1

Table of contents
Presentation of the mission................................................................................................................................................ 6
Thanks................................................................................................................................................................................. 7
List of hearings.................................................................................................................................................................... 8
Executive summary............................................................................................................................................................. 9
Introduction...................................................................................................................................................................... 16
1.

Introduction of a soft price collar on the European carbon market......................................................................... 20

1.1.

Functioning of the European carbon market and its limitations .................................................................... 20

1.1.1.

Clarifying the intentions of the European carbon market .......................................................................... 20

1.1.2.

European carbon market review ................................................................................................................ 21

1.2.

Examples of foreign approaches implemented or in progress ....................................................................... 24

1.3.

Analysis of possible options for the adjustment of supply via auctioning ...................................................... 25

1.4.

Price levels considered for the soft price collar .............................................................................................. 27

1.5.

Impact on European greenhouse gas emissions ............................................................................................. 30

1.6.
Political opportunity: assessment of the impacts of a soft price collar on the various actors and their
positions ....................................................................................................................................................................... 30

2.

1.6.1.

Effect on European companies covered by the EU ETS .............................................................................. 31

1.6.2.

Impact on economic actors and households .............................................................................................. 34

1.6.3.

Position of NGOs......................................................................................................................................... 34

1.6.4.

Impact on revenues from Member State auctions..................................................................................... 35

1.6.5.

Position of the European commission and the european parliament........................................................ 35

1.7.

Conditions of follow-up................................................................................................................................... 36

1.8.

Legal aspects ................................................................................................................................................... 37

a national mechanism to accelerate frances coal phaseout.................................................................................... 38

2.1.
The Context: Panorama of french emissions, existing carbon pricing systems and national emission
reduction objectives ..................................................................................................................................................... 38
2.2.

Origin and objectives of the measure ............................................................................................................. 38

2.3.

Implementation options.................................................................................................................................. 39

2.4.

Environmental, economic and political effects of an uniform national tax on the electricity sector ............. 40

2.5.

Chosen solutions and their impacts on european policies.............................................................................. 43

4

3.

promoting carbon pricing worldwide ....................................................................................................................... 46

3.1.

Political economics of carbon pricing: where do the obstacles come from?.................................................. 46

3.2.

Panorama of existing global carbon pricing .................................................................................................... 47

3.3.

Climate negotiations and carbon pricing: prospects opened up by the Paris Agreement.............................. 49

3.4.

Some paths to be explored to promote the extension of the scope of carbon pricing .................................. 50

Conclusion ........................................................................................................................................................................ 52
References ........................................................................................................................................................................ 54
Annex 1: Landscape of carbon pricing instruments and the resulting range of explicit and implicit prices .................... 57
Annex 2: international Expriences .................................................................................................................................. 60
Annex 3: History of the European carbon market from phase 1 to phase 3, and perspectives for phase 4 .................... 64
Annex 4: Amendment proposal for a soft price collar for the EU .................................................................................... 68
Annex 5: Answers to three frequently asked questions................................................................................................... 70
Annex 6: Comparison of modeling results on a uniform tax affecting electricity production from gas and coal ............ 71
Annexe 7: Electricity prices formation.............................................................................................................................. 72
Annexe 8: CGE study on carbon pricing and competitiveness ......................................................................................... 74

PRESENTATION OF THE MISSION

Sgolne Royal, President of COP21 has entrusted Pascal Canfin (former Minister, Director of WWF France), Alain
Grandjean (co-founder and partner of Carbone 4), and Grard Mestrallet (Chairman of ENGIE) with the mission to
bring proposals for enhancing carbon pricing across the world.
More specifically, the co-chairs were asked to:
(i) Analyse and develop concrete proposals on the way to implement the French proposal of introducing a soft price
collar on the European carbon market,
(ii) Make proposals on a national measure to accelerate the phasing out of coal in France, through the introduction of
a carbon price floor on the electricity market aiming at encouraging the use of gas rather than coal
(iii) Bring ideas to enlarge the perimeter of carbon pricing across the world.
The mission interviewed more than 80 experts of carbon pricing (from governments, research organizations, and a
broad range of stakeholders including representative of business and civil society) in France, in Brussels and in Berlin.
The following report recalls that carbon pricing is a key instrument to meet the decarbonization goal adopted in the
Paris Agreement and proposes concrete and pragmatic solutions to introduce a carbon soft price collar in the EU-ETS.
The reform of the European carbon market is a real credibility test for the European Union which has to enhance its
climate policies, and thus contribute to broader positive dynamics to enlarge the perimeter of carbon pricing across
the world. This report also contains detailed proposals to implement a carbon price floor in France, and enhance
efficiency of carbon price instrument worldwide.

THANKS
It would not have been possible to realize this report without the valuable support provided by Benot Faraco, Anne
Chassagnette, Herv Casterman, and Sophie Aubert, and without the availability of the 79 persons who accepted to be
interviewed during the mission. We would like to thank them sincerely.
We would like to thank also the team of regional economic service of the French Embassy in Berlin, in particular AnneLaure de Coincy, Laure Joya, and Stphane Reiche, as well as the team of the Permanent Representation of France to
the European Union, in particular Alexis Dutertre and Philippe Deprdurand. Finally we thank all the persons who
provided useful insights on carbon pricing to stimulate the discussion within the mission: Emilie Alberola, Marion
Afriat, Ruben Bibas, Dominique Bureau, Oskar Lecuyer, Philippe Quirion, Raphal Boroumand, Chritoph Wolff.

Disclaimer:
The views expressed in this report do not represent the views of the persons who were interviewed, nor those of the
institutions to which they belong, nor those of Carbone4, WWF, and ENGIE. They are the sole responsibility of the
authors.

LIST OF HEARINGS
ALBEROLA Emilie, I4CE
BARREYRE Gildas, UNIDEN
BAUBY Catherine, EDF
BELET IVO, European Parliement, PPE,
COMENVI
BERNARD-GELY Anne, SFIC
BOQUET Nicolas, Afep
BORDAT Jacques, INTITUT DU VERRE
BOUCHARD Georges, AFG
BRUEL Patrice, EDF
CATUCOLI Xavier, Direct nergie
CAMPAS Adeena, ANIA
CANNET Pierre, WWWF France
CARP Suzana, Sandbag
CHARPIN Jean-Michel
CHAUVEAU Philippe, Solvay / UIC
CHENU Anne, UFE
CHONE Fabien, Direct Energie
CRIQUI Patrick
DANIA Rpke, Ministry of Energy
(Germany)
DANJOU Philippe, CERCLE DE L'INDUSTRIE
DE LANGERON Claire, A3M
DE MONTCHALIN Amlie, AXA
DE PARISOT Raoul, SFIC
DE PERTHUIS Christian, Chaire Economie
du Climat
DE WARREN Nicolas, ARKEMA
DELPEYROUX Stphane, A3M
DINGUIRARD Frdric, The Shift Project
DUSEUX Francis, UFIP
DUTERTRE Alexis, Permanent
Representation of France to the EU
EICKHOUT Bas, European Parliament,
Greens COMENVI
FERRIER Jrme, AFGAZ
FUSS Sabine, MCC
GAUTIER Clia, CAN France
GERARDIN Patrice, EDF
GICQUEL Marianne, CERCLE DE
L'INDUSTRIE
GOEKE Berthold, Ministry of Environment
(Germany)
GUILBAUD Michel, MEDEF
HAYA Antonio, Pont-sur-Sambre Power
SAS
HEIN Joachim, Bundesverband der
Deutschen Industrie

HUET Gwenalle, MEDEF

HUGUET Frdric, AFA / RIO TINTO
FRANCE SAS
IMBAULT Olivier, MEDEF /
BUSINESSEUROPE
JOURNET-CUENOT Florent, TOTAL
KNOPF Brigitt, MCC
LACOUR Paul-Antoine, COPACEL
LAFON Madeleine, AFG
LASSAIGNE Thomas, RTE
LE CAIGNEC Corinne, ARCELORMITTAL
LEGUET Benot, I4CE
LENAIN Yves, UIC
MAGES Vincent, AIR LIQUIDE
MARTINET Bruno, FFTB
MIGNON Herv, RTE
MOUNIER Cyrille, AFA
MULLER Isabelle, UFIP
NAHON Claude, EDF
NEVELING Stefanie, Ministry of Energy
(Germany)
PELLERIN-CARLIN Thomas, Jacques Delors
Institute
PESCIA Dimitri, Agora Energiewende
PHILIBERT Cedric, IEA
POYER Luc, Uniper
QUINIOU Valrie, TOTAL
RICOUR Olivia, RTE
ROBERT Stphanie, Afep
RONCATO Jean-Pierre, UNIDEN
ROQUES Fabien, Compass Lexecon
ROSIER Philippe, MEDEF
ROUAULT Bruno, MEDEF
SCHMITT Jrme, TOTAL
SCHRAMM Christophe, Solvay
SEJOURNE Jean-Baptiste, Engie
SOLIER Boris, Chaire Economie du Climat
SOULMAGNON Franois, Afep
THIMANN Christian, AXA
TIROLE Jean
TROTIGNON Raphal, Chaire Economie
du Climat
TUTENUIT Claire, EPE
VAILLES Charlotte, I4CE
VAN DEN PLAS Sam, WWF Europe

EXECUTIVE SUMMARY
There is now a wide consensus among economists, international organizations, NGOs, and even businesses
which joined the cause with the momentum created by COP21 on the key role played by carbon pricing and
climate finance instruments to trigger a low-carbon transition in an efficient way. These instruments make
polluters pay for the cost of greenhouse gas emissions for society, and symmetrically, reward those who
avoid such costs through emission reductions. Thereby, they accelerate the transition while providing
significant co-benefits.
1. Sending an efficient and predictable price signal on the European carbon market
A necessary reform of the European carbon market
The European carbon market, which covers about 45% of European Union emissions, is a regulated system
allocating emissions rights and using a price signal to optimize the cost of emissions reductions. Until now,
even though the emissions covered by this system have remained below the cap set by the
European Union, the role of the carbon market to meet the emissions reductions objective has been
rather limited. Indeed, emissions reductions in Europe were mostly due to both the economic crisis, and to
other successful policies (such as standards for energy efficiency and targets for renewable energy) which
contributed to significant emissions reductions in some sectors. Confronted with these unexpected emissions
reductions, and the inflow of international carbon credits coming from Kyoto protocol mechanisms, the
European carbon market has not been able to deliver an efficient carbon price. The resulting surplus of
quotas together with the absence of expected structural reforms of the market have kept carbon prices at
very low levels and undermined the credibility of the trajectory of future European emissions.
This situation has led to an inconsistency between the Paris agreement, the long and mid-term
1
European climate objectives , and the functioning of the European carbon market. Such inconsistency
has several damaging impacts on the price signal. Regarding quantities, (i) the planned reduction of
emissions cap in the future is not sufficient to meet the objective of 80% to 95% decrease in emissions by
2050 compared with 1990 levels, and (ii) the possibility of using after 2020 unused allowances allocated
before 2020 will disturb the price signal on the market by maintaining a surplus. Current price levels at
around 5/tCO2 and expected trends of prices are far too low to provide a strong incentive for transitioning
toward low-carbon investments.
So far, successive reforms of the European carbon markets have only brought one-off solutions to
those difficulties. Complementary action is required as prices are too low and too volatile to both
guide todays operational decisions, and foster the low-carbon investments we need to meet the objectives
decided in the Paris Agreement. An efficient and predictable price is essential to guide businesses decisions
that will partly drive the future trajectory of European emissions.
In particular, the economics of the power sector, based on marginal costs for power generation, is
directly related to the carbon price and the price of fossil fuels. Current low prices of lignite and coal,
combined with a low carbon price signal are not sufficient to move investments away from carbon intensive
assets damaging the climate. In this context, some countries consider that the European carbon market is
not able today to deliver the appropriate signal to transition towards a low-carbon economy and have
decided to implement unilateral measures. The UK for instance has implemented since 2013 a carbon price
floor on electricity production to accelerate the phasing out of coal-fired power plants and the energy
transition of the country. France has recently decided to follow the UK example, announcing the
implementation in 2017 of carbon price floor in the power sector in order to favour gas against coal
generated power. In Germany, there is an ongoing debate on how to best plan the phasing out of coal
generated power. In order to avoid a fragmentation of climate policies, it is of critical importance to

1 At

least 40% decrease in greenhouse gases emissions by 2030 compared with 1990, and between 80% and 95% by 2050.

implement, without delay, measures aiming at both regulating quantities and providing a relevant
price signal at the European level.
A soft price collar for the European carbon market
Setting up a soft price collar with a minimum and a maximum price would strengthen the regulation
of the market through quantities. Indeed, such a soft price collar would act as a pull back force on
prices making sure that the price trajectory is consistent with European climate objectives and would
incentivize low-carbon investments as soon as possible.
A soft price collar would make it possible to:

Send, notably through the floor price, a sufficiently strong signal to trigger low-carbon
investments, starting with the energy sector where low carbon technologies are already available ;

Guide economic agents expectations and smooth over time the costs of transition, rather
than accepting greater costs in the future due to sudden acceleration of mitigation efforts;

Adjust the supply of quotas to exogenous shocks in a more reactive manner than what is
currently possible with a regulation only determined by the quantity. These shocks can result from a
sharp contraction of economic activity or unintended consequences of the interaction of different
climate policies. The soft price collar would ensure that prices do not get too far from a trajectory that
is consistent with the European objectives, even when the demand of quotas is suddenly impacted
upward or downward by a shock.

