The 2030 Energy and Climate targets: a (necessary?) compromise for the next milestone on the low-carbon path to 2050
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The 2030 Energy and Climate targets: a (necessary?) compromise for the next milestone on the low-carbon path to 2050

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February 2014 A newsletter of CDC Climat Research N°88 The 2030 Energy and Climate targets: Key points a (necessary?) compromise for the next • Backloading: the backloading proposal was milestone on the low-carbon path to 2050 endorsed by the Climate Change Committee and approved by the ENVI Committee. thOn 6 February, the European Parliament The European Commission (EC) released its 2030 Energy and Climate Package on voted in favour of its faster implementation. 22 January 2014. First observations reveal that this is a package markedly different th• Free allocations: on 17 January, the EU from the 2020 package with regards to its ambition and nature. The 2020 Energy and Commission gave its approval to six member Climate package was an ambitious and “marketed” political package designed to set a states’ allocation plans to issue free 2013 decarbonisation trend. The current package strikes across more of an “economic” deal carbon permits. In total 370 MtCO2 have been that tries to make a consensus between a large spread of interests. The EC does not allocated i.e 42% of 2013 free allocations. specify the exact roadmap for Member States this time around as it did for the 2020 energy and climate package. Now, it will merely ensure that all Members States are • 2030 package: the EU Commission released “on the track”, ensuring more fexibility.

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Published 19 February 2014
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February 2014 N°88
A newsletter of CDC Climat Research
The 2030 Energy and Climate targets: a (necessary?) compromise for the next milestone on the low-carbon path to 2050
The European Commission (EC) released its 2030 Energy and Climate Package on 22 January 2014. First observations reveal that this is a package markedly different from the 2020 package with regards to its ambition and nature. The 2020 Energy and Climate package was an ambitious and “marketed” political package designed to set a decarbonisation trend. The current package strikes across more of an “economic” deal that tries to make a consensus between a large spread of interests. The EC does not specify the exact roadmap for Member States this time around as it did for the 2020 energy and climate package. Now, it will merely ensure that all Members States are “on the track”, ensuring more flexibility. This communication essentially provides three main elements: two new binding targets, a new governance structure and new parameters for the EU ETS. Firstly, it proposes a GHG emissions reduction target of 40% below 1990 levels by 2030, which is a welcome start. Double that of the 2020 cap, it is the minimum necessary to reach 2050 objectives. The EU has set a domestic target for its climate objectives: no international credits will be imported unless an international climate agreement is reached. Secondly, the EC proposes a renewable energy target of at least 27% of energy consumption above 1990 levels which is fixed at the EU level. No individual Member State targets are set. It probably aims to placate countries such as Germany, who have invested a lot in renewable energy generation technologies, as well as countries such as Poland and the UK who wish to explore other options such as nuclear energy and shale gas. Finally, no explicit energy efficiency target has been put forward; a review of the energy efficiency directive is expected in mid-2014. Regarding the governance aspects, the EC gives itself the job of Member State energy and climate policy implementation supervisor without defining national targets so as to ensure flexibility. In addition to the national energy plans, the EC also declared the development of indicators to monitor the energy system, such as the energy price differentials between the EU and its major trading partners to keep an eye on international developments in energy markets. The centrality of the EU ETS as the instrument to meet the GHG target beyond 2020 is clear: according to the EC, the ETS sectors will have to reduce emissions by 43% from 2005 levels compared to 30% for the non-ETS sector. The EU ETS will be based on revised parameters such a new linear factor of 2.2%, no Kyoto credits and the implementation of a market stability reserve. However, the proposal of a market stability reserve still has a lot of uncertainty surrounding it: the EC itself states that it cannot model potential impacts of this mechanism on the carbon price. We have to remain vigilant that it does not generate further costs due to uncertainty. While the communication is welcomed for giving some visibility on the future legal framework for investors, the political choice of a renewable energy target raises two questions related with the governance framework and the carbon price. Firstly, according to the Impact Assessment of the EC, the achievement of a 40% GHG reduction target automatically would imply a 27% renewable energy share by 2030. So what is the benefit of choosing a target that the EC believes would be met anyway by a single GHG target? Moreover, the EC leaves it to Member States to define their renewable objectives and policies and will review their plans if they are deemed insufficient. How will these national “ambitions” be coordinated? Secondly, according to the Impact Assessment, a renewable energy target higher than 27 % would lead to a significant drop in the carbon price (see graphics on page 3). If the EU ETS is the central climate policy instrument, what will be effects on the abatement options and costs if the renewable energy development surpasses the target of 27% - even with the presence of a market stability reserve in the EU ETS?
