Karoline S. Rogge

Implications of announced phase II national allocation plans for the EU ETS

Abstract We quantified the volume of free allowances that different national allocation plans proposed to allocate to existing and new installations, with specific reference to the power sector. Most countries continue to allocate based on historic emissions, contrary to hopes for improved allocation methods, with allocations to installations frequently based on 2005 emission data; this may strengthen the belief in the private sector that emissions in the coming years will influence their subsequent allowance allocation. Allocations to new installations provide high and frequently fuel-differentiated subsidies, risking significant distortions to investment choices. Thus, in addition to supplying a long market in aggregate, proposed allocation plans reveal continuing diverse problems, including perverse incentives. To ensure the effectiveness of the EU ETS in the future, the private sector will need to be shown credible evidence that free allowance allocation will be drastically reduced post-2012, or that these problems will be addressed in some other way.

The role of the regulatory framework for innovation activities: the EU ETS and the German paper industry

Based on a research framework, which combines environmental economics and innovation studies, we explore the relevance of the regulatory framework for innovation activities in the German paper industry, with a focus on climate policies. Innovation activities considered include research and development, adoption and organisational change. Empirically, we mainly rely on the survey data of paper producers and technology providers. Findings suggest that innovation activities are mainly governed by market factors and (as yet) are hardly affected by the European emission trading system and other climate policies. Also, the impact of these policies on innovation activities is lower for technology providers than for paper producers. However, the majority of companies expect the effects of the regulatory climate policy framework on innovation to increase by 2020.

Going Beyond Instrument Interactions: Towards a More Comprehensive Policy Mix Conceptualization for Environmental Technological Change

Reaching a better understanding of the policies and politics of transitions presents a main agenda item in the emerging field of sustainability transitions. One important require- ment for these transitions, such as the move towards a decarbonized energy system, is the redirection and acceleration of technological change, for which policies play a key role. Several studies of policies supporting environmental technological change have ar- gued for the need to combine different policy instruments in so-called policy mixes. However, existing policy mix studies often fall short of reflecting the complexity and dy- namics of actual policy mixes and the underlying politics of (re)designing them. In this paper we take a first step towards a more comprehensive, interdisciplinary policy mix concept for environmental technological change based on a review of the bodies of lit- erature on innovation studies, environmental economics and policy analysis. The concept introduces a clear terminology and consists of the three building blocks elements, proc- esses and characteristics, which can be delineated by several dimensions. Throughout the paper, we illustrate the concept using the example of the policy mix for fostering the transition of the German energy system to renewable power generation technologies. We argue that the proposed concept provides an integrating analytical framework for empirical studies analyzing the impact of the policy mix on environmental technological change and sustainability transitions more broadly. Finally, we derive policy implications and suggest avenues for future research.

Reviewing the Evidence on the Innovation Impact of the EU Emission Trading System

The Paris Climate Agreement calls for decarbonization of the economy in the second half of this century. This requires a radical redirection and acceleration of technological change towards low- and particularly zero-carbon solutions. Global carbon pricing is seen as a key enabler for such decarbonization, with the European Union’s Emission Trading System (EU ETS) serving as an important pillar. In this paper, I therefore re-view the evidence on the innovation impact of the EU ETS. The review shows a very limited effect of the scheme on technological innovation, but there are clear signs of it having stimulated organizational innovation, with the impact being more pronounced for the electricity sector than for industry. The initially high expectations of the EU ETS regarding technological innovation largely dissipated once the scheme’s lack of strin-gency became apparent and prices collapsed accordingly. Also, for many of the rather incremental innovations that have taken place, the EU ETS was shown to be only one contributing factor among others, with the broader policy mix and long-term targets playing a particularly pivotal role in stimulating innovation. In contrast, there is clear evidence that the EU ETS has been a key driver of various organizational innovations, including making climate change a top management issue. However, so far, these or-ganizational innovations have only had limited effects on shifting corporate strategies towards low-carbon solutions because of low carbon prices, the relatively high share of free allocations in industry, and more pressing business concerns. Despite this, the scheme’s positive impact on organizational innovations should not be underestimated, as these constitute a necessary precondition for future technological innovations. The findings suggest that the Commission’s proposal for the fourth trading period of the EU ETS points in the right direction, but further efforts will be needed to significantly in-crease the scarcity of EU allowances and the share of auctioning in order to fully un-leash the scheme’s transformative power. If the identified shortcomings are not ad-dressed, the EU ETS cannot play its foreseen role in guiding the decarbonization of the European economy, for which innovations in low-carbon solutions are a fundamental requirement.

Reputational impact of businesses‘ compliance strategies under the EU emissions trading scheme

Since January 2005, more than 11,000 installations in the EU are participating in the CO2 Emission Trading Scheme. Within this system companies may choose from a variety of compliance strategy options. To assess the relevance of reputational effects on companies’ climate strategies, a survey of the 300 largest emitting companies in Germany was conducted. Results indicate that reputational effects matter, but are dominated by other factors such as compliance costs, technical and economic risks, or practicabilty. Long-run reputational risks are most relevant for the Clean Development Mechanism and Joint Implementation.

