Department of Economics School of Business, Economics and Law at University of Gothenburg Vasagatan 1, PO Box 640, SE 405 30 Göteborg, Sweden +46 31 786 0000, +46 31 786 1326 (fax) www.handels.gu.se info@handels.gu.se WORKING PAPERS IN ECONOMICS No 634 Architecture of the EU Emissions Trading System in Phase 3 and the Distribution of Allowance Asset Values Åsa Löfgren, Dallas Burtraw, Markus Wråke, and Anna Malinovskaya October 2015 ISSN 1403-2473 (print) ISSN 1403-2465 (online) Architecture of the EU Emissions Trading System in Phase 3 and the Distribution of Allowance Asset Values Åsa Löfgren, Dallas Burtraw, Markus Wråke, and Anna Malinovskaya∗ Abstract Recent changes to the EU Emissions Trading System introduce structural changes regarding the initial distribution of emissions allowances, which are worth tens of billions of euros. A key change is the expanding role for auctions, which account for about half of the allowance allocation now and will be a growing share going forward. The use of revenue from auctions is a decision left to EU Member States and appears increasingly important. Well over half of auction revenue to date has been directed to energy and climate related purposes. Further, we do not find evidence that Member States have used state aid to electricity-intensive firms to strategically support domestic industry. The trading system is evolving in a way that is likely to improve its performance, but there remain important questions related the future price of allowances and the distribution and use of asset value created under the trading system. Key Words: auction, cap and trade, European Union, EU ETS, allocation, climate change, policy JEL Classification Numbers: H23, P48, Q54 ∗ Löfgren is an associate professor at the Department of Economics at the University of Gothenburg; Burtraw is the Darius Gaskins Senior Fellow at Resources for the Future; Wråke is head of the Energy Unit at IVL; and Malinovskaya is a research assistant at Resources for the Future. The authors appreciate financial support from the Mistra INDIGO research program. Research assistance by Oskar Falk, Diana Ivanova, Nicklas Nordfors, and Haben Tekie on earlier versions of this paper is gratefully acknowledged. 2 1. Introduction Administrators of the EU Emissions Trading System (ETS) recently introduced changes to the system that affect the initial distribution of emissions allowances. A key change is the expanding role for auctions, which will yield billions of euros in revenue. From a policy perspective, understanding the potential consequences of various approaches to the use of the auction revenues is critical because this has distributional and strategic impacts both within and between Member States. The trading system is evolving in a way that is likely to improve its performance, but there remain important questions related the future price of allowances and the distribution and use of asset value created under the trading system. The introduction of a cap assigns a scarcity value to the opportunity to emit and thereby has created an asset in the form of emissions allowances. Each EU allowance (EUA) enables the holder to emit one metric tonne of carbon dioxide (CO2). The total value of allowances has varied with their price, approaching 10 billion euros in 2013 and 2014 and more than 30 billion euros in some previous years. Using auctions to initially distribute emissions allowances has the potential to collect large financial value for EU Member States. In phase 1 (2005–2007) and phase 2 (2008–2012) of the ETS, about 97% of emissions allowances—and the associated financial value of those allowances—were distributed for free to incumbent firms. That has changed in phase 3 (2013–2020), when roughly half of the allowances will be distributed through an auction. Although free distribution is still substantial, auctioning is the default allocation method and will have an expanding role going forward. Important changes that were made to the EU ETS before the third phase of the program (2013–2020)1 include the following: • the introduction of a centralized system for setting the annual cap on the number of new emissions allowances to be issued; • an expansion of the scope of the scheme to include more industrial activities and other greenhouse gases apart from CO2; 1 These changes result from amendments to the ETS Directive 2003/87/EC. 3 • an expanded role for auctions and the identification of auctions as the default way of distributing emissions allowances; • the elimination in principle of free allocation to electricity production, with exceptions discussed below; • the implementation of harmonized system-wide rules based on product-specific emissions rate benchmarks for free allocation of emissions allowances to industry; • set aside of 300 million allowances in the New Entrants Reserve (NER) to fund the deployment of innovative renewable energy technologies as well as carbon capture and storage, known as the NER 300 program;2 and • changes in the allowed use of international credits for compliance. The next section of the paper addresses the basic architecture of the program, including the determination of the cap on the annual distribution of emissions allowances. Section 3 describes the magnitude of financial value created under the trading program and how the initial distribution of that value has changed in phase 3. Section 4 describes in more detail the growing role of auctions. Section 5 reviews how Member States have used the revenue from auctions. Section 6 outlines state aid measures introduced to reduce some of the indirect costs that the system imposes on large electricity consumers. Section 7 concludes. 2. The Basic Architecture of the EU ETS in Phase 3 During phase 1 and phase 2 (2005 to 2012), the emissions cap was established in an indirect manner based on decentralized decisions taken by individual Member States. Each Member State was required to draw up a national allocation plan (NAP) containing a list of all stationary installations to be included in the ETS and the proposed allocation of emissions allowances to each installation for each year. The NAPs constituted the aggregate cap over covered facilities and were reviewed by the Commission in each phase to verify that they were consistent with the emissions reduction targets for the EU and the criteria established in an annex to the Emissions Trading Directive, as well as with the EU rules on state aid and competition.3 As a result of the phase 1 review, the Commission requested that some Member States make 2 European Commission, 2015a. 3 European Commission, 2015b. 4 changes to their NAPs because it was concerned that their proposed allocation plans would jeopardize the achievement of the Kyoto targets and allow the Member States to intervene in the market after the allocation was done to redistribute allowances. The Commission also made an effort to make the process of creating NAPs simpler and more transparent in phase 2.4 2.1 The Introduction of a Centralized System for Setting the Cap A major change in phase 3 was the replacement of the NAP process with a centralized system for setting the emissions cap. In July 2010, in its Decision 2010/384/EU, the Commission determined the cap for 2013 based on the current scope of the EU ETS—that is, the installations covered in the 2008–2012 period.5 The determination of the number of allowances issued in 2013 applied an annual factor for reducing the cap to an amount determined by a calculation based on the following elements:6 • the ETS-wide average annual quantity of allowances that have been issued from 2008 to 2012; • the average annual quantity of allowances issued to installations that opted in to the trading system from 2008 to 2012;7 • the quantity of allowances that accounts for the extended scope of the ETS to include additional installations in 2013 that emitted the following greenhouse gases: o CO2 emissions from petrochemicals, ammonia, and aluminum; o N2O emissions from the production of nitric, adipic, and glyocalic acid; and o perfluorocarbons (PFCs) from the aluminum sector; and • a deduction of the quantity of allowances associated with emissions from installations that opted out from the ETS.8 4 European Commission, 2015b. 5 European Commission, 2015c. 6 European Commission, 2015c. 7 Article 24 of the EU ETS Directive enables Member States to expand the coverage of the ETS by exercising an option to include in the trading program activities, greenhouse gases not originally covered by the scheme, installations in sectors covered by the ETS that operate below defined capacity limits, and installations in sectors not covered by the EU ETS. See Ellerman et al. (2010a) for a detailed discussion of how the opt-in provision was used in phase 1 and early in phase 2. 5 Because the cap for 2013 is calculated from the midpoint of the period 2008 to 2012 (i.e., 2010), the annual emissions cap reduction factor of 1.74 percent (in absolute figures, 38,264,246 allowances per year) was applied three times (for 2011, 2012, and 2013) to arrive at the total ETS-wide quantity of allowances (cap) for 2013 of 2,084,301,856 allowances.9 If this linear reduction factor is applied to the cap in each year in phase 3, as required by current regulations, then by the end of phase 3 in 2020, this process will result in a 21 percent cut in emissions from installations in the EU ETS compared with 2005 levels.10 At the start of phase 4 in 2021, the annual linear reduction factor will increase to 2.2 percent, as agreed upon by EU leaders in October 2014 as part of the 2030 policy framework for climate and energy.11 2.2 Expansion of the Scope of the ETS When the ETS started in 2005, it covered only CO2 emissions and the 25 EU Member States. In 2008, additional installations from participating Member States were covered by the scheme, due to the termination of the Article 27 temporary opt-out provision and to the clarification of the definition of combustion installations. Further, a number of countries decided to opt in N2O-emitting installations. 12,13 In addition, a range of new sectors and source categories have been added, as listed in Table 1, including in particular installations emitting N2O and PFCs.14,15 8 Article 27 of the first 2003 EU ETS Directive allowed Member States to exercise an option to exclude certain installations from the ETS during phase 1. Originally, this temporary opt-out provision was meant to give installations that were subject to specific constaints more time to transition to the ETS scheme. However, Article 27 in the amended 2009 Directive also allowed for the exclusion of small installations and hospitals subject to the same measures from the ETS in order to help those installations avoid administrative burdens and costs (Climate Policy Section Department of the Environment, Heritage and Local Government, and Environmental Protection Agency, 2011). 9 Note that the absolute number of allowances established in the Commission Decision 2010/634/EU was 2,039,152,882 allowances. It was later updated to 2,084,301,856 allowances (European Commission, 2015d). 10 European Commission, 2015c. 11 European Commission, 2015e. 12 European Parliament and Council, 2003, Article 9a(1). 13 European Parliament and Council, 2003, Article 24(1). 14 European Environment Agency, 2015a. 15 European Parliament and Council, 2003, Annex I. 6 Table 1. Expansion of Program Scope in Phase 3 Ne w r egulate d a ctiv ity Regulat e d g ree nho use g ase s Pro duct io n of prim ary alum inium CO 2 and perfl u o ro c arbo ns Pro duct io n of nitric acid CO 2 and nitro us oxide Pro duct io n of adipic acid CO 2 and nitro us oxide Pro duct io n of gly o xal and gly o cy lic acid CO 2 and nitro us oxide Pro duct io n of ammo nia CO 2 Pro duct io n of bulk organic chem icals by crack ing, reform ing, part ial or full oxidat io n , or sim ilar pro ce sse s CO 2 Pro duct io n of hydro ge n (H 2 ) CO 2 The geographic scope of the ETS has also changed. In 2007, the last year of phase 1, Bulgaria and Romania joined the 25 EU Member States. At the beginning of phase 2, in 2008, Liechtenstein and Norway were added. At the beginning of phase 3, in 2013, Croatia and Iceland entered the EU ETS. Thus, the EU ETS currently covers 31 countries in the European Economic Area, including 28 EU Member States and 3 Members of the European Free Trade Association (Iceland, Liechtenstein, and Norway). This sequence of changes in coverage and scope is illustrated in Figure 1. 7 Figure 1. Scope of the EU ETS since 2005 Source: European Environment Agency, 2015a. 2.3 Regulation of the Aviation Sector The European Commission set a separate cap on emissions from the aviation sector that is equivalent to 97 percent of historical aviation emissions in 2012, declining to 95 percent starting in 2013. The annual average of CO2 emissions in the years 2004, 2005, and 2006 forms the baseline for “historical” aviation emissions in the European Economic Area. Eighty-two percent of aviation emissions allowances are granted for free to aircraft operators, and 15 percent are auctioned starting in 2013, with the remaining 3 percent set aside for new entrants and fast-growing airlines. The free aviation allowances will be distributed by a benchmarking process that accounts for the activity of each operator in 2010 measured in tonne- kilometres (distance × payload) using a formula that accounts for the total distance traveled and the total mass of freight, mail, and passengers carried.16,17 The benchmark (emissions per tonne- kilometer) is calculated by dividing the total annual amount of free allowances available by the 16 European Commission, 2015f. 17 European Parliament and Council, 2008. 