Zuheir Desai and Émilie Alberola -CDC Climat Research
Key points  Backloading: the backloading proposal was endorsed by the Climate Change Committee and approved by the ENVI Committee. th On 6February, the European Parliament voted in favour of its faster implementation.
th   Free allocations: on 17January, the EU Commission gave its approval to six member states’ allocation plans to issue free 2013 carbon permits. In total 370 MtCO2have been allocatedi.e42% of 2013 free allocations.
 kage:0203p ca the EU Commission released important proposals on the EU 2030 Climate and Energy package, an impact assessment on it, a report on energy prices and costs and a legislative proposal to reform the EU ETS.
Trading volumes: EUA +18.3%, CER –46.4%, ERU –1.8% 900 ol. 800 700 600 500 400 300 200 100 0 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan 13 13 13 13 13 13 13 13 13 13 13 13 14 * Spot & futures, exchanges & OTC cleared Source: CDC Climat Research calculation, based on data from BlueNext, EEX,  ICE Futures Europe, NYMEX, Nasdaq OMX, and LCH Clearnet
Price of the Dec. 14 contract: EUA +3.1% 8EUA Dec. 14CER Dec. 14ERU Dec. 14 76543210Feb Mar Apr May JunJul Aug Sep Oct Nov Dec Jan Feb 13 13 13 13 13 13 13 13 13 13 13 14 14 Source: CDC Climat Research, ICE Futures Europe
Income from Phase 3 auctions: 382 Mein January (+62.5%) 450 400 350 300 250 200 150 100 50 0 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan 13 13 13 13 13 13 13 13 13 13 13 13 14 Source: CDC Climat Research based on data from ICE Futures Europe, EEX
Primary energy prices and electricity prices
CoalAPI # 2 CIF ARA (First month in USD/t)
Natural gas
NBP (spot in/MWh)
TTF (spot in/MWh)
Crude oilBrent (First month in USD/b)
Spot Germany (/MWh) Calendar
ElectricitySpot United Kingdom Nextsummer (/MWh) Next winter
Jan. 2014
83.0s
26.9t
26.3t
107.3t
38.8s
36.4t
57.6t
62.5t
69.8t
rgy Clean dark, clean spark spreads and switching price Clean sparkClean darkSwitching Price (e/MWh) (e/MWh) (e/tCO2) spot futures spot futures spot futures Germany*–15.5 –17.713.3 9.8 31.831.1 United Kingdom*36.6 32.4 30.411.6 8.6 31.3 * Germany, 2015 calendar contract, United Kingdom, summer 2015 contract. German baseload  monthly average of Cal. 2015 clean dark  and clean spark spreads 20 Clean dark spread 15 10 5 0 – 5 – 10 Clean spark spread – 15 – 20 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan 13 13 13 13 13 13 13 13 13 13 13 13 14
The average monthly price of Brent crude fell by 3.1% in January to 107.3 USD/b primarily because of worries over the economic outlook in emerging economies and the US Federal Reserve’s winding down its stimulus. Weak demand and oversupply exerted a bearish pressure on gas prices: NBP prices fell by 4.9% to 26.9/MWh while TTF prices fell by 5.2% to26.3/MWh. Coal API2 prices rose slightly in January as the Colombian government suspended coal exports by Drummond. Electricity prices in both Germany and the UK fell marginally as mild weather across Europe suppressed demand and windy weather facilitated higher renewable energy generation. While German spot prices rose by 1.1%, calendar 2015 prices decreased by 1.2%. In the UK, spot prices decreased by 3.8% while winter and summer 2015 prices both fell by 0.1%. Clean dark and spark prices rose on the German spot market but fell on the forward market. In the UK, clean dark prices fell on both the spot and future markets, but clean spark prices increased marginally. The theoretical carbon price that would make switching to natural gas profitable was calculated at around31/tCO2.
