Does the EU Emission Trading Scheme ETS Promote Energy Efficiency?

Does the EU Emission Trading Scheme
ETS Promote Energy Efficiency ?
12 October 2021
Wolfgang Eichhammer, Fraunhofer Institute for Systems and
Innovation Research ISI

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Key Questions
▪ Through which mechanisms does the EU Emission Trading Scheme ETS promote
energy savings?
▪ How can we identify energy savings from the EU ETS through top-down indicators
as provided by ODYSSEE?
▪ Is there quantitative evidence that the EU ETS promotes energy efficiency?
Presentation and policy brief discusses, based on the Odyssee and
MURE databases (www.odyssee-mure.eu), through the use of
energy efficiency indicators how the EU ETS may have promoted
energy efficiency progress in the EU in the period 2005-2019/2020.

© Fraunhofer
Phases of the EU ETS
2005-2020
Phase I Phase II Phase III Phase IV
2005-7
Historical
emissions
(grandfathering)
2008-12
Historical
emissions
(grandfathering)
10% auctioning
2013-20
Auctioning energy sector (60%)
Benchmarking industry sector:
54 product benchmarks
+fallback
(40%)
cut in emissions volume 6.5%
below 2005 level
Single EU-wide cap, 1.74% cap
reduction every year (-21% by 2020
below 2005 level)
(Domestic) Aviation
New industries (Chemicals, Non-ferrous
New gases (N20, CH4)
Market Stability Reserve MSR
ETS Auction Revenue for innovative
low-carbon processes (NER 300)
2021-30
Ambition / Innovation / Integrity
Enhanced GhG targets (-55% by 2030): strong
link between general targets and EU ETS cap
Penalty 100 €/t CO2)
Penalty 40 €/t CO2)
From 2.2 to 4.2% annual cap reduction
New sectors: maritime,
buildings/transport, enhancement aviation
CDM/CERs
Carbon border adjustment mechanism (CBAM)
Strengthened Market Stability Reserve
End of CDM/CERs
Strengthened Benchmarks and faster
phase-out of free allocation
Spur Innovation

© Fraunhofer
Seite 7
Evolution of the EU ETS allowance price
Source: Sandbag, https://sandbag.be/index.php/carbon-price-viewer/
https://www.euractiv.com/section/emissions-trading-scheme/interview/analyst-eu-carbon-
price-on-track-to-reach-e90-by-2030/
Phase II
Phase III Phase IV
low prices due to:
▪ Oversupply from Clean Development
Mechanism CDM
▪ Economic/financial crises 2008/2009
▪ Oversupply of one annual emission budget
rising prices due to:
▪ Market Stability Reserve MSR
▪ Perspective of Phase IV
strongly rising prices due to:
▪ Climate neutrality target
▪ 55% GHG target and corresponding reduction in
ETS cap (from 2.2% to 4.2% annual decrease)

Energy Efficiency Impacts of the EU ETS in the Industrial Sector
1. Fuel efficiency improvements in industry branches concerned by the EU ETS;
2. Electricity efficiency improvements in ALL industrial branches, including non-
ETS industries, due to the integration of CO2 prices into electricity prices;
3. Enhanced fuel shift towards less CO2-intensive fuels in the industrial sector:
more natural gas and electricity; increased penetration of renewables in ETS-
Industries;
4. Reduction in production volumes (due to the shift of production volumes
outside Europe).

Energy Efficiency Impacts of the EU ETS in the Energy Sector
5. Energy efficiency improvement in thermal electricity generation by fuel (natural
gas, coal, oil…);
6. Enhanced penetration of more efficient power plants: more efficient fossil
power plants (in particular gas plants), enhanced penetration of renewables
into electricity generation;
7. Reduction in the demand for electricity across ALL sectors due to the
integration of CO2 prices in into electricity prices;
8. Change in the dispatch of power plants. This implies that less carbon intensive
fuels such as natural gas or renewables are used more intensively in the daily
dispatch of power plants compared to oil and coal.

