Public Finance and the EU ETS: A Brief History and Implications of Potential Reform Christian Flachsland Workshop Closing the Carbon Price Gap: Public Finance and Climate Policy, 22-23 May, Berlin

Basics: Deriving Country-Level EU ETS Auction Revenue EUA Quantity Country EU ETS Revenue

=

x

Auction Price

2

Basics: Deriving Country-Level EU ETS Auction Revenue EUA Quantity Country EU ETS Revenue

=

Total EU GHG Emissions

x

EU ETS Sector Coverage

x

Auction Share

x

Country Share

x

Auction Price

3

Basics: Deriving Country-Level EU ETS Auction Revenue EUA Quantity Country EU ETS Revenue

=

Total EU GHG Emissions

x

EU ETS Sector Coverage

x

Auction Share

x

Country Share

x

Auction Price

Example Germany in 2013 (illustrative back-of-envelope): : 791 Mio € = 4,5 Gt CO2eq x 0,45 x 0,4 x 0.22 x 4.44€

Revenues Germany with a potential EU ETS Reform (Knopf et al. 2014): • 90% sector coverage • 80% auctioning • Price collar with minimum price starting at 20€

14.257 Mio.€ = 4,5 Gt CO2eq x 0,9 x 0,8 x 0.22 x 20€ 4

Basics: Deriving Country-Level EU ETS Auction Revenue EUA Quantity Country EU ETS Revenue

=

Total EU GHG Emissions

x

EU ETS Sector Coverage

x

Auction Share

x

Country Share

x

Auction Price

Example Germany in 2013 (illustrative back-of-envelope): 791 Mio € = 4,5 Gt CO2eq x 0,45 x 0,4 x 0.22 x 4.44€

Revenues Germany with a potential EU ETS Reform (Knopf et al. 2014): • 90% sector coverage • 80% auctioning • Price collar with minimum price starting at 20€

14.257 Mio.€ = 4,5 Gt CO2eq x 0,9 x 0,8 x 0.22 x 20€ 5

EU GHG Emissions and EU ETS Coverage Over Time Cap in 2013 = 2.084 Mt CO2eq ~45% of Total EU GHG Emissions 6.000.000

International Maritime Transport

5.000.000

International Aviation

Agriculture

Mt GHG

4.000.000

Buildings 3.000.000

Transport

2.000.000

Industry (non-ETS)

1.000.000

Industry (ETS)

0 2005

Power & Heat (ETS) 2006

2007

2008

2009

2010

2011

Increading Sector Coverage to 90% to Ensure Cost

Effectiveness of EU Climate Policy?

Data: EEA EU ETS Viewer

6

From Free Allocation to Auctioning In 2013, about 40% of EU ETS Cap Auctioned 2.500

Million EUAs

2.000 1.500

EU ETS Cap

1.000

Auctioned/Sold EUAs

500 0

2005 2006 2007 2008 2009 2010 2011 2012 2013 Data: EEA EU ETS Viewer

Raising Share of Auctioned Allowances to 80% to Eliminate

Windfall Profits and Support Public Budgets? 7

Country Ownership in Auctioning Revenues 2013 Country Share in EUAs Eligible for Auctioning Portgual Bulgaria 2% 2% Belgium 3% Netherlands 3% Greece 3% Czech Republic 5%

Germany 20%

Poland 12%

Romania 5% France 5%

Own Calculation, Based on data from EEA EU ETS Viewer

Spain 8%

Italy 9%

United Kingdom 10% 8

Country Ownership in Auctioning Revenues – Side Payments • Distribution of Auction Shares: Grandfathering based on 2005-2007 • Adjusted by Redistributing 12% of Auctioned Allowances Net-Recipients and Net-Payers of 12% Redistribution

2 1 0

-1 -2

Poland Romania Czech Republic Bulgaria Slovakia Estonia Hungary Lithuania Belgium Latvia Greece Portgual Slovenia Cyprus Malta Luxembourg Sweden Spain Ireland Denmark Austria Finland Netherlands France Italy United Kingdom Germany

Percent of Total Auctioned EUAs

3

-3

Revisit Distributional Adjustment to Enable EU Climate &

Energy Package Reform? Own Calculation, Based on data from EEA EU ETS Viewer

9

EUA Price Historic Development of EUA 1-Year Forward Price 2005-2013

EMF-28 Modeling of Future EUA Prices Compatible with EU 2050 Goals, 2015-2050

35

30 25 €

20

15 10 5

0 Kopf et al. 2013

Set a Rising EUA Price Collar with Minimum Price 20€ to Stabilize

Expectations (Dynamic Cost Effectiveness) and Fiscal Revenues? 10

EU ETS Auction Revenues in 2013 • Total EU ETS Auctioning Revenue in 2013 was € 3,55 Billion • With indicated EU ETS Reform, Revenue would rise to € 64 Billion Year 2013 Country EU ETS Auctioning Revenues in Million € 900 800 600 500 400 300