Production Electricity generation (TWh)idec sI(tcoi nniProdu0)01sab xedn2 raey e Jan.- Year-on-YearVariationVariation sur EU 20 (in TWh)Oct. 13EU 27Nov. 13 Sep. 13(% change)mensuelle (pts)un an (pts) Production255.2 2,566.0–1.5%Indust. Prod(excl. construction)2.1103.7 1.6 EU ETS sectors production*(incl. electricity)93.3 1.4–0.1 of which - Combustible fuels122.9 1,205.7–6.1% EU ETS sectors production*(excl. electricity)92.0 1.7 1.6  -Nuclear 67.7676.4 –0.3% Electricity. gas and heating94.0 1.3–0.9  -Hydro 37.5434.8 4.0% Cement78.2 0.6 0.6  -Geoth./Wind/Solar/Other 27.1249.1 10.3% Metallurgy4.2101.4 1.8 * Gas, coal, oil. Oil refinery93.0 2.6–1.9 * Index weighted by EU ETS sectors’s weight in average total allocation over 2008-2012 350 110 300 Industrial Production (EU 27)EU ETS sector  Electricity incl udedEU ETS sectors  Electricity excl uded 250 105 200 150 100 100 5095 0 Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct90 12 12 12 13 13 13 13 13 13 13 13 13 13 85 Combustible fuelsNuclear Nov Dec Jan Feb Mar Apr May JunJul Aug SepOct Nov Geoth./Wind/Solar/Other Hydro12 12 13 13 13 13 13 13 13 13 13 1313
Figures released in early January indicated that EU industrial output rebounded in November growing by 1.5% after a corresponding fall of 0.5% in October. Correspondingly, the Eurozone Purchasing Managers Index rose to 54.0 in January compared to 52.7 in December, registering a 32 month high. The EU-27 business climate index remained virtually unchanged in January at 0.19. Our EU ETS sector production index rose by 1.4 points in November helped by an increase of 1.6 points in the manufacturing sector. It was recorded to be only 0.1 points below its 2012 level. The cumulative electricity generation for EU-27 between January and October 2013 was 2 556 TWh, which represents a 1.5% decrease over the same period last year. This decrease in cumulative electricity generation was accompanied by an increase of renewable energy (+10.3%) and hydroelectric energy (+4%) and a decline in the use of fossil fuels (–6.1%) and nuclear energy (0.3%).
Assessment of 2030 scenarios: targets and carbon price
%/tCO2 60 45 40 40 50 35 40 30 25 22 30 20 20 15 14 11 10 10 5 0 0 GHG40 GHG40/EEGHG40/EE/RES30 GHG45/EE/RES35 Total GHG Emission abatement in 2030 (% from 1990 levels) ETS abatement in 2030 (% from 2005 levels ) NonETS abatement in 2030 (% from 2005 levels) ETS Carbon price in 2030 ()
20-20-20 policies  
Assessment of 2050 scenarios: targets and carbon price
/tCO2 % 300 90 264 80 250 70 200 60 152 158 50 150 40 100 30 85 20 50 10 0 0 GHG40 GHG40/EEGHG40/EE/RES30 GHG45/EE/RES35 Total GHG Emission abatement in 2050 (% from 1990 levels) ETS abatement in 2050 (% from 2005 levels ) NonETS abatement in 2050 (% from 2005 levels) ETS Carbon price in 2050 ()
Note: GHG40 refers to the scenario with only a 40% GHG target, GHG40/EE refers to the one with additional ambitious energy efficiency (EE) policies, GHG40/EE/RES30 refers to the one with an additional 30% EU level renewable energy target and GHG45/EE/RES35 refers to the one with a 45% GHG target with additional ambitious EE policies and a 35% EU level renewable energy target.
th On 8January, the EU Commission released its working document on the energy efficiency progress made in the European Union. This report concluded that the EU’s primary energy consumption has slightly decreased over the last years (–0.3% on average for the years 2005-2008) and a high level of energy savings achieved since 2008. However, questions arise on the divergence of methodologies used to calculate savings and the extent to which published saving figures reflect the level of energy nd saving efforts. On 22January, the EU Commission published its proposal on the 2030 Climate and Energy Framework. A binding target has been introduced on renewable energy target of at least 27% for the EU as a whole (no binding member state objective). There is no binding target for energy efficiency and the topic will be considered in the EU Energy Efficiency Directive’s progress assessment that would be realized later in 2014. The 2030 framework also proposes a new governance framework based on national energy plans.