Energy Efficiency Impacts of the EU ETS in the Aviation Sector
9. Energy efficiency improvement in fuel consumption for aviation
10. Modal shift from (domestic) air traffic towards less CO2-intensive transport
modes

Methodology (1)
▪ From the period 1995-2004, PRIOR to the EU ETS, which was introduced in 2005, we
deduce a reference development (counterfactual without EU ETS).
▪ The counterfactual was then projected to the period 2005-2019/2020, which covers
Phase I, Phase II and nearly fully Phase III of the EU ETS.
▪ Basic idea: factors which have induced energy efficiency improvements in the period
1995-2004 may have continued in the period 2005-2019 while the ETS has come in
addition.
▪ The spread in data during the reference period allows determining a standard deviation
which helps to establish whether any effect found for the EU ETS is significant
▪ Correction for fluctuations in the business cycle
▪ Further policies have to be taken into account such as dedicated policies for renewables
(e.g. feed-in/premium tariffs, obligation schemes, auctions).
▪ Hence, results related here present hence an upper limit for the impacts of the EU ETS
on energy efficiency.

Methodology (2)
▪ Four sectors in the ODYSSEE indicators which are mainly covered by the ETS and
which represent a large share of the EU ETS emissions:
▪ Primary metals (mainly iron/steel and non-metallic minerals)
▪ Non-metallic minerals (cement, glass, bricks, ceramics)
▪ Chemicals (e.g. steam crackers)
▪ Paper industry
▪ Difference between energy consumption of 4 branches in ODYSSEE and in the
European Union Transaction Log (EUTL) about 2%

Effect 1 - fuel efficiency industry ▪ No fuel savings
observable in industry
due to the ETS.
▪ The trend in savings as
determined from the
baseline 1995-2004 has
been interrupted by the
economic and financial
crises in the years
2008/9 and following
years.
▪ After this period of
time, the fuel savings
continued with a
similar path as during
1995-2004 up to 2019.
Source: own calculation based on Odyssee Database

Evolution of specific emissions cement clinker
▪ Difficult data context:
e.g. WBCSD GNR
change in specific
emissions related to
biomass
▪ Gradual adaption over
time leads to apparent
decrease in emissions
per tonne of cement
▪ Not confirmed by
analysis based on
EUTL
Source: Impacts of the Allocation Mechanism Under the Third Phase of the European Emission Trading Scheme
https://www.mdpi.com/1996-1073/11/6/1443#

Effect 2 - electricity efficiency All
industrial branches
▪ Significant electricity
savings observable in
industry.
▪ However, there is most
likely a strong impact from
eco-design and labelling
policies in industry which
have had strong impact on
cross-cutting technologies
such as electric motors.
▪ One step forward could by
taken in the analysis by
separating cross-cutting
technologies from process-
specific technologies.
However, no long-term
data series are available for
this analysis.

Effect 3 - enhanced fuel shift industrial sector
▪ Observable effects are at
the limit of sensitivity.
▪ Potential energy savings
from the use of more
efficient fuels are already
included in Effect 1.
▪ Therefore, this effect has
only (potential)
additional impacts in
terms of decarbonisation
of the fuel supply.
▪ This is expressed as the
average emission
coefficient for the fuels
used in industry.

Effect 4 – carbon leakage/reduction in production volume
▪ The possible impact of the ETS on production volumes of products in manufacturing industries
and the possible shift of production to outside Europe (carbon leakage) cannot be dealt with
the methodology of the ODYSSEE indicators. Requires analysis of trade patterns
▪ Also, the effect arises from reduced activity levels, which in the industry sector may be less
desirable.
▪ Past studies did not find significant carbon leakage during the first phase of the EU ETS, e.g. IEA
(2008); Healy et al. (2018).
▪ The sectors examined showed no marked changes in trade flows and production patterns:
• Explanations advanced: carbon leakage may have been hidden to the free allocation of allowances.
• Largely free allocation to ETS industry has been valid up to 2020 (Phase 3), despite the introduction of
benchmarks and will continue to 2030, though linked to more stringent features.
• Low carbon price levels
▪ In future: effect could be visible but more and more countries embark on ETS schemes
though ambition levels can be different.

Effect 5 - thermal power plant efficiency
▪ While efficiency improvements
are observable, they are lower
during the ETS phases than the
baseline, implying that the ETS
was not a main driving factor.
▪ The potential effect is
measured through the average
efficiency of thermal power
plants (notably oil, natural gas,
coal/lignite and biomass).
▪ May be explained by fact that
efforts of supplier shift away
from improving technology to
be phased out as well as by
limitations in technology to
improve further.
Source: own calculation based on ENERDATA Global Stat