Such soft price collar could build upon the existing auction mechanism, taking stock of the
experience of Northern American carbon markets. Those markets have established, right from the start,
an auction reserve price which prevents allowances from being released into the market when the auctioning
price does not reach a minimum level. Conversely, when the ceiling price is reached, allowances are
released at the price ceiling to provide a safety valve in case of high prices.

Figure 1: Trajectory of the soft price collar proposed by the mission

The trajectory of the soft price collar would be set at a level that would accelerate the transition to a
low-carbon economy, in particular in the energy sector, which accounts for nearly 60% of the
10

European carbon market emissions in 2015. Prices below the price floor of that corridor would prevent the
economy from deploying a lot of low-carbon measures in the industry. The price floor could be set between
20 to 30 in 2020, with an annual increase of 5 to 10% in order to overshoot 50 in 2030, and the price
ceiling set at 50 in 2020 with the same annual increase as the price floor. The slope of this trajectory is key
to anticipate the trend and provide visibility to investors.
If the price floor is superior to current levels of carbon prices, it will drive up the wholesale price of power in
Europe. Still, it is important to notice that wholesale power prices in Europe are historically low. This
represents a good window of opportunity to make a carbon pricing reform more acceptable, in particular for
the industry.
A soft price collar will increase substantially auction revenues for governments in the mid-term.
These extra revenues should be used to cope with the social and economic consequences of the
implementation of a price floor, and should support the development of low-carbon sectors and best practice
to reduce businesses and households energy bills, in particular for those in situation of energy poverty.
A relevant carbon price signal strengthens the competitiveness of businesses that are providing lowcarbon solutions and sows the seeds of future dynamism and prosperity within the European Union.
However, in the short term, carbon pricing can negatively impact some carbon intensive sectors. The
implementation of this soft price collar should thus be accompanied by improved and strengthened
provisions to mitigate the potential risk of loss of competitiveness for these sectors. In the absence of
equivalent carbon pricing policy in the rest of the world, European climate policies could create a distortion of
competition between EU companies and their foreign competitors. To protect companies that are effectively
exposed to a risk of loss of competitiveness, transitory measures should be taken such as the inclusion of
importations in the European carbon market, or free allocation of quotas. Such measures should be based
on the following principles: (i) making sure that the most efficient European plants, effectively exposed to this
risk, are compensated till 100% of the carbon costs in order to set a level playing field with their foreign
competitors; (ii) not undermining the goal of the European carbon market; (iii) being transparent,
understandable and transitory.
Finally, the mission supports the idea of introducing an independent Advisory Committee that would
provide regular recommendations both on line with the regular review of the Paris Agreements
contribution and with the evolutions of the market conditions in order to better steer the European
carbon market regulation. The objective of this Committee would be to appraise, on a regular basis, the
price trajectory and its articulation with the quantity regulation, warning decision makers to avoid the risk of
material divergence from the objective.
A broader discussion on the consistency of European instruments with climate objectives
The discussion on a soft price collar is complementary to a reflection on a better quantity-based
regulation. It is also part of a broader discussion on the coherence of climate policy instruments with
the European emission reductions objectives. Some proposals based on a quantities have been made.
Some suggest for instance to reduce the cap of emissions, or to find solutions to cut down the current
surplus of quotas.
The objectives set by the European Council to reduce emissions by 43% in 2030 in the European carbon
market compared with emissions level in 2005 will require sharp decrease of the cap after 2030 to be
consistent with the -90% objective for 2050. The proposal by the European Commission to increase the
annual reduction factor of emissions cap from 1.74% to 2.2% from 2020 is not sufficient to meet the EU
commitments taken in Paris. A possible solution would be to adjust the trajectories of emissions reductions in
the European carbon market to the 2050 objective, by increasing the annual reduction factor up to 2.4% or
2.6% per year from 2020. Another option would be to change the reference years from which annual
reductions are computed.

11

It is therefore urgent to act now to improve the functioning of the market in order to; accelerate in the short
term - the transfers of quotas into the reserve, and - in the longer term - to send a credible signal that the
market will be short at some point and well-aligned with the EU 2050 objective. The soft price collar proposal
addresses pragmatically this urgency to act.
More broadly, the credibility of French and European commitments at COP21 implies to raise the pace of
emissions reductions, in particular in a context of low prices of energy (due to the decrease of fossil fuels
prices). In addition to the necessary reform of the European carbon market, the increase of the carbon
component of energy taxation and the reopening of European discussions on that topic are essential
conditions to accelerate changes of behaviours.
2. A national measure to accelerate the phasing out of coal in France
President Hollande announced during the fourth environmental conference in April 2016, that a carbon price
floor will be implemented in the French power sector in order to favour gas-fired power generation against
coal-fired power generation.
The implementation of this announce could take different forms:
a uniform top-up tax that the French power plants will pay in addition to the price of quotas on the
European carbon market, so that total carbon price for the power sector makes 30/tCO2;
the increase of an existing tax on coal, such as the domestic consumption tax on coal, or the
implementation of a differentiated tax according to thermal performance of power plants;

a technical standard based on carbon emissions of power plants

2

Economic studies identify the following impacts:

Impacts on greenhouse
gases

Impacts on wholesale
power prices

Impacts
on
supply security

power

Tax on both coal and gas

Tax on coal only
Technical standard

The impact of a uniform top-up tax would be:

Emissions reductions in the EU between 3 and 6 millions of tons of CO2, or equivalently from 0.15%
to 0.3% of total emissions covered by the European carbon market. These reductions can be
decomposed into a drop of 12 millions of tons in France compensated by an increase in emissions in
the rest of the EU, in the absence of a coordinated measure at the EU level such as a soft price
collar;

Decrease in operating hours of French coal-fired power plants leading to their quasi closure, and
decrease also of operating hours of gas-fired power plants, below 500 hours per year, leading to
significant operating losses, that could result in closing or mothballing them;

Possible increase in the supply security risk on the French power system;;

Those studies have been conducted by Direct nergie, EDF, Engie, Chaire Economie du Climat, Thomson Reuters, Compass
Lexecon, and UFE.

12

Increase in the wholesale power price in France ranging from 5 to 10% of mean wholesale prices in
2015.

It is therefore important to design the French measure so that it maximizes its environmental impact, does
not destabilize power supply security, and as desired by the President, favours, for the specific power
sector, the use of gas against coal. In light of these elements, the mission suggests two solutions: (1)
defining a technical standard, based on CO2 emissions of power plants, or (2) increasing an existing tax on
coal, such as the domestic consumption tax on coal, or implementing a differentiated tax according to
thermal performance of power plants for instance in order to incentivize energy efficiency of thermal power
generation.
Now, the technicalities of those options have to be scrutinized to allow fast implementation of the measure in
accordance with the conditions and objectives set by President Hollande. The mission stresses out the
urgency to conduct legal studies in order to make sure that the retained option complies with the French
Constitution and the European law.
Lastly, in order to preserve the environmental integrity of the national measure, the mission flags the
importance of examining how to remove from the European carbon market the amount of quotas
corresponding to the extra emissions reductions due to the closure of power plants.
3. Promoting carbon pricing across the world
At the international level, ambitious objectives aiming at stabilizing the climate were adopted in Paris on
December 2015: article 2 of the Paris Agreement sets the collective objective of keeping the increase in
mean global temperature well below 2C (1.5C if possible) compared to pre-industrial level. Each party has
to elaborate and implement a national contribution to this objective, the ambition of which can only ratchet up
with time. For the first time in climate negotiation history, countries, supported by non-governmental actors,
have unanimously recognized that climate policies are the levers of a more resilient regime of development.
Carbon pricing, whatever the practical forms it takes (emission trading system or carbon tax for instance) is
one of the key tools to trigger the low-carbon transition we need to meet climate objectives and reap their cobenefits in terms of health, energy security, and green gowth.
To date, carbon pricing only covers a small but growing share of global greenhouse gases emissions.
Now many actors wish to enlarge the perimeter of carbon pricing. For instance, the Carbon Pricing
Leadership Coalition (CPLC) aims at doubling the share of emissions covered by carbon prices by 2020, and
doubling it again from 2020 to 2030 in order to reach a coverage of 50% at this date. The bigger the share
the more dramatic impact carbon prices would have on greenhouse gas emissions reductions, and the
smaller would be the risk of loss of competitiveness. It is also critical to address the question of the
redistribution of incomes generated by carbon prices. The redistribution should support the funding of the
energy transition, and the preservation of the competitiveness of businesses in regions of the world that are
the most advanced in terms of emissions reductions.
For the first time, financial actors have come on board and started to address the climate challenge
from a risk management perspective: climate change brings new risks that may endanger the
stability of the financial sector if there are not appropriately taken into account. This is why the
Financial Stability Board is now trying to appraise those risks and a growing movement of divestment from
fossil fuel is taking place among institutional investors as long-term returns of these assets is threatened.
The Paris Agreement does not directly deal with carbon pricing issues. Still, there is in the text of the
Agreement and the Decisions coming along, some elements providing the seeds for enlarging the perimeter
of carbon pricing.
Article 2 of the Agreement sets the general objective of making financial flows compatible with climateresilient development. Article 6 of the Agreement, setting up a new market mechanism following the flexibility
mechanisms of the Kyoto protocol, echoes paragraph 108 of the Decision that recognizes the social,
13

economic, and environmental value of mitigation activities, as well as paragraph 136, although it does not
apply to countries, that recognizes the important role of carbon pricing as an incentive for emissions
reductions activities. All together, we argue that those key juridical elements can be seen as underlying
principles for building innovative and efficient economic and financial instruments.
The diversity of carbon pricing initiatives across the world shows that the main barriers to carbon prices
implementation lie on their distributive impacts among industries, households, and countries with different
levels of development.
Based on this statement, we suggest the following three tracks of measure to enhance social acceptability of
carbon pricing : (1) promoting fast enlarging of the perimeter of carbon pricing, at least among a coalition of
countries such as the Carbon Pricing Leadership Coalition, and encouraging the publication on a regular
basis of the different levels of carbon prices applied by the industry across the world together with global
trends of emissions worldwide; (2) designing carbon pricing instruments as levers to finance low-carbon
development in developing countries, which are attached to the principle of common but differentiated
responsibility ; (3) installing a high-level Commission (appointed by the UN) to elaborate an indicative
trajectory of a corridor of social values of carbon aligned with the 2C objective and the objectives of NorthSouth transfers. Such a corridor would not provide prescriptive values but landmarks for countries willing to
implement carbon pricing mechanisms or make the diversity of existing instruments more consistent.
Eventually, this corridor would have a pull back effect on explicit carbon prices that are bound to get
close to the social value of carbon in order to meet the 2C challenge. This Commission could also make
proposals on how to deal with the inevitable issue of differences in social values of carbon among different
regions of the world and necessary safeguards to the downward risk on prices caused by potential linking of
carbon markets across the world.

14

The 10 proposals of the Mission

Proposal 1: From 2020, adapt market emission reduction trajectories for the European carbon market
to the 2050 climate objective, by increasing the reduction factor of the emission cap from 2.2%
adopted by the European Council to a value between 2.4% and 2.6% per year and accelerating the
placement in reserves of quotas surpluses.
Proposal 2: Introduce a carbon price corridor at European level built on the California and Quebec
model with an auction reserve price, meaning allowances do not have to be sold on the market if the
minimum price is not reached at auction.
Proposal 3: Fix the following trajectory for the price floor: between 20 and 30 in 2020, with an
annual increase of 5-10% so as to exceed 50 by 2030, and thereby accelerate the transition to the
lowest-carbon solutions, in particular in the energy sector. Fix the price ceiling at 50 for 2020 with
an annual increase similar to that of the floor price.
Proposal 4: Encourage Member States to target the use of revenues from emission allowance
auctions on low-carbon innovations controlling the social and economic consequences of the price
floor and support developing countries in their fight against climate change.
Proposal 5: Introduce a regular revision system (every 5 years) on floor and cap prices via an
informed dialogue between European bodies and an independent consultative committee using the
best available data and, in particular, on the pace of the enhancement of the European ambition as
foreseen in the Paris Agreement.
Proposal 6: In all cases, form an ambitious coalition with other Member States and European
decision-makers in order to make carbon pricing work in the EU, and in particular the idea of a soft
price collar on the European carbon market, in addition to regulation by quantities.
Proposal 7: Prefer gas-fired to coal-fired electricity production by introducing a technical standard
on the basis of greenhouse gas emissions from power stations by increasing the existing tax on coal
(domestic consumption tax on coal), or creating a differentiated tax, the level of which would take the
thermal performance of power stations into account.
Proposal 8: Promote a rapid extension of carbon pricing to achieve carbon pricing coverage of at
least 25% of global emissions as quickly as possible.
Proposal 9: Introduce a high-level commission (appointed by the UN) to define the indicative
trajectory of a corridor of social values of carbon, aligned with the 2C objective and the North-South
financial transfers objectives.
Proposal 10: Promote the reopening of discussions on the introduction of a carbon component into
European energy taxation as part of the dialogue which will open in 2018 on the European climate
policy ambition.

15

INTRODUCTION
The value of the transition to a low carbon economy
With the Paris agreement, the international community fixed the objective of limiting the increase in temperatures
on our planet well below 2C and continuing efforts to limit the increase to 1.5C. In practice, this ambitious
objective would require our economies to cease emitting greenhouse gases into the atmosphere in the second half
of the century, except those quantities we are capable of removing. This balance is required to achieve carbon
neutrality. All countries are now convinced that stabilising the climate is desirable and has a social, economic and
3
environmental value .
By investing in emission reductions, society is giving a value to climate stabilisation, which equates to the value of
avoided climate damage. Estimating this value continues to be a source of scientific controversy (Nordhaus, 2014;
4

Stern, 2007). The most recent IPCC report (2014) suggests a range from a few US dollars per tonne of CO2eq to more
56

than $200 per tonne of greenhouse gas .