8 independently verified sum of tonne-kilometer data included in applications from aircraft operators to the Commission. In phase 3, the aviation sector cap does not decrease, and aircraft operators will also continue to receive the large majority of their emissions allowances for free in the manner described.18 The number of aviation emissions allowances in phase 3 (210 million/year) is relatively small compared with the total number of allocated EUAs (over 2 billion in 2013). Moreover, through a series of amendments to the original decision, such as changing the scope to include only domestic EU flights and exclude flight operators with annual emissions below 1,000 tonnes/year, the number of allowances that have actually been allocated is even lower—only some 38 million allowances/year. Of these, 6 million are auctioned; the remainder is allocated free of charge. Aviation allowances cannot be held or surrendered by stationary installation operators and are issued to aviation operators only. However, aviation operators can hold and surrender both aviation allowances and general allowances if necessary for compliance. In addition, they are entitled to use international credits up to a maximum of 1.5 percent of their verified emissions during the period from 2013 to 2020.19 3. Distribution of the Allowance Value The introduction of the cap on emissions and the transferability of emissions allowances in a market create economic value that flows to the holder of the allowances. In phase 1 and phase 2, the asset value was initially distributed almost entirely to incumbent emitting firms. Although firms received allowances for free, the market value of allowances was expected to be apparent in changes in the prices paid by energy consumers, yielding additional revenue to these firms. Firms charge their consumers for the use of allowances because they face an opportunity cost in using the allowances for production and forgo the opportunity to sell the allowances in the market. In effect, the cost of allowances translates a firm’s emissions into a variable cost of production, resembling other factor inputs such as labor and other resources. When allowances are distributed for free, the change in revenues from higher product prices will typically be greater than the change in costs from reducing emissions and complying with the program, resulting in extra-normal or “windfall” profits. Several studies by banks, governments, and 18 European Commission, 2015g. 19 Environment Agency, 2014a; Environment Agency, 2014b; European Commission, 2015g; and European Commission, 2014a. 9 academic teams have found that free allocation led to windfall profits, especially in the electricity sector (Nicolai and Zamorano 2014, Laing et al. 2013, Veith et al. 2009, Woerdman et al. 2009, Sijm et al. 2006, Bovenberg and Goulder 2000, Burtraw and Palmer 2008) but also among industrial firms (Martin et al. 2014). Phase 3 marked an important transition by directing the initial distribution of emissions allowances away from firms and instead to Member State governments, which can then sell these allowances into the market using auctions (Figure 2). The magnitude of that value is illustrated in Table 2, which describes the value of allowances that have entered the market, the percentage that have been auctioned and the revenues directed to Member States. It is important to note that this is a lower bound on the value that will be distributed through an auction because it is anticipated that not all allowances set aside for allocation to industry and new entrants will be used.20 According to independent market analysts, some 500-900 million allowances are expected to be left over by the end of phase 3.21,22 The cumulative volume left over will be transferred to the market stability reserve (MSR) at the end of phase 3 in accordance with the MSR regulation.23 However, it is not known what happens to these unallocated allowances after they are placed into MSR; several alternative policy options are currently being considered.24 In addition, auction shares in Figure 2 and Table 2 do not include an important portion of allowances directed to the electricity sector. Although these allowances are distributed to power generators in the eligible Member States for free, their value should be directed to modernization of the electricity sector, which could be viewed as an auction with revenues earmarked to this purpose.25 The European Commission takes these aspects into account in estimating that 57 percent of the total allowances introduced in phase 3 will be distributed through an auction or its equivalent.26 This includes back-loaded allowances that are placed into MSR. 20 There is one additional source of unallocated allowances. According to the European Commission, “A third category of de facto "unallocated" allowances stems from the application of a carbon leakage factor for sectors not on the carbon leakage list, which the legislator has not directed to the MSR” (European Commission, 2015h). 21 International Emissions Trading Association, n.d. 22 Note that the European Commission cites a narrower range of 550-700 million (European Commission, 2015h). 23 European Parliament, 2015a. Market stability reserve is discussed in more detail in section 3.4. 24 European Commission, 2015h. 25 These allowances are also subtracted from auction volumes of the eligible Member States (European Commission, 2015h). 26 European Commission, 2015h. 10 A large drop in the total volume of emissions allowances can be noticed between the years 2013 and 2014, due primarily to the decision of back-loading allowances (see section 3.4 for more details). Historical EUA prices were computed as annual averages of December futures contract prices. In phase 1 through the beginning of phase 2, most of the reported transactions were December futures, but there is little difference between these prices and spot prices over this period.27 The table reports projections starting in 2015. Based on projected prices and volumes (see section 5 for details of the calculation of the projected prices) in 2018, the auction revenue directed to Member States will exceed 50 percent of total asset value of allowances that have entered the market, finally overtaking the share that has been directed to free allocation. It is noteworthy that the total asset value of allowances continues to increase through 2020, and will continue to do so for years thereafter. Even as the quantity of allowances is reduced each year the price is expected to increase at a greater rate, so that total asset value of emissions allowances grows over time. Further, as noted earlier, some allowances from those intended for free allocation to new entrants, industry and efforts to mitigate carbon leakage are expected to remain unallocated, and these allowances are likely to ultimately enter the market through an auction or distributed for earmarked purposes. 27 Ellerman, Convery, and de Perthuis, 2010b. 11 Figure 2. Share of Auctioned Allowances in the Total Volume of Allowances that Have Entered the Market Source: Table 2, below. 12 Table 2. The Financial Value and Initial Distribution of Emissions Allowances that Have Entered the Market Total volume of emissions allowances (million tonnes) Average price (2014 €/tonne) Total asset value (billion 2014 €) Auction revenue portion of total asset value (%) Auction revenue directed to Member States (billion 2014 €) Phase 1 2 00 5 2 ,09 6 27 56.65 <1 <0.01 200 6 2 ,07 9 21 43.46 <1 0.1 4 200 7 2 ,19 5 <0.5 0.6 1 <1 <0.01 Phase 2 2008 2 ,01 1 25 49.29 3 1.3 0 200 9 2 ,04 9 15 29.90 4 1.1 6 201 0 2 ,08 1 16 32.90 4 1.4 5 201 1 2 ,10 1 14 29.50 4 1.3 0 201 2 2 ,17 0 8 16.75 6 0.9 7 Phase 3 2013 2 ,10 9 4 9.2 8 52 4.8 3 201 4 1 ,56 2 6 9.1 5 40 3.6 8 201 5 1 ,68 6 8 13.15 39 5.0 9 201 6 1 ,73 7 11 19.11 42 8.0 5 201 7 1 ,91 3 13 24.87 49 12.16 201 8 1 ,89 2 14 26.49 50 13.16 201 9 1 ,86 7 14 26.14 51 13.24 202 0 1 ,84 4 15 27.66 53 14.60 Notes: Prices and calculated values are based on the weighted average of the observed futures price for December of the year in which the futures mature through 2014 and projections starting in 2015. See Appendix 1 for detail. As discussed above, the auction share estimated by the European Commission over the entire phase 3 is larger because the European Commission includes unallocated allowances, back-loaded allowances, and allowances set aside for allocation to power generators in the eligible Member States in the auction share. 3.1 Auctioning is the Default Mechanism Beginning in Phase 3 but Free Allocation Remains Important Before phase 3, the ETS prescribed a maximum on the volume of emissions allowances that Member States could distribute through an auction. In phase 1 the maximum was 5 percent, and in phase 2 it was 10 percent of the total national volume of allowances to be issued. The actual share of allowances auctioned was less than 1 percent in phase 1 and varied between 2.6 13 percent and 5.8 percent during phase 2. Beginning in phase 3, the use of auctions was adopted as the default way of initially distributing emissions allowances.28 The share of allowances auctioned amounted to 52.1 percent in 2013, falling to 40.2 percent in 2014 due to back-loading, and hence substantial quantities of allowances are still allocated free of charge. Most of these flow to industry, but some electricity-producing installations also receive free allowances. These shares are summarized in Table 3. By an amendment to the Auction Regulation adopted in November 2011, the Member States agreed to the Commission’s proposal of “early auctions” of a portion of EU ETS phase 3 allowances by holding auctions beginning in 2012.29 One of the motives for “early auctions” was the perceived need for entities to hedge costs, particularly in the power sector, due to the common practice of selling electricity forward and at the same time buying the inputs needed for electricity production, including emissions allowances.30 The allowances auctioned in 2012 were divided among the Member States as set out in Annex I of the Auction Regulation. The volume of “early auction” allowances does not constitute extra allowances for EU ETS phase 3, but is instead deducted from the total amount of allowances for the years 2013 and 2014. The volume of early auctions was only 90 million allowances. 28 European Parliament and Council, 2003, Article 10(1). 29 European Commission, 2011a. 30 European Commission, 2011a, Recital (2). 14 Table 3. Total Initial Distribution of Allowances in Phase 3 (million tons CO2 equivalent) 2013 2014 2015 2016 2017 2018 2019 2020 Total Cumulative percent of the cap Auction not including back-loading 8 98 928 952 932 936 940 946 973 7 ,5 0 5 42.3 ( 56 .6) a Back-loadingb – 400 – 300 – 200 - 900 5.8 Targeted allocation to electricity 1 36 97 115 98 81 63 42 0 632 4. 1 Free allocation to industry 7 60 732 758 756 752 752 749 747 6,00 6 38.5 Free allocation to district heatingc 1 04 94 84 76 68 61 54 48 589 3.8 New entrants reserve 1 0 11 76 76 76 76 76 76 477 3. 1 NER 300d 2 00 100 300 2 Total for stationary installations 2 ,10 8 1,56 2 1,68 6 1,73 7 1,91 3 1,89 2 1,86 7 1,84 4 14,6 09 Cap for stationary installations e 2 ,08 4 2,04 6 2,00 8 1,97 0 1,93 1 1,89 3 1,85 5 1,81 6 15,6 03 99. 6 e Auctioned to aviation 6 6 6 6 6 6 6 6 48 Free allocation to aviation 3 2 32 32 32 32 32 32 32 256 Total allocation to aviation 3 8 38 38 38 38 38 38 38 304 Grand Total 2 ,14 6 1,60 0 1,72 4 1,77 5 1,95 1 1,93 0 1,90 5 1,88 2 14,9 13 Notes: Values for 2013 and 2014 are reported, other values are projected. aThe auction share of 56.6 percent includes 700 million unallocated allowances, 632 million allowances allocated to power generators in eligible Member States in 2013-2014 or set aside for this purpose for 2015-2020 , and 900 million back-loaded allowances in accordance with European Commission’s methodology (European Commission, 2015h). bThese amounts were withdrawn from the amounts to be auctioned in accordance with the Commission Regulation (EU) No 176/2014 (European Commission, 2014b) and will be managed in accordance with the market stability reserve provisional regulation discussed in section 3.4. cIncludes high-efficiency cogeneration. dThe NER300 program has the aim of funding innovative low-carbon energy demonstration projects. eThe difference between the total and the cap over phase 3 is due to back-loaded allowances and some unallocated allowances left over in 2013 and 2014 from targeted allocation to electricity, industry, and new entrants reserve. Source: Authors’ calculations. See Appendix 2 for detail. 15 3.2 The Dominant Approach in the Electricity Sector: Auctioning In principle, there should be no free allocation to electricity producers.31 However, the provisions of the amended ETS Directive allow some Member States to deviate from this principle. Member States with national electricity networks that are poorly connected to the international interconnected system for transmission of electricity and with a high dependency on a single fossil fuel for their electricity generation were given the option to allocate allowances for free to such installations, with an expectation about how the allowance value will be used (see “Targeted Electricity Allocation” in Table 2, also known as “optional derogation”).32 The so- called “Eligible States” that have this opportunity are Bulgaria, Cyprus, the Czech Republic, Estonia, Hungary, Latvia, Lithuania, Malta, Poland, and Romania. All of the eligible States except Malta and Latvia have applied to the Commission for such targeted allocation. Hungary stopped using this option after 2013.33 However, the revised ETS Directive stipulates that even when the derogation is granted, the level of targeted allocation in 2013 should not exceed 70 percent of the allowances needed in a Member State to cover emissions for the supply of electricity to domestic consumers.34 Across the eight eligible Member States that took advantage of optional derogation, 133,059,430 allowances were allocated for free to power generators in 2013, and 100,474,443 allowances were allocated to the same Member States minus Hungary in 2014.35 Over the period 2013–2020, the total amount of allowances available for free allocation to power generators in the eligible Member States amounts to close to 680 million. The number available will be reduced each year, reaching zero in 2020. However, the actual allocated amount might be smaller because the eligible Member States can decide to distribute fewer free emissions allowances than the maximum amount permitted by the Commission decisions.36 The number of allowances allocated in 2013 and 2014 was about 14 percent and 29 percent smaller than the maximum amount available in 2013 and 2014, respectively.37 The remaining allowances are to 31 European Parliament and Council, 2003, Article 10a(3). 32 European Parliament and Council, 2003, Article 10c(1). 33 European Commission, 2015i. 34 European Commission, 2011b. 35 Authors’ calculations. 36 European Commission, 2015j. 37 European Commission, 2015j. 16 be issued through auctions by 2020.38 The eligible States are expected to make an investment in modernizing their electricity generation that is at least as great as the economic value of free allowances to electricity producers. 39 Because the allowance value is linked to specific investment priorities, one might conclude this allocation is not free, but is earmarked allowance value. 3.3 Free Allowances for Industry Based on Performance Benchmarks The primary logic underlying the use of free allocation to industry is to avoid “carbon leakage.” This term describes a situation where costs related to the trading system make businesses transfer production to other countries that have laxer constraints on greenhouse gas emissions.40 Such transfer of production can lead to decreased economic activity in the EU, which in turn could result in higher overall emissions of greenhouse gases if the activities are transferred to countries with higher emissions intensity (Fischer and Fox 2012). The risk of carbon leakage is highest for energy-intensive industries that face competition from non-EU firms. Sectors and subsectors that are judged by the Commission to be at a significant risk of carbon leakage receive a more generous allocation of free allowances than sectors and subsectors not deemed to be exposed to the risk for carbon leakage. The Commission is required to determine an official list of the sectors and subsectors deemed to be exposed to a significant risk of carbon leakage every five years. The first carbon leakage list was adopted at the end of 2009 and is applicable for the free allocation of allowances in 2013 and 2014.41 The list was amended in 2011, 2012, and 2013; it was ultimately adopted in October 2014 and applies for the years 2015–2019. The criteria used to determine these lists are based on the additional direct and indirect costs to be induced by the regulation and the trade intensity of the sector or subsector.42,43 38 European Commission, 2015j. 39 European Commission, 2012b. 40 European Commission, 2015k. 41 European Commission, 2015k. 42 European Commission, 2010a. 43 European Commission, 2015k. 17 All free allowances set aside for non-electricity-producing manufacturing industries are allocated on the basis of product-specific benchmarks. The product-specific benchmarks were developed to reflect the most efficient techniques, substitutes, and alternative production processes available for reducing greenhouse gas emissions.44 The benchmarks are calculated for products rather than for inputs.45 The benchmark methodology does not differentiate according to technology or fuel, the size of an installation, or its geographic location.46 The starting point for establishing benchmarks was the average performance of the 10 percent most efficient installations in a sector or subsector in the EU ETS in the years 2007–2008.47 There are four methods for calculating the allocations based on benchmarks: product benchmarks (estimated to cover around 75 percent of eligible emissions) and three fallback approaches: heat benchmark (estimated to cover around 20 percent of eligible emissions), fuel benchmark (estimated to cover around 5 percent of eligible emissions), and process emissions (estimated to cover less than 1 percent of eligible emissions).48 Each installation that is eligible for free allocation will receive allocation based on at least one of these methodologies.49 However, emissions can be covered by only one methodology.50 Table 4 provides additional information about each of these benchmarks. 