The Eu Tradable Emission Per- Mit System: Some Policy Issues Identified with the Poles- Aspen Model

This paper provides some insight on the issues raised by the Tradable Emission Permit System (TEPS) proposed in a Green Paper of the EU in 2000. It is based on the results of the POLES model for the simulation of the Marginal Abatement Cost curves of the EU countries and on the ASPEN software for the assessment of the corresponding structure of permit market. The first section identifies the issue of the national sectoral entitlements, in the context of the European burden sharing agreement, and then derives a simple scheme for the CO2 entitlement of energy intensive industries and electricity sector; this system is based on the hypothesis of entitlements allowing for the equalisation of the marginal abatement costs (MACs) across the different sectors of each country. The second section presents and discusses the key outcomes of the simulation of the energy intensive industries and electricity sector TEPS in 2010. The third section discusses the consequences for industries of different environmental regulation schemes, while comparing the grandfathered and auctioned permit system with the tax or technical standard (Policies and Measures). It also identifies some key issues that will have to be further analysed and discussed in the process of designing the EU emission permit market. Introduction In 2000 the European Union prepared a Green Paper on the creation of a European Tradable Emission Permit System to be implemented from 2005 on, in a perspective of early action for the compliance to the Kyoto Protocol. This proposal was issued in order to allow for reactions of industry, stakeholders and academic researchers, before further elaboration by the EU services. The exercise performed with the POLES model and the ASPEN software shows that such a TEPS for large energy consumers in Europe would bring large economic benefits, compared with the notrade situation. It also shows however that this type of tradable permit system supposes first that the thorny issue of sectoral entitlements is solved in a satisfactory way both inside each country and across member countries. The EU Green Paper on emission trading In 2000, the EU published a Green Paper presenting the main lines of a future European emission trading system for the electricity sector and the energy intensive industries, i.e. the industries identified the Directive on Large Combustion Plants. The proposed scheme would start in 2005 and thus be incorporated in an early action scheme for the compliance to the Kyoto Protocol. But it is also proposed that the market may be progressively extended to other industries and economic actors and thus constitute the core of a future EU-wide tradable emission permit system. It is thus important, in view of these possible developments, to identify the key issues raised by the definition and implementation of such a scheme. The key issues of course relate basically to questions of economic effectiveness on one hand, and equity and competitiveness on the other hand. The POLES model for the simulation of MAC curves The POLES model is a partial equilibrium, energy sector model for the world up to 2030. Its geographical and sectoral disaggregation (30 countries or regions in the version used for this exercise, about 12 sectors of activity and 24 power generation and renewable technologies) is however sufficient to provide insights on the potential impacts of energy and environment policies at a country or regional level and, in the case of this study, for Europe.