The investment required to stabilise the climate can also be considered as the payment of an insurance premium
against the risk of uncontrolled climate change which would occur in the event of average temperatures increasing
beyond the 2C limit (Weitzman, 2012). We know that inaction which would result in a temperature rise between 4
and 5C would expose our societies to unacceptable levels of cost through increasingly frequent climate disasters,
irreversible damage to ecosystems and massive population displacement. Already, the Stern report (2007) showed
that investing 1% of domestic revenues would avoid damage corresponding to at least 5% of domestic revenues, and
7

consequently that the cost of action would be substantially less than the cost of inaction .
As well as limiting the costs associated with climate change, investing in low-carbon development will procure
multiple co-benefits for health because of lower pollution. The IMF (2014) calculated that only taking into
consideration the health co-benefits of reducing greenhouse gas emissions would justify a carbon price of around 50
per tonne of CO2eq.
Finally, by investing in low-carbon transition, society hopes to benefit from the macroeconomic advantages from a
new green growth system. The Stern-Calderon report (2015) on the new climate economy shows that the fight against
climate change could be a source of improved growth. This is explained primarily by a cut in the energy bill, the
recovery of productive investment and the recycling of carbon revenues which will allow employment and investment
taxes to be reduced, and a net gain in jobs. Low-carbon transition requires massive investment in almost 50% of the
economys production sectors, the first amongst which are energy, construction and transport. Redirection of
investment to these sectors will be of the order of 2,500-4,000 billion dollars per year depending on the methodology
3

Paragraph 108 of the decision accompanying the Paris Agreement.

Apart from CO2, there are several greenhouses gases, such as methane and nitrogen. These gases dont have the same impact
on the climate as CO2. So as to be able to quantify the emissions of these greenhouse gases, we use the notion of CO2 eq, which
refers to the quantity of emissions of CO2 which would have the same impact on the climate.
4

The factors explaining these differences are the actualisation rate, the functional forms of climate damage, hypotheses on
uncertain parameters such as climate sensitivity, and technical progress (Espagne et al., 2012; Pottier et al., 2015).
6

The way in which reference values of carbon in France (Quinet, 2009), Great Britain and the US have been established
shows the highly political nature of the values chosen. The American administration, for example, decided in May 2013 to
suddenly increase the official value range by 60%, increasing from [$7, $86] to [$13, $137] (EPA, 2015) in 2020 in the
cost/revenue analyses of public projects. Such an increase will have a considerable effect, in particular on energy investment
decisions in America.
7

This diagnosis is today confirmed and supplemented by other macroeconomic studies (New Climate Economy, OFCE, CepiiCired) and numerous reports from international organisations (World Bank, OECD, UNEP, IMF).

16

used (WEO, 2015; Aglietta et. al, 2015), that is to say between 14 and 20% of total productive investment. This is why
low-carbon transition offers a high multiplier effect on numerous industrial sectors, rich in employment and covering
a wide pallet of skills (from building insulation to the digital industry).

Thus, acting on the climate creates wealth. Whilst the climate challenge has for a long time been considered as a
constraint on growth, investing in low-carbon transition now appears as an opportunity of distancing the global
9

economy from the ghost of secular stagnation .

And yet, the necessary efforts to trigger the transition towards low-carbon economies cannot be underestimated.
Transition implies a redirection of investment on an unprecedented scale, and massive short- and medium-term
redistribution effects, thus reducing its social acceptability in the absence of compensatory measures which, for the
most part, still need to be defined.
Carbon pricing consensus on the principle and implementation challenges
The advantages of giving a price to greenhouse gas emissions whatever the pricing instrument used to trigger
transition is widely recognised by economists, international organisations, NGOs and companies which have broadly
stood behind the carbon price cause under the dynamics of COP21. CEOs have called for a strong and more
importantly, stable political signal on the social cost of greenhouse gas emissions. A lot of companies are already
using an internal carbon price to guide their investment decisions, given that in the absence of such a signal, in most
cases there is no individual interest in investing in low-carbon options.
Giving a price to carbon is an economic method inspired by the polluter-pays principle which seeks to reduce the
greenhouse gas emissions that are responsible for climate changes. This means asking greenhouse gas emitters to
pay a sum proportionate to their emissions and, therefore, to integrate the cost of the damages caused by such
emissions into the market prices for goods and services. With market prices inflated by climate damage cost, the hope
is that economic actors decisions will be directed towards low-carbon activities.
The idea of setting a carbon price is not a new one. It has been supported since 1997 by economists, when The
economists statement on climate change was signed by 2500 of them, including nine Nobel Prize winners, which
clearly stated that The United States and other nations can most efficiently implement their climate policies through
market mechanisms, such as carbon taxes or the auction of emissions permits. Thanks to carbon pricing, low carbon
policies can theoretically be implemented in an effective way, that is to say at the lowest possible cost, in the global
economy.
There are different ways of introducing carbon prices into the economy, via a carbon tax, a market for emission
permits or hybrid systems. Theoretical economic analysis is rather in favour of carbon tax (Newel and Pizer, 2002;
Philibert, 2009; Weitzman, 2015,) considered to be more effective than a quotas-based emissions market for
10

addressing the climate challenge . But adding political economy elements into the mix and taking into consideration
the various national circumstances makes assessment of the real effectiveness of such instruments more complex
8

Sustainable mobility infrastructures, renewable energies and the associated storage technologies, high energy performance
buildings, agro-ecology and intelligent town planning (OFCE, CIRED, Energy Modelling Forum).
9

Economists such as Robert Gordon (2015), Paul Krugman (2013) and Larry Summers (2014) have popularised this idea of
secular stagnation which is characterised by an extended period of low growth (between 0 and 1%) upheld by a lack of
investment and the absence of major innovations required to increase productivity and growth potential. Conversely,
breakthrough innovations in decarbonisation of the economy could see growth recovery.
10

Weitzman (1974) defined criteria on abatement and damage cost curves which would allow the choice to be made between
a price instrument and a quantity instrument. Since the climate is a problem of stock, the slope of the damage curve is less
steep than the cost curve, which makes the price instrument preferable.

17

and the ranking of instruments less obvious. In the European institutional context, even though the theoretical
effectiveness of a tax would be superior to that of a trading system, a tax is hardly impossible to implement as it
requires a unanimous decision from Member States. It is for this reason that there is no universal solution. Depending
on specific national situations, the social, environmental and economic efficiency of such instruments can differ
from one country to another. Different price levels can also reflect a diversity of situations particularly economic
ones in these countries. As a result, today there are not one but several carbon prices.
Public policy-makers have a full toolbox to introduce carbon prices: regulations, emission permit trading, carbon tax,
feed-in tariffs, tax credits and carbon reference prices. Companies, having understood the climate risk for their
businesses, have also developed a number of tools of their own: shadow carbon price, voluntary carbon markets (cf.
appendix 1).
Whether carbon pricing instruments ensure payment of the cost of greenhouse gas emissions to society or,
similarily, reward the benefits of avoiding such emissions for society, they contribute to accelerating the low-carbon
transition process. This is true for the energy sector for which a carbon price is a powerful instrument to encourage
the deployment of almost zero emission technologies such as renewable energies and energy efficiency. Whilst
breakthrough innovations would accelerate the transition for the energy sector, for other industrial sectors lowcarbon objectives will only be achieved with the arrival of technological breakthroughs that would transform their
economic model. This implies additional RD&D policies to create an environment favourable to radical innovation.
Herein lies the demonstration of the benefits of carbon pricing. And yet the switch to political action remains all-too
rare. The scope of carbon pricing has extended over the last ten years across the world and today covers more than
12% of global emissions (World Bank, 2015), but it still remains too narrow. And most carbon prices observed
throughout the world are often too low (generally a few euros per tonne of CO2eq. for the most part) to massively
trigger investments. Industrialised countries carry the historic responsibility of demonstrating that realistic,
acceptable, effective price levels can be introduced. In order to be accepted, carbon pricing instruments must
fundamentally send strong incentives to new low-carbon investments whilst accompanying the transition of carbon
intensive activities.
Approach of the mission and plan of the report
The approach of this mission is deliberately action-oriented so as to go beyond theoretical arguments of principle
and to counter opportunistic arguments on carbon pricing. Its pragmatic objective is to adapt carbon prices to
economic, social and political realities in order to increase their effectiveness and acceptability. Changing
behaviours while preserving economic growth is the primary motivation. Hence, for a given situation, the simplest and
most effective instruments must be considered.
In the term of reference for this mission, Minister Sgolne Royal asked us to examine carbon pricing on three
geographical scales: international, Europe and France, by primarily focusing our efforts on an assessment of the
French proposal to introduce a soft price collar on the European carbon market.
The work of the mission is based both on literature reviews but also on numerous hearings which allowed us to get
feedback on the points of view of a wide variety of European actors representing industrial, political and
administrative sectors, as well as research and civil society.
At the end of the mission, the expertise and field information collected allowed us to define five strong beliefs:
1.

The current price signal delivered by the European carbon market is not consistent with the commitments
taken by the EU in the Paris Agreement, which requires a reduction in emissions of between 80-95% by
2050 (which translates into a minimum objective of 90% emission reductions for the sectors covered by the
18

carbon market compared to 2005). The reforms being introduced or already in place do not allow the
system to be adjusted to this trajectory, which would require a higher price signal.
2.

It is important to support the European market signal whilst learning from foreign experiences. In this
respect, introducing a soft price collar is a tried and tested solution, used in particular on the Californian
market.

3.

It is possible and desirable to accelerate decarbonisation in the electricity sector via measures promoting
gas and renewables in place of coal until electricity storage technologies become available in sufficient
quantities and at a competitive price.

4.

Promoting the transition to a low-carbon economy in carbon-intensive sectors exposed to international

competition will require measures creating conditions of fair competition. In this respect, broadening the
use of carbon pricing via the coalition set up by the World Bank could usefully be accelerated.

5.

In order to be acceptable, carbon pricing instruments in the countries of the South need to be designed as
levers of funding of a low-carbon development mode.

The report is structured around three geographical scales for carbon pricing. The first part, the core of the report,
focuses on the European carbon market and the practical proposal of introducing a soft price collar to bring a more
effective and predictable price signal. The second part refers to the effects of a national floor price for carbon on the
electricity market. The third part reviews carbon pricing throughout the world and proposes a number of avenues of
investigation to promote an extension of its scope. In conclusion, the report opens up perspectives for strengthening
the ambitions of carbon pricing, in particular at European level.

19

1. INTRODUCTION OF A SOFT PRICE COLLAR ON THE EUROPEAN CARBON MARKET

1.1. FUNCTIONING OF THE EUROPEAN CARBON MARKET AND ITS LIMITATIONS
1.1.1. CLARIFYING THE INTENTIONS OF THE EUROPEAN CARBON MARKET
The hearings held during the mission revealed two radically different points of view on the objectives of the European
11
carbon market (EU ETS):
For some, the low price of allowances is a proof of the instruments failure to provide a price signal capable
of triggering low-carbon investments. They consider that emission reductions in Europe are more a result of
the effects of the economic crisis, other climate policies on renewable energies or energy efficiency.
For others, EU ETS operates effectively, since it allows us to achieve emission objectives fixed for the
sectors covered and this at the least possible cost, which explains the very low price level of allowances.
Thus, for the first group, the carbon price signal should be sufficient to trigger structural low-carbon investment (they
see the rabbit in figure 1). Whilst for the second group, the price signal simply adjusts the productive system on the
margins to ensure it respects a decreasing emissions cap at the least possible cost (they see the duck in figure 1).
FIGURE 2: DIFFERENT PERSPECTIVES OF THE OBJECTIVES OF CARBON PRICING (TAKEN FROM A PRESENTATION BY CHRISTINA HOOD, IEA)

Article 1 of Directive EU ETS 2003/87/EC states its purpose:

To establish the European Unions system for greenhouse gas emission allowance trading in order to promote
reductions of greenhouse gas emissions in a cost-effective and economically efficient manner.
Depending on the assessment of what are considered to be cost-effective and economically efficient conditions,
some see a duck where others clearly see a rabbit.
12

In its roadmap towards a competitive low carbon-intensity economy by 2050 the European Commission clarifies the
role of the EU ETS:
11

12

A description of how this market operates and a history of its developments to the present appear in appendix 3.
Communication COM(2011) 112 final of March 8, 2011 (page 7)

20

The EU ETS will be critical in driving a wide range of low carbon technologies into the market, so that the power
sector itself can adapt its investment and operational strategies to changing energy prices and technology. For the ETS
to play this role on the identified pathway to 2050, both a sufficient carbon price signal and long-term predictability
are necessary.
Even if this objective does not explicitly appear in directive 2003/87/EC, the Commission clearly expects that the EU
ETS will spur low-carbon investments, which implies that the system should be reformed to deliver more explicit
messages to the market than it has done to date.