44 European Parliament and Council, 2003, Article 10a(1), 3rd subparagraph. 45 European Parliament and Council, 2003, Article 10a(1), 4th subparagraph. 46 European Commission, 2015l. 47 European Parliament and Council, 2003, Article 10a(2). 48 European Commission, 2015m. 49 European Commission, 2011c. 50 ECOFYS, 2011. 18 Table 4. Alternative Methods for Assigning Benchmark Allocations Methodology Value Unit Conditions Relevant emissions P ro duct benchm ark There are 52 pro duc t benchm ark s tCO 2 / unit pro duc t - Pro duc t benchm ark available Em issio ns within syst em bo undarie s of pro duc t Heat benchm ark 62.3 tCO 2 / TJ - No pro duct benchm ark available - Heat is measurable Em issio ns relat ing to pro duc t io n of the co nsume d measurable heat , not cov e re d by a pro duc t benchm ark Fuel benchm ark 56.1 tCO 2 / TJ of fuel - No pro duct benchm ark available - Heat is no t measurable - Fuel is com bust e d Em issio ns originat ing fro m the com bust io n of fu els, no t co ve re d by pro duc t or heat pro duc t io n benchm ark Proce ss em issio ns appro ac h 97 % of hist o ric al em issio ns tCO 2 - No pro duct benchm ark available - Heat is no t measurable - Emissio ns are no t result ing from com bust io n of fuel - Emissio ns are “pro ce ss em issio ns” All em issio ns within inst allat io n no t co ve re d by prev io us appro ac he s, but not including no ne ligible em issio ns Source: European Commission, 2011c. A number of additional factors may be applied to the benchmark value to determine the actual allocation, including a carbon leakage exposure factor (CLEF) and either a linear reduction factor (LRF) or a cross-sectoral correction factor (CSCF): Allocation = Benchmark × Historical activity level × CLEF × (LRF or CSCF).51 The carbon leakage exposure factor used for allocation to sectors included on the carbon leakage list is 1.00 for all years. For allocation to sectors not on this list, the carbon leakage exposure factor is 0.80 in 2013, declining to 0.30 in 2020, with a view to reaching no free allocation in 51 ECOFYS, 2011. 19 2027.52 It should also be noted that due to a special provision, district heating installations that have high emissions will be provided with a temporary and declining extra allocation.53 Finally, the linear reduction factor, as discussed in section 2.1 of this paper, describes the rate (1.74 percent) at which the total amount of allowances issued for free shall decrease each year from 2013 to 2020. For installations that are identified as electricity generators, as well as new entrants, the preliminary total annual amount of free allocation should be reduced each year by this factor. For other installations already part of the scheme eligible for free allocation (non- electricity-producing manufacturing industries), as discussed above, a so-called cross-sectoral correction factor can be applied. This is uniform factor, used to ensure that the total amount of free allocation to non-electricity-producing manufacturing industries and other relevant generators does not exceed the maximum amount of free allocation as determined by the ETS Directive.54 Further, an amount less than 5 percent of the cap to be issued for the entire period from 2013 to 2020 is set aside as reserve for new entrants. 3.4 The Structural Surplus of Allowances Since 2009, the EU ETS has experienced a growing supply of allowances and international credits, which has resulted in surplus of emissions allowances and significantly weakened their price.55 By the end of 2013, the surplus had grown further, to over 2.1 billion allowances. The low demand for EUAs has been caused by several factors, principally high imports of international credits, which currently constitute more than half of the surplus, as well as the economic crisis and the associated reduction in economic activity.56,57 Other contributing reasons for the low demand include overlapping policies by EU Member States to promote renewable energy and energy efficiency, which substitute for fossil generation, and the fact that the electricity industry demand for allowances to hedge emissions associated with existing power contracts is limited.58 52 European Commission, 2011c. 53 European Commission, 2015m. 54 European Commission, 2011c; European Commission, 2013a. 55 European Commission, 2015n. 56 European Commission, 2015n. 57 Carbon Market Watch, 2014. 58 Burtraw, 2015. 20 Under the EU ETS, existing operators are entitled to use international credits associated with the Kyoto mechanism—certified emissions reductions (CERs) under the Clean Development Mechanism (CDM) and emissions reductions units (ERUs) under Joint Implementation (JI)—for compliance with EU ETS during the 2008 to 2020 period, with some qualitative and quantitative limitations.59 Credits are accepted from all types of projects except nuclear energy projects, afforestation, or reforestation activities. In phase 3, however, credits from projects involving the destruction of industrial gases are no longer accepted.60 In addition, newly generated (post-2012) international credits may only come from projects in Least Developed Countries, and credits issued for emissions reductions that occurred in the first commitment period of the Kyoto Protocol were accepted only until 31 March 2015.61 Beginning with phase 3, international credits are no longer eligible to be used directly as compliance instruments but can be exchanged one-for-one for emissions allowances and used for compliance.62 On 22 January 2014, the Commission proposed to exclude international credits from the EU ETS starting in phase 4.63 Table 5 illustrates the surplus buildup since the start of phase 2. It is not anticipated that the overall surplus will decline significantly during phase 3. The European Commission and many observers are concerned that the surplus and associated low allowance prices risk undermining the function of the carbon market to promote innovation and investments in low- carbon technology. This may affect the ability of the EU ETS to meet more demanding emissions reduction targets in the long run.64,65 59 International Carbon Action Partnership, 2015. 60 European Commission, 2015o. 61 International Carbon Action Partnership, 2015. 62 Głowacki Law Firm, 2014. 63 International Carbon Action Partnership, 2015. 64 European Commission, 2015n. 65 Burtraw, 2015. 21 Table 5. Buildup of the Surplus of ETS Allowances (million EUAs) 2008 2009 2010 2011 2012 2013 2014 Total Total allocation 2 ,01 1 2,04 9 2,08 1 2,10 1 2,17 0 1,81 8 1,46 2 13,6 92 Surrendered CERs and ERUs 8 4 81 137 254 493 133 66 * 1,18 2 **NER 300 200 100 300 Early auctions 90 90 Total supply 2 ,09 5 2,13 0 2,21 8 2,35 5 2,75 3 2,15 1 1,56 2 15,2 64 Verified emissions from stationary installations 2 ,12 0 1,88 0 1,93 9 1,90 4 1,86 7 1,90 8 1,81 2 13,4 30 Cumulative surplus - 2 5 2 25 5 04 9 55 1 ,84 1 2 ,08 4 1 ,83 4 1 ,70 1 Surplus as share of current year verified emissions - 1 % 1 2% 2 6% 5 0% 9 9% 1 09 % 1 01 % 1 4% *Not known. **The NER300 program has the aim of funding innovative low-carbon energy demonstration projects. Source: European Environment Agency, 2015c. 66 European Commission, 2013b. 22 As a short-term measure, the Commission postponed the auctioning of 900 million allowances (referred to as back-loading) from its initially proposed dates in 2014, 2015, and 2016 until 2019–2020 (see Table 3). However, a recent regulation cancelled the reintroduction of back-loaded allowances to the market in 2019 and 2020.67,68 The European Parliament has recently approved in first reading the Commission’s proposal to establish a market stability reserve with the aim of addressing the allowance surplus and adding stability to the system.69 Before coming into force, however, the legislation is to be approved by the council of ministers in September 2015.70 Starting in 2019, the MSR will adjust the auction volumes by automatically placing or releasing allowances from the reserve. Whether the reserve is absorbing or releasing allowances will depend on the number of allowances in circulation in any given year. If the total number of allowances in circulation is fewer than 400 million, then 100 million allowances will be released from the reserve and added to the volume of allowances to be auctioned by the Member States. In addition, the MSR regulation mandates that allowances that were to be reintroduced into the market in 2019 and 2020 in accordance with the 2014 regulation on back-loading and allowances that were not allocated to new entrants and installations that ceased or reduced the scope of their operations be placed in reserve.71 4. The Design of the Auction Mechanism of the EU-ETS Throughout each element of the ETS there is a growing role for the use of auctions. Member States (not the European Union) are responsible for conducting the auctions.72 The distribution of the total quantity of allowances to be auctioned among the Member States follows these rules: a) 88 percent is distributed according to each Member State’s respective share of verified emissions in 2005 or the average of the 2005–2007 period, whichever is higher; 73 67 European Commission, 2015n. 68 European Parliament, 2015a. 69 European Commission, 2015n. 70 European Parliament, 2015b. 71 European Parliament, 2015a. 72 European Parliament and Council, 2003, Article 10(2). 73 European Commission, 2015p. 23 b) 10 percent is distributed among the least wealthy Member States for the purpose of solidarity and to enhance their prospects for economic growth; 74 and c) 2 percent is distributed to those nine Member States that in 2005 had reduced their emissions of greenhouse gases by at least 20 percent compared to their respective base year under the Kyoto Protocol (the “Kyoto bonus”).75 Member States determine the use of the revenue generated from the auctioning of their allowances, subject to constraints.76 At least 50 percent of the revenue from the auctioning of allowances distributed according to (a) and 100 percent of the revenue generated from the auctioning of allowances distributed according to (b)–(c) should be used for the purpose of combating climate change. Hence, across the ETS, at least 56 percent of the total allowance value should be directed to this purpose. The ETS Directive lists policies toward which this part of the revenue could contribute, including the following: • reductions of greenhouse gas emissions and adaptation to the impacts of climate change; • development of renewable energies and increase in energy efficiency; and • implementation of measures to avoid deforestation and promote reforestation in developing countries that have ratified the international agreement on climate change. The Member States are expected to report to the Commission on their use of the revenue. Most Member States have adopted earmarking practices that link specific expenditures to auction revenues. In section 5, we summarize these practices. 4.1 Auction Platforms Regulations implementing the use of auctions are directed to ensure that EU ETS participants have harmonized, nondiscriminatory, and cost-efficient access to the primary market for emissions allowances. Auctions take place only on authorized trading platforms that are bound by EU financial market legislation.77 74 European Parliament and Council, 2003, Annex IIa. 75 The Member States that had achieved this are Bulgaria, Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland, Romania, and Slovakia. The exact division of these allowances is given in Annex IIb of the ETS Directive (European Parliament and Council, 2003). 76 European Parliament and Council, 2003, Article 10(3). 77 European Commission, 2015p. 24 Member States may consign their allocations to the common auction platform. However, Member States also may appoint their own auction platforms, which has been exercised by Germany, the United Kingdom, and Poland.78 Opt-out auction platforms must conform to the framework set out in the Auctioning Regulation, which provides for further rules to ensure adequate coordination between the opt-out auction platforms and the common auction platforms. The transitional common auction platform currently used by 25 Member States (Croatia is yet to join the platform) is the European Energy Exchange (EEX) in Leipzig; in this capacity, EEX also conducts emissions auctions for Poland during a transitional period. Additionally, EEX serves as Germany’s permanent opt-out auction platform;79 the United Kingdom’s opt-out platform is ICE Futures Europe (ICE) in London. The 3 European Free Trade Association states and Croatia were expected to start auctioning in 2013, but the arrangements with the auction platform were not complete. They will begin to auction their cumulated allowances in 2015 on the common auction platform as well.80,81 The transitional common auction platform will be succeeded by a common auction platform, to be appointed by tender procedure carried out under the joint procurement agreement by the Commission and the 25 participating Member States (Poland and Croatia not included).82 The maximum appointment duration for any auction platform is five years. The contract for EEX as a joint auction platform runs until August 2016.83 4.2 Auction Design The minimum volume exchanged in the auction is labeled one lot. This term has two definitions. On a transitional auction platform (see section 4.1), one lot is either 500 or 1000 allowances, with an allowance enabling emissions of one ton of carbon dioxide. On a permanent auction platform, one lot is 500 allowances.84 78 European Commission, 2015q. 79 European Energy Exchange, n.d. 80 European Commission, 2015p. 81 European Commission, 2015q. 82 European Commission, 2015p. 83 European Commission, 2015p. 84 European Commission, 2010b, Article 6(1). 25 According to the Auction Regulation Chapter II, the allowances shall be offered for sale on an auction platform in the form of standardized electronic contracts. It is expressly stated that the Member States shall auction the allowances in the form of either “two-day spot” or “five-day futures.”85 A two-day spot transaction means allowances are auctioned for delivery at an agreed date no later than the second trading day after the day of the auction.86,87 An auction platform offers allowances through its regularly recurring bidding window that opens for at least two hours and closes on the same trading day. Bidding windows of any two or more auction platforms may not overlap, and there must be a two-hour delay between consecutive bidding windows.88 Allowances for stationary installations (EUAs) on a common auction platform are auctioned at least on a weekly basis. The volume of allowances to be auctioned on a common platform is spread evenly over the auctions held by that auction platform during a given year, except that the amount of allowances auctioned in the month of August is half the amount of allowances auctioned in any other month.89 Table 6 shows the timing of auctions for general allowances on all auction platforms. Table 6. Auction Schedule for General Allowances Auction platform States Details E E X Part ic ipat ing Euro pe an Econo m ic Area Mem be r Stat e s * Weekly auct io ns on Mo nday s, Tuesday s , and Thursday s EEX Germ any Weekly auct io ns on Friday s ICE Unit e d Kingdom Fo rt night ly auct io ns on Wedne sdays EEX Po land Once every two mo nt hs in 201 5 *Excluding those listed below Source: European Commission, 2015p. 85 European Commission, 2010b, Article 3(3) and 3(4). 86 European Commission, 2006, Article 38(2)(a). 87 European Commission, 2006, Article 38(3). 