Domestic Offset Projects: Limited Opportunities in Germany but Potential for Others?

This paper examines the potential for Domestic Offset Projects (DPs) in climate protection in Germany. DPs are unilateral GHG emissions reduction projects carried out in a country with a binding greenhouse gas emission reduction target under the Kyoto Protocol (Annex I Country). In contrast to the well known project-based mechanisms under the Kyoto Protocol – the Clean Development Mechanism (CDM) and Joint Implementation (JI) – Domestic Offset Projects are located in the same country as the investor. Therefore tradable emission reduction certificates for DPs are issued by the investors domestic authority. This paper presents possible implementation options for DPs based on JI and CDM experience, as well as possible implementation problems. Policy additionality seems to be an especially crucial requirement and thus was analysed in more detail. In addition, the emission reduction potential resulting from DPs was estimated for the Federal state of Baden-Württemberg, in South-West Germany. Here, it is shown that the scope for DPs is restricted because of the extent of the German climate program. In Baden-Württemberg only some DPs and JI activities fulfil the criterion of policy additionality. For this reason, DPs are probably of more interest in Annex-I countries with a more limited climate policy mix.

Exploring Perceptions of the Credibility of Policy Mixes: The Case of German Manufacturers of Renewable Power Generation Technologies

The credibility of climate policy has been identified as paramount factor for low-carbon investment and innovation and is thus key for the cost-effective achievement of the decarbonization objectives set out in the Paris Agreement. Yet, despite its importance we have only limited insights into how such policy credibility is formed. To address this gap we explore whether and to what extent corporate perceptions of policy credibility depend on the current policy mix with its national targets, concrete policy instruments and their consistency as well as policy making and implementation. For this, we use the case of the German Energiewende and rely on data collected in 2014 through a survey of German manufacturers of renewable power generation technologies. We analyze the answers of 390 companies through a linear regression to identify policy mix related determinants of perceived policy credibility - measured by a novel indicator based on four survey items. We find that corporate perceptions of policy credibility are mainly shaped by two characteristics of the policy mix, namely the coherence of policy making and implementation, followed by the consistency of the policy mix. Elements of the policy mix matter as well, in particular changes in the design of the core demand pull instrument (the Renewable Energy Sources Act, EEG) and the nuclear phase-out policy, but also the German targets for the expansion of renewable energies play a role. These insights enable us to derive more general implications for policy makers around the world interested in promoting the innovation-led decarbonization of the economy by safeguarding and increasing policy credibility.

Local Utilities Under the EU Emission Trading Scheme: Innovation Impacts on Electricity Generation Portfolios

In January 2005, the EU wide emission trading scheme (EU ETS) for large stationary emitters of CO2 started in its then 25 Member States. The general objective of this novel economic instrument is to help the EU cost-efficiently achieve its Kyoto commitment of reducing its greenhouse gas emissions (GHG) by −8% by 2008–2012 (compared to 1990) and future – possibly more stringent – GHG reduction goals. With a view to the scale of long-term emission reduction requirements, climate protection innovations will have to play a major role. It is therefore of utmost importance to understand how the EU ETS influences activities in these technologies.

Exploring the Role of Instrument Design and Instrument Interaction for Eco-Innovation: A Survey-Based Analysis of Renewable Energy Innovation in Germany

Empirical research on eco-innovation has produced a substantive body of literature on the relevance of regulation for stimulating such innovation. Much of this work on the role of policy for eco-innovation relies on econometric analyses of company survey data. In this regard, the eco-innovation module introduced in 2008/2009 in the Community Innovation Survey serves as an important data source that has helped improve our under-standing of the role of environmental and innovation policy for eco-innovation in the European Union (EU). However, so far, this data source has provided only limited opportunities to generate insights into the role of instrument design and instrument interaction for eco-innovation. In this chapter, we present a first attempt to measure such aspects in a company innovation survey based on the example of renewable energy innovation in Germany. In particular, we explore to what extent the design of the German Renewable Energy Sources Act (and the interaction of its feed-in tariffs with the EU emissions trading system) correlates with innovation in renewable power generation technologies. We find instrument design features but not instrument type to be related to eco-innovation. In addition, our exploratory study provides evidence for an interaction effect between climate policy and renewables support policy. Based on these findings, we discuss implications for future research on the role of policy in eco-innovation.

Cross-Country Comparison of the Incentives of the EU Emission Trading Scheme for Replacing Existing Power Plants in 2008–12

In this paper, we conduct a cross-country quantitative analysis of the replacement incentives generated by the EU Emission Trading Scheme (EU ETS) for the power sector in 2008–12. In order to do so, the allocation rules of the Member States are applied to concrete reference power plants for three different fuel types (lignite, hard coal and gas). Based on these calculations, we compare installation-specific replacement incentives across the Member States. Our analysis shows that replacement incentives vary significantly across Member States and typically deviate from the incentives provided in the reference case of full auctioning. Furthermore, the EU ETS allocation rules lead to perverse incentives in approximately 30% of the possible replacement options. Only 5 MS do not provide any perverse incentives. Finally, we explore the link between replacement incentives and allocation types. Based on our findings, we derive policy recommendations for the design of emission trading schemes emerging around the world.