1.1.2. EUROPEAN CARBON MARKET REVIEW

The European carbon trading system has been operating for over a decade. Against the objective of maintaining
greenhouse gas emissions under a given cap, the carbon market has achieved its objectives: emissions have even
been lower than the ceiling defined in the directive, which means that the European Union is well on the way to
achieve its domestic objectives by 2020. In 2014, greenhouse gas emissions from installations covered by the EU ETS
reached their lowest level since 2006, i.e. 1789 Mt CO2eq., which corresponds to an emissions reduction of 24%
between 2005 and 2014 (European Environment Agency, 2015). The objective of a 21% reduction by 2020 has
therefore already been exceeded.
Nevertheless, this outcome is largely due to the economic crisis, but also to the effects of other climate policies
such as energy efficiency standards and renewable energy objectives. In a study performed on phase 2 of the EU ETS
(2008-2010), I4CE shows that around 30% of these emission reductions are due to a drop in production, and around
60% to the development of renewable energies and energy efficiency improvements (Gloaguen & Alberola, 2013).
This study suggests that the carbon price was not the main reason for domestic emission reductions, although it did
allow reductions at a lower cost than that derived from the deployment of renewable energies (Marcantonini &
Ellerman, 2013). It also resulted in emission reductions in other sectors and geographical areas via the use of project
mechanisms delivering international credits: 1048 Mt of greenhouse gas emissions were thereby avoided outside the
13

scope of the EU ETS .

The limited role that the EU ETS has played to date reflects the increasing imbalance between supply and demand
14

for quotas. In phase 2, emissions were systematically below the ceiling (except in 2008), leading to a surplus of
almost 2 billion quotas which was transferred to phase 3 (2013-2020). The use of international credits also
contributed to increasing the supply of allowances: the total authorised amount of credits exceeds 1600 Mt CO2eq,
which corresponds to around 50% of the allowances needed between 2008 and 2020 (I4CE, 2015) and contributes to
the current surplus. Over-allocation and the difficulty of adjusting emission quotas to economic reality have today led
to a persistent surplus which maintains prices of quotas at a very low level, around 5 currently, well below the prices
expected for the period 2013-2020.
This situation reflects an imbalance between the EUs long-term objectives (80-95% of greenhouse gas emission
reductions compared to 1990 by 2050) under the Paris Agreement, and the instruments in place. This imbalance is
visible in terms of quantities, since the reduction of the emissions cap is lower than what would be required to achieve
the 80-95% target, plus the possibility of using pre-2020 banked emission quotas for the period post-2020 which
would disrupt the pricing on the market by creating an over-abundance of emission quotas. It also results in price
levels much lower to those announced by the European Commission, the IAE, etc. as part of the long-term objective.
FIGURE 3: COMPATIBILITY OF EMISSION REDUCTIONS WITH THE EUROPEAN UNIONS TARGETS
13

This also implies that 1048 Mt of quotas were not used in phase 2 of the EU ETS and are added to the surplus carried over
to phase 3 (2013-2020).
14

The fact that emissions are systematically lower than the cap does not necessarily mean that the EU ETS has not had an
impact. The first SO2 and NOx markets in the USA faced the same situation, but did lead to emission reductions.

21

Figure 2 shows that the objectives fixed by the European Council, to reduce emissions covered by the carbon
market by 43% by 2030 compared to 2005, requires an acceleration in the reduction of the cap after 2030 in order
to stay in line with the 2050 objective of -90% compared to 2005.
Until 2020, the reduction factor for emissions is 1.74%. The European Commission proposed increasing it to 2.2% from
2021, to keep with the -43% objective for the EU ETS by 2030 compared to 2005. This objective was set in stone by
European leaders at the European Council meeting of October 23 and 24, 2014. It is therefore difficult for European
institutions to move away from it, which is reflected by current discussions about the reform of the carbon market.
And yet, to achieve the lower milestone by 2050, the calculations in figure 2 show that we would need an annual
reduction of the emissions cap of at least 2.4% per year between 2021 and 2030, and 2.6% per year between 2031
and 2050. Indeed, a 2.2% factor would only reduce EU ETS emissions by 84% by 2050 compared to 2005, instead of
the EUs minimum objective of 90%.
An analysis by Thomson Reuters (2016) confirms that for the targets to be reached, we would need to increase the
factor to 2.5% from 2031 onwards. The European Commissions proposal is therefore insufficient to achieve the
objectives agreed in Paris.
Also, it is important to note that the reduction of the emission cap is linear, i.e. the cap is reduced by the same
amount of emissions each year. For example, a 2.2% factor corresponds to a cap reduction of 48.4 Mt each year. On
the other hand, this means that from one year to the next the relative effort is greater: the lower the emissions, the
greater 48.4 Mt is in percentage terms. The Thomson Reuters analysis shows that towards 2050 the annual reductions
required would exceed 10%, which represents a considerable effort if not anticipated.
Proposal 1: From 2020, adapt market emission reduction trajectories for the European carbon
market to the 2050 climate objective, by increasing the reduction factor of the emission cap from
2.2% adopted by the European Council to a value between 2.4% and 2.6% per year and
accelerating the placement in reserves of quotas surpluses.
22

Up to now, neither the backloading (2014) nor the anticipation of the Market Stability Reserve (MSR), which is to
come into force in 2019, have succeeded in reducing the EU ETS imbalance. The surplus is still large and should
increase in 2017 and 2018 (after the backloading and before the implementation of MSR). The price forecasts, which
do not anticipate any substantial increase in prices before 2030, are evidence of this: according to studies, prices could
reach 10 by 2020 and then around 30 in 2030 (Thomson Reuters, 2016) or remain at around 5 until 2030 (Barclays,
2016). Furthermore, it is important to note that price projections have until now been systematically higher than
actual prices (cf. figure 3).
FIGURE 4: GAP BETWEEN FORECASTS AND ACHIEVEMENTS. SOURCE: DGEC BASE ON SURVEYS BY THOMSON REUTERS ANALYSTS (AVERAGE OF
10 MARKET ANALYSTS)

15

According to a Thomson Reuters survey , the stakeholders are also not in agreement concerning the potential of the
current EU ETS reform to strengthen the market, in spite of the fact that the perception of the EU ETS has improved
over recent years as a mature, cost-efficient market having a central role to play between now and 2030.
The EU ETS situation discredits the carbon markets ability to decarbonise the economy in a cost-effective manner
(Edenhofer, 2014). Today, the carbon price in Europe is around 5: on the one hand, these price levels do not
currently trigger sufficient low-carbon investment or guide operational decisions, and on the other, price instability
does not give a clear, predictable price signal over time which investments rely on. As a result, investments in
renewable energies and energy efficiency are less competitive. Public support for renewable energies is more
costly for Member States, and revenues from emission trading are low while they could be reinvested in energy
transition.
In particular, the current price level works more in favour of coal than gas or renewables: given the price of gas and
coal, the price on the European market does not make the production of electricity using gas less costly than using
coal (cf. section 2.2.1 below). Under these conditions, the United Kingdom considered the European carbon market
insufficient to achieve the decarbonisation of its electricity sector and, in 2013, chose to introduce a domestic price
15

Carbon Market Survey, May 2016

23

floor to provoke coal phaseout (cf. part 3). France chose to follow in 2016, by announcing the introduction of a price
floor on the electricity sector to prioritise the use of gas over coal. In Germany, many questions remain as to how coal
phaseout can be organised. So as to avoid a fragmentation of European climate policies, a solution needs to be
found under the current reform. It is essential to start implementing measures providing a better regulation of the
amount of allowances and provide a pertinent price signal at the European level.
The current price level and the absence of prospects of medium-term recovery carry over most of the reduction
effort to the post-2030 period. Without substantial change, emission reduction efforts will accelerate in the future,
instead of smoothing out the cost of transition over time for economic actors. And yet, the European Commissions
road map for 2050 contains emission reduction objectives of 80-95% which can only be achieved if investments made
today accommodate the long-term objective of low-carbon transition and do not run the risk of locking us into carbon
intensive technologies. Given the potential for reduction of emissions and the restricted speed of deployment of lowcarbon technologies, investments over the next decade will be crucial if we are to avoid being locked into carbon
intensive technologies which would prevent the long term objective being achieved (CGDD, 2016). The IEA shows that
in order to be compatible with a +2C scenario, the carbon intensity of new global investments in electricity sector
must be lower than 200 kg CO2/MWh by 2020 and after this date lower than 50 kg CO2/MWh.
In the absence of clear price signals on the level of carbon restriction, the market will not itself provide a
satisfactory solution to redirect investments towards low-carbon options. This is why the European carbon market
needs a pull back force mechanism to prevent prices sustainably moving away from a trajectory with European
climate targets. This trajectory could be defined as a corridor with a price floor and a price ceiling.
The introduction of a soft price collar would bring numerous benefits to the European carbon market, as outlined in
the next part of this report. The soft price collar would allow the following:

introduce a sufficient price signal, and in particular a minimum price, to trigger low-carbon investments,
starting in the energy sector where substitution technologies already exist;

for economic actors, frame expectations and smooth out the cost of transition over time, rather than
supporting the higher cost of accelerating emission reduction efforts in the future. Additional efforts in the
short term induced by a corridor would lend credibility to the commitments made by the EU in Paris;

adjust the supply of emission allowances to exogenous crises in a more reactive way than current practices
allow, which work purely on volumes. These crises could be the result of a rapid contraction in economic
activity or the interaction of different climate policies. The corridor would then ensure that prices do not
move too far away from a trajectory which is coherent with European climate targets, even when the
demand for allowances suddenly increases or decreases in economic crisis situations.

1.2. EXAMPLES OF FOREIGN APPROACHES IMPLEMENTED OR IN PROGRESS

Drawing inspiration from the EU ETS, several carbon markets in the world have brought improvements by
introducing from the very start a minimum carbon price sometimes accompanied by a safety valve mechanism
for prices that are too high creating de facto a soft price collar. Price control mechanisms have especially been
developed in California, Quebec, in the US for 9 states involved in the RGGI carbon market, in China in the sum of the
7 regional pilot carbon markets, in New Zealand, and in South Korea (cf. appendix 2).

24

These examples prove that in the emissions trading systems, the market price can be determined by supply and
demand whilst being guided by a soft price collar (or simply by a minimum or maximum price). These markets allow us
to draw the following conclusions:
-

The choice of minimum and maximum price level is essential. In California and in Quebec, prices rarely move
away from the floor price (currently around 10). On the RGGI market, where the price corridor target is
between 2 and 7 approximately, the price followed the price floor price for some time before exceeding
the cap. At current levels, these prices do not generate major emission reductions.

The market price can temporarily move out of the soft price collar: this is currently happening in California
and in Quebec where allowances can be traded under the floor price and it has happened on the RGGI
market where allowances have been sold at prices above the cap.

1.3.

ANALYSIS OF POSSIBLE OPTIONS FOR THE ADJUSTMENT OF SUPPLY VIA AUCTIONING

Several major families of mechanisms can be proposed for the introduction of a soft price collar in the EU ETS (nonexclusive and non-exhaustive options):
Option 1: Adjustment of the supply of allowances on the market via auctions of quotas
With an auction reserve price, quotas are set aside when the adjudication price fails to reach the floor price. These
allowances can be put on the market again (up to the limit of stock of quotas) for example when the cap price is
reached.
It is important to note that this method only affects the primary market (auctions) and would fix a price target whilst
allowing the market to move away from the corridor temporarily.
This option was chosen for the California, Quebec and RGGI markets, for example.
The main question is how allowances are stocked if the bidding price at the auction is lower than the reserve price and
that, as a result, quotas are not sold. Symmetrically, there is the question of how to return the quotas to the market
once the ceiling price has been reached. Several solutions could be applied to the European carbon market:
(1.a) create a new reserve in which allowances would be placed when auction prices are lower than the floor price.
Allowances would then be returned to the market when the cap is reached. This option is not popular with other
Member States because the creation of a new reserve would contribute to increasing the complexity of a system
already perceived as overly-complex.
(1.b) amend the market stability reserve (MSR) rather than creating a new reserve. This option would require
reopening the MSR decision recently voted in October 2015, which would be met with opposition from European
institutions.
(1.c) leave the allowances on the Union registry, and auction them subsequently (this option was chosen for the
Californian carbon market).
Option 2: Create an independent authority to manage supply to the market in the same way as central banks do on
monetary markets or public stock on farming markets
With a budget, this independent authority would have the role of buying or selling allowances to strictly control the
market at price levels between the floor price and the price ceiling.
25

This option would allow us to act on primary and secondary markets, and to strictly frame market prices between a
minimum and maximum level. However, the budget the authority has and the initial stock of allowances attributed to
it would determine how it could more or less easily effectively defend the price corridor.
This option could be costly in the short term, since in order to maintain a floor price above 0, it would potentially be
required to buy back the surplus of carbon market allowances (and there are about 2 billion of them), which would
imply an initial budget of several billion euros.
Option 3: Introduce an allowance supply adjustment rule according to price levels via the Market Stability Reserve
(MSR).
The current activation criteria for MSR could be replaced by a criterion based on allowance prices. Such a system
would allow some of the surplus on the market to be absorbed annually if the previous years average price is lower
than the floor price, or allowances to be put back on the market if the price is higher than the cap.
This option would only act on the primary market (auctions) and would fix a price target whilst allowing the market to
move away from it.
The efficiency of this method would depend on the annual volumes MSR could absorb. The current decision allows the
MSR to withdraw 12% of the surplus every year. On this scale, it is not clear whether the system would efficiently
sustain short- and medium-term prices.
As with option 1.b, this option would involve re-opening the MSR decision recently voted (October 2015), which
seems problematic today.
Amongst these options, the most promising technically and politically would seem to be option 1.c based on the
Californian model: introducing an auction reserve price so that the auctions could be cancelled when the price is
below the floor price. If auctions are cancelled, the allowances would be stocked on the Unions registry and then
returned to auction subsequently or when the ceiling price is reached. In terms of implementation, an amendment
of the EU ETS directive would be required to define price levels, but should be supplemented by a revision of the
auctioning regulation to specify the technical conditions (cf. amendment proposal presented in appendix 4).
If the option of using auctions to control supply as presented in the section above were adopted, only the primary
market would be directly affected by the soft price collar: the reserve price would prevent the adjudication price at
auctions from being lower than the floor price, and returning the allowances to the market at the ceiling price would
limit the risk of prices rising above the ceiling price (for example, RGGI where the primary market price is never lower
than the floor price but can occasionally exceed the upper price).
Nothing, however, would prevent the secondary market price from moving away from the corridor. This is, for
example, what is currently happening in California where prices are temporarily lower than the floor price. In the
European Union, a convergence over time between the primary market and the secondary market is nevertheless
anticipated for two reasons.
Firstly, anticipation of actors should lead to an increase in price even before the introduction of the corridor.
Secondly, introducing a price floor above the market price could result in several auctions being cancelled: through
an arbitrage between the primary and secondary markets and intertemporal arbitrage, actors seeking to source
allowances would have to buy them on the secondary market. The cumulative surplus of allowances since 2008 should
therefore progressively be reduced, leading to an increase in price on the secondary market. In 2017, the primary and
secondary market prices could take a month or two to converge (Thomson Reuters, 2016) with a price floor rising
from 10 in 2016 to 30 in 2030. This result depends on the price trajectory chosen but also on industrys selling
26

behaviour with their quotas. Indeed, the surplus has been accumulated partly by industrialists who receive free
allowances. Historically, few of these allowances have been re-sold on the secondary market and it is possible that the
introduction of a price corridor would reinforce industrys allowance-hoarding practices. In this case, prices could
converge even more quickly.
A study performed by the Climate Economics Chair (2016) determines the volume of allowances that would have to be
withdrawn from the market to achieve certain price levels. Depending on the chosen floor price, the convergence
between the primary and secondary markets could take between one month for a price floor of 8.50 and eighteen
months for a price floor of 30.