Institutional environment
Phase 3 balance of EUA supply
Auctions (MtCO2)
Free Allocation (MtCO2)
Total amount of free allocation pending decision by the commission on changes
Final total validated by the commission and ready for allocation
* Till January 2014
2013 2014* 80476 887 785
370
Free allocation status table Jan. 2014Fév. 2014 Number of countries that have submitted their 21 27 national allocation tables Number of countries that have submitted 16 25 revised allocation tables Number of countries that have finalised free 8 14 allocation per industrial installation
CER and ERU supply
Jan. 14Last month change Number of CDM projects11,100+9  ofwhich - registered7,426 +8  with- CER issued2,539 +17 Cumulative volume of CER issued (Mt)1,428 +8 CERs available until 2015, EU ETS eligible – CDC Climat2,060 0 Research estimate (Mt)* Number of JI projects7880  ofwhich - registered604 +1 Cumulative volume of ERU issued (Mt)829.20  via- Track 1803.8 0  via- Track 225.4 0 * CDC Climat Research’s model: http://www.cdcclimat.com/The-risks-of-CDM-projects -how-did-only-30-of-expected-credits-come-through,900.html?lang=fr
nd On 22January, the EU Commission published its proposal on the 2030 Climate and Energy Framework. A domestic GHG target of 40% by 2030 compared to 1990 levels was proposed. This implies a target of 43% for the ETS sectors compared to 2005 levels and a target of 30% for non-ETS sectors compared to 2005 levels. The EU Commission also released an EU ETS structural reform legislative proposal – the creation of a market stability reserve – and published an impact assessment report on energy prices and costs. While the carbon price impact of this reserve has not been quantified, the EU Commission expects it to help reduce the th current surplus. On 30January, the ENVI Committee voted to reject both motions (the ITRE one and the ENVI MEPs one) that objected to implement a faster measure of backloading. As a result of no objections being adopted by the lead Committee, MEPs rd voted on the request to shorten the scrutiny period. On 23January, the ITRE Committee voted against the aviation airspace approach proposal and recommended extending the Stop the Clock proposal until 2020.
Carbon markets dashboard Primary market - EUA auctions in Phase 3 Jan-13 Feb-13 Mar-13 Apr-13 May-13 Jun-13 Jul-13 Aug-13 Sep-13 Oct-13 Nov-13 Dec-13 Jan-14 Price (/t)5.05 4.37 4.06 3.85 3.40 4.23 4.16 4.40 5.19 4.83 4.51 4.62 5.00 Common Auction Platform + United Kingdom & Germany Volume (Mt)59.63 65.03 70.61 70.19 66.45 65.89 76.65 33.65 80.33 80.62 84.53 50.90 76.31 Germany42.61 62.46 82.86 62.31 69.46 68.98 67.09 44.50 84.82 78.19 91.29 36.66 92.28 United Kingdom39.40 36.38 34.23 31.05 28.69 35.06 49.65 18.30 42.33 38.40 37.87 18.27 48.43 Auction France21.28 19.65 13.43 22.2121.97 19.37 17.50 18.14 13.58 18.29 20.168.76 24.28 Revenues (M) Others252.38 232.84 166.63 218.9876.64 265.65191.70 166.09 152.26 158.58 116.04 156.10 172.06 Total295.68 284.30 286.86 270.07 227.66 278.43 308.96 148.20 417.08 390.25 381.64 235.00 381.89 Sources: EEX, ICE Futures Europe Primary market - CER and ERU issued (MtCO2) Jan-13 Feb-13 Mar-13 Apr-13 May-13 Jun-13 Jul-13 Aug-13 Sep-13 Oct-13 