Dóra Fazekas Carbon Market Implications for new EU - UniCredit ...

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Innovation implications of the EU ETS Another set of research is concerned whether the EU ETS spurs innovation (Gagelmann and Frondel, 2005; Schleich and Betz, 2005). Although this question is very important for the design of future climate policy, there is insufficient empirical evidence to answer it. Gagelman and Frondel, and Kemp (1997) provide an overview of the body of literature comparing C&C to ETS from the point of view innovation spurring effects. Compared with C&C measures emission trading does not necessarily increase a firm’s incentive to adopt new pollution abatement technology, according to the literature. On the other hand, C&C policies provide little or even no innovation incentive at all. They conclude that the substantial body of theoretical literature provides no consensus on the issue of whether or not emission trading generally triggers more innovation than other policy instruments, such as regulation standards. Downing and White (1986, pp. 21-22.) claim that emission trading increases a firm’s incentive to adopt new technologies. Jaffe et al. (2002) provide a survey on the general relationship between environmental policy and technological change. Fischer et al. (2003) conclude that a unanimous ranking of policy instruments with respect to their innovation- stimulating effects is impossible, although market-based instruments have long been regarded as superior. Gagelmann and Frondel (2005) expect only moderate innovation effects from the EU ETS. Schleich and Betz (2005) conclude that there are only moderate incentives for developing low carbon technologies during the pilot phase. Similarly, Oberndorfer and Rennings (2007) conclude that the scheme’s impact on innovation would be rather small. Sorrell and Skea (1999, pp.12) argue that emission trading induces incentives for R&D investment and additional improvement of current technologies. The survey conducted by the European Commission, McKinsey, and Ecofys (2005) states, that about half of the companies claim that the EU ETS has a strong or medium impact on decisions to develop innovative technology. The loose design of the current scheme and experiences with trading systems in the USA counter-indicate a quick surge in innovation. Hungarian carbon market experiences show that carbon price in the pilot phase was not high enough to spur innovation, and also the abundance of allowances did not mean constraint to innovate. Maybe the Kyoto phase will indeed spur innovation. Implications of the EU ETS on operating and investment decisions A number of studies tried to clarify the effect of the EU ETS on operating decisions and investment options by analyzing the varying cost increases for different technologies. Due to regulatory uncertainties and the large volatility of the allowance price, the EU ETS constitutes significant risks for technology investment decisions. In addition, the ETS review periods are too short-term for the 48
investments needed in the industry. On a longer term, not including a value for CO2 in investment projections becomes increasingly hazardous. A key criterion is the extent, to which the EU ETS allows market participants to manage carbon risk over the long run. Egenhofer (2007) argues, “a successful market allows predictability for investment and thereby provides the certainty to make efficient investment decisions, e.g. whether to invest in new equipment to reduce emissions or to buy extra allowances”. According to the study of the European Commission, McKinsey, and Ecofys (2005) for half of the companies the EU ETS is one of the key issues in long-term decisions; for the other half, it is only one among many issues. Reinaud (2003) analyzed the effect of emissions trading on operating decisions and investment options by comparing the effects of different carbon prices on the profitability of different power plant investments. She states that contrary to the theory; in practice investment signals may be distorted by the EU ETS. Incentives for shutting plants down, companies may decide to delay the plant’s closure, which could prevent investment in new plants and have a negative signal on the market. The obligation of new entrants to purchase allowances might represent an entry barrier on the one hand. Whereas on the other hand, allocating to new entrants for free could penalize investment in capacity expansion for incumbents. After all, she concludes, that the uncertainty surrounding the trading market causes definite hesitance to invest. This conclusion was confirmed during the interviews with Hungarian operators. Hoffmann (2007) provides an analysis of the technology investment decisions based on case studies in the German power sector. He looks at companies’ risk management and the timing of the various investments. He concludes that “the basic principle of the regulation works: CO2 allowance prices are integrated into several aspects of corporate decision making.” He concludes however that the implementation of the EU ETS in its first phase did not constitute an optimal regulatory environment for low carbon electricity generation. Pricewaterhouse Coopers conducted a Utilities global survey in 2007 (PWC, 2007) in order to find out whether the EU ETS has spurred investment in renewable generation. They found that two thirds of respondents from European utility companies have increased such investment and just over a third (36%) have increased investment in gas generation. 49
Page 1 and 2: PhD Program in Management and Busin
Page 3 and 4: List of figures Figure 1. Optimal l
Page 5 and 6: „If you want to understand today,
Page 7 and 8: Neither the theory nor the empirica
Page 9 and 10: Table 1. Installations receiving th
Page 11 and 12: oth on national and corporate level
Page 13 and 14: 1. Climate Change Regulation The fi
Page 15 and 16: approaches, activities that are not
Page 17 and 18: In Europe the United Kingdom and De
Page 19 and 20: (2) Allocating emission rights is d
Page 21 and 22: Figure 2. The cap determines the ma
Page 23 and 24: Table 5. Tradeable certificates (ba
Page 25 and 26: value, sectoral and spatial coverag
Page 27 and 28: with their quantified reduction tar
Page 29 and 30: * * * Several authors (Hahn and Sta
Page 31 and 32: EU ETS Within the context of the UN
Page 33 and 34: establishing an international marke
Page 35 and 36: (c) Allowances can also be distribu
Page 37 and 38: • ETS in New Zealand; • Volunta
Page 39 and 40: emissions trading schemes, making i
Page 41 and 42: end of the pilot phase. Since Augus
Page 43 and 44: Figure 10. Distance to burden-shari
Page 45 and 46: Early attitude of companies towards
Page 47: high quality, differentiated produc
Page 51 and 52: 3.2. Emission Trading in the new EU
Page 53 and 54: environmental benefits at a relativ
Page 55 and 56: well below their Kyoto target (EEA,
Page 57 and 58: lawsuits against the Commission for
