Ex ante assessments, such as those presented in Section 2, assumed that EUAs would be treated as 'normal' factors of production by the firms covered by the EU ETS, even if the allowances were given free of charge. This means that decision-makers in these firms would consider the opportunity costs of the allowances in their production decisions. Evidence (at least from the power sector) supports this assumption.
The ex ante assessments commonly modeled the EU ETS as being equivalent to the least-cost solution to an optimization problem, solved by one, fully informed, European planner. What the assessments therefore did not foresee was the significant impact of asymmetric information by market participants on trade and prices, and hence on the volatility of the EUA price. In addition, the assessment assumed a binding cap on emissions, while the cap in the 'learning phase' of the EU ETS was, in effect, and on balance, not binding.34
The ex ante assessments also did not pay specific attention to the banking restrictions in the EU ETS. There is increasing evidence that banking restrictions between trading periods increase price volatility and seriously threaten the intertemporal (and therefore the overall) efficiency of the system.
Table 8.1 above showed ex ante assessments of CO2 emissions in EU15 under different climate change regimes. A comparison between the 'Baseline' (business-as-usual) and 'EU-wide trading' suggested a difference of emissions of 372 million tonnes of CO2 between the scenarios, of which 243 million tonnes are from the EU ETS trading sectors.35 The EUA equilibrium price was estimated to be 33.3. We assume that this difference would be caused by abatement activities within the sectors. For the year 2005, our best estimate of abatement is 50 million tonnes of CO2 in the EU ETS trading sectors of EU27. We may assume, however, that if abatement has occurred, it has occurred in the 'old' EU15, and not in the new Member States. Therefore, our best empirical, ex post evidence is that 50 million tonnes of CO2 have been abated in
33 Today, only 18% of EU smelter capacity has no long-term, fixed-price electricity contracts. All long-term contracts will expire by 2016, though. Reinaud (2008).
34 Although not yet required by the Kyoto Protocol, the emission quotas in the EU ETS 'learning phase' were binding in a legal sense. Because of the oversupply of allowances they were not binding in an economic sense, however.
35 The sectors ESS (Energy Supply Sector) and EII (Energy Intensive Industries).
EU15 at an 'average' EUA price of 22.5. There are, of course, obvious difficulties in comparing the ex ante and ex post estimates, because of, for example, the different time periods (2010 versus 2005). Nevertheless, for 2005 at least, the ex ante estimate is of the same order of magnitude as the ex post estimate.
There are also some differences. One ex ante assessment (POLES) showed the UK as a main seller and France as buyer. In 2005, the UK was biggest buyer and France possibly a seller (at least France had a long position). What this shows is that the ex ante assessments made the wrong assumptions on the (over-) allocations of allowances in Member States. This nicely illustrates the broader issue that it is very difficult to make predictions on the distributional consequences of policy initiatives before the details of the initiatives are known.
Ex ante assessments on costs and competitiveness were somewhat mixed. The ex ante estimates of costs are probably correct,36 but cost increases do not automatically translate into effects on competitiveness, as, for example, argued by Oxera and Smale et al.37 Ex post evidence so far does not reveal any negative impacts on competitiveness of European industries, but it does suggest that the EU ETS has favoured at least some industries with 'windfall profits'.
Judging by industry's own opinions, the EU ETS has already had a strong influence on investment and innovation behaviour right from its start. A survey by McKinsey and Ecofys in 2005 revealed that for 50% of the companies concerned the EU ETS played a key role in their long-term decisions. Likewise, about half of the companies claimed that the EU ETS had a strong or medium impact on decisions to develop innovative technologies, with the strongest impact in the steel industry.38 A study for the American NGO Environmental Defense describes various cases illustrating the kind of innovations that have been stimulated by the introduction of a price tag for CO2 emissions.39 These impacts on innovation have occurred even though the first phase of the EU ETS did not fulfill all conditions for 'innovation-friendliness': e.g., most Member States have chosen to cancel EUAs upon plant closure, which can be seen as discouraging innovation (see Section 2.3).
36 Basic cost estimates (share of the (opportunity) cost of allowances in total production costs) are basically engineering type assessments.
37 See Section 2.2, Oxera (2004); Smale et al. (2006).
38 McKinsey & Company and Ecofys (2005).
39 Petsonk and Cozijnsen (2007).
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