Effect 6 - enhanced penetration of
efficient power plants
▪ Effect by far the largest observable.
▪ Expressed as average efficiency of
the power sector which raised by 10
points, leading to substantial primary
energy savings.
▪ Dedicated RES policies (feed-in
tariffs, obligation schemes) played
major role inprimary energy savings.
▪ Previous EU ETS impact assessments
concluded on relatively large contri-
bution to the shift observed towards
RES. Given the relatively low ETS
prices in most of the period up to
2018, it is doubtful that the effect is
so large.
▪ Only starting 2018, the relatively
steep decline of lignite and coal on
the power sector could be related to
the strongly increasing ETS prices.
Source: own calculation based on ENERDATA Global Stat

Effect 7 - electricity efficiency All sectors
(excl. ind.)
▪ There are some significate
savings observable for
other sectors than
industry though limited.
▪ Industry already
considered in Effect 2
▪ Nevertheless, the same
remark applies than for
industry: stronger eco-
design standards and
labels, as well as top-
runner programmes for
electric appliances in
households and the
services sector could
explain those additional
savings as compared to
the regulation during the
base period 1995-2004.

Effect 8 – efficient hourly power plant dispatch
▪ One central impact of the ETS in the power sector is the change in plant dispatch caused by
higher generation cost for CO2-intensive generation technologies due to carbon pricing.
▪ This implies that less carbon intensive fuels such as natural gas or renewables are used
more intensively in the daily dispatch of power plants compared to oil and coal.
▪ RES policies have in so far an impact as they prescribe generally priority for renewable
energy sources in the dispatch.
▪ The ETS has therefore rather an impact on the dispatch of less carbon-intensive fossil
fuels than on the dispatch of renewables.
▪ Such effects are included in effect 6 representing the change in the power plant mix and
cannot be easily separated on an annual basis from investment effects such as enhanced
investments in renewables.
▪ Detailed hourly modelling of power sector dispatch required.

Effect 9 - fuel efficiency (domestic) aviation ▪ No additional
savings/impacts are
observable from the
EU ETS on the fuel
efficiency in (domestic
aviation

Effect 10 - share of (domestic) aviation in Mobility
▪ No additional
savings/impacts are
observable from the EU
ETS on the (domestic)
aviation share in modes.
▪ There is also the impact
visible of the economic/
financial crises but
finally, aviation took up
the same speed in the
period 2013-2019 than
for the baseline period
(excluding the period of
economic down-turn)

Summary of results for the possible impacts of the EU ETS on
the different effects in the period 2005-2019/2020
▪ Maximum energy
savings of around
107 Mtoe and CO2
savings of around
218 Mt CO2 observed
for 2019/2020
▪ Mostly stemming
from Effect 6, the
power plant mix.
▪ At least partially or
even to a large
degree influenced by
other factors than the
EU ETS such as
renewables policies
or fuel prices

▪ Enhanced GhG targets (-55% by 2030): strong link between general targets and EU ETS
▪ A bundle of enhanced features:
▪ a one-off reduction to the cap and increased linear reduction factor (from 2.2% to 4.2%);
▪ inclusion of the maritime sector into the EU ETS’ scope from 2023 onwards;
▪ a separate fuel ETS for buildings and transport (danger: ETS as an instrument for everything);
▪ strengthened benchmarks and a faster phase down of free allocation which would be tied to low-carbon investment by the
receiving entity;
▪ introduction of a carbon border adjustment mechanism (CBAM) that prices imported goods based on their embedded
emissions to become fully operational by 2026;
▪ updated parameters of the Market Stability Reserve (MSR) including a new buffer threshold and an extension of the current
intake rate of 24% beyond 2023;
▪ new regulations around revenue use to address distributional effects and spur innovation, including the creation of the
Social Climate Fund.
▪ use of offsets is not envisaged
Outlook on European Green Deal / Fit for 55
packages and EU ETS (Phase 4)
Quite a number of features to keep the
allowance price at sufficiently high levels.
More impacts of ETS to be seen by 2030

Seite 26
MANY THANKS FOR
YOUR ATTENTION!
Wolfgang Eichhammer
Head of the Competence Center Energy Policy and Energy Markets
Fraunhofer Institute for Systems and Innovation Research ISI
Breslauer Straße 48 | 76139 Karlsruhe | Germany
Phone +49 721 6809-158 | Fax +49 721 6809-158
mailto: wolfgang.eichhammer@isi.fraunhofer.de
https://www.isi.fraunhofer.de
and
Utrecht University
Copernicus Institute of Sustainable Development
Princetonlaan 8a
3584 CS UTRECHT
The Netherlands
Email: w.a.eichhammer@uu.nl

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