Page 59 and 60: The most active countries to host J
Page 61 and 62: Figure 14. Hot air as supply for AA
Page 63 and 64: There have been three proposals on
Page 65 and 66: transparency of AAU transfers; redu
Page 67 and 68: Figure 18. Tradeable Hungarian AAU
Page 69 and 70: “Think Globally, Act Locally” I
Page 71 and 72: At the same time, this relatively f
Page 73 and 74: processes on the whole act a sink,
Page 75 and 76: directly from CO2 emissions are ess
Page 77 and 78: 1.2. A Review of the Hungarian Lite
Page 79 and 80: 2. Introducing the EU ETS in Hungar
Page 81 and 82: databases containing common data el
Page 83 and 84: instances where inconsistent decisi
Page 85 and 86: emissions each calendar year Non-tr
Page 87 and 88: is found to be in order, they may s
Page 89 and 90: economy to a market economy, as is
Page 91 and 92: the EU ETS. Many observers believe
Page 93 and 94: Emissions allowances to be allocate
Page 95 and 96: 2005 2006 2007 Installation Alloc.
Page 97 and 98: Finance is putting much of the reve
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conclusion. It is safe to conclude
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allowance surplus, and then increas
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agent. 23 Denmark sold 2,762 thousa
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and Water prepared its proposal on
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What was the reason for this anomal
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considered a “transfer.” Apart
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When allowances are recognized as g
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provision is to be formed against t
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the model shall be supplemented wit
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Participants of the Hungarian EU ET
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program, full sets of emissions dat
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Figure 27. The Concentration of the
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Figure 30. The Hungarian EU ETS mar
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Figure 32. Positions of Hungarian E
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Figure 40 below shows the allocatio
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3.2. The Impact of the EU ETS on Hu
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interviews, that companies looked u
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neither emissions-reduction targets
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was considered, since they all obta
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spillover effect; this, however, co
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During the pilot period, Hungarian
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to comply shall have their names pu
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eact efficiently to regulations. Th
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ensuring great enough profit, it sw
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combined with an internal price tha
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Were Emissions Actually Reduced? Co
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column) and the verified emissions
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Figure 38. Hungarian reference peri
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* * * The effects of the EU ETS on
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(2) Transfer account of allowances,
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In an EU-context, Hungary held its
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installations the author spoke to w
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Companies, which were certain of th
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Figure 42. Hungarian transactions d
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phase. CITL Data The transaction da
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International Transfers The author
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Based on these numbers, it may be c
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The two right-hand side columns in
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sales, and how much was accounted f
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the CITL only contains data on wher
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approximately two-fifths of the vol
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(3) Installations that had shut dow
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production, one-fifth represented t
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IV. EXPERIENCES OF THE EU ETS PILOT
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starting in 2012, the European Unio
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originally allocated. Based on thes
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economic development rather than as
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Hungary has still to learn to opera
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Appendix I. - Questionnaire 3.c. Cl
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Had surplus but did not sell EUAs ,
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Appendix III. - Accounting Aspects
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Appendix V. - Overview and main fea
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Appendix VII. - Foreign emission al
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Hungária Cementipari Rt. 2006 HU 5
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Reductions Clean Development Mechan
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Linking Directive from project acti
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VII. REFERENCES Ahman, M. - Burtraw
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Burtraw, D. - Palmer, K. - Bharvirk
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EEA (2006): Greenhouse gas emission
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Hahn, R. - Stavins, R. (1999): What
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Kaderják, P. (1997): Economics for
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Montero, J. P. (1997): Marketable P
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Philibert, C. (2006): Certainty ver
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Tietenberg, T. (1992): Relevant Exp
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Woerdmann, E. (2003): Developing ca
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Hungarian law - Hungarian governmen
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Oxford University Press, USA http:/
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