The EU ETS as an Environmental Instrument - Green Energy and Efficiency: An Economic Perspective - page 359

hedge their costs (related not just to CO 2 but also to raw materials) well before
electricity is actually generated. So when they market electricity, depending on the
current cost of CO 2 and raw materials and the market price of electricity itself, they
decide which option is more pro

table: producing and selling electricity or undoing
their hedging positions and selling the raw materials and CO 2 back to the market. In
this way they always get the opportunity cost of CO 2 .
Other industries are unable to transfer CO 2 costs. EU companies that operate in,
for instance the re

ning, chemical, metal and cement production industries have to
compete with non EU producers that are not burdened by CO 2 emissions so they are
unable to impose this extra cost under the threat of cheaper imports. For those
industries which are unable to transfer their costs to their customers the EU ETS
provides partial free allocations. These industries are also divided up according to
the impact of carbon costs in their pro ts and losses and the intensity of trade in

each sector ( receive 100 % free allocations and

other sectors receive less). The system for distributing free allocations is based on
benchmarks, which are established generally on the basis of one product = one
benchmark. So the calculation does not differentiate between facilities with different
sizes, types of fuel or technologies. A product benchmark re

“ sectors under carbon leakage risk ”

ects the greenhouse
gas emission performance of the top 10 % of best producing facilities in the EU for
that product. So every facility in the EU that produces that speci c product would

receive free allowances equivalent to the emissions of the top 10 % best performing
facilities. Every tonne of CO 2 above that 10 % level must be acquired on the market
by industrial operators to ful

l their requirements. 10

4.3 Offsets

One of the structural factors of the EU ETS is the ability of operators to import
different credits (offsets) at comparatively lower costs than EUAs. These interna-
tional credits, CERs and ERUs, are not assigned by the EU or auctioned; they are
issued by the United Nations under the Kyoto Protocol (CERs from the Clean
Development Mechanism and ERUs from Joint Implementation), and were origi-
nally intended to help developed countries meet their Kyoto targets by providing

exibility to emissions trading.

10

) According to the European Commission (2012), some additional 500 million allowances
from three exceptional sources have been brought to the market in 2012/2013: (1) Unused
allowances from the second phase national new entrants reserves were auctioned at the end of the
second phase. (2) The European Investment Bank is selling a xed amount of third-phase
allowances in order to fund a number of carbon capture and storage and innovative renewables
projects (NER300 program) (3) Some third-phase allowances have been auctioned early in order to
avoid the scarcity that was feared at the time the climate Package was negotiated in 2008/2009. As
emission allowances not used in the second trading period (2008

“ ( …

12) can also be held over and
used in the third trading period, a surplus of “ well over 1.5 billion allowances, and even as large as
2 billion allowances ” might have accumulated at the start of the third phase ” [ 13 ].

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