Nov-13 Dec-13 Jan-14 Cumulative volume of CER issued 1 1981 2081 2711 3081 3351 3531 3621 3691 3881 4001 4091 4191 428 UNEP-Risoe (Mt) Track 1 (Mt)564.6 600.0 651.3 651.3 714.5 757.0 757.0 785.1 801.5 802.4 803.5 803.7 803.8 Cumulative volume of ERU issued (Mt) Track 2 (Mt)22.6 22.7 22.9 22.9 23.9 24.4 24.6 24.7 25.1 26.7 25.4 25.4 25.4 Sources: UNEP-Risoe, CDC Climat Research Secondary market - Prices (e/t) and volumes: EUA, CER (ktCO2) Jan-13 Feb-13 Mar-13 Apr-13 May-13 Jun-13 Jul-13 Aug-13 Sep-13 Oct-13 Nov-13 Dec-13 Jan-14 Price EUA phase 35.20 4.59 4.10 3.88 3.51 4.25 4.22 4.41 5.22 4.91 4.53 4.79 4.98 Volume EUA phase 3957 19,0979,452 85,67410,483 7,136 14,96514,40514,731 38,427 24,0765,564 14,672 Daily spot Price CER0.17 0.15 0.17 0.09 0.39 0.44 0.53 0.62 0.65 0.56 0.42 0.36 0.39 Volume CER327 1,0991,541 1,9010 112 057 1700 471,204 80 Price EUA5.61 4.94 4.37 4.11 3.72 4.46 4.39 4.58 5.38 5.07 4.69 4.92 5.07 Volume EUA112,934 59,33470,721 78,927 79,675135,862 163,545 240,590 450,33895,104 48,690 74,289 93,620 Dec.14 Price CER0.43 0.38 0.37 0.35 0.39 0.48 0.56 0.62 0.62 0.52 0.41 0.35 0.37 Volume CER20,287 15,3055,883 4,361 2,089 3,885 1,949 8,891 7,134 6,50512,753 7,949 16,224 ICE Futures Europe Price EUA5.87 5.15 4.55 4.28 3.88 4.67 4.55 4.75 5.59 5.28 4.89 5.10 5.26 Volume EUA102,31241,647 57,190 49,718 61,556 34,689 91,861 41,204 20,176 46,207 57,629 55,672 57,784 Dec.15 Price CER0.51 0.43 0.41 0.38 0.46 0.55 0.64 0.70 0.71 0.60 0.48 0.45 0.48 Volume CER5,586 4,15810,987 8,7662,281 2,767710 1,7064,087 6,792 2,617620 3,184 Price EUA6.17 5.41 4.80 4.47 4.04 4.89 4.75 4.96 5.85 5.54 5.12 5.32 5.49 Volume EUA14,054 14,964 22,885 31,151 18,256 27,115 11,90221,449 16,416 17,398 36,7217,216 26,918 Dec.16 Price CER0.61 0.54 0.54 0.47 0.51 0.60 0.66 0.72 0.74 0.62 0.50 0.46 0.50 Volume CER0 0 01,033 32268910 00 0 0134 1,134 Sources: ICE Futures Europe
Emission-to-cap by EU ETS sector and country: difference between distributed allocations of allowances and verified emissions 2008 2009 2010 2011 2012 2008 2009 2010 2011 2012 Combustion–76.9 –40.6–253.1 –113.5 –125.8Germany–84.0 –36.6 –54.4 –49.5 –27.8 Oil refining–1.4 7.614.3 16.0 24.2United Kingdom–50.8 –15.0 –16.82.5 –2.2 Coking plants1.5 6.8 2.9 3.1 5.7Italy12.88.5 5.3–8.5 24.1 Metal ores8.8 8.9 9.84.3 11.0Poland16.1–3.1 10.85.9 4.2 Steel production51.6 89.3 71.4 72.8 74.0Spain–9.6 13.7 29.5 18.4 17.4 Cement20.9 61.4 61.0 62.8 74.1France5.5 17.5 23.4 33.9 35.8 Glass2.5 6.1 5.5 5.4 6.4Czech Republic5.2 12.2 10.6 12.2 17.1 Ceramic products5.3 10.0 10.29.6 10.4The Netherlands–6.8 2.8 0.1 8.910.6 Paper6.9 11.3 10.0 11.1 12.9Romania7.7 24.9 27.7 23.6 26.9 Other activities–0.7 6.20.2 4.3 1.3Others–17.0 39.8 25.3 52.7 76.6 Total (Mt)Total (Mt)–161.3 94.2 59.8161.3 94.2 59.8112.1 183.2112.1 183.2
CDC Climat Research is the research department of CDC Climat, a subsidiary of the Caisse des Dépôts dedicated to the fight against climate change. CDC Climat Research provides public research on the economics of climate change. ISSN: 1953- 0439
CDC Climat Research Publication manager: Benoît Leguet Editor in Chief: Zuheir Desai, Tel: + 33 1 58 50 66 17 zuheir.desai@cdcclimat.com 47, rue de la Victoire - 75009 Paris