88 European Commission, 2010b, Article 8(1). 89 European Commission, 2010b, Article 8(5). 26 4.3 Determination of Auction Clearing Price and Resolution of Tied Bids Auctions are carried out through a single-round, sealed-bid, and uniform-price format whereby bidders submit bids within a specified window of opportunity (single-round), without knowing the bids offered by other bidders (sealed-bid).90 Directly following the closure of the bidding window, the auction platform determines and publishes the clearing price at which demand for allowances equals the number of allowances offered for sale in the auction concerned.91 Successful bidders are the ones who have placed bids for allowances at or above the clearing price, and they pay the same price for each allowance regardless of the price bid (uniform-price).92,93 This is the design used in emissions allowance auctions in the subnational programs in North America, including the Regional Greenhouse Gas Initiative, California, and Quebec. The auction clearing price is determined by the minimum bid at which demand for allowances exhausts supply in the auction.94 To determine this price, all submitted bids are ordered in descending willingness to pay (bid). Bids are fulfilled starting with the highest bid. The price of the bid at which this accumulative sum is equal to or larger than the amount of allowances auctioned shall be the auction clearing price.95 In case several bids have the same price, these bids are ordered through random selection according to an algorithm determined by the auction platform before the auction.96 5. The Use of Auction Revenues Member States determine the use of revenue generated from auctions; however, they face expectations embodied in the Directive of the European Parliament and of the Council that articulates the guideline in phase 3 that at least 50 percent of the revenue should be allocated 90 European Commission, 2010b, Recital (17) of the preamble. 91 European Commission, 2015p. 92 European Commission, 2010b, Article 5. 93 European Commission, 2015p. 94 European Commission, 2010b, Article 7(1). 95 European Commission, 2010b, Article 7(2), 2nd subparagraph. 96 The motivation for ordering tied bids according to a random process is that “this generates uncertainty for bidders making collusion on the price they are bidding unsustainable.”Source: European Commission, 2010b, Article 7(2), 1st subparagraph, and Recital (17) of the preamble. 27 toward “energy and climate related” purposes.97 This guideline is applicable for the 88 percent of allowances that are distributed according to a Member State’s respective average share of verified emissions for the period from 2005 to 2007. In other words, 44 percent of the total auction revenue is expected to go to these purposes. Note that this does not include the targeted free allocation to electricity in eligible Member States (optional derogation), which also yields energy related investments. The definition of energy and climate related purposes includes the following items: • funding of research and development and demonstration projects for reducing emissions and for adaptation; • funding of initiatives within the framework of the European Strategic Energy Technology Plan and the European Technology Platforms; • development of renewable energies to meet the commitment of the Union to using 20 percent renewable energies by 2020; • development of other technologies contributing to the transition to a safe and sustainable low-carbon economy; • development of technologies that help meet the commitment of the Union to increase energy efficiency by 20 percent by 2020; • forestry sequestration in the Union; • environmentally safe capture and geological storage of CO2; • encouragement of a shift to low-emission and public forms of transport; • finance research and development in energy efficiency and clean technologies; • measures intended to increase energy efficiency and insulation or to provide financial support in order to address social aspects in lower and middle income house-holds; • coverage of administrative expenses of the management of the ETS; • other reduction of greenhouse gas emissions; • adaptation to the impacts of climate change; 97 European Parliament and Council, 2009, Article 10(3). 28 • other domestic uses.98 The final text of the Directive contrasts with what was initially proposed in 2008, which would have directed 20 percent of the revenues to this purpose.99 In growing the share to 50 percent, the language was inserted that stated the legal and institutional reality that the EU cannot actually determine how Member States spend their revenue.100 Further, the amended Directive indicates that the goal can be achieved with equivalent financial value, not relying on auction revenues directly, making explicit the possibility that spending of auction revenues crowd out spending that would have occurred anyway, which is an issue we reserve for further investigation. Each country is expected to submit a yearly report on how the country has used its revenues from the auctions. Figure 3 illustrates Member State ownership of total revenues from auctioning of allowances from November 2012 to December 2014. 98 European Parliament and Council, 2003, Article 10(3) and 3d(4). 99 European Commission, 2008. 100 We are grateful to A. Denny Ellerman for pointing out the evolution of the Commission’s Directive. 29 Figure 3. Country Shares of Total Auction Revenues, November 2012 to December 2014 Source: European Commission, 2015r. Note: This figure does not include the financial value of targeted free allocation to electricity in eight eligible Member States. Figure 3 shows the distribution of auction revenues in relative terms, led by Germany, the UK and Italy. However, the countries that receive most of auction revenues are not the countries that receive the greatest revenue relative to their GDP in the corresponding year. Figure 4 displays the relative ranking of Member States with respect to auction revenue in absolute terms and as a portion of GDP. Bulgaria, Estonia, and Romania received the greatest amounts compared to the size of their GDP in 2013. 30 Figure 4. Rankings of Auction Revenues in Absolute Terms and as Percent of GDP by Member State in 2013 Notes: Croatia was excluded because it did not hold auctions in 2013. Data underlying this figure come from Appendix Table A1. Appendix Figure A1 is an analogous figure for the year 2014. This figure does not include the financial value of targeted free allocation to electricity in eight eligible Member States. 31 Because the Directive mandates only that countries report how they use the 50 percent of auction revenues that should be directed to energy and climate related spending purposes, only a partial overview of the total spending of auction revenues is possible. The member country reports on the use of auction revenue provide various levels of detail—from Hungary describing one project for the entire amount to Poland detailing over 300 different projects in their 2013 reports. Budget processes and regulations also differ among countries. Countries that do not practice earmarking (Austria, Belgium, Denmark, Ireland, the Netherlands, Poland, Sweden, and the UK) add another layer of uncertainty, since their expenditures are not directly traceable.101 Some of these countries nevertheless provide data on spending of the amount equivalent to at least 50% of their auction revenue that is related to climate and energy purposes as outlined in articles 3d(4) and 10(3) of the Directive; however, it is noted that this amount does not represent all of their spending for such purposes. This suggests the question of whether auction revenue spending is additional to what would have happened anyway, or if instead it is crowding out other sources of spending for these purposes. There is a large variation from country to country in the share of total auction revenue that is spent on climate and energy related purposes, and the share does not seem to be associated with relative wealth. For example, in 2014, the relatively lower-income countries Lithuania and Cyprus reported spending 100 percent of their revenue for these purposes, while Finland reported spending about 50 percent. The reason may be that relatively rich countries already have a significantly higher baseline level of expenditure on climate and energy related purposes compared with relatively poor ones. Figure 5 examines whether the countries that receive the biggest amount of auction revenue relative to their GDP also spend the biggest revenue amount (relative to their GDP) on climate and energy projects. Indeed, Bulgaria, Romania, and Estonia appear at the top. One hypothesis may be that auction revenue provides a unique source of revenue for countries with a smaller GDP that enables investment in climate and energy projects. 101 European Commission, 2014c. 32 Figure 5. Rankings of Auction Revenues Relative to GDP and Spending of Auction Revenues on Climate and Energy Projects Relative to GDP by Member State in 2013 Notes: Croatia, Belgium, and Italy were excluded. Croatia did not hold auctions in 2013. Belgium does not earmark auction revenues and does not provide information on spending an amount equivalent to at least 50 percent of its auction revenues. Italy did not report on its auction revenue spending in 2013 for technical reasons. Data underlying this figure come from Appendix Table A1. As noted in text, this information does not include general revenue expenditures on climate and energy programs. Appendix Figure A2 is an analogous figure for the year 2014. This figure does not include the financial value of targeted free allocation to electricity in eight eligible Member States. 33 A large share of climate and energy spending by Member States is related to energy efficiency improvements and investments in renewable energy sources. Energy efficiency improvements are primarily focused on renovations of both private and public buildings to decrease energy costs. France is an example of a country that has allocated 100 percent of its revenues toward this purpose in 2013 and 2014. Spain and Bulgaria allocated most of their revenues to renewable energy investments in both years. International aid directed toward climate and energy related purposes, although not as common as domestic spending, amounted to 15 percent of the total Member States’ climate and energy related spending in 2013 and 7 percent in 2014. The countries that used a portion of their auction revenue to provide support to other countries in 2013 or 2014 are Denmark, Estonia, Finland, Germany, Ireland, Portugal, Spain, Sweden, and the UK. This aid was split between bi- lateral and multilateral aid. Estonia, Sweden, and the UK directed all of their aid to developing countries through multilateral channels, while Portugal used only bi-lateral channels. Interestingly, the Member States providing support to other countries are not the ones for which the auction revenue was the biggest relative to their GDP with the exception of Estonia. A small part of the total expenditure, but common among member countries, is the use of part of the revenue to cover expenses associated with administrating and managing the EU ETS. Figure 6 presents the information aggregated for a selection of Member States. Figure 7 presents in more detail how the spending on climate and energy related purposes varies across categories and Member States. Figure 7 indicates there appears to be little change from 2013 to 2014 in spending priorities in this area; most countries used their auction revenue to support the same climate and energy related projects in 2014 that they financed in 2013. 34 Figure 6. Use or Planned Use of Auctioning Revenues for Climate and Energy Related Purposes (based on data availability) Notes: This figure includes participating Member States with the exception of Austria, Belgium, Croatia, Italy, and Luxembourg. Carry-over amounts from previous years spent in the current year are not included. “Unknown” means spent on climate and energy programs, but specific spending category is not known. “Research” includes 1) funding of research and development and demonstration projects for reducing emissions and for adaptation and 2) finance research and development in energy efficiency and clean technologies. “Energy Efficiency” includes 1) measures intended to increase energy efficiency and insulation or to provide financial support in order to address social aspects in lower and middle income households and 2) development of technologies that help meet the commitment of the Union to increase energy efficiency by 20 percent by 2020. “Other Domestic Spending on Climate and Energy” includes 1) funding of initiatives within the framework of the European Strategic Energy Technology Plan and the European Technology Platforms; 2) development of other technologies contributing to the transition to a safe and sustainable low-carbon economy; 3) environmentally safe capture and geological storage of CO2; 4) other reduction of greenhouse gas emissions; 5) adaptation to the impacts of climate change; 6) other domestic uses. Data come from Appendix Table A2 and A3. This figure does not include the financial value of targeted free allocation to electricity in eight eligible Member States. 35 Figure 7. Use or Planned Use of Auctioning Revenues for Climate and Energy Related Purposes by Member State. Notes: Croatia did not hold auctions in 2013 or 2014. Belgium does not earmark auction revenues and does not provide information on spending an amount equivalent to at least 50 percent of its auction revenues. Italy did not provide data for the year 2013 for technical reasons. Austria’s and Luxembourg’s reports on their use of auction revenues for the year 2014 are not available as of September 2015. Data come from Appendix Table A2 and A3. This figure does not include the financial value of targeted free allocation to electricity in eight eligible Member States. 36 Looking ahead, the stated intentions of countries with respect to the use of revenues may vary from the outcome due to policy changes or market changes, including changes in the realized price of emissions allowances. However, thus far the ex ante intentions typically have been realized. Germany provides an interesting example because it followed through on its announced intention to contribute revenues to a climate fund, even supplementing revenue when the price of allowances fell and allocating greater than 100 percent of its auction revenues to the fund.102 5.1 Future Auction Revenues and Price Volatility The commitment to emissions reduction goals through 2030 provides an indication of the future quantity of allowances in the ETS. However, approval of the market stability proposal by the European Parliament in July 2015 introduced important changes to the volume of allowances that will circulate on the market in the remaining period of phase 3 and in phase 4.103 One of the provisions of the new regulation mandates that 900 million of the back-loaded allowances be put into the reserve instead of being reintroduced into the market later in this trading period as was planned earlier in accordance with the back-loading regulation of 2014. In addition, the mechanism of the market stability reserve introduces uncertainty about the annual introduction of allowances because the issuance of allowances will depend on the number of unused allowances remaining in circulation (as discussed earlier), but when they enter the market they will expand the portion that are auctioned compared to free allocation. These new developments prompted traders, market analysts, and participants to adjust their price expectations. However, the adjusted price forecasts differ significantly among different analysts. Figure 8 shows price forecasts by two major energy market analytics companies—ICIS Tschach Solutions and Thomson Reuters Point Carbon—as well as by the European Commission, that were released after 25 February 2015, when the market stability reserve proposal was approved by the environment committee of the European Parliament and was finally taking its current shape. Appendix Table A4 provides more information about the price forecasts presented in Figure 8. As the figure illustrates, there is substantial uncertainty about the price of allowances in the future. Hence, our estimates of total asset value and auction revenues directed to Member States for the period 2015–2020 presented in Table 2 in section 3 102 Li and Grießhaber, 2013. 