Proposal 2: Introduce a carbon price corridor at European level built on the California and
Quebec model with an auction reserve price, meaning allowances do not have to be sold on the
market if the minimum price is not reached at auction.

1.4. PRICE LEVELS CONSIDERED FOR THE SOFT PRICE COLLAR

The choice of price levels for the soft price collar reflects several objectives:
Provide a pull back force to economic agents with regards to the long term low-carbon objective;
Smooth out the cost of low carbon transition over time and avoid the risk of technology lock-in;
Send a sufficient signal now to trigger the substitution of coal by gas for electricity production and mobilise
all currently-available low-carbon technologies at reasonable cost.
Pull back force to secure the long term objective: the political economics challenge of lending credibility to the longterm objective
If an ETS is managed by strictly respecting the agreed cap (without giving in to various pressure groups), then, by
construction, the objectives can be achieved. At a given date, there will not be more allowances available than the
quantity of emissions permitted by the objective. In this case not much importance should be attached to the current
allowance price or its drift from a target price which could be considered a right price signal.
In reality, good political economics reasons can challenge public authorities inflexibility regarding the allocation of
allowances, and the stability of quantitative objectives over the medium- to long-term. On the European carbon
market, although allowance quantities are defined in legislative text through to 2020 and confirmed by European
leaders for 2030, uncertainty remains as to the future of the mechanism. Also, what happens in the case of
widespread difficulties to respect the cap, for example, if the price trajectory is too close to a negligible level in the
coming years and does not allow appropriate investment decisions to be triggered? Industrials will be in an even
better position of strength to negotiate future increases in the emissions cap when their emissions will be higher. It
would be a real test for decision-makers ability to ensure that the cap is respected if those having to comply with it
are not properly prepared to cope with the carbon constraint. There is therefore a real risk that efforts to reduce
emissions will remain very limited in the future, and out of sync with the objectives agreed at COP21. There is also
the risk of this gap being sustained over time.
Smoothing the cost of low carbon transition over time and avoiding the risk of technological lock-out

27

In a situation of uncertainty regarding future costs of decarbonisation and because of the inertia of the productive
system, the price floor, because it is forcing short term emission reductions, may be perceived as an insurance
against the cost of a sudden acceleration in emission reductions in the future (Ha-Duong, 1997).
Simulations performed by CIRED (Bibas and Hourcade, 2013) using the IMACLIM model show that depending on the
conditions under which transition occurs, the macroeconomic fallout is positive over the medium and long terms
for growth and jobs, because of the synergy between three mechanisms: drop in energy imports, energy savings
freeing up buying power for households for non-energy goods and services, drop in the cost of employment triggered
by the recycling of carbon revenues. Accompanying economically the transition is therefore decisive to change a
slightly negative outcome in the short term to positive economic outcomes in the medium term. The challenge is a
credibility effect which would come from the coherent implementation of policies on carbon pricing and on finance
tools used to guide agents anticipations. This credibility effect reduces uncertainty for future climate policies. This
would limit increases in carbon taxation needed to meet the factor 4 objective in France for example which would
substantially improve growth over the short, medium and long terms.
By corollary, the cap also works as insurance against exogenous crises which could suddenly heighten constraints
on emissions. It could be due to European targets being aligned with the 1.5C objective, massive reindustrialisation,
general nuclear phaseout in Europe, a cut in gas supply forcing a return to coal, and so forth. In all these scenarios, the
demand for allowances could increase dramatically. The existence of a safety valve to temporarily increase the supply
of allowances to adjust to demand would allow the efforts of emission reductions to be smoothed out over time,
rather than concentrating them over a brief period post-crisis.
Coal gas substitution
There is a carbon price range which makes the production of electricity by gas less costly than by coal, thereby
ranking gas-powered stations ahead of coal-fired power stations in the merit order curve. The markers for that price
range depend on the absolute prices of gas and coal, and the relative energy performances of the 2 alternative types
16

of power station. Studies (CEC, EDF, RTE-ADEME ) converge towards a reference floor price of around 30 per tonne
of CO2eq for gas to replace coal. This is currently in progress because of the absolute and relative levels of gas and
coal prices, but if we look back at prices between 2006-2016 on one-month futures contracts, we note that achieving
the substitution over the period 2011-2015 would have required a carbon price substantially above 30 (around 55,
cf. figure 4). This analysis on the inversion of the order of merit of alternative types of power stations does not directly
provide answers to investment choices and the abandonment or not of coal-fired power stations which depend on
their capacity to generate positive cash flows and therefore on their number of operating hours.
FIGURE 5: CARBON PRICE MOVEMENTS EQUATING THE COST OF PRODUCING ELECTRICITY FROM GAS AND FROM COAL ACCORDING TO TWO
HYPOTHESIS OF POWER STATION OUTPUT (JULY 2006 MAY 2016). SOURCE: CGE MODEL. PRODUCTION FROM COAL IS LESS COSTLY THAN
FROM GAS WHEN THE REAL CARBON PRICE IS BELOW THE BLUE PRICE FLOOR LINE AT 30/T CO2. THE OPPOSITE IS TRUE WHEN THE CARBON
PRICE IS ABOVE IT.

16

RTE, CO2 price signal, op. cit.

28

80
75
70
65
60
55
50

/ Tonne CO2

45
40
35
30
25
20
15
10
5

01/04/2016

01/01/2016

01/10/2015

01/07/2015

01/04/2015

01/01/2015

01/10/2014

01/07/2014

01/04/2014

01/01/2014

01/10/2013

01/07/2013

01/04/2013

01/01/2013

01/10/2012

01/07/2012

01/04/2012

01/01/2012

01/10/2011

01/07/2011

01/04/2011

01/01/2011

01/10/2010

01/07/2010

01/04/2010

01/01/2010

01/10/2009

01/07/2009

01/04/2009

01/01/2009

01/10/2008

01/07/2008

01/04/2008

01/01/2008

01/10/2007

01/07/2007

01/04/2007

01/01/2007

01/10/2006

-5
-10

01/07/2006

-15
neutralit
carbone
( / t CO2) gaz 50 cha 38

neutralit
carbone
( / t CO2) gaz 52 cha 36

Choice of minimum and maximum price trajectories

The price trajectory for the European carbon market must be in line with the technological dynamics of the energy
sector for the following reasons:

In 2015, energy represents almost 60% of greenhouse gas emissions covered by the EU ETS. The second
biggest sector, steel, only represented 10%. It is therefore crucial to pay particular attention to this sector
whilst, if necessary, introducing compensation mechanisms for the other sectors.

The energy sector also has available technological alternatives which could find substitutes for the most
carbon-intensive technologies, thus allowing it to substantially reduce European emissions over the short and
medium terms.

Broadly, this sector is favourable to a strong price signal, which would help them to start directing their
17

operational choices and investments .

Thus, the floor price could be fixed at between 20 and 30 in 2020, with an annual increase of 5-10% so as to
exceed 50 by 2030, and the price ceiling at 50 in 2020 with annual increases in line with the floor price. The
trajectory curve is central to give visibility to economic actors in terms of investments. Price levels below the corridor
floor price would deprive the economy of numerous decarbonizing opportunities in industrial sectors.

17

A call of 30 electricity sector companies to reinforce EU ETS, June 9, 2016.

29

Proposal 3: Fix the following trajectory for the price floor: between 20 and 30 in 2020, with an
annual increase of 5-10% so as to exceed 50 by 2030, and thereby accelerate the transition to the
lowest-carbon solutions, in particular in the energy sector. Fix the price ceiling at 50 for 2020
with an annual increase similar to that of the floor price.

FIGURE 6: TRAJECTORY OF THE SOFT PRICE COLLAR PROPOSED BY THE MISSION

1.5.

IMPACT ON EUROPEAN GREENHOUSE GAS EMISSIONS

The introduction of a floor price above current prices, and whose trajectory could be forecast over time, should lead
to additional greenhouse gas emission reductions. For a floor price trajectory from 11 in 2017 to 30 in 2030, 300400 additional Mt should be avoided between 2017 and 2030 (Thomson Reuters, 2016). This estimate is a lower limit
for avoided emissions, which does not take into account the additional investments triggered by price predictability
into account, such as the probable deployment of renewable energies.
For a floor price of 30, the reduction in emissions in the electricity sector will exceed 100 million tonnes per year.
Indeed, according to an RTE-ADEME study (2016), with the hypotheses of gas and coal prices at 2015 levels, the
introduction of a floor price of 30 per tonne emitted should reduce European emissions by 100 Mt per year. This
18

figure only takes into account the 13 countries of the west of Europe . When other countries of the EU are factored
in, and in particular Poland and the Czech Republic, emission reductions will be even higher.

1.6. POLITICAL OPPORTUNITY: ASSESSMENT OF THE IMPACTS OF A SOFT PRICE COLLAR ON THE
VARIOUS ACTORS AND THEIR POSITIONS

18

Portugal, Spain, France, Great Britain, Northern Ireland, Belgium, Holland, Luxembourg, Germany, Switzerland, Austria,
Italy.

30

1.6.1. EFFECT ON EUROPEAN COMPANIES COVERED BY THE EU ETS

Effects on the electricity sector
Overall, the electricity sector is favourable to a strong, predictable carbon price signal.
The electricity production sector is considered to be capable of passing through the cost of carbon in its electricity
19

prices without losing competitiveness . As a result, it is not covered by protection measures against the risk of
carbon leakage: the electricity sector must purchase all the allowances corresponding to its emissions at auction or on
the secondary market. This cost is then passed through in the market price for electricity. According to the RTEADEME (2016) study, with a hypothesis of gas and coal prices at 2015 levels, and for a carbon price of 7/t, very little
changes are observed in the sector. However, the introduction of a floor price at 30/t would lead to an increase in
20

annual production costs of 17M per year in the West of Europe compared to a 7/t price.
A floor price of 30 per tonne of CO2 applied to European electricity production would increase French electricity
prices by more than 30% (almost 12 per MWh) on the wholesale market. Indeed, a carbon price at this level would,
according to the Climate Economics Chair at Dauphine and CDC Climat, trigger an increase of almost 35% in French
electricity prices on the wholesale market (cf. figure 14 of appendix 8). This result is coherent with the order of
21

magnitude of 31% resulting from RTE simulations . However, if private consumers, i.e. households, have regulated
tariffs, they would be partially protected from this increase by regulated rates, the calculation of which only partly
depends on market prices. Associated measures for households in situations of energy vulnerability such as the
energy cheque, building renovation grants, social tariffs would have to be adjusted to price fluctuations in electricity
prices caused by carbon pricing.
An increase of 11.6/MWh on total French consumption of 475 TWh corresponds to an additional cost of 5.5 billion
for electricity consumers, but it would be distributed in a differentiated manner between households, who would be
protected from this increase by regulated tariffs and major consumers who could, in any event, be compensated.
With the floor price defined around 20-30 in 2020, the main triggered investments would take place in the energy
sector. As explained in section 1.4, these levels should allow coal to be replaced by gas for electricity production as
soon as the soft price collar is put in place, under certain price conditions as regards to gas and coal. In the longer
term, improved visibility on price trajectories should eventually allow the deployment of certain low-carbon
technologies (eg: renewable energies) and investment in the development of new technologies. It is clear that in the
longer term, a price increase trajectory for carbon will favour Member States investing in a low-carbon electricity
which is exactly the objective of the exercise.
Effects on industrial sectors

22

The effect of a carbon price on industrial sector activity depends on different elements (i) the cost of carbon paid
23

directly and indirectly (through the increase in electricity prices) ; (ii) the capacity of the sector to pass through the

19

The price of electricity takes into account the price of carbon since the market spot price reflects the cost of the last power
station called upon to answer demand. In the European Union, this refers generally to coal or gas fired power stations whose
production cost depends on the carbon price (cf. study by RTE-ADEME, 2016)
20

In France, only consumers having a market price contract (and not a regulated rate) will be directly impacted by this
increase (cf. appendix 7).
21

RTE-ADEME calculates the increase in the annual average marginal cost of production of electricity at between 39 and 51
/MWh, i.e. 30.8% and estimates that this increase in marginal cost could result in an increase on the same scale for customers
with contracts indexed to the market price.
22

A CGE study on the impact of carbon pricing on competitiveness is laid out in appendix 8.

