1. Intervene on ETS and non-ETS: Increase target from -20% to -30%
2. Intervene only on the ETS Cap
a. Reduce ETS cap
b. Temporary set-aside (back-loading): withdraw and reintroduce allowances
3. Intervene directly on ETS price through an inferior limit: two versions
a. National price floor
b. EU price floor
4. Carbon Central Bank to stabilize carbon price through quantity adjustments
5. Setting long-term target
7
Methodology: A Multi-criteria Analysis
5 steps
1. Define a comprehensive set of multiple criteria
Environment, economic (static and dynamic efficiency, competitiveness) and procedural
2. Weight criteria: consider the relevance of each criterion according to preferences
3. Assess the impact of policy options on ETS price and emission and evaluate their procedure
 grade each policy option against the weighted criteria.
4. Rank the various policy options
 identify the most appropriate instrument for the ETS.
5. Test the ranking robustness through a Sensitivity Analysis (SA)
8
First Step: Multi-criteria tree
Direct GHG reduction
Environmental performance
Indirect environmental effects
Short term carbon price supprt
(static efficiency)
Long term price stability
(dynamic efficiency)
Improve ETS
effectiveness
Competitiveness
Political acceptability
European harmonization
Flexibility
Stringency for non-compliance
Implementation network capacity
Feasibility of implementation
Adopted by Konidari and Mavrakis (2007)
Timing of implementation
Impact on public finance
9
Ranking technique
• criteria weighted according to revealed preferences by various climate stakeholders (KM 2007)
• high preference for political acceptability (0.738), environment (0.168) and feasibility (0.094)
• Grade options using Simple Multi-Attribute Ranking Technique (SMART) scale [0,10]
• Clear and univocal ranking
• Widely adopted in the literature on decision processes (Journal of Behavioural Decision Making)
• Preferences toward criteria might have changed
• Grades may correspond to personal evaluation open to criticism (why 8 instead of 7 or 9?)
• Need to control for them with sensitivity analysis (our result varies by changing coefficients)
10
Impact of Policy Options on ETS
ETS cap reduction (-30%, permanent and progressive set-aside)
•
Environment highest emissions reduction (reduce ETS cap + increase non-ETS target)
•
Efficiency Increase average price but variability unchanged: no long term price stabilization,
uncertain demand and rigidity on supply side remain
•
Feasibility Implementation critical issue (emending both ETS and non-ETS Directive)
D2A
p
D
Cap 1
E2A
p2A
D2B
E1
p1
p2B
Cap 0
E2B
E0
p0
q1
q0
11
q
Impact of Policy Options on ETS
Temporary set-aside
• Environment No further emissions reduction (Cap unchanged)
• Efficiency Higher price in the short-time, even higher price variability in the long run
• Feasibility: procedure faster than other options (amendment of Auction Regulation)
D2A
p
D
p2B
Cap 0
E2A
p2A
p1
Cap 1
D2B
E1
E2B
p0
E0
p3
E3
q1
q0
12
q
Impact of Policy Options on ETS
National Price Floor
•
Higher price and lower emissions were floor is applied
•
National reduction of emissions lower ETS price emissions increase rest of EU emissions
•
EU intra leakage
•
Environment No further emissions abatement as overall cap unchanged
•
Efficiency ETS price reduced in the rest of ETS
•
Feasibility Fastest and easiest implementation (change in national law, no negotiation)
13
Impact of Policy Options on ETS
Carbon Central Bank
•
Central bank adjusts money supply according to inflation target
•
Reversible adjustment of the ETS cap to keep price within a fluctuation band
•
Increased flexibility on the supply side and possibility to react to unexpected exogenous shocks
•
Need for independent authority with clear mandate and insulated from short-term political concerns
•
Price control  market outcome like carbon tax, though different procedure and distributive effects
•
Efficiency static and dynamic efficiency (Short-term price support and long-term price signalling)
•
Environment variability from price to emissions
•
Feasibility difficult implementation (public consultation, regulation and public procurement)
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Grades and ranking of the policy options (method 2)
Criteria
Weight coef.
