Our CSCF Simulator suggests that the Commission's ETS Fit-for-55 reform proposal is more resilient to a CSCF than the Impact Assessment might suggest.
The difference in finding seems to be due to the following factors: - The Impact Assessment seems to include expansion that would be serviced from the NER within its calculations, which tends to overestimate the claims on the free share and CSCF buffering pool
- The Impact Assessment does not add the maritime sector to the cap before deriving the size of the free share and CSCF buffering pool, which tends to underestimate the number of allowances available
- The Impact Assessment assumes a 62% emissions reduction target and, in its initial analysis at least, a 1.6% benchmark reduction corridor, which increases the risk of a CSCF
Assuming the Commission's rule changes are introduced in 2024, and activity levels and emissions intensity improvements are consistent in the baseline periods, the proposal just avoids a CSCF. See below for an explanation of the model and its assumptions in more detail. The parameters can be adjusted directly below and the full model can be downloaded here. For further information, or to provide feedback, contact damien.green@perspectiveclimate.com EXPLANATION - Based on how you set the adjustable parameters, the model estimates the number of allowances owed to installations and the number of allowances available for allocation each year to generate a CSCF.
- The following assumptions are built into the model (i.e. are not adjustable):
- The observed annual improvement in benchmarks in 2021/22 will be the same as in 2016/17
- The hydrogen benchmark will be decoupled from the refinery benchmark
- Changes in activity level will be consistent across benchmarks
- The fuel-electricity exchangeability factors for 2019-23 will be consistent with 2014-18
- The proportion of entitlements in 2026 that are not on the carbon leakage list will be the same as in 2021
- The maritime sector will be added to the union-wide cap but will not receive free allocation
- The LRF and cap will be revised in the manner set out in the Commission's proposal (with certain assumptions made about the correct interpretation)
- The standard diversion of free-share allowances to funds results in a uniform reduction of the annual amount of allowances available for free allocation
- The transfer of CBAM-sector free allocation to the auction share proposed by the Commission will be administered in such a way so as not to reduce or increase the CSCF (i.e. the unadjusted final allocation for 2026-30 would be reduced in proportion to the reduction in preliminary allocation due to the CBAM Factor)
- Entitlement estimates are based on adjusting the known annual entitlement on each benchmark for 2021-25 (published in the benchmark data report) in the following manner:
- Each entitlement is revised down based on the assumption that the observed annual improvement in benchmarks in 2021/22 will be the same as in 2016/17 and will be corrected to fall within the benchmark reduction corridor you enter in the table
- All the entitlements are then further adjusted uniformly according to the assumption you enter concerning how the overall activity level in the baseline period 2019-23 will compare to 2014-18
- A quantity is then subtracted from the entitlements annually from 2027-30 based on the assumption that the proportion of entitlements not on the carbon leakage list will be the same in 2026 as in 2021
- The number of allowances available for free allocation is a function of the cap, which is affected by the 2030 ETS target you enter, and the year you select for the inclusion of maritime sectors and upgrading the LRF. The model adjusts the cap as follows:
- A reference stationary cap for 2010 is derived by dividing the known current LRF for Phase IV (i.e. 43,003,515) by 0.022
- A reference stationary cap for 2005 is derived from the Commission's proposal based on the implied 2030 cap representing a 61% reduction
- A nominal stationary cap for 2020 is defined by adding the known LRF (i.e. 43,003,515) for Phase IV to the known 2021 stationary cap
- The nominal stationary cap for 2020 is reduced by a linear reduction factor to reach the 2030 cap generated by the target you enter
- A nominal maritime cap for 2020 is defined separately as 90 million allowances (based on the figure stated on page 4 of the Commission's proposal) and this is reduced by a set quantity from 2021 onwards to reach 79 million in 2023 (based on the figure stated on page 46 of the Commission's proposal) and around 53 million in 2030 (based on the cap figure stated in the Impact Assessment on page 194 of the Commission's proposal).
- This approach was taken because the Commission's proposal and attendant impact assessments do not make clear how shipping would be added to the target baseline or LRF baseline.
- The stationary and maritime nominal caps are added together to give a union-wide nominal cap for 2021-30
- The annual cap switches from its currently defined path to the nominally defined path in the year that you select for changes to apply
- Expansions and contractions that are serviced by the NER do not influence the CSCF value, so are not considered in the model. The model also does not consider possible reductions in entitlements due to installations not implementing Article 8 audit recommendations, which would reduce the risk of a CSCF.
- The adjustable parameters are by default set to be consistent with the Commission's ETS proposal, assuming that HAL is flat and changes are introduced from 2024.
- We will make alternative versions of the model during the ETS reform debate, adjusting the built-in assumptions as required to match different proposals from the institutions.
DATA SOURCES Benchmark data report Phase IV cap and LRF value Phase III cap and LRF value Commission's ETS reform proposal
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