|EU ETS cost/benefit analyses based on artificial and unrealistic assumptions|
|Saturday, 16 February 2013 13:38|
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M&R Regulation applies a constant allowance price of 20 € as an input for important business estimations and assessments. Another regulatory document, the European Commission’s Guidance on the optional application of Article 10c of Directive 2003/87/EC (2011/C 99/03) adopted the relevant price levels between 14.5 € (years 2010 - 2014) and 20 € (2015 – 2020).
What are the effects of the above assumptions considering the background of current market prices for carbon?
Current extraordinary low market prices for carbon permits have already gained their supporters as well as evenly committed adversaries. Regardless, however, of the present political battle between regulatory-set versus market conceptions for shaping carbon prices (the nearest battlefield scheduled for 19 February 2013 is the European Parliament's environment committee (ENVI) vote on backloading) it would be interesting to observe how the whole situation influences on certain EU ETS mechanisms where certain levels for an allowance price have been incorporated in advance.
Among these instances in the Commission Regulation (EU) No 601/2012 of 21 June 2012 on the monitoring and reporting of greenhouse gas emissions pursuant to Directive 2003/87/EC of the European Parliament and of the Council (OJ L 181, 12.7.2012, p. 30), which entered into force on 1 August 2012 and applies from 1 January 2013 (M&R Regulation).
The great merit of the new M&R Regulation is the possibility for the operator to get permission from the competent authority to derogate from a specific monitoring requirements (such as in particular the required tier level), if fully applying the requirement would lead to “unreasonable costs”.
Point 4.6 of the Guidance document No. 1 - General guidance for installations of 22 November 2012 clarifies that when assessing whether costs for a specific measure are reasonable, the costs are to be compared with the benefit it would give and costs are considered unreasonable where the costs exceed the benefit. The detailed description of the cost-benefit analysis is a new element in the M&R Regulation.
And there we come to the point. Under the M&R Regulation the benefit is considered to be proportionate to an amount of allowances in the order of magnitude of the reduced uncertainty, however, the M&R Regulation requires a constant allowance price of 20 € to be applied for all the estimations of the allowance value. Generally the purpose of this is to make estimations independent from daily price fluctuations.
Acknowledging the value of the above argument it is, however, logical that the value of hypothetical benefits under the M&R Regulation rules is overestimated comparing with the market price for allowances. This, in turn, forces economic operators and installations to apply metering technologies, the costs thereof are not fully supported by business analyses based on actual market data.
Such an outcome appears to be in contrast with cost effectiveness which is the underlying assumption embedded in the foundations of the M&R Regulation. It also results in measurable economic loss on the part of economic operators (for practical example see: Tiers - data quality levels under the EU ETS M&R Regulation - overstated).