31

carbon price in the price of its products without losing competitiveness, (iii) protection measures against a risk of
carbon leakage; and (iv) the effect of the carbon price on innovation in the sector which can improve non-price
competitiveness (Porters hypothesis).
In theory, a higher carbon price reduces both profit and production for the carbon-intensive sectors impacted, with
these effects being more impactful as the price of carbon increases, and the degree of carbon intensity of the sector
increases. Exposure of the sector to international competition, which may not pay the same carbon prices, would
amplify these effects whilst reducing the impact on the reduction of carbon emissions. The latter could even be
nullified or inverted if the sectors where the imports are coming from are more carbon intensive. This mission
performed a review of 23 studies performed over the last five years on the subject of the impact of carbon prices on
economic competitiveness. Amongst these studies, ex ante modelling of prices higher than those observed in the
EU ETS generally conclude that there would be a negative impact on certain industrial sectors if there were an
absence of carbon pricing in the other regions of the world.
However, ex post empirical studies, most of which concern the EU ETS market in past years (with an average of 10
per tonne) almost all conclude that there would be a no impact (or a low impact) on competitiveness. An OekoInstitute study published by the European Commission at the end of 2015, itself based on an extensive literature
review, also shows that it seems that numerous sectors now choose to pass through a large part of the cost of carbon
in their prices whilst measures protecting against the risk of carbon leakages are being put in place. However, the
subject is the topic of numerous debates and the Commission has estimated these studies insufficiently consensual to
be able to base legislation upon them.
To date, studies therefore do not show a negative effect of the EU ETS on competitiveness. However, it remains to
be seen what the effect of a higher carbon price signal would be, in particular on investment decisions in the
absence of comparable measures in the rest of the world.
Also, it is important to take into account investments made possible through carbon pricing. In the short term,
prices of around 20-30 in 2020 will not be sufficient to stimulate investment among electro-intensive industries
beyond the optimisation of existing processes. However, the increased visibility of the price trajectory should allow
innovations to emerge and make certain low-carbon technologies competitive. This will allow the European Union to
develop certain technologies and industrial sectors needed for the low-carbon transition, which could position them
on international markets expected to develop in the same way in the years ahead.
In the EU, the situation facing industrial sectors can be very different depending on the quantity of free allowances
received each year, but also free allowances received during previous years and to which companies can use to
cover their emissions (if they have been banked). In particular, whilst many sectors stock-piled substantial amounts
of allowances during the period 2008-2012 (and in particular the cement and steel industries, which each
accumulated the equivalent of 2-3 years of verified emissions), sectors joining the EU ETS in 2013 do not have those
same reserves (in particular the aluminium and chemical industries).
At least until 2020, allowances will be primarily indexed to pre-crisis business levels. The result is that the sectors
whose business levels have contracted considerably after the crisis will benefit from a net gain of freely allocated
allowances. This is the case of the cement and steel sectors. In 2015, the cement sector continued to receive 25%
over-allocations.
In comparison, the refinery sector has been exposed to carbon costs since 2013 with an under-allocation of about
20%. Consequently, the refining activity, contrary to other sectors, has only slightly contracted since the reference
23

It is important to differentiate the direct costs of carbon pricing from indirect costs due to an increase in the price of
electricity. For electro-intensive industries, it may represent a source of loss of competitiveness if those costs are not
compensated for effectively.

32

period and facilities present substantial disparities which makes it more difficult to meet the allowance reference set
(based on the most efficient facilities).
Industry is favourable to a predictable price signal, if it is accompanied by protection measures against a risk of
carbon leakage. Industrial sectors are mostly very sensitive to a strong carbon price signal being accompanied by
protection measures so as to protect the competitiveness of their industries. This is particularly the case in those
sectors most exposed to the risk of carbon leakage, including fertilisers, steel, aluminium, chemicals, refining and
cement. In the EU ETS, these measures include, in particular, free allocation of quotas and compensation for indirect
costs. Other measures have been proposed like the introduction of a carbon inclusion mechanism which would allow
importers to be included in the European carbon market so as to position European and importing producers on an
equal footing.
TABLE 1: RATIO BETWEEN THE COST OF CARBON AND THE PRICE OF A PRODUCT AT DIFFERENT CARBON PRICES. SOURCE: AUTHORS
CALCULATION BASED ON ADEME DATA.

Element

Category

Factor of
emissions
kg CO2eq. /
unity

Mean price

30

50

100

1 ton of cement

Industry

866

50

52%

87%

173%

1 ton of steel

Industry

3190

200

48%

80%

160%

1 ton of aluminium

Industry

9830

1 500

20%

33%

66%

1 ton of ammonia 33,5%

Industry

1966

310

19%

32%

63%

1 MWh - Europe

Electricity

420

42

30%

50%

100%

1 MWh - France

Electricity

60

42

4%

7%

14%

1 MWh - France

Electricity

81

125

2%

3%

6%

In the absence of sufficient protection measures, the introduction of a strong carbon price signal would trigger a
substitution of coal by gas and renewables which could have major effects on certain industrial sectors if similar
measures are not taken in other regions of the world, as stakeholders mentioned during our hearings. In this case, the
protection mechanism will need to be strengthened to face the risk of carbon leakage in one or more of the
following ways:
-

Primarily, widen the scope of carbon pricing throughout the world, to ensure that European producers and
their foreign competitors are on an equal footing;

Introduce a border carbon inclusion mechanism ;

Allocate allowances free of charge to cover 100% of the best-performing facilities costs which could require
(1) a definition of ambitious but realistic references for the emissions of the best-performing facilities, (2) if
necessary, increase the number of allowances distributed free of charge in such a way as to adapt protection
measures to a higher price, and (3) base the allocation of quotas on real business levels and not historic
levels.

24

24

Cf. the French proposal (non-paper available on the ministry website: www.developpement-durable.gouv.fr/Non-papierde-la-France-Mise-en.html)

33

Compensate the costs incurred by the increase in electricity prices. It is a fact that the electricity sector
passes through the cost of carbon in the price of electricity, which could represent a major proportion of
costs for certain electro-intensive industries. Legislation gives Member States the possibility of compensating
for indirect costs through a national state aid mechanism. On the other hand, this mechanism is currently left
to the discretion of Member States, which leads to competitive distortions between the Member States using
the aid and those not doing so.

Provide more support to innovation, for example by boosting the Innovation Fund.

Apart from short-term protection for these sectors, such measures cannot be effective over the long term unless they
are accompanied by real incentives to exploit the potential of emission reductions for industries, and if a transition
towards a low-carbon industry is triggered. An effective and progressive transition will provide European industry
with the means to take leadership on low-carbon economy markets. The Innovation Fund and Modernisation Fund
could be used in a profitable way in this respect.
Finally, it should be noted that other types of measures can accompany the transition towards a low-carbon economy
by creating conditions that are favourable to the deployment of innovation and low-carbon products. This is the case,
for example, of public contracts which can, without affecting international commerce, include emission criteria for
certain low-carbon products that currently struggle to find market opportunities.

1.6.2. IMPACT ON ECONOMIC ACTORS AND HOUSEHOLDS

The capacity of the electricity sector, and to a lesser extent, industrial sectors, to pass through the carbon cost in
their prices will have a substantial effect on households. For consumers having a market price contract less than
13% of households in France according to the electricity regulation commission and not a regulated tariff, the
invoice will reflect the substantial increase in the price of electricity linked to a higher carbon price. However, as things
stand, electricity wholesale prices are at historically low levels. Thus, the cost of electricity, although higher compared
to a situation without a strong carbon price signal, is comparable to historic price levels. The current situation
therefore presents an opportunity that can be grasped to reinforce the carbon market price signal in an acceptable
way, in particular, for households.
Supplementary measures could, however, be taken to accompany households and SMEs already facing a precarious
energy situation by acting primarily on the control of electricity demand.

1.6.3. POSITION OF NGOS

Overall, NGOS support the principle of an intervention on the carbon price and the principle of a soft price collar in
addition to measures designed to adapt the emission trajectory to the Paris Agreement objectives and the
treatment of the surplus currently present on the market. A consensus has been established at European level to
encourage Member States wishing to do so to develop unilateral measures that are more ambitious than the common
core of the EU ETS system. Amongst the measures that NGOs defend to act on the quantities of allowances available
are the following: remove quotas from the market, increase the linear reduction factor, cancel all or part of the
surplus, revise the EU ETS more regularly (every 5 years rather than every 10 years), limit allowance stock-piling in the
MSR or define a maximum MSR ceiling or a maximum period of storage of allowances in the MSR, facilitate the
cancellation of allowances by Member States (Carbon Market Watch (2015), CAN Europe (2015), Sandbag (2015)).
34

NGOs are also particularly vigilant about a toughening of the rules for allocation of allowances that they consider very
generous and unjustified in respect of assessments carried out on carbon leakage risks.

1.6.4. IMPACT ON REVENUES FROM MEMBER STATE AUCTIONS

The introduction of a soft price collar should lead to an increase in revenues from auctions for Member States.
However, the positioning of different Member States also depends on the challenges faced by the stakeholders
involved and, in particular, the electricity and industrial sectors: Member States whose electricity production is very
highly carbonated will see stronger resistance to a substantial carbon price.
Concerning revenues from auctions, estimates show that a number of auctions would be cancelled, but this
volume effect will be more than made up for by the price effect. Using the hypothesis of a floor price of 11 in
2017, increasing to 30 in 2030, revenues from auctions for Member States will be substantially higher with a soft
price collar (Thomson Reuters, 2016). Indeed, in spite of auction cancellations, revenues for all Member States would
be 2-3 billion higher as of 2017 and between 45-54 billion higher for the whole of the period.
For Member States, short-term revenues are a central issue. The analysis above shows that revenues from auctions
should increase as of 2017, but several factors could limit this increase:

The behaviour of industry (who could sell a bigger or lesser portion of allowances than envisaged);

Hedging practices in the electricity sector, which could be less than planned.

Even by accumulating these two effects, the Thomson Reuters analysis shows that revenues from auctions would be
slightly increased for all Member States: it is therefore unlikely that the introduction of a price corridor would reduce
auction revenues with the hypothesis of a floor price increasing from 11 in 2017 to 30 in 2030.
The Climate Economics Chairs analysis also shows that revenues from auctions would increase by more than 21
billion for a floor price of 30/t CO2eq.
It would also be possible to use these increased revenues to limit or invert the negative impacts of carbon pricing on
certain economic sectors in the short and medium terms. According to the EU ETS Directive, Member States
determine the use made of revenues from allowance auctions. But 50% of these revenues should be reinvested in
25
reduction and adaptation measures primarily . In France, for example, auction revenues are passed on to ANAH
(national housing agency) for energy retrofit for housing, which stimulates the construction sector. Thus, the increase
in revenues from auctions which should result in the introduction of a price corridor could see greater investment in
energy transition (I4CE, 2016).

Proposal 4: Encourage Member States to target the use of revenues from emission allowance
auctions on low-carbon innovations controlling the social and economic consequences of the
price floor and support developing countries in their fight against climate change.

1.6.5. POSITION OF THE EUROPEAN COMMISSION AND THE EUROPEAN PARLIAMENT

25

Article 10, paragraph 3 of Directive 2003/87/EC

35

The European Commission has not shown openness to the idea of a price corridor idea, whilst the European
Parliament is focussing the debate on the objective on the choice of emission cap.
In terms of European institutions, the European Commission seems to prefer an approach on quantities rather than on
prices (cf. exchange of points of view with Commissioner M-A Canete at the European Parliament on April 19 and the
intervention at the Environment Council of June 20, 2016). The reports submitted by Ian Duncan and Frederick
26
Federley for the ENVI and ITRE Commissions at the European Parliament have not taken up the French proposal
either.
However, the auditions held during this mission with parliamentary groups were an opportunity to raise their interest
in the carbon price corridor approach, thereby triggering debate with the filing of amendments.

1.7.

CONDITIONS OF FOLLOW-UP

The European institutional system is characterised by its slow decision-making processes. Thus, the decision on
backloading took more than 18 months of debate, which reduced the confidence of certain actors in the EU ETS and,
according to some observers, resulted in an allowance price fall. Article 3 in the decision on MSR provides that within
three years of the introduction of the reserve, and every five years subsequently, the Commission will re-examine the
reserve and, where applicable, present a proposal to modify reserve control parameters to the European Parliament
and the Council.
Automatic activation criteria for the management of MSR will not cater for unforeseen exogenous crises or have
the ability to adjust according to interactions that are difficult to simulate ex ante between the different policies
making up the Unions Climate-Energy package. It is somewhat speculative to rely exclusively on such an automatic
formula to compensate anything other than moderate fluctuations in the context in which the EU ETS is acting.
An innovative adjustment mechanism on the carbon markets was proposed in Australia (CDC Climate, 2012) where
the introduction of a carbon market had been envisaged before it was recently abandoned. They planned to fix
emission caps over the medium term: each year, the cap for year n+5 is defined (notion of 5-year sliding cap) taking
into account long-term emission reduction targets, complementary policies, international action, etc.
One of the advantages of the soft price collar proposal is that it will effectively guide the price without requiring
additional interventions on quantities: it takes into account exogenous crises that can lead to emission variations,
but also the European and national policies that are complementary to the carbon market. For the system to be
better adjusted to economic conditions, corridor price level developments could be correlated to economic factors
such as GDP/inhabitant or inflation, whilst ensuring that actors have sufficient visibility on price developments to be
able to invest.
To promote a piloting of the carbon market objective which takes into account both regular reviews mentioned in
the Paris Agreement and changes in market conditions, the mission supports the idea of creating a high-level
independent consultative committee whose objective would be to regularly assess price trajectory and its
articulation with management through quantities, but also to alert political decision-makers in case there is a risk
that the system does not deliver what is expected.

