Model based estimations (Tier 3)

The model based (Tier 3) methodology was applied separately and in different ways for the industry sector and the power sector.

4.3.2.1 Industry sector

The application of Tier 3 to the German industry sector was based on an impact assessment of the EU ETS to derive abatement cost curves that could be used in such an analysis. The dimensions of the impact assessment as well as the downstream Tier 3 cost efficiency analysis were defined as follows:

► Regional detail: Germany

► Sector detail: Industry sectors (iron & steel, non-ferrous metals, non-metallic minerals, pulp and paper, chemicals) not including refineries

► Temporal perspective: ex-ante analysis for the years 2020 and 2030

► Counterfactual scenario: Model run with zero carbon price

► ETS scenario: Several different carbon price levels from 0€/t to 50€/t in 2030 with linearly in-creasing CO2 prices, starting from 7€/t CO2 in 2014

► Definition of the alternative policy scenario: Three variants were analysed i) Emissions reduc-tion of 7 Mio. t CO2 need to be achieved by German industry without trading (resulting from the maximum modelled carbon price at 50 Euros in 2030); ii) each German industrial sector needs to reduce emissions according to EU ETS cap by 43% in 2030 compared to 2005, trading is not permitted; iii) Each industrial sector in Germany needs to reduce emissions by a given percentage. The percentage reduction for each industry sector is derived as follows: the EU ETS cap of 43% translates into an EUA price of 40 Euros per ton of CO2 (scenario GHG 40, (Eu-ropean Commission (EC) 2014)) or alternatively 11 Euros per ton CO2 (scenario

GHG40/EE/RES30, (European Commission (EC) 2014) (European Commission (EC) 2014)).

143 According to abatement cost curves for overall German industry, the EUA price signal trans-lates into emissions reductions for industry of 21% or 17%. These percentage reductions are equally applied to each industrial sector implying that inter-industry trade is not permitted.

► Information on abatement costs: Abatement costs derived through model runs with model FORECAST Industry

The focus of the Tier 3 analysis on the German industry sector was on the methodological develop-ment of a bottom-up model-based methodology to analyse the effects of the EU ETS on industrial emissions and the presentation of the results in the form of marginal abatement cost curves. There-fore, several differences exist to the other analyses within the project. In particular, the analysis pre-sented an ex-ante analysis covering the timeframe from 2014 to 2030 instead of an ex-post analysis.

Furthermore, the methodological approach to designing and analysing the alternative policy scenarios resembles more a Tier 2 approach than a full integrated modelling Tier 3 approach. For example, in a Tier 3 analysis, emissions reductions would have been based on a comparison between the EU ETS scenario and a counterfactual scenario, and would have consecutively been applied to the alternative policy scenario.

The analysis shows emission reductions of up to 24 Mt CO2e in 2030 compared to 2010 for a CO2 price of up to 50 €/t CO2. Of that, 17 Mt CO2e are already realised in the counterfactual scenario, i.e. a model run with a price of 0€/t CO2. That is, those emissions reductions are not due to the introduction of a CO2 price signal, but have other causes such as changes in energy prices and – exogenously defined in the modelling– structural changes from primary to secondary production processes.

The analysis allowed identifying some methodological challenges when using a bottom-up model for impact assessments of the EU ETS. One of them is the matching of the bottom-up modelled sectors, which use the scope and classifications of energy and national greenhouse gas inventories, with the sectors and scope under the EU ETS. In particular, the permitting practice of power plants which are part of an industry installation can vary under the EU ETS between different regulatory authorities, making a matching difficult. Another challenge are blast furnace gases, which are reported under the EU ETS by the power plant using them as input for power generation. In the bottom-up modelling, however, they are attributed to the iron and steel making process.

Other restrictions of the mitigation potential stem from model assumptions. The model is based on historic structures and only allows for forward projections based on historic trends. Structural chang-es, e.g. in the form of technology developments that allow for more radical fuel switchchang-es, are not taken into account. Also, industry technology normally has rather long life-times. Hence, with a timeframe until 2030 only part of the installations is likely to be replaced. Also, according to our model assump-tions on industrial production, investments in new installaassump-tions are not to be expected.