103 European Parliament, 2015b. 37 need to be interpreted with caution because of uncertainty about both the quantity and the price of allowances in the future. Figure 8. Forecasts of Allowance Prices Source: Appendix Table A4. *These values provide a connection between this figure and entries in Appendix Table A4. **This forecast was used in Table 2 in section 3. 6. Industry Compensation for Indirect Costs Member States are authorized to compensate the most electricity-intensive sectors through the national state aid schemes for increases in electricity costs relating to ETS.104 Unlike facilities that incur direct costs for their own emissions, which can be compensated through free allocation of allowances, facilities that incur indirect costs can receive compensation as a share of auction revenue. If a Member State wants to compensate its sectors, it is obliged by law to notify the Commission and approval is necessary.105,106 To be considered for compensation, a company must be in one of the sectors listed in Table 7. 104 European Parliament and Council, 2003, Article 10a(6). 105 European Union, 2007, Article 108(3). 106 The Commission has published guidelines to guarantee that actions are adopted in conformity with the EU's state aid rules (European Commission, 2012c; European Commission, 2015k). 38 Table 7. Sectors and Subsectors Deemed Ex Ante to Be Exposed to a Significant Risk of Carbon Leakage due to Indirect Emissions Costs Description Alum inium pro duc t io n Mining of chem ic al and fert ilize r mine rals Manufac t ure of othe r ino rganic basic chem ic als Lead, zinc , and tin pro duct io n Manufac t ure of leat her clot he s Manufac t ure of basic iro n and stee l and of ferro - alloys Seam less stee l pipe s Manufac t ure of pape r and pape rbo ard Manufac t ure of fert ilise rs and nitro ge n com po unds Co ppe r pro duc t io n Manufac t ure of othe r organic basic chem ic als Preparat io n and spinning of co tt o n - ty pe fibe rs Manufac t ure of man - m ade fibe rs Mining of iro n ores Plast ic s in primary fo rm s – Lo w - de nsit y po lye t hy le ne – Line ar low - de nsity po ly ethy le ne – High- de nsit y po lye t hy le ne – Po ly pro py le ne – Po lyv iny l chlo ride – Po lyc arbo nate Manufac t ure of pulp – Mechanic al pulp Source: European Commission, 2012c. The maximum aid that is payable per facility is calculated according to two formulas. The first formula applies where electricity consumption efficiency benchmarks have been published for a given product: Ba = Aia × Ca × Pa × BM × PM Where: Ba is the maximum aid amount per facility in year a. Aia is the aid intensity in year a. Ca is the applicable CO2 emissions factor at year a. Pa is the EU ETS allowance forward price for year a. BM is the applicable product-specific electricity consumption efficiency benchmark. PM is the installation’s relevant output. 39 The second formula applies when no product-related electricity consumption efficiency benchmarks have been published: Ba = Aia × Ca × Pa × EF × SV Where: EF is the applicable fallback electricity consumption efficiency benchmark, and SV is the installation’s relevant electricity consumption. The value of the aid that is provided cannot exceed 85 percent of the eligible costs incurred in 2013, 2014, and 2015; 80 percent in 2016, 2017, and 2018; and 75 percent in 2019 and 2020. Furthermore, Member States are obliged to demonstrate that the aid is necessary to prevent environmental harm—that is, that the aid helps avoid leakage of economic activity that might result in emissions increases (carbon leakage). The compensation should further provide an incentive for the beneficiary to attempt to reduce emissions and should be essential for the beneficiary in order to undertake investment. In addition, it is of high importance that Member States demonstrate that the aid does not adversely affect trading conditions to an extent contrary to the common interest, especially where the aid is focused on a restricted number of beneficiaries or where the aid is likely to reinforce the beneficiaries’ market position. As of September 2015, only six Member States—Belgium, Germany, Greece, the Netherlands, Spain, and the United Kingdom—have been granted permission to compensate specific industries. The amount of compensation is unpredictable because it varies with the allowance price. For instance, in Belgium the total compensation budget from 2013 to 2020 was estimated to be from 7 million to 113 million euros, depending on the market price of allowances, which was expected to range from 1 to 15 €/ton.107 Moreover, there is interaction between the incentive to compensate and the allowance price, since one will affect the other. Belgium has tied the compensation budget to the revenue from the auctioning of emissions allowances. Germany expects to deliver the greatest amount of compensation, with a total budget of 756 million euros from 2013 to 2015, with the program continuing thereafter until 2020. Eligible beneficiaries have to bear a share of their indirect costs for which no aid will be paid out, corresponding to the CO2 costs of 1 GWh of electricity consumption per year per installation, 107 European Commission, 2013c. 40 which means that beneficiaries with small installations of less than 1 GWh of consumption per year will not receive any aid. Based on the 2012 allowance price, 1 GWh represents a cost of about 4,000 euros.108 Greece, like Belgium, has also tied the budget available for compensation to the revenue coming from the auctioning of the emissions allowances; the annual budget is expected to range from 14 to 20 million euros (estimated at a price of 5 and 7.5, respectively).109 In the Netherlands, the budget was planned to be 78 million euros per year for 2014 and 2015. The 2014 budget was based on the 2012 CO2 price of 8 EUR/ton; however, the actual price in 2014 was lower.110 Spanish authorities planned to spend 1 million euros per year in 2013 and 2014 and 3 million in 2015.111 Finally, the United Kingdom scheme will have a GBP 13 million in 2013 and GBP 50 million in 2014 and 2015; however, the scheme was expected to extend beyond 2015.112 Table 8 presents information regarding the amount of money spent on compensation for indirect costs by Member States (note that these data are based on decision texts and are therefore “ex ante” data. Data on actual spending on compensation for indirect costs in 2013 are not yet available). The mechanism for compensation for indirect cost is not tied to auction revenues (although Greece and Belgium have implemented such a link); Member States can finance the compensation from any sources in their budgets. This arrangement will remain through phase 3. Even after 2021 it seems likely that any link between auction revenues and compensation will be voluntary, but there is a proposal to amend the ETS Directive and encourage Member States to use auction revenues as the source for compensation. The compensation spending as a share of auction revenues varied greatly from a meager 0.29 percent in Spain to 52.17 percent in Belgium in 2013. However, while the compensation schemes are designed to last for a number of years, the actual or planned compensation for specific years varies, and hence the figures in Table 8 should not be used as an indicator for compensation for other years. 108 European Commission, 2010c. 109 European Commission, 2014d. 110 European Commission, 2013d. 111 European Commission, 2013e. 112 European Commission, 2013f . 41 Table 8. Member State Spending on Climate and Energy and Provision of Compensation for Indirect Costs Using Auction Revenue in 2013 EU-ETS auction revenue Climate and energy spending anticipated* Anticipated compensation industry spending** Anticipated climate and energy spending as percent of auction revenue Anticipated compensation spending as percent of auction revenue ( m illio n €) (m illio n €) (m illio n €) (perc e nt ) (perc e nt ) Belgium 1 15 58 60 50 52 Germany 7 90 790 350 100 44 Greece 1 48 148 17 100 12 Netherlands 1 34 134 0 100 <1 Spain 3 46 346 1 100 <1 United Kingdom 4 85 485 16 100 3 Total 2 ,01 9 1,90 4 444 94 22 Notes: Since Greece and Belgium intended to use their auction revenues to finance industry compensation schemes, their climate spending might have to be reduced by the corresponding amount. *Based on data from the countries’ reports on their actual and intended use of auction revenues. See Appendix Table A2 for detail. **These figures represent what was planned to be spent for this purpose by Member States as stated in decision texts and may not represent the final actual amounts spent because the final amount was, in many cases, clearly dependent on carbon price. Whenever Member States provided an interval for the anticipated compensation to industry, we took the midpoint of that interval. Source: European Commission, 2014c; European Parliament and Council, 2013; European Environment Agency, 2015b; European Commission, 2010c; European Commission, 2013c,d,e,f; European Commission, 2014d. 42 7. Concluding Remarks The expanded role of auctions of emissions allowances in phase 3 of the EU ETS meant that, for the first time, a substantial share of the total allowances value was directed to Member States’ governments. Auctions are a new source of revenue for EU Member States, and these revenues, while already worth tens of billions of euros, are likely to grow over time as the cap is tightened and other measures to further increase the scarcity of allowances are introduced. There is, however, great uncertainty over future allowance prices as reflected by the large variations in projections made by commercial market analysts. Given the significant and growing value of emissions allowances, understanding the effects of how auction revenues are used will be increasingly important. Member States appear to fulfill the legal requirement to direct at least 50 percent of auction revenues to “climate and energy purposes.” However, the extent to which the funds generated by auctions are additional to what otherwise would have been spent on climate and energy cannot be determined from our analysis. This is a key area for further study. It is not until 2018, however, that auction revenues will exceed 50 percent of the total value of annual allocated allowances that have entered the market, despite the amendments introduced to make auctioning the default allocation mechanism in the EU ETS. Thus, how the remaining (free) allocation is carried out is still important for the performance of the system. Nevertheless, the move to auctioning as the default allocation mechanism may carry administrative benefits and be more transparent than free allocation. Other changes in the design of the EU ETS implemented as of September 2015 represent an improvement of the system as well. The centralized allocation process introduced in phase 3 removes the possibility for Member States to subsidize domestic firms through over allocation of emissions allowances. The expansion of the trading system to include more activities—notably aviation—and greenhouse gases other than CO2, also offers potential economic benefits as mitigation costs are equalized across a larger share of the economy. Perhaps the greatest concern over the EU ETS, at least as expressed in the public debate, is the persistently low allowance price in the last five years. Key reasons for the low prices are poor projections of future industrial production; limited growth of the European economy in general; use of international carbon credits (primarily an unexpected influx of certified emissions reduction credits under the Clean Development Mechanism); and subsidies to renewable energy. The most straightforward way to increase the scarcity of allowances (and hence increase the 43 price) would be to reduce the cap and consequently the number of allowances available in the market. However, this has proven politically impossible, despite efforts in this direction. Instead, two other principal measures have been introduced: back-loading and the market stability reserve. Back-loading will result in 900 million allowances not entering the market; instead they are being put into the reserve. Those allowances are likely to be auctioned or earmarked. The flow of allowances entering into the market from the reserve will be based on estimated emissions and volumes of allowances in circulation. The extent to which these two measures will reach their objectives is still under debate. Another concern has been regarding industry compensation. As of 2015, Member States are authorized to use state aid measures to compensate large electricity consumers for indirect costs caused by the EU ETS. Similar to other state aid measures, this opens up the possibility for strategic behavior by Member States to support their own industries. However, only six Member States (as of September 2015) have used the compensation opportunity. We do not find support for concerns of a “race to the bottom” where Member States subsidize domestic industry and as a result increase the total cost of meeting the emissions target. However, since this is a new mechanism and more Member States may make use of it in the future, it is too early to dismiss the issue of strategic behavior altogether. Looking ahead, the European Commission presented in July 2015 a legislative proposal to revise the EU Emissions Trading System for the period after 2020, with several changes addressing the risk of carbon leakage: revising the system of free allocation to focus on sectors at the highest risk of relocating their production outside the EU; a considerable number of free allowances set aside for new and growing installations; more flexible rules to better align the amount of free allowances with production figures and update of benchmarks to reflect technological advances since 2008 (benchmarks are currently not updated nor output based). 113 In addition, the proposal establishes two new funds: 1. The Innovation Fund, extending existing support for the demonstration of innovative technologies to breakthrough innovation in industry (450 million allowances); 2. The Modernisation Fund, facilitating investments in modernizing the power sector and wider energy systems and boosting energy efficiency in 10 lower-income Member States (310 million allowances). 113 European Commission, 2015s 44 Free allowances will also continue to be available to modernize the power sector in the lower-income Member States.114,115 The implemented and proposed changes to the EU ETS expose the continued tension between the desire to reduce emissions at least cost and keep the EU ETS as the cornerstone in EU mitigation efforts on the one hand, and concerns over international competition, carbon leakage, and domestic politics on the other. Although the move to auctioning and the expanded scope of the system are positive steps, other changes complicate the picture. Different allocation methods to industry, state aid measures, and the introduction of a complex market stability reserve may undermine the credibility of the EU ETS. Future adjustments will determine whether it will be a clear, predictable, and efficient policy instrument as it was intended to be, or a complex array of interacting mechanisms, and whether it contributes to achieving important emissions reductions. 