-30%
Perm. setaside
Temp. setaside
Prog. setaside
CCB
Nat. price
Floor
EU price
floor
Long-term
target
Environmental
performance
0,168
Direct reduction of
emissions
0,833
9
7
5
7
7
5
7
8
Indirect environmental
effects
0,167
9
7
5
7
7
5
7
8
Political
acceptability
0,738
Static efficiency
0,474
8
8
8
7
8
3
8
5
Dynamic efficiency
0,183
5
5
2
5
10
3
8
8
Competitiveness
0,085
3
3
6
4
5
6
3
5
EU harmonization
0,175
5
7
7
7
8
2
7
7
Flexibility
Stringency for noncompliance
0,051
5
5
5
5
8
5
5
5
0,032
9
9
9
9
9
9
9
9
0,309
6
6
6
6
4
6
6
6
0,581
3
4
6
4
1
8
4
3
0,11
4
7
4
7
7
3
7
5
1
6,60
6,61
6,13
6,32
7,43
3,97
7,01
6,18
4
3
7
5
1
8
2
6
Feasibility of
implementation
Impl. network
capacity
Timing of
implementation
Impact on public
finance
TOTAL
Ranking
weighted
0,094
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Discussing Results and Sensitivity Analysis
• Clear ranking identified: CCB and EU price floor best options under both methods
• Ranking depends on grades and coefficients’ of environmental performance (EP), political
acceptability (PA) and feasibility of implementation (FI)
• Test robustness of ranking through a Sensitivity Analysis
1. One coefficient is increased gradually by a certain percentage, the second is lowered by the
same percentage and the third one is adjusted accordingly.
2. one weight coefficient is increased gradually, while the second one is reduced by the same
amount and the third one is kept constant
• Perform six SA with different combinations of coefficients
• Report some of them
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Discussing Results and Sensitivity Analysis
Case 1: preference for environmental performance (highest coefficient)
8
7,8
7,6
- 30% becomes first
option
7,4
Long term becomes
second option
7,2
7
6,8
CCB looses positions
6,6
6,4
6,2
0%
2%
4%
6%
8%
10%
12%
14%
16%
18%
20%
22%
24%
26%
28%
30%
32%
34%
36%
38%
40%
42%
44%
46%
48%
50%
52%
54%
56%
58%
60%
62%
64%
66%
68%
70%
72%
74%
76%
78%
80%
82%
84%
86%
88%
90%
92%
94%
96%
98%
100%
6
-30%
EP (adjsument)
PA (% reduction)
FI (fixed)
CCB
EU price floor
0%
0,168
0,738
0,094
20%
0,315
0,590
0,094
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Long-term target
30%
0,389
0,516
0,094
55%
0,574
0,332
0,094
Discussing Results and Sensitivity Analysis
Case 2: preference for both EP and FI (increase) against PA (decrease)
7,5
7
CCB looses position and EU price floor becomes
the first best option
6,5
6
5,5
5
When Feasibility is the
most relevant criterion,
then National price floor
becomes first option
4,5
0%
2%
4%
6%
8%
10%
12%
14%
16%
18%
20%
22%
24%
26%
28%
30%
32%
34%
36%
38%
40%
42%
44%
46%
48%
50%
52%
54%
56%
58%
60%
62%
64%
66%
68%
70%
72%
74%
76%
78%
80%
82%
84%
86%
88%
90%
92%
94%
96%
98%
100%
4
temporary set-aside
EP (% increase)
PA (% reduction)
FI (adjustment)
CCB
national price floor
0%
0,168
0,738
0,094
21%
0,203
0,583
0,214
18
62%
0,272
0,280
0,447
EU price floor
85%
0,311
0,111
0,579
Discussing Results and Sensitivity Analysis
Case 3: preference for political acceptability and effectiveness (increase PA)
8,5
CCB and EU price cover first and second position
8
7,5
7
6,5
6
permanent set-aside
EP (fixed)
PA (% increase)
FI (% reduction
progressive set-aside
0%
0,168
0,738
0,094
19
CCB
EU price floor
20%
0,168
30%
0,168
55%
0,168
0,7568
0,0752
0,7662
0,0658
0,7897
0,0423
Conclusions
Findings from SA
1. Best scenario: ranking unchanged by changing coefficient
2. Worst scenario: ranking unchanged up to 19% variation of coefficients: robust result
3. No unilateral conclusion Final ranking and best option strictly depends on preferences for
environment, efficiency or feasibility
4. Rather than determine the best option, better to find the most suited one according to priorities
5. Set-aside option mainly discussed in the EU political agenda, but it does not cover the first or
second position in any of the analyzed scenarios.
20
Thank you for your attention
Stefano Clò
Universitò degli Studi di Milano
[email protected]
21