For the cost efficiency analysis, the above mentioned three alternative policy scenarios are being looked at. Due to the methodological character of the study, the results are only of illustrative nature and cannot be presented in detail. For each alternative policy definition, however, abatement costs were substantially higher than in the emissions trading scenario and – in those cases where mitigation levels were set – differed by industrial sector in relation to their individual mitigation cost curves.

4.3.2.2 Power sector

A Tier 3 analysis for the power sector was already conducted for the year 2010 in the previous re-search project (Cludius et al., 2016). There, the alternative policy scenario assumed a plant-level emis-sion standard, at a level to receive the same amount of emisemis-sions reductions as in the EU ETS scenario (this standard amounted to 1220g per kWh of electricity produced). In this project the analysis was taking further by using a different type of alternative policy scenario, namely, plant-level budgets for the amount of emissions allowed per year.

144 In both analyses, the dimensions were defined as follows:

► Regional detail: Germany

► Sector detail: Power sector

► Temporal perspective: Year 2010, mid of 2^nd trading period

► Counterfactual scenario: Model run with zero carbon price

► ETS scenario: Carbon price and emissions level for year 2010

► Definition of the alternative policy scenario: i) in this report: Emission budget approach, annu-al freight of emissions per instannu-alled production capacity based on the characteristics of an effi-cient natural gas based power plant at 6814 t CO2/MW. The budget was applied to all coal based power plants dated 1980 and older. Such a budget leads to constraints in the amount of load hours that less efficient plants can operate to produce electricity ; ii) in previous project:

emission standard at 1220 g/kWh. Both alternative policy scenarios were designed in a way for the German power sector in 2010 to achieve the same amount of emission reduction as in the EU ETS scenario, compared to a counterfactual without the ETS.

► Information on abatement costs: Abatement costs derived through model runs with model PowerFlex

The results can be summarized as follows: Compared to the counterfactual 2.29 Mt CO253 were re-duced in the Germany power sector in the year 2010 through the emissions trading scheme, the car-bon price was at an average at 14.80 Euro/t CO2 in 2010. The alternative policy approach based on an emission standard implied the closure of three lignite power plants to reach the same level of emission reduction. The alternative policy scenario based on an emissions budget implied the reduction of op-erating hours for coal plants, with the exact opop-erating hours depending on each plant’s conversion efficiencies, ranging from 7800 to 8600 hours per year for lignite powered plants and from 1300 to 5800 hours per year for hard coal power plants.

To assess the cost efficiency in the Tier 3 application for the German power sector, the abatement costs from a societal perspective were calculated by focussing on the difference in the sum of variable costs for power dispatch excluding CO2 costs. Table 4-5 summarises the findings. According to the model calculations, abatement costs for 2.29 Mt CO2 of abatement result in 15 m€ in the ETS scenario and 152 m€ in the alternative policy case i) based on emission standards and 137m € in the alterna-tive policy scenario ii) based on an emission budget. That is, abatement costs are about 137m € lower in the ETS scenario compared to the emission standard scenario and about 122m € lower compared to the emission budget scenario. At the same time, the introduction of a CO2 price results in an increase in power prices of 12.55 €/MWh in the ETS scenario (assuming that CO2-related costs are fully passed-through into power prices), while the price increase in the alternative policy scenarios is significantly lower, 0.77 €/MWh in the emission standard scenario and 0.44 €/MWh in the emission budget scenar-io.

Table 4-5: Abatement costs in the EU ETS and the alternative policy scenario for the Tier 3 ap-proach for Germany in 2010 (compared to counterfactual scenario)

Power price difference

(€/MWh) Abatement costs

(m€)

53 Due to slight methodical differences, the emission reduction calculated in the previous project amounted to a reduction of 2.53 Mt CO2 for the emissions trading scenario , while the alternative policy scenario led to a reduction of 2,37 Mt. Aiming at a reduction of 2,53 Mt would have resulted in slightly higher costs and power prices, whereas aiming at a reduction 2.29 Mt would have resulted in slightly lower costs and power prices than shown in Table 4-5 for alternative policy sce-nario i) Emissions Standards. However, the differences are not as large so as to significantly influence the results.

145 Power price difference

(€/MWh) Abatement costs

(m€)

ETS scenario 12.55 15

i) Alternative policy scenario: Emission

Standard 0.77 152

ii) Alternative policy scenario: Budget

approach 0.44 137