114 European Commission, 2015s. 115 European Commission, 2015t. 45 8. References Bovenberg AL and Goulder LH 2000, “Neutralizing the Adverse Industry Impacts of CO2 Abatement Policies: What Does it Cost?,” NBER Working Paper No. 7654, viewed 14 September 2015, http://www.nber.org/papers/w7654 Burtraw D and Palmer K 2008, “Compensation rules for climate policy in the electricity sector,” Journal of Policy Analysis and Management, vol. 27, no. 4, pp. 819–847, viewed 14 September 2015, http://onlinelibrary.wiley.com/doi/10.1002/pam.20378/abstract Burtraw, D 2015, “Low allowance prices in the EU Emissions Trading System: New research on an evolving program,” Common Resources: Resources for the Future blog, web blog post, 25 June 2015, viewed 14 September 2015, http://common-resources.org/2015/low- allowance-prices-in-the-eu-emissions-trading-system-new-research-on-an-evolving- program/ Carbon Market Watch, 2014, What’s needed to fix the EU’s carbon market, viewed 14 September 2015, http://carbonmarketwatch.org/wp-content/uploads/2014/07/ETS- POLICY-BRIEF-JULY-2014_final_1.pdf CDC Climat Research, 2013, Auction revenues in EU ETS phase 3: A new public resource, viewed 14 September 2015, http://www.cdcclimat.com/IMG/pdf/13-01- 24_climate_brief_no25_-_auction_revenues_in_eu_ets_phase_3.pdf Climate Policy Observer, 2015, EU deal on Market Stability Reserve sets forth ETS reform, viewed 14 September 2015, http://climateobserver.org/eu-deal-market-stability-reserve- sets-forth-ets-reform/ Climate Policy Section Department of the Environment, Heritage and Local Government, and Environmental Protection Agency, 2011. Article 27 of the Revised ETS Directive (2009/29/EC). Exclusion of small installations and hospitals subject to equivalent measures, viewed 14 September 2015, https://www.epa.ie/pubs/advice/air/climatechange/phase/article27_ets_directive.pdf ECOFYS, 2011, Allocation in phase 3 of EU ETS, viewed 14 September 2015, http://ec.europa.eu/clima/policies/ets/cap/allocation/docs/gen_en.pdf Ellerman, DA, Convery, FJ, de Perthuis, C 2010a, “Linkage and global implications” in Pricing Carbon: The European Union Emissions Trading Scheme, Ellerman, DA, Convery, FJ, de Perthuis, Cambridge University Press, New York, pp. 260-286. 46 Ellerman, DA, Convery, FJ, de Perthuis, C 2010b, “Market development” in Pricing Carbon: The European Union Emissions Trading Scheme, Ellerman, DA, Convery, FJ, de Perthuis, Cambridge University Press, New York, pp. 122-157. Environment Agency, 2014a, Guidance. EU ETS: allowances, Department for Environment, Food & Rural Affairs UK Government, viewed 14 September 2015, https://www.gov.uk/eu-ets-allowances ———, 2014b, European Union Emissions Trading System (EU ETS) Phase III. Guidance for aircraft operators administered by the UK. How to comply with the EU ETS for the period 2013 to 2016, Department for Environment, Food & Rural Affairs UK Government, viewed 14 September 2015, https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/390089/LI T_7591.pdf European Commission, 2006, Commission Regulation (EC) No 1287/2006 of 10 August 2006 implementing Directive 2004/39/EC of the European Parliament and of the Council as regards recordkeeping obligations for investment firms, transaction reporting, market transparency, admission of financial instruments to trading, and defined terms for the purposes of that Directive. ———, 2008, Proposal for a Directive of the European Parliament and of the Council amending Directive 2003/87/EC so as to improve and extend the greenhouse gas emission allowance trading system of the Community, COM(2008) 16 final. ———, 2010a, EU ETS Handbook, viewed 14 September 2015, http://ec.europa.eu/clima/publications/docs/ets_handbook_en.pdf ———, 2010b, Commission Regulation (EU) No 1031/2010 of 12 November 2010 on the timing, administration and other aspects of auctioning of greenhouse gas emission allowances pursuant to Directive 2003/87/EC of the European Parliament and of the Council establishing a scheme for greenhouse gas emission allowances trading within the Community. ———, 2010c, State aid case – Germany – N 450/2009 Top Gas Recycling (TGR) Project - Aid to ArcelorMittal Eisenhüttenstadt GmbH, C (2010) 1245/2. ———, 2011a, Commission Regulation (EU) No 1210/2011 of 23 November 2011 amending Regulation (EU) No 1031/2010 in particular to determine the volume of greenhouse gas emission allowances to be auctioned prior to 2013. 47 ———, 2011b, Emissions trading: Questions and Answers on rules and guidance on allocation of free allowances to the power sector, viewed 14 September 2015, http://europa.eu/rapid/press-release_MEMO-11-201_en.htm ———, 2011c, Guidance Document n°1 on the harmonized free allocation methodology for the EU-ETS post 2012, viewed 14 September 2015, http://ec.europa.eu/clima/policies/ets/cap/allocation/docs/gd1_general_guidance_en.pdf ———, 2012a, Commission Staff Working Document: Information provided on the functioning of the EU Emissions Trading System, the volumes of greenhouse gas emission allowances auctioned and freely allocated and the impact on the surplus of allowances in the period up to 2020, viewed 14 September 2015, http://ec.europa.eu/clima/policies/ets/cap/auctioning/docs/swd_2012_234_en.pdf ———, 2012b, Commission rules on temporary free allowances for power plants in Hungary, viewed 14 September 2015, http://ec.europa.eu/clima/news/articles/news_2012113001_en.htm ———, 2012c, Communication from the Commission: Guidelines on certain state aid measures in the context of the greenhouse gas emission allowance trading scheme post-2012 2012/C 158/04. ———, 2013a, Questions and Answers on the Commission's decision on national implementation measures (NIMs), on the cross-sectoral correction factor (CSCF), on the impact of the NIMs decision on auction volumes, and on the Commission's decision on standard capacity utilisation factors (SCUFs), viewed 14 September 2015, http://ec.europa.eu/clima/policies/ets/cap/allocation/docs/faq_nim_cscf_en.pdf ———, 2013b, CERs and ERUs surrendered under EU ETS, viewed 14 September 2015, http://ec.europa.eu/clima/policies/ets/registry/documentation_en.htm ———, 2013c, State aid SA.37017 (2013/N) – Belgium Compensation for indirect EU ETS costs State aid SA.37017 (2013/N), C(2013) 7725. ———, 2013d, State aid SA.37084 (2013/N) – The Netherlands Compensation for indirect EU ETS costs, C(2013) 6636. ———, 2013e, State aid SA.36650 (2013/N) – Spain Compensation for indirect EU ETS costs in Spain, C (2013) 7906. 48 ———, 2013f, State aid SA.35543 (2013/N) – United Kingdom Compensation for indirect EU ETS costs in the UK, C(2013) 2380. ———, 2013g, Commission Decision of 5 September 2013 concerning national implementation measures for the transitional free allocation of greenhouse gas emission allowances in accordance with Article 11(3) of Directive 2003/87/EC of the European Parliament and of the Council, 2013/448/EU. ———, 2014a, Frequently Asked Questions on the Commission proposal for a European Regional Airspace Approach for EU emissions trading for aviation (February 2014), viewed 14 September 2015, http://ec.europa.eu/clima/policies/transport/aviation/docs/faq_eraa_en.pdf ———, 2014b, Commission Regulation (EU) No 176/2014 of 25 February 2014 amending Regulation (EU) No 1031/2010 in particular to determine the volumes of greenhouse gas emission allowances to be auctioned in 2013-20. ———, 2014c, Progress towards achieving the Kyoto and EU 2020 Objectives, viewed 14 September 2015, http://ec.europa.eu/clima/policies/ets/cap/auctioning/documentation_en.htm ———, 2014d, European Commission, State aid SA.38630 (2014/N) – Greece National scheme for the compensation of indirect EU ETS costs, C(2014) 4486. ———, 2014e, 2015 Auction calendars for general and for aviation allowances published, viewed 14 September 2015, http://ec.europa.eu/clima/news/articles/news_2014100901_en.htm ———, 2014f, Status table on transitional free allocation to power generators for 2013, viewed 14 September 2015, http://ec.europa.eu/clima/policies/ets/cap/auctioning/docs/process_overview_10c_en.pdf ———, 2015a, The EU Emissions Trading System (EU ETS), viewed 14 September 2015, http://ec.europa.eu/clima/policies/ets/index_en.htm ———, 2015b, National allocation plans, viewed 14 September 2015, http://ec.europa.eu/clima/policies/ets/pre2013/nap/index_en.htm ———, 2015c, Emissions trading: Questions and Answers concerning the second Commission Decision on the EU ETS cap for 2013 (October 2010), viewed 14 September 2015, http://ec.europa.eu/clima/policies/ets/cap/faq_en.htm 49 ———, 2015d, Allowances and caps, viewed 14 September 2015, http://ec.europa.eu/clima/policies/ets/cap/index_en.htm ———, 2015e, 2030 climate & energy framework, viewed 14 September 2015, http://ec.europa.eu/clima/policies/strategies/2030/index_en.htm ———, 2015f, Reducing emissions from aviation, viewed 14 September 2015, http://ec.europa.eu/clima/policies/transport/aviation/faq_en.htm ———, 2015g, Allocation of aviation allowances in an EEA-wide Emissions Trading System, viewed 14 September 2015, http://ec.europa.eu/clima/policies/transport/aviation/allowances/index_en.htm ———, 2015h, Commission Staff Working Document: Impact assessment accompanying the document Proposal for a directive of the European Parliament and of the Council amending directive 2003/87/EC to enhance cost-effective emission reductions and low- carbon investments, viewed 20 October 2015, http://ec.europa.eu/clima/policies/ets/revision/docs/impact_assessment_en.pdf ———, 2015i, Status table on transitional free allocation to power generators for 2014, viewed 14 September 2015, http://ec.europa.eu/clima/policies/ets/cap/auctioning/docs/process_overview_10c_2014_e n.pdf ———, 2015j, Optional derogation: transitional free allowances for power generators, viewed 14 September 2015, http://ec.europa.eu/clima/policies/ets/cap/auctioning/derogation_faq_en.htm ———, 2015k, Carbon leakage, viewed 14 September 2015, http://ec.europa.eu/clima/policies/ets/cap/leakage/index_en.htm ———, 2015l, Free allocation based on benchmarks, viewed 14 September 2015, http://ec.europa.eu/clima/policies/ets/cap/allocation/index_en.htm ———, 2015m, Free allocation based on benchmarks: Questions and Answers on the Commission Decision 2011/278/EU on free allocation rules for the ETS (26/02/2014), viewed 14 September 2015, http://ec.europa.eu/clima/policies/ets/cap/allocation/faq_en.htm ———, 2015n, Structural reform of the European carbon market, viewed 14 September 2015, http://ec.europa.eu/clima/policies/ets/reform/index_en.htm 50 ———, 2015o, International carbon market, viewed 14 September 2015, http://ec.europa.eu/clima/policies/ets/linking/index_en.htm ———, 2015p, Auctioning, viewed 14 September 2015, http://ec.europa.eu/clima/policies/ets/cap/auctioning/faq_en.htm ———, 2015q, Auctions by the Transitional Common Auction Platform: January to March 2015, viewed 14 September 2015, http://ec.europa.eu/clima/policies/ets/cap/auctioning/docs/cap_report_201503_en.pdf ———, 2015r, Auctioning, viewed 14 September 2015, http://ec.europa.eu/clima/policies/ets/cap/auctioning/documentation_en.htm ———, 2015s, Revision for phase 4 (2021–2030), viewed 14 September 2015, http://ec.europa.eu/clima/policies/ets/revision/index_en.htm ———, 2015t, EU ETS Revision: European Commission proposal, viewed 14 September 2015, http://ec.europa.eu/clima/policies/ets/revision/docs/ets_revision_slides_en.pdf ———, 2015u, Status table on transitional free allocation to power generators for 2014, viewed 14 September 2015, http://ec.europa.eu/clima/policies/ets/cap/auctioning/docs/process_overview_10c_2014_e n.pdf ———, 2015v, Allocation of allowances from the New Entrants' Reserve 2013 - 2020, viewed 14 September 2015, http://ec.europa.eu/clima/policies/ets/cap/allocation/docs/status_table_entrants_allocation _reduction_2015_en.pdf European Energy Exchange, n.d., Emissions auctions, viewed 14 September 2015, http://www.eex.com/en/products/environmentals/emissions-auctions European Environment Agency, 2015a, EU ETS data viewer user manual and background note, viewed 14 September 2015, http://www.eea.europa.eu/data-and-maps/data/data- viewers/emissions-trading-viewer ———, 2015b, EIONET Reporting Obligations Database, viewed 14 September 2015, http://rod.eionet.europa.eu/ ———, 2015c, EU Emissions Trading System (ETS) data viewer, viewed 14 September 2015, http://www.eea.europa.eu/data-and-maps/data/data-viewers/emissions-trading-viewer 51 European Investment Bank, 2014, European Investment Bank – NER300 Monetisation, viewed 14 September 2015, http://ec.europa.eu/clima/policies/lowcarbon/ner300/docs/summary_report_ner300_mone tisation_en.pdf European Parliament, 2015a, European Parliament legislative resolution of 8 July 2015 on the proposal for a decision of the European Parliament and of the Council concerning the establishment and operation of a market stability reserve for the Union greenhouse gas emission trading scheme and amending Directive 2003/87/EC. ———, 2015b,“Parliament adopts CO2 market stability reserve,” European Parliament News, viewed 14 September 2015, http://www.europarl.europa.eu/news/en/news- room/content/20150703IPR73913/html/Parliament-adopts-CO2-market-stability-reserve European Parliament and Council, 2003, Directive 2003/87/EC of the European Parliament and of the Council of 13 October 2003 establishing a scheme for greenhouse gas emission allowance trading within the Community and amending Council Directive 96/61/EC. ———, 2008, Directive 2008/101/EC of the European Parliament and of the Council of 19 November 2008 amending Directive 2003/87/EC so as to include aviation activities in the scheme for greenhouse gas emission allowance trading within the Community. ———, 2009, Directive 2009/29/EC of the European Parliament and of the Council of 23 April 2009 amending Directive 2003/87/EC so as to improve and extend the greenhouse gas emission allowance trading scheme of the Community. ———, 2013, Regulation (EU) No 525/2013 of the European Parliament and of the Council of 21 May 2013 on a mechanism for monitoring and reporting greenhouse gas emissions and for reporting other information at national and Union level relevant to climate change and repealing Decision No 280/2004/EC. European Union, Treaty on the Functioning of the European Union, 2008/C 115/01, 2007. Fischer, C, and Fox, A. 2012. Comparing Policies to Combat Emissions Leakage: Border Tax Adjustments versus Rebates, Journal of Environmental Economics and Management, 64 (2): 199-216. Garside B 2015, “EU carbon prices expected to be above €9 by 2020–Point Carbon survey,” Carbon Pulse, viewed 14 September 2015, http://carbon-pulse.com/eu-carbon-prices- expected-to-be-above-e9-by-2020-point-carbon-survey/ 52 Głowacki Law Firm, 2014, CERs and ERUs market as from 2013, viewed 14 September 2015, http://www.emissions-euets.com/cers-erus-market-as-from-2013 ICIS, 2015, ICIS Tschach Solutions analysts forecast €31 EUA price in 2020 following 24 Feb MSR vote, viewed 14 September 2015, http://www.icis.com/press-releases/icis-tschach- solutions-analysts-forecast-31-eua-price-in-2020-following-24-feb-msr-vote/ International Carbon Action Partnership, 2015, EU Emissions Trading System (EU ETS), viewed 14 September 2015, https://icapcarbonaction.com/index.php?option=com_etsmap&task=export&format=pdf &layout=list&systems%5B%5D=43 International Emissions Trading Association, n.d., Unallocated allowances in the EUETS – How should they be treated in the Market Stability Reserve proposal?, viewed 20 October 2015, https://ieta.memberclicks.net/assets/EUWG/2030- Package/ieta%20unallocated%20allowances_19.03.2015.pdf Laing T, Sato M, Grubb M and Comberti C 2013, “Assessing the effectiveness of the EU Emissions Trading System,” Centre for Climate Change Economics and Policy Working Paper No. 126; Grantham Research Institute on Climate Change and the Environment Working Paper No. 106, viewed 14 September 2015, http://www.lse.ac.uk/GranthamInstitute/wp-content/uploads/2014/02/WP106- effectiveness-eu-emissions-trading-system.pdf Lee B 2015, “Industrial strategy change on cards to handle EUA