26

Reports available on: http://www.europarl.europa.eu/committees/fr/draft-reports.html

36

Proposal 5: Introduce a regular revision system (every 5 years) on floor and cap prices via an
informed dialogue between European bodies and an independent consultative committee using
the best available data and, in particular, on the pace of the enhancement of the European
ambition as foreseen in the Paris Agreement.

1.8. LEGAL ASPECTS

Since France proposed the introduction of a soft price collar on the EU ETS, several arguments have emerged against
such a measure, including the idea that with a soft price collar, any modification to the EU ETS should be voted
unanimously at the Council. On this subject, a legal analysis was published in May 2016 by the think tank The Shift
Project. It puts forward two separate questions:

Is the price corridor a fiscal provision?

Could the price corridor substantially affect Member States energy mix?

On the first question, the analysis shows that the corridor is not a fiscal-type provision, because:

It does not lead to a compulsory imposition for the States benefit;

The introduction of a corridor does not modify the nature of auction rights recognised to the State and the
transfer of assets to private entities;

A corridor does not fix a tax rate, but simply offers a framework for prices. Also, the market price can, in
practice, be lower than the auction reserve price;

Finally, in terms of case law, the Council and the Parliament rejected the fiscal nature of allowance auctions
during the negotiation on the EU ETS Directive in phase 1.

As for the second question, the analysis firstly reiterates that European climate objectives seek by definition to
modify energy systems in all Member States. It seems difficult to ask for a unanimous vote in the Council on EU ETS
on the basis of the fact that the price corridor would modify the energy mix of Member States, without bringing into
question the whole EU ETS mechanism and other climate policies. Also, the impact of the corridor depends on the
price levels envisaged: compared to a carbon price at 7/t, a price floor at 30/t would lead to a drop in emissions of
100Mt/year, whereas a price floor of 100/t would lead to a drop of 220Mt/year.
If a Member State were to challenge the corridor on this basis, it would have to prove that the corridor itself (and
not the market price, which is influenced by other factors than the corridor) has an effect on its choices between
different energy sources and on the general structure of its energy provision.
Proposal 6: In all cases, form an ambitious coalition with other Member States and European
decision-makers in order to make carbon pricing work in the EU, and in particular the idea of a
soft price collar on the European carbon market, in addition to regulation by quantities.

37

2. A NATIONAL MECHANISM TO ACCELERATE FRANCES COAL PHASEOUT

2.1. THE CONTEXT: PANORAMA OF FRENCH EMISSIONS, EXISTING CARBON PRICING SYSTEMS
AND NATIONAL EMISSION REDUCTION OBJECTIVES

In 2013, emissions in France reached 491.5 Mt CO2eq.

Today, almost 60% of greenhouse gas emissions in the country are covered by two complementary, but mutually
27

exclusive, price systems, to encourage emissions reductions :

the European Union Emission Trading System (EU ETS)

For France, the system covered around 100 Mt CO2eq in 2014 and concerned 126 airlines and 1185 industrial
facilities.
The EU ETS system thereby covers around 20% of the countrys total emissions. The EU ETS allowance price
is currently around 5/t.

the climate-energy contribution (CCE)

Introduced in France in 2014, the Contribution Climat-Energie (CCE) is designed to tax energy products
according to their CO2 content. This tax is levied at the point of fossil fuels consumption.
The CCE today covers around 180 Mt CO2eq, according to the governments revenue objectives, i.e. almost
40% of Frances emissions. The total tax was 14.5/tCO2eq in 2015 and increased to 22/tCO2eq in 2016. The
objective formulated in the energy transition law for green growth is to increase its price to 56/tCO2eq in
2020, and 100/tCO2eq in 2030.

Not all national greenhouse gas emissions are therefore covered by these two systems. Greenhouse gas emissions
other than CO2, such as those from the agricultural sector or waste, broadly avoid carbon pricing in France.
To reduce its emissions, France has ambitious climate objectives. The energy transition law for green growth,
promulgated in August 2015, fixes the greenhouse gas emission level reduction target at 40% in 2030 and 75% in 2050,
compared to 1990 levels. However, it is interesting to note that France is one of the least greenhouse gas emitting
28

industrialised countries and only accounts for 1.2% of global emissions .

In 2015-26, the French authorities chair COP21 and shall continue to be exemplary on climate issues. France, whose
energy mix is already one of the least carbon-intensive in the world, is actively seeking to contribute to the
construction of an ambitious European position and international consolidation as regards to the achievements of the
Paris Agreement. The President of the Republics decision to introduce a floor price for the electricity sector is a clear
illustration of the French authoritys determination to play a proactive role in these matters.

2.2. ORIGIN AND OBJECTIVES OF THE MEASURE

27

The figures of the pricing panorama for carbon in France come from an I4CE analysis for the Commission in April 2016.

28

http://www.cop21.gouv.fr/comprendre/cest-quoi-la-cop21/la-politique-climat-de-la-france/

38

Subsequent to the Paris Agreement, carbon pricing has been considered by the French authorities as an essential
element for making a success of transitioning our economies towards a model compatible with respecting the
1.5C/2C limit in global warming.
Whilst progression on the energy climate contribution is an essential component, the President of the Republic also
decided at the environment conference of April 25, 2016 that France would unilaterally commit to introducing a
floor price specifically for the electricity sector. In his opening speech at the conference, the President outlined the
objectives of this measure: The floor price will give more visibility to all investors and, specifically for the electricity
sector, will promote the use of gas over coal. Mrs Royal, President of COP21, added that the introduction on January 1,
2017 of a carbon price floor on electricity production seeks to: Reverse the order of priority between gas-fired and
coal-fired power stations, the latter being higher emitters, thereby avoiding 12 million tonnes of CO2/year.
One of the main objectives sought by the introduction of a floor price for the electricity sector at a national level is
therefore to reduce greenhouse gas emissions by substituting coal-fired electricity generation by gas-fired
generation.

2.3. IMPLEMENTATION OPTIONS

Implementing this measure could take several different forms.
Introduction of a uniform top-up tax on the electricity sector
In practice, a uniform top-up tax on the French electricity sector would inflate the price paid by electricity
manufacturers on the European carbon market. The sum of this additional tax and of the allowance price should be
equal to 30/tonne of CO2 for example.
Increase the existing tax on coal (such as the domestic consumption tax on coal) or introduce a differentiated tax
whose level would take the thermal performance of power stations into account
The increase of an existing tax like the domestic consumption tax on coal (TICC)to integrate a carbon price level
equivalent to 30/tonne of CO2 or introducing a tax according to the performance of the power plants, thereby
29

encouraging producers to choose power stations with greater thermal performance would have the benefits to
clearly align the measure with its objectives. Introducing a tax that decreases as performance increases would
improve the energy efficiency of the national thermal production system while protecting it, given that this system
still remains crucial for the management of the electricity grid.
A differentiated tax according to the performance of the power plants could be part of the framework for the
implementation of directive 2012/27/EU of October 25, 2012 relating to energy efficiency and achieving the
objective of limiting primary energy consumption, which is part of it.
Introduce a technical standard on greenhouse gas emissions
Such standards already exist in North America.

In Canada:

29

We could switch from a uniform T tax in /t CO2, where the cost for a power station is T*C/r where C = the emission factor
of CO2 and r = the thermal performance, to a variable tax according to output T(r) for which the cost for a power station
would become T(r)*C/r with augmented tax reduction. For example, we could take T(r)=40/(12*r-3) which gives about
30/t CO2 for a French coal-fired power station and 11/t CO2 for a combined gas cycle with 55% performance.

39

Since July 1, 2015, an emission standard has been imposed on new Canadian electricity production facilities and those
reaching the end of their service life, estimated at 50 years (giving existing power stations time to adapt to the new
standard). The limit imposed by the standard is 420 tCO2/GWh, which corresponds to the level of emission intensity of
the technology in combined cycles fired by natural gas and, therefore, prohibits the construction of new coal-fired
power stations which would not have the most modern technologies at their disposal (ultra-super critical and CCS).
30

Until 2025, facilities which include carbon capture and storage technologies (CCS) could apply for exemption .
Canada estimates that this regulation will result in a cumulative net reduction in greenhouse gas emissions of around
214 Mt between 2015 and 2035, i.e. 33% of greenhouse emissions resulting from the production of electricity over the
period. This measure should also lead to an economy of 7.3 billion dollars (cost linked to climate change and the
production of electricity, and avoided health costs). The production of electricity from coal represents 77% of
emissions from the electricity and heating sector and 11% of the countrys total emissions

31

In the US:

In the US, President Obama presented measures designed to limit emissions from electricity power stations on August
3, 2015 to substantially reduce their CO2 emissions in the production of American electricity.
In Europe, similar provisions are already in place for atmospheric polluting emissions.
Thus, this type of standard would avoid affecting gas- and coal-fired power stations indiscriminately.

2.4. ENVIRONMENTAL, ECONOMIC AND POLITICAL EFFECTS OF AN UNIFORM NATIONAL TAX ON

THE ELECTRICITY SECTOR
32

To assess the effects of the different options for the implementation of a CO2 price floor , the mission used several
33
expert studies that show the following impacts:

Table 2: Impacts of the different options on the environment, the price of electricity and security of electricity
supply.
Impacts on greenhouse
gases

Impacts on wholesale
power prices

Impacts
on
supply security

power

Tax on both coal and gas

Tax on coal only
Technical standard

30

http://laws-lois.justice.gc.ca/fra/reglements/DORS-2012-167/index.html

31

http://www.gazette.gc.ca/rp-pr/p2/2012/2012-09-12/html/sor-dors167-fra.html#REF9

32 These analyses are made on the basis of a floor price of 30 per tonne of CO2eq, which is in line with the ambition of
changing the order of priority of thermal power station using coal and gas.

33

Studies performed by Direct Energie, EDF, Engie (and the summary of those studies by UFE), the Climate Economics Chair, ParisDauphine, and CDC, Thomson Reuters and Fabien Roques. A summary of these studies is presented in appendix 6.

40

The specific impacts of a top-up 30/t CO2 tax on the electricity sector (first line of table 2), are described with greater
precision below.
Reduction of electricity production in France, compensated for by an increase in imports
The introduction of a price floor for CO2 at national level would increase the cost of electricity from fossil fuels (gas
and coal) produced in our country. Since the measure would apply unilaterally, the price of electricity made from fossil
fuels in France would increase compared to the price of electricity from fossil fuels produced by our European
neighbours, and on an interconnected electricity market such as the European platform, this would lead to an
immediate substitution of French production of electricity by imports of foreign electricity, as the latter would
become more competitive. Correlatively, France would import less coal and gas.
In actual fact, under current market conditions, the marginal cost of production of French coal-fired power stations is
less than that of Combined Cycle Gas Turbine power stations (CCGT) in France and abroad, which makes them a
priority in the merit-order on the electricity market. In the future, with a carbon price floor applied to electricity
production from fossil fuels in France, both French coal-fired and gas-fired power stations would be degraded in the
merit order of the electricity market, in spite of an average performance which is higher for CCGT in France given
facilities age.
France would see its electricity production fall to the benefit of that of its neighbours, who would then make up for
the effects of this fall by increasing their exports to the French market. According to certain studies, it is Italy, Belgium
and Spain that would increase the most their electricity exports the to France via their CCGT production, whilst the
measure would lead to a slight increase in the production of electricity made from coal in Germany to supply the
French market.

41

FIGURE 6: IMPACTOF A NATIONAL FLOOR PRICE AFFECTING COAL AND GAS ON THE SOURCES OF ELECTRICITY PRODUCTION IN EUROPE (SOURCE:
DIRECT ENERGY).

Closure of coal-fired power stations, and possible closure or mothballing of the majority of French gas-fired power
stations, with an increase in the risk of failure in French electricity supply.
This measure would contribute to reducing production of coal-fired produced electricity in France: without
accompanying measures the coal-fired power stations would be closed down definitively.
However, it would also have another consequence: that of considerably reducing the operating hours of French gasfired power stations. With a carbon cost at 30/tCO2, the number of operating hours for thermal power stations
would fall by several thousand hours, representing a 70-90% reduction in current operating hours.
The loss of revenue could lead to possible closure or mothballing of the majority of French gas-fired power stations,
putting the countrys electricity supply in jeopardy as these highly flexible power stations are the most suitable tool
for managing consumption peaks. This flexibility is also a major advantage for feeding more renewable energies into
the electricity mix. Also, the progressive reduction of the share of nuclear electricity production could mean
maintaining existing gas-fired power stations for a few years to come.