200 100

Malta Cyprus

Luxembourg

Latvia

Slovenia

Estonia

Lithuania

Hungary

Sweden

Ireland

Bulgaria

Austria

Denmark

Slovakia

Finland

Portgual

Czech Repub

Belgium

Romania

Netherlands

Greece

France

Poland

Spain

Italy

United Kingdom

0 Germany

Mio. €

700

Data: EU Commission

11

Country-Level Spending • EU ETS Directive Recommends Spending more than 50% on

Mitigation and Adaptation • Data Should Improve in 2014 with Implementation of Reporting Year 2013 Country EU ETS Spending in Million € 900 800

Unknown

General Budget

600 500

Domestic Mitigation & Adaptation

400

International Mitigation & Adaptation

300 200 100 Cyprus

Malta

Luxembourg

Latvia

Denmark Austria Bulgaria Ireland Sweden Hungary Lithuania Estonia Slovenia

Slovakia

Finland

Portgual

Czech Republic

Belgium

Romania

Netherlands

Greece

France

Poland

Spain

Italy

United Kingdom

0 Germany

Mio. €

700

Data: Emails, Various Public Documents Esch 2013, Haita 2013

12

EU Aggregate Spending • EU Aggregate Spending of €3,55bn Auction Revenues in 2013

Unknown 41%

General Budget 25%

Domestic Mitigation & Adaptation 29%

International Mitigation & Adaptation 5% Data: Personal Communications, Various Public Documents, Esch 2013, Haita 2013

13

United Kingdom • All Revenues Allocated to

450

Central Government Budget

400 350

Mio. €

300

250

General Budget

200

2013

EU ETS Reform

€ Revenue

0,4 bn

7.4 bn

Share of Central Govt. Budget

0,1%

0,9%

150 100 50 0

EU ETS Revenue & Spending

Data: EU Commission, OECD Database, Personal Communications

14

Poland 500

• Revenue: Poland Cashed

450

in only ~55% of its Auctioning Share in Favor of Transitional Free Allocation to Utilities

400 350

Mio. €

300 250

General Budget

200

2013

EU ETS Reform

€ Revenue

0,2 bn

8 bn

Share of Central Govt. Budget

0,3%

8,9%

(likely)

150 100 50 0

EU ETS Transitional Spending Revenue Free Allocation

Data: EU Commission, OECD Database, Personal Communications

15

Germany 1600

• All Revenues Spent on

1400

International Climate Finance

1200 National Climate Action Programmes

Mio. €

1000

Energy Efficiency 800

Climate-Related Projects • Unexpectedly Low EUA Price necessitated Additional Public Funds to Finance scheduled Spending Programs

Renewable Energy

600 400

Programme Electromobility

200

CO2 Building Restoration

0

ETS Additional Scheduled Revenue Funds Spending [Preliminary Data]

2013

EU ETS Reform

€ Revenue

0,8 bn

14,3 bn

Share of Central Govt. Budget

0,2%

3,9%

Data: EU Commission, OECD Database, Esch 2013

16

Greece • EU ETS reform would add

~3 % to Greek Central Government Budget

160 140

Mio. €

120 100

Unknown

80 60

40

€ Revenue

20

Share of Central Govt. Budget

0

EU ETS Revenue & Spending

2013

EU ETS Reform

0,15 bn

2,7 bn

0,2%

3,4%

Data: EU Commission, OECD Database

17

Complementarity of Climate and Fiscal Objectives in EU ETS Reform? • Linking Climate and Fiscal Reform Rationales in the EU ETS

Reform Discussion (Knopf et al. 2014) • Expanding EU ETS Sector Coverage to 90% • Increasing Auctioning Shares to 80% • Introducing a Rising Price Collar with Minimum Price 20€ • Yields Total EU Revenues of ~64bn€ (Factor 18 of Year 2013 Revenue)

• Opposition can be Expected from Industries and Countries

Reluctant to Implement More Ambitious Climate Policies • Using EU ETS Reform for Financing Fiscal Consolidation as well

as Green and non-Green Public Stimulus in Countries with Fiscal Challenges (Creutzig et al. 2014) 18

Contact Dr. Christian Flachsland Mercator Research Institute on Global Commons and Climate Change gGmbH Torgauer Str. 12–15 | 10829 Berlin | Germany tel +49 (0) 30 338 55 37 - 246 mail [email protected] web www.mcc-berlin.net

MCC was founded jointly by Stiftung Mercator and the Potsdam Institute for Climate Impact Research

EU ETS Country Revenues with EU ETS Reform 16,0 14,2 14,0 12,0

Billion EUR

10,0

8,0

7,4

6,9 6,2

6,0 4,4 4,0

3,9

2,7 2,0

2,4

2,2

2,1

1,5

1,3

1,2

1,1

1,0

1,0

0,9

0,8

0,6

0,6

0,4

0,3

0,3

0,2

0,1

0,1

0,0

0,0

*Funds from Phasing Out Transitional Free Allowance Allocation not considered (relevant e.g. for Poland) 20