price rise,” Redshaw Advisors ltd, viewed 14 September 2015, http://www.redshawadvisors.com/industrial-strategy- change-on-cards-to-handle-eua-price-rise/ Li, L. and Grießhaber L. 2013, “From carbon market to climate finance: The use of ETS revenues,” Greenovation Hub, viewed 14 September 2015, https://germanwatch.org/en/download/8337.pdf Martin, R, Muûls M, and Wagner, UJ 2014, “Trading Behavior in the EU Emissions Trading Scheme,” viewed 14 September 2015, http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2362810 Nicolai, JP and Zamorano, J 2014, “Windfall Profits 2.0 During the Third Phase of the EU- ETS,” CERETH Center of Economic Research Working Paper 13/189, viewed 14 September 2015, http://dx.doi.org/10.2139/ssrn.2376177 53 Quandl, n.d., ICE EUA Futures (C), viewed 14 September 2015, https://www.quandl.com/collections/futures/ice-eua-futures Redshaw Advisors ltd, 2015, The European Commission review of the EU ETS for phase IV, viewed 14 September 2015, http://www.redshawadvisors.com/the-european-commission- review-of-the-eu-ets-for-phase-iv/#more-1920 Sijm J, Neuhoff K and Chen Y 2006, “CO2 Cost Pass Through and Windfall Profits in the Power Sector,” Climate policy, vol. 6, no. 1, pp. 49-72, viewed 14 September 2015, http://www.tandfonline.com/doi/abs/10.1080/14693062.2006.9685588 Szabo M 2015a, “Poll: Analysts see annual 15% EUA price rise through 2020, but diverge on MSR views,” Carbon Pulse, viewed 14 September 2015, http://carbon-pulse.com/poll- analysts-see-annual-15-eua-price-rise-through-2020-but-diverge-on-msr-views/ Szabo M 2015b, “Impact of unallocated allowances on future EUA prices negligible - analysts,” Carbon Pulse, viewed 14 September 2015, http://carbon-pulse.com/impact-of- unallocated-allowances-on-future-eua-prices-negligible-analysts/ Veith S, Werner JR and Zimmermann J 2009, “Capital market response to emission rights returns: Evidence from the European power sector,” Energy Economics, vol. 31, no. 4, pp. 605-613, viwed 14 September 2015, http://econpapers.repec.org/article/eeeeneeco/v_3a31_3ay_3a2009_3ai_3a4_3ap_3a605- 613.htm Woerdman E, Couwenberg O, Nentjes A 2009, “Energy prices and emissions trading: windfall profits from grandfathering?,” European Journal of Law and Economics, vol. 28, no. 2, pp. 185-202, viewed 14 September 2015, http://link.springer.com/article/10.1007/s10657- 009-9098-6 54 Appendices Appendix 1. This Appendix explains authors’ calculations in Table 2. Historic values of total volumes of emissions allowances for the years 2005-2014 were copied from European Environment Agency (2015c). No scope correction factor was used for values in phase 1 and 2.116 Thus, what we have in Table 2 are actual values and not what they would have been if EU ETS had had the scope that it has today when it just started. Note that the values for the years 2013 and 2014 were slightly adjusted as explained in Appendix 2. Values for the years 2015-2020 were copied from Table 3. They represent projected totals based on projected shares, and do not generally equal the caps for the corresponding years. Auction revenue portion of total asset value is based on shares of auctioned amounts in the total volume of allocated allowances, which were also copied from Table 3. Average annual historical prices for the years 2005-2014 were computed by taking the average of monthly auction prices weighted by monthly auction volumes. The prices are futures prices for December of the same year contract. For example, the annual average price for 2008 represents the weighted average December 2008 futures price in that year. Technically, the average December 2008 futures price could be computed as a monthly average of December 2008 futures prices from the early 2005 up to December 2008. However, we based the average only on the prices in the corresponding year following remarks by Ellerman et al. (2010b). In other words, the December 2008 futures price in this example would be based only on December 2008 futures prices in the 12 months of 2008. The futures prices data come from Quandl (n.d.). 116 Scope correction can be used to make values comparable across phases by taking into account the extended scope of the EU ETS in phases 2 and 3. 55 Appendix 2. This Appendix explains authors’ calculations in Table 3. We copied the 2013 cap from European Commission (2015d) and reduced it by 1.74 percent annually to calculate the caps for the years 2014-2020. We know that 1) the base for the 1.74% reduction factor is the historical average of emissions in the years 2008-2012; and 2) the reduction factor is linear, not compound, that is, the reduction factor is the same in absolute terms for all years in phase 3, and it equals 38,264,246.117 For example, to calculate the cap for 2014, we took the 2013 cap and subtracted 38,264,246. Similarly, to calculate the cap for 2015, we took the 2014 cap and subtracted the same number again, and so on. For the years 2013 and 2014, from European Environment Agency (2015c) we copied the values “1.3 Allowances auctioned or sold (EUAs and EUAAs)” into the “Auction” row, “1.1.1 Free allocation to existing entities (Art. 10a(1))” into the “Free Allocation to Industry” row, “1.1.2 Free allocation from the new entrants reserve (Art. 10a(7))” into the “New Entrants” row, and “1.1.3 Free allocation for modernization of electricity generation (Art. 10c)” into the “Free Allocation to Electricity” row. Then we summed up these four values in the 2013 and 2014 columns that we copied from European Environment Agency (2015c) and verified that they are equal to the values reported in European Environment Agency (2015c) in the column “1. Total allocated allowances (EUAs or EUAAs)”. Allocations to district heating are not reported in a separate column in European Environment Agency (2015c). We copied district heating allocation for the years 2013-2020 from European Commission (2013g). Then, we returned to the row “Free allocation to industry” and modified the values for 2013 and 2014 by subtracting the values for district heating that we had just copied from the decision text. It is necessary to modify the “Auction” row to account for the NER300 program because the 300 million NER300 EUAs were included into the auction volumes for the years 2013 and 2014 that we copied from European Environment Agency (2015c). This can be confirmed based on the last two rows in Table 8 in European Environment Agency (2015a). We copied the 117 European Commission, 2015d. 56 NER300 values into the corresponding row in our Table 3. Then we subtracted those values from the values in the “Auction” row.118 There are several other adjustments we could have made to the 2013 and 2014 columns. In 2012, the so-called “early auctions” of the third trading period were held. The volumes of these auctions were equal to 90 million EUAs and are added to the 2013 auctioning volumes in the data in European Environment Agency (2015c).119 Thus, there was no need to adjust the 2013 auction volume by 90 million. We filled out the rest of the table with ex-ante values. We copied the auction volume for the year 2015 from European Commission (2014e). That amount had already been adjusted for back-loading and it does include 11,328,500 and 19,470,500 allowances to be auctioned by Croatia and the EEA-EFTA States, respectively, for the years 2013 to 2015, for which auctioning is still to start. It is important not to double-count the amount set aside to be auctioned for Croatia in the years 2013-2015. According to European Commission (2014e), the whole Croatia’s 2013-2015 amount was included into the 2015 auction volume. According to European Environment Agency (2015a), even though "Croatia has been part of the EU ETS since 2013, it only started auctioning in 2015, since the necessary arrangements between the EEX, which serves as the transitional common auction platform, and the Croatian auctioneer had not been in place before-hand. In 2015, Croatia is set to auction a total amount of 11 328 500 EUAs. This amount represents 4 900 000, 3 012 000, and 3 416 500 allowances that were to be auctioned in the years 2013, 2014 and 2015 respectively. Therefore, the data viewer includes those amounts for the years 2013 and 2014 (2015 to be included next year)." Thus, in order to avoid double-counting, we subtracted Croatia's allowances for the years 2013 and 2014 from the auction volumes for 2013 and 2014 that we copied from European Environment Agency (2015c) as those amounts had already been included into the 2015 auction volume. We subtracted 4 900 000 and 3 012 000 from the auction volumes for the years 2013 118 Technically, the first portion of 200 million NER300 EUAs was sold by the European Investment Bank between December 5, 2011 and September 28, 2012 and the second portion of 100 million EUAs was sold between November 14, 2013 and April 11, 2014 (European Investment Bank, 2014). 119 European Environment Agency, 2015a. 57 and 2014, respectively. We verified that these amounts were included into the 2013 and 2014 auction volumes by examining Table 8 in European Environment Agency (2015a). Then we summed up all values (excluding the annual cap) in the columns for the years 2013 and 2014. Checking whether we had to make a similar adjustment for the three EEA-EFTA countries, we read in European Environment Agency (2015a) that "For Iceland, Liechtenstein and Norway, a different approach is suggested. These countries are also set to auction on the transitional common auction platform, but similarly to Croatia, the necessary arrangements have not been in place. However, whilst Croatia has started auctioning in 2015, the three EEA- EFTA states have not done so. This is why their cumulated withheld amount of 19 470 500 is not displayed in the data viewer yet. It will be included – and distributed between years, according to the Croatian case – once these countries have carried out their first EUA auction." Thus, EEA-EFTA amount of 19,470,500 is counted only once - in the 2015 auction volume. We double-checked by examining Table 8 in European Environment Agency (2015a). We copied the amounts for the years 2016-2020 into the “Auction” row from European Commission (2015p). Those numbers take into account the back-loading regulation of 2014 but not the market stability reserve regulation of 2015. Thus, we subtracted 300 million from the 2019 auction value and 600 million from the 2020 auction value. Using Figure 3 in CDC Climat Research (2013) we copied the values from the “Transitional free allocation – 8 countries” row of the figure into the “Free Allocation to Electricity” row of our table for the years 2015-2020. The values for the years 2013 and 2014 as reported in this source are higher than the values we copied from European Environment Agency (2015c). This is because what we copied from CDC Climat Research (2013) represents the maximum amount set aside in the decision text, whereas the European Environment Agency (2015c) values were actual amounts allocated to electricity generators.120 Then we copied the values from the “Estimated benchmark allocation” row (from the same Figure 3 in CDC Climat Research) into the “Free Allocation to Industry” row for the years 2015-2020. These amounts include amounts set aside for allocation to district heating, so we subtracted district heating values. 120 See European Commission, 2014f and 2015u. 58 The “New Entrants” row for the years 2015-2020 could be calculated as 5% of the annual cap. (This is what was actually done in Figure 3 in CDC Climat Research, but annual caps in Figure 3 are slightly different). Thus, the total amount set aside for New Entrants for Phase 3 (2013-2020) should add up to about 780 million allowances (which equals 5% of the total emissions cap in phase 3). However, according to the most recent update of July 2015, the New Entrants Reserve for phase 3 originally had only 480.2 million allowances because 300 million allowances were deducted from the original amount for the NER300 program.121 We subtracted the 2013 and 2014 New Entrants allocations of 10.19 and 11.46 million, respectively, from 480.2 to get 458.55 million allowances available for the years 2015-2020 and divided that number by 6 to get 76.425 million allowances available for New Entrants in each year of the 2015-2020 period. Ideally, New Entrants allocation in phase 3 would start with a higher number and then would be reduced by 1.74% each year; however, what matters is that the total maximum possible New Entrants allocations for the years 2015-2020 add up to 458.55. Also, according to European Commission (2015v), some unallocated allowances will be transferred to the market stability reserve. We did not make adjustments for unallocated allowances in Table 3. Finally, we summed up the values in each column (excluding the annual cap) to get the totals. 121 European Commission, 2015v. 59 Table A1. Auction Revenues and Auction Revenue Spending on Climate and Energy Programs as Percent of GDP by Member State Auction Revenues as Percent of GDP Auction Revenue Spending as Percent of GDP Country 2013 2014 2013 2014 Austria 0 .0 1 0 % 0.00 6 % Belgium 0 .0 1 6 % 0.0 1 4 % Bulgaria 0 .0 7 3 % 0.0 4 9 % 0.0 7 1 % 0.0 4 9 % Croatia Cyprus 0 .0 0 6 % 0.0 0 2 % 0.0 0 6 % 0.0 0 2 % Czech Republic 0 .0 2 9 % 0.0 2 0 % 0.0 2 6 % 0.0 1 0 % Denmark 0 .0 1 3 % 0.0 1 1 % 0.0 1 3 % 0.0 1 1 % Estonia 0 .0 5 5 % 0.0 2 2 % 0.0 2 7 % 0.0 1 1 % Finland 0 .0 1 9 % 0.0 1 8 % 0.0 0 9 % 0.0 0 9 % France 0 .0 0 6 % 0.0 0 6 % 0.0 0 6 % 0.0 0 6 % Germany 0 .0 1 6 % 0.0 1 5 % 0.0 1 6 % 0.0 1 5 % Greece 0 .0 4 6 % 0.0 4 2 % 0.0 4 6 % 0.0 4 2 % Hungary 0 .0 2 0 % 0.0 3 1 % 0.0 1 0 % 0.0 0 7 % Ireland 0 .0 1 4 % 0.0 1 1 % 0.0 1 4 % 0.0 1 1 % Italy 0 .0 1 4 % 0.0 1 4 % 0.00 7 % Latvia 0 .0 2 6 % 0.0 2 4 % 0.0 2 6 % 0.0 2 4 % Lithuania 0 .0 3 2 % 0.0 2 7 % 0.0 3 2 % 0.0 2 7 % Luxembourg 0 .0 0 6 % 0.00 3 % Malta 0 .0 3 5 % 0.02 2 % The Netherlands 0 .0 1 2 % 0.0 1 1 % 0.0 1 2 % 0.0 1 1 % Poland 0 .0 3 5 % 0.0 1 1 % 0.0 1 8 % 0.0 0 5 % Portugal 0 .0 2 4 % 0.0 2 2 % 0.0 2 4 % 0.0 2 1 % Romania 0 .0 4 9 % 0.0 3 7 % 0.0 3 6 % 0.0 3 7 % Slovakia 0 .0 4 8 % 0.0 4 3 % 0.0 4 8 % 0.0 4 3 % Slovenia 0 .0 2 8 % 0.0 2 5 % 0.0 1 4 % 0.0 1 3 % Spain 0 .0 1 9 % 0.0 1 8 % 0.0 1 9 % 0.0 1 8 % Sweden 0 .0 0 5 % 0.0 0 4 % 0.0 0 5 % 0.0 0 2 % United Kingdom 0 .0 1 4 % 0.0 1 0 % 0.0 1 4 % 0.0 1 0 % Notes: Following a note by European Commission (2014c), we set Finland’s spending of auction revenues on climate and energy projects in 2013 equal to 50% of its auction revenues in 2013; and Latvia’s and Slovakia’s spending of auction revenues on climate and energy programs in 2013 equal to 100% of their auction revenues in 2013. In addition, in this table Latvia’s and Slovakia’s spending of auction revenues on climate and energy programs in 2014 was also set to 100% of their auction revenues in 2014. 60 Table A2. Auction Revenues and Auction Revenue Spending by Member State in 2013 Revenue, 1000s euros Expenditure, 1000s euros Country (numbers indicate a key to notes at the end of the table) Total Auction Revenue Revenue from Auctioning of General Allowances Revenue from Auctioning of Aviation Allowances Carry-over Amount (1) Total Amount Spent on Climate & Energy Projects from Total Auction Revenue Received in 2013 Total Amount Not Spent on Climate & Energy Projects from Total Auction Revenue Received in 2013 Additional Amount Spent on Climate & Energy Projects in 2013 not from Auction Revenue Received in 2013 (2) Austria (4) 55, 752 55, 752 36,904 18, 848 Belgium (5) 114, 992 114, 992 Bulgaria 52, 629 52, 629 22,138 51, 294 1,335 Croatia (6) Cyprus 1, 928 1,928 1,928 Czech Republic (7) 80, 686 80, 686 73,150 7,536 Denmark (8) 56, 045 56, 045 56,045 Estonia (9) 18, 074 18, 074 9,037 9,037 Finland 66, 970 66, 970 33,485 33, 485 France 219, 247 219, 247 219, 247 Germany (10) 790, 292 790, 292 195, 000 790, 292 195, 872 Greece 147, 638 147, 638 147, 638 Hungary (11) 34, 592 34, 592 17,296 17, 296 168 Ireland 41, 677 41, 677 41,677 Italy (12) 385, 890 385, 890 76,497 Latvia 10, 792 10, 792 2,129 10, 792 Lithuania (13) 19, 978 19, 978 3,286 19, 978 Luxembourg 4, 985 4,985 368 2,493 2,493 Malta (14) 4, 466 4,466 2,869 1,597 1 The Netherlands 134, 238 134, 238 134, 238 Poland 244, 022 244, 022 128, 677 115, 345 4 Portugal (15) 72, 782 72, 782 71,402 1,380 2,421 Romania (16) 122, 736 122, 736 91,172 31, 564 Slovakia 61, 703 61, 703 12,183 61, 703 Slovenia (17) 17, 739 17, 739 3,512 8,889 8,850 Spain (18) 346, 111 346, 111 68,533 346, 111 68,531 Sweden (19) 35, 700 35, 700 35,700 United Kingdom (20) 485, 361 485, 361 485, 361 61 Table A2 continued Expenditure of Auction Revenues by Spending Category, 1000s euros Country (numbers indicate a key to notes at the end of the table) Unknown (3) Forestry Sequestration Other Reduction of Greenhouse Gas Emissions Funding of Research and Development and Demonstration Projects ETS Management Measures Intended to Increase Energy Efficiency in order to Address Social Aspects in Lower and Middle Income Households Finance Research and Development in Energy Efficiency Development of Renewable Energies 0 1 2 3 4 5 6 7 Austria (4) 29,804 Belgium (5) Bulgaria 51,294 Croatia (6) Cyprus 1, 395 300 66 89 78 Czech Republic (7) 73,150 Denmark (8) 28,023 Estonia (9) 1 Finland France 219, 247 Germany (10) 632, 000 17, 376 Greece 147, 638 Hungary (11) 168 Ireland 24,969 1,228 15, 480 Italy (12) Latvia 10, 779 13 Lithuania (13) 1 1,092 3,464 Luxembourg 2, 493 Malta (14) 2,789 The Netherlands 134, 238 Poland 157 41 4,091 25, 514 18 44, 533 Portugal (15) 4,479 5,188 826 1,331 55, 900 Romania (16) 3 7,836 Slovakia 61, 641 62 Slovenia (17) 4, 331 4 579 Spain (18) 17,429 373, 178 Sweden (19) 17, 800 1,100 9,900 United Kingdom (20) 89,517 827 123, 368 74,259 62 Table A2 continued Expenditure of Auction Revenues by Spending Category, 1000s euros Country (numbers indicate a key to notes at the end of the table) Other Domestic/EU Uses Development of Other Technologies Development of Technologies to Increase Energy Efficiency Funding of Special Initiatives Adaptation to the Impacts of Climate Change Sustainable Transport Capture and Storage of CO2; Support to Developing Countries Support to Countries Other Than Developing Countries 8 9 10 11 12 13 14 15 16 Austria (4) 7,100 Belgium (5) Bulgaria Croatia (6) Cyprus Czech Republic (7) Denmark (8) 28,023 Estonia (9) 9,036 Finland 33,485 France Germany (10) 94, 000 240, 204 2,584 Greece Hungary (11) 17, 296 Ireland Italy (12) Latvia Lithuania (13) 15,421 Luxembourg Malta (14) 81 The Netherlands Poland 219 30, 346 21, 596 2,166 Portugal (15) 1, 045 2,633 2,421 Romania (16) 83,333 Slovakia Slovenia (17) 3,975 Spain (18) 17,182 6,853 Sweden (19) 6,900 United Kingdom (20) 9,094 188, 296 63 Notes: All amounts in columns (1) through (14) are disbursed amounts unless noted otherwise. Austria, Belgium, Denmark, Ireland, the Netherlands, Poland, Sweden, and the UK do not earmark auction revenues. Greece and Luxembourg did not provide data on climate and energy spending by category, but Austria, Denmark, Ireland, Poland, Sweden, and the UK provide data on spending an amount equivalent to at least 50% of their auction revenues. Following European Commission (2014c), Finland’s spending on climate and energy programs was set equal to 50% of its auction revenues; Latvia’s and Slovakia’s spending on climate and energy related purposes was set equal to 100% of their auction revenues. (1) Total amount of auctioning revenues generated, or the equivalent in financial value committed in years before 2013, generated and not disbursed in the years before the year 2013, and carried-over for disbursement in the year 2013. (2) This amount was included by countries in their reported amount in columns 1-16. For Germany and Spain, this amount is almost equal to their carry-over amount from 2012. For other countries it reflects an inconsistency between the sum of the amounts in columns 1-16 and the amount that they reported in the column "Total Amount Spent on Climate & Energy Projects from Total Auction Revenue Received in 2013". (3) This amount was included by countries into the column "Total Amount Spent on Climate & Energy Projects from Total Auction Revenue Received in 2013" but not in the amounts reported in columns 1-16. (4) Disbursed: 0. (5) In accordance with the Belgian special law of January 16, 1989 Art. 65 quarter §7, as modified by the Belgian special law of January 6, 2014, the revenues of the Belgian auctioning must be distributed between the federal government and the Flemish, Walloon and Brussels Capital regional governments in accordance with a cooperation agreement to be concluded between these four governments. As no cooperation agreement on the distribution of the revenues has been concluded so far, the revenues remain blocked on an account and cannot be used for any purpose. (6) No auctions have been held yet. (7) Disbursed: 0. (8) Disbursed: 0. (9) The amount in column (10) is also associated with column (2). (10) Disbursed: 649,376,000. The amount in column (3) is also associated with columns (1), (2), (5), (6), (7), (9), (10), (11), (12), (13), and (14). (11) Disbursed: 0. (12) Auction revenues were not allocated in 2013 for technical reasons. (13) Disbursed: 282,000. The amount in column (10) is also associated with column (5). The amount in column (4) is also associated with column (8). (14) Disbursed: 1,070,000. (15) The amount in column (3) is also associated with column (11). (16) Disbursed: 0. (17) Slovenia claims to have spent 8,889,000 on climate and energy. (18) Disbursed: 373,556,000. (19) Sweden claims to have spent 100% of its auction revenues on climate and energy. The amount in column (3) is also associated with columns (7), (9), (10). The amount in column (7) is also associated with columns (9) and (10). (20) The amount in column (3) is also associated with column (6). 64 Table A3. Auction Revenues and Auction Revenue Spending by Member State in 2014 Revenue, 1000s euros Expenditure, 1000s euros Country (numbers indicate a key to notes at the end of the table) Total Auction Revenue Revenue from Auctioning of General Allowances Revenue from Auctioning of Aviation Allowances Carry-over Amount (1) Total Amount Spent on Climate & Energy Projects from Total Auction Revenue Received in 2014 Total Amount Not Spent on Climate & Energy Projects from Total Auction Revenue Received in 2014 Additional Amount Spent on Climate & Energy Projects in 2013 not from Auction Revenue Received in 2014 (2) Austria Belgium (4) 97, 079 97, 079 Bulgaria 36, 415 36, 192 223 23, 473 36, 192 223 Croatia (5) Cyprus 730 730 431 730 Czech Republic (6) 55, 710 55, 243 467 69, 008 26, 925 28, 785 Denmark (7) 48, 090 46, 927 1,163 48,090 Estonia (8) 7, 447 7,409 38 3,623 3,824 Finland 63, 496 62, 683 813 31,113 32, 383 France 215, 345 215, 345 215, 345 Germany (9) 749, 983 749, 983 94,149 749, 983 96,831 Greece (10) 131, 070 129, 971 1,098 131, 070 Hungary (11) 56, 499 56, 210 288 23 13, 102 43, 397 Ireland 35, 982 35, 110 872 35,982 Italy (12) 408, 567 403, 318 5,249 428, 019 192, 767 215, 800 Latvia 10, 224 10, 083 141 12, 897 10, 224 Lithuania (13) 17, 340 17, 282 58 22, 982 17, 340 22,982 Luxembourg Malta (14) 3, 915 3,815 100 1,800 3,915 1,771 The Netherlands 131, 101 125, 632 5,470 131, 101 Poland (15) 78, 010 78, 010 39,024 38, 986 3 Portugal (16) 67, 095 65, 822 1,273 64,849 2,246 161 Romania (17) 97, 890 97, 568 322 23, 897 97, 890 Slovakia 57, 635 57, 591 45 73, 824 57, 635 Slovenia (18) 16, 642 16, 642 8,321 8,321 8,321 806 Spain (19) 330, 097 323, 532 6,564 26, 620 330, 097 40,120 Sweden 33, 598 32, 575 1,023 18,939 14, 659 United Kingdom (20) 401, 504 387, 425 14, 079 401, 504 65 Table A3 (continued) Expenditure of Auction Revenues by Spending Category, 1000s euros Country (numbers indicate a key to notes at the end of the table) Unknown (3) Forestry Sequestration Other Reduction of Greenhouse Gas Emissions Funding of Research and Development and Demonstration Projects ETS Management Measures Intended to Increase Energy Efficiency in order to Address Social Aspects in Lower and Middle Income Households Finance Research and Development in Energy Efficiency Development of Renewable Energies 0 1 2 3 4 5 6 7 Austria Belgium (4) Bulgaria 20,605 Croatia (5) Cyprus 332 200 27 87 84 Czech Republic (6) 1 25,195 1,729 Denmark (7) 24,045 Estonia (8) 3,200 Finland France 215, 345 Germany (9) 733, 874 16, 109 Greece (10) 1 131, 069 Hungary (11) 13,102 Ireland 1,131 699 Italy (12) 2,887 85, 300 Latvia 10, 117 107 Lithuania (13) 455 28, 948 10,919 Luxembourg Malta (14) 135 5,330 The Netherlands 131, 101 Poland (15) 6,655 30,820 1,552 Portugal (16) 4,500 6,849 975 49,246 Romania (17) 30, 573 Slovakia 42, 624 58 14, 953 Slovenia (18) 27 Spain (19) 320, 750 Sweden United Kingdom (20) 80,601 547 192, 893 66 Table A3 (continued) Expenditure of Auction Revenues by Spending Category, 1000s euros Country (numbers indicate a key to notes at the end of the table) Other Domestic/EU Uses Development of Other Technologies Development of Technologies to Increase Energy Efficiency Funding of Special Initiatives Adaptation to the Impacts of Climate Change Sustainable Transport Capture and Storage of CO2; Support to Developing Countries Support to Countries Other Than Developing Countries 8 9 10 11 12 13 14 15 16 Austria Belgium (4) Bulgaria 15, 587 Croatia (5) Cyprus Czech Republic (6) Denmark (7) 24,045 Estonia (8) 423 Finland 31,113 France Germany (9) 94, 149 1,770 912 Greece (10) Hungary (11) Ireland 608 33,544 Italy (12) 104, 580 Latvia Lithuania (13) Luxembourg Malta (14) 221 The Netherlands Poland (15) Portugal (16) 419 3,021 Romania (17) 67,317 Slovakia Slovenia (18) 9,100 Spain (19) 38,200 11,267 Sweden 18,939 United Kingdom (20) 54,567 72, 896 67 Notes: All amounts in columns (1) through (14) are disbursed amounts unless noted otherwise. Austria, Belgium, Denmark, Ireland, the Netherlands, Poland, Sweden, and the UK do not earmark auction revenues. Austria, Denmark, Ireland, Poland, Sweden, and the UK generally provide data on spending an amount equivalent to at least 50% of their auction revenues. However, Austria and Luxembourg have not submitted their reports on the use of auction revenues in 2014 (as of September 2015). Latvia’s and Slovakia’s spending on climate and energy related purposes was set equal to 100% of their auction revenues. (1) Total amount of auctioning revenues generated, or the equivalent in financial value committed in years before 2014, generated and not disbursed in the years before the year 2014 and carried-over for disbursement in the year 2014. (2) This amount was included by countries in their reported amount in columns 1-16. For Cyprus, Germany, Lithuania, Malta, and Spain this amount is close to their carry-over amount. For other countries it reflects an inconsistency between the sum of the amounts in columns 1-16 and the amount that they reported in the column "Total Amount Spent on Climate & Energy Projects from Total Auction Revenue Received in 2014". (3) This amount was included by countries into the column "Total Amount Spent on Climate & Energy Projects from Total Auction Revenue Received in 2014" but not in the amounts reported in columns 1-16. (4) In accordance with the Belgian special law of January 16, 1989 Art. 65 quarter §7, as modified by the Belgian special law of January 6, 2014, the revenues of the Belgian auctioning are distributed between the federal government and the Flemish, Walloon and Brussels Capital regional governments in accordance with a cooperation agreement to be concluded between these four governments. As no cooperation agreement on the distribution of the revenues has been concluded so far, the revenues remain blocked on an account and cannot be used for any purpose. (5) No auctions have been held yet. (6) Disbursed: 1,236,000. (7) Disbursed: 0. (8) The amount in column (7) is also associated with columns (10) and (2). (9) The amount in column (3) is also associated with columns (1), (5), (6), (7), (9), (10), (11), (13), and (14). (10) Disbursed: 0. (11) Disbursed: 0. Also, there might be a mistake in the carry-over amount. The amount in column (5) is also associated with column (12). (12) Disbursed: 2,887,000. (13) Disbursed: 2,799,000. The amount in column (4) is also associated with column (8). (14) Disbursed: 5,351,000. (15) The amount in column (3) is also associated with columns (11) and (12). The amount in column (7) is also associated with column (9). (16) The amount in column (3) is also associated with columns (1), (11), and (13). (17) Disbursed: 43,399,000. Romania claim to have spent 100% of its auction revenues on climate & energy but it might be a mistake. (18) Disbursed: 27,000. Slovenia claims to have spent 8,321,000 on climate and energy but it might be a mistake. (19) Disbursed: 308,611,000. The amount in column (9) is also associated with column (12). The amount in column (13) is also associated with column (2). (20) The amount in column (3) is also associated with column (6). 68 Table A4. Forecasts of Allowance Prices (data for Figure 8) Predicted price and assumptions Analyst, source, date T he surve y respo nse s were rece iv e d betwe e n Feb. 20 and Mar. 15. €8.90 Average , 201 5 €10 .80 Average , 2016 €11 .00 Average , 2017 €11 .60 Average , 2018 €14 .40 Average , 2019 €16 .80 Average , 2020 €8.60 Median, 2015 €9.50 Median, 2016 €9.08 Median, 2017 €9.83 Median, 2018 €10 .77 Median, 201 9 €13 .31 Median, 202 0 T hom so n Reute rs Po int Carbo n Po ll of 10 marke t analy st s, April 15, 201 5 122, 123 €7.80 by 201 5 €11 .00 by 2016 €13 .00 by 2017 €14 .00 by 2018 €14 .00 by 2019 €15 .00 by 2020 €17 .00 by 2021 €19 .00 by 2022 €20 .00 by 2023 €22 .00 by 2024 €24 .00 by 2025 €25 .00 by 2026 €26 .00 by 2027 €28 .00 by 2028 €29 .00 by 2029 €30 .00 by 2030 T hom so n Reute rs Po int Carbo n, June 18, 201 5 124 These price s appe ar in Table 2. € 25.40 ”Euro pe an Co mm issio n are expe c t ing an average price in Phase IV of as much as… ” Euro pe an Comm issio n, as cite d in Redshaw Adv iso rs ltd, July 15, 201 5 €22 / tCO 2 e by 2020 “an average of analy st fo re c ast s… ” Euro pe an Daily Carbo n Marke t s (ED CM 12 May 201 5 ) by ICIS, June 12, 2015 as cite d by Lee (20 15 ) 122 Garside, 2015. 123 Szabo, 2015a. 124 Szabo, 2015b. 69 at least €9 by 2020 ”76 % of 457 respo nde nts said… ” abo ve €11 by 202 0 ”Mo re than 50% predic t…” abo ve €15 by 202 0 ”23% say …” T hom so n Reute rs Po int Carbo n annual surve y of Euro pe an carb o n marke t part ic ipant s and obse rv e rs, May 13, 2015 125 €19/ t 2020 , €32/ t by 2030 Thom so n Reute rs Po int Carbo n, May 11, 2015 126 €31 in 202 0 and aro und €39 in 2030 , taking into acco unt a 2019 MSR start and back - lo ading in rese rv e Icis Tschac h So lut io ns, February 25, 201 5 127 125 Garside, 2015. 126 Climate Policy Observer, 2015. 127 ICIS, 2015. 70 Figure A1. Rankings of Auction Revenues in Absolute Terms and as Percent of GDP by Member State in 2014 Notes: Croatia was excluded because it did not hold auctions in 2014. Austria was excluded because it has not submitted its report on the use of auction revenues for the year 2014 (as of September 2015). No GDP data for the year 2014 was available for Malta and Luxembourg from the World Bank (as of September 2015). Data underlying this figure come from Appendix Table A1. This figure does not include the financial value of targeted free allocation to electricity in eight eligible Member States. 71 Figure A2. Rankings of Auction Revenues Relative to GDP and Spending of Auction Revenues on Climate and Energy Projects Relative to GDP by Member State in 2014 Notes: Austria, Belgium, Croatia, Malta and Luxembourg were excluded. Data underlying this figure come from Appendix Table A1. As noted in text, this information does not include general revenue expenditures on climate and energy programs. This figure does not include the financial value of targeted free allocation to electricity in eight eligible Member States.