42

Increase in the wholesale price of electricity in France of 5-10% compared to average wholesale prices in 2015
In France, the wholesale price for electricity could increase between 1.7 and 3.2 /MWh, which corresponds to a 510% increase compared to average wholesale prices in 2015. This increase in price would primarily affect electrointensive industries, for which compensation mechanisms could be used. Households would be affected to a lesser
extent in the short term, since most are partially protected from price increases by regulated rates.
Figure 7: average wholesale price on the French electricity market (spot), in /MWh

Net reduction in CO2 emissions in the European Union of between 3 to 6 million tonnes, i.e. 0.15 to 0.3% of emissions
covered by the carbon market
Environmentally speaking, the main objective of the measure is to contribute to reducing emissions, and French
emissions in particular.
And yet, in terms of emissions, it would seem that whilst this measure would clearly lead to a reduction in French
emissions (between 8.7 and 12 Mt per CO2 per year less) the increase induced by the production of thermal electricity
in neighbouring countries would actually lead to a lower net reduction of emissions of 3-6 MtCO2 (cf. appendix 6).

2.5. CHOSEN SOLUTIONS AND THEIR IMPACTS ON EUROPEAN POLICIES

In the short term, the substitution of coal-fired power stations by CCGT power stations is a good lever for reducing
CO2 emissions in the electricity sector. A tax of 30 per tonne of CO2 exclusively on electricity production in France
would clearly result in the cessation of electricity production from coal in France. However, this measure would also
weaken French CCGT power stations to a great extent, reduce the export balance for French electricity, slightly
increasing the price of French electricity (bearing in mind that todays rate is historically low), and would have a
limited impact on reducing carbon emissions because electricity imports would simply replace domestically-generated
electricity.
On the other hand, the introduction of a measure only affecting electricity production from coal would indeed lead to
coal-fired electricity production being replaced by gas-fired electricity production.
The mission therefore proposes the following two solutions:
.

introduce a technical standard on the basis of greenhouse gas emissions from power stations;
43

a tax on coal-fired power stations by increasing the existing tax on coal (like the domestic consumption tax
on coal - TICC), or by introducing a differentiated tax whose level would take the thermal performance of
power plants into account.

These options must nevertheless be the subject of in-depth technical and legal analyses, in particular to ensure the
compliance of the envisioned mechanisms which with the French Constitution and European law.
Whatever option is chosen, the substitution of coal by gas production could have an effect on the European carbon
market and on the climate policies of the other Member States of the EU.
At European level, the national measure could have a knock-on effect on other countries. The idea being that by
showing the way forward, France could successfully encourage other countries which are willing to move forward on
climate policies.
Indeed, the French proposal is inspired from the system put in place in Great Britain: the Climate Change Levy CCL.
This tax was introduced in Great Britain to guarantee that the carbon price signal would encourage economic actors to
make socially desirable investments. Thus, this tax corresponds to the difference between the target price
(comparable to a floor price) and the allowance price on the EU ETS market. The tax amount is revised every two years
so as to react to price fluctuations on the EU ETS. However, it is important to note that since the adjustment is not
instantaneous, it is possible that the sum of allowance prices and the CCL could be temporarily lower or higher than
the target price.
In Great Britain, the CCL acts as a sort of price floor to ensure that the price signal is sufficiently high to maintain the
British economy on an emission reduction trajectory which is coherent with its national objectives.
As designed currently, the mechanism offers good visibility to British companies on emission levels over the longer
term and therefore on the price trajectories of CO2 and electricity. The increase in electricity prices (+6/MWh
observed in 2015, +11/MWh expected in 2020) allows energy producers to reinvest in production capacities, whilst
for the Treasury, the CCL generates new revenues. In 2015, revenues from the tax were estimated at 2.5 billion.
In consequence, British companies are making efforts to reduce emissions beyond what they would be prepared to
do if the CCL did not exist. The additional restriction on emissions from the British electricity sector in phase 3 is
estimated between 26.6 Mt CO2 and 37.6 Mt CO2 by 2020 (I4CE).
However, the situation in Great Britain needs to be nuanced from that in continental Europe. In reality, the effect
of such a measure on Britains electricity balance of trade is limited because interconnection capacities with the
continent are already saturated.
In Great Britain, it is also important to note that in 2014 the Carbon Price Support was finally capped at 18 i.e. 21,
because the difference was too big between it and the EU ETS carbon price.
For Germany, it would seem that the probability of an introduction of a similar measure to that practised in France
or in Great Britain is low, at least in the short term, particularly because of elections in 2017. Indeed, the German
energy mix is still primarily based on the production of coal-fired power station electricity. Such a measure would
therefore have much greater effects in Germany than it would in France. Since the question of coal is a source of
considerable tensions in Germany, it seems difficult to imagine the introduction of a similar measure to Frances in the
short term and, in particular, before the 2017 elections. However, Germany is currently working on a 2050 climate
plan which will in particular look at how to phase out coal by mid-century. A high-level political rapprochement with
this essential partner is therefore a priority.

44

Furthermore, the impact of the measure on the allowance price in the EU ETS system will be limited. Indeed, the
reduction in CO2 emissions of a few million tonnes at European level would have very little impact on the global
demand for allowances on the EU ETS.
The operation of the EU ETS market means that when the carbon price increases on one market sector, the resulting
emission reductions mechanically lead to reducing demand for allowances in that sector. These allowances therefore
become available to other sectors because the global emissions cap remains unchanged, which contributes to feed
the market and, therefore, reduces the price of carbon.
Thus, according to Climate Economics Chair simulations, a floor price in France of 30 would lead to a drop in the
allowance price at European level of -0.71 in 2017 and -0.15 in 2020, which is negligible given weekly price
variations on the European carbon market.
The hearings held with European partners showed that environmental integrity was a decisive criterion for eliciting
the desired knock-on effects. This implies in particular that allowances freed up by national measure would not lead
to a transfer of emissions to other European countries. Indeed, applying a CO2 floor price to a limited number of
Member States without revising the overall volume of EU ETS allowances would result in a simple transfer of the
emission reduction effort from the country applying the floor price to those outside the scope of the measure,
without any effect on total EU emissions.
Allowances thus freed up would therefore have to be neutralised. And yet, the pure and simple cancellation of
allowances, if desirable from an environmental point of view, would be difficult to accept, in particular for
budgetary reasons. An intermediary solution would involve buying an equivalent quantity of allowances so as to
remove them temporarily from the market and re-inject them into the market when prices rise, or to use them later
when the constraint on emission volumes will be greater on the French electricity sector (which must anticipate
effects on CO2 emissions from the progressive phaseout from nuclear in the energy mix).
Proposal 7: Prefer gas-fired to coal-fired electricity production by introducing a technical
standard on the basis of greenhouse gas emissions from power stations by increasing the
existing tax on coal (domestic consumption tax on coal), or creating a differentiated tax, the level
of which would take the thermal performance of power stations into account.

45

3. PROMOTING CARBON PRICING WORLDWIDE

In spite of broad agreement on the benefits of carbon pricing to achieve the objective of a low-carbon economy,
climate negotiations have not taken on the issue of carbon pricing head-on and, in practice, even though there are
more and more examples of carbon pricing, actions remain far too rare. Profound divergences of opinion exist on the
practical conditions (level, deadline, instruments) for the implementation of carbon pricing.

3.1.
FROM?

POLITICAL ECONOMICS OF CARBON PRICING: WHERE DO THE OBSTACLES COME

Carbon pricing leads to transfers between the winners and losers of the transition to a low-carbon economy. Thus,
it is primarily the distributive effects of the carbon price that are slowing down/blocking political actions.
At international level, during climate negotiations, the carbon price remains a red line for some fossil fuelproducing countries which would mechanically lose part of their income with the introduction of a carbon price. The
higher the carbon price, the greater this transfer of income from oil-producing countries to consumer countries would
be.
Amongst the industry, a fault line divides the producers of energy and their industrial customers. Indeed, the former
can pass through all the cost of carbon in their price whilst the latter are in theory unable to do so because their
production activities are positioned on relatively globalised markets, where their competitors do not necessarily face
costs linked to carbon emissions. Electricity producers are therefore clearly in favour of the rapid introduction of a
carbon price at European level, in particular to re-establish the competitiveness of electricity power stations using
natural gas and ready to reduce the quantities of CO2eq emitted. Their industrial customers are, conversely,
profoundly hostile to any measure increasing the carbon price unilaterally and demand guarantees on long-term free
allocation of allowances.
For some consumers, the carbon price means an increase in the price of energy and, therefore, a drop in buying
power over the short term. Accordingly, the energy-climate contribution would have an annual average cost of 100
in 2016 for French households (60 for heating and 40 for transport) since their consumption is supposed to remain
constant. This regressive effect increases the energy precarity of some less well-off households, hence the need to
34
introduce compensatory measures of the energy cheque type . In the medium-to-long term, the price signal and the
elasticity of the demand price as well as investments in energy efficiency would modify behaviour which may cancel
out the negative effect on buying power.
A strong political will is therefore necessary to address these distributive challenges, and the question of
redistribution of carbon revenues is crucial to promoting the acceptability of carbon pricing. Candidates for recycling
of revenues remain numerous. It is therefore important to target the most affected households and companies first
and foremost and if possible use the opportunity to eliminate other levies which detrimentally affect employment and
productive investment. Successful experiments in introducing carbon taxation and ambitious green taxation more
broadly (as in Sweden, in particular) show that its acceptance is based on a total overhaul of the fiscal pact.

34

For a more detailed assessment of the differentiated impacts of energy taxation, refer to the works of CGDD performed
using the PROMETHEUS model (PROgramme de Microsimulation des nergies de Transport et Habitat pour valuations
Usage Social)

46

The introduction of green taxation is therefore an opportunity to open a broad social debate on the legitimacy of the
tax, on the foundation of basic public provision that citizens need, and on the financing of the Welfare State.
In a low-carbon world, once the transition is complete, the advantage of the price will be clear to all. The balance of
power will be in favour of a carbon price, in order to maintain the advantages gained from renewable energies, for
example. The problem of the transition is to manage the switch in the balance of power by taking into account the
very dynamic of the evolution of the often highly capitalistic economic sectors concerned, which are by definition
potentially confronted with stranded assets issues. The early introduction of a price signal for carbon that can be
interpreted by investors is therefore important to avoid the effects of a carbon-intensive technology lock-in in the
economy.
Finally, it is important to pursue international mobilisation to reduce or re-allocate subsidies to fossil fuels. Their
existence indeed counters the effects of carbon pricing and, often without having any obvious social or economic
benefit, contributes to locking down the economy in models that are incompatible with the Paris Agreement.

3.2.

PANORAMA OF EXISTING GLOBAL CARBON PRICING

Carbon prices at this stage cover a limited but increasing proportion of global emissions. The extension of carbon
pricing is the aim of numerous actors, as demonstrated by the introduction of initiatives such as the Carbon Pricing
35
Leadership Coalition whose objective is to increase the coverage of global emissions from 12% in 2015 to 25% in
2020, and then 50% in 2030. An IETA-EDF report (2016) shows that to achieve 25% by 2020, existing and planned
carbon pricing programmes must be supplemented by new measures (for example, extending the scope of the
European carbon market or covering the whole energy sector in the US). According to this report, the 50% objective
by 2050 is ambitious but achievable if, for example, several major countries (such as Australia, Russia, Turkey and
Ukraine) adopt carbon pricing that covers the majority of their emissions. Extended to a greater proportion of
emissions, carbon pricing would have substantial effects on greenhouse gas emission reductions.
Today, a plethora of instruments exists to explicitly or implicitly give a cost to carbon at the level of a country, a
region or a sector. However, none of these instruments have been applied on a global scale. Carbon taxes are
national measures. The market for allowances in the European Union is the first regional carbon market. Infra-national
pilot markets have been created in China. The linking of Californian and Quebec markets is the first example of a
successful linking between infra-national markets. The 2015 World Bank report on the state and trends of carbon
pricing in the world polled 40 countries, covering 12% of global emissions, who introduced carbon taxes or an
emission trading scheme. Coverage of emissions by carbon pricing tripled between 2005 and 2015 and will increase
strongly through to 2020, with the introduction of a national carbon market in China.
Figure 8 shows that carbon prices observed across the world range from a few euros in Mexico (grants to fossil fuel
energies in developing countries even result in negative prices) to over 100 in Sweden.

35

In September 2014, at the United Nations Climate Summit in Lima (COP20), The World Bank, The World Economic Forum
and a set of international institutions and associations launched the Carbon Pricing Leadership Coalition. Shortly afterwards,
at a summit organised by the Secretary-General of the United Nations in New York, 74 national governments, 23 infranational governments and more than 1000 companies brought their support in principle to the project to fix a price for
carbon.

47

FIGURE 8: MAP OF CARBON MARKETS AND OTHER EXISTING CARBON PRICING MECHANISMS OR MECHANISMS UNDER STUDY THROUGHOUT
THE WORLD (SOURCE: CDC CLIMATE RESEARCH 2015)

These differences are explained by:

() the specific nature of the sectors targeted: in France, 100/t CO2eq in 2030 as mentioned in the UN report
represents around 0.25/L of petrol, i.e. on the same scale as oil price variations, whilst for the steel industry
it represents 200 for each tonne of steel (i.e. 40% of its sale price which is currently around 500);
() country and regional characteristics: A $50 carbon price can be considered as unacceptable in India because it
would double the price of cement, whilst the country is in the middle of an urbanisation phase with
construction representing 20% of GDP. In a broadly urbanised country like France, the social impact of the
same price would be much lower, given that the construction sector only accounts for 5% of GDP.
Thanks to the momentum achieved by COP21, financial actors are also taking hold of the climate challenge,
primarily from the point of view of the risks that climate changes could have on the stability of the financial sector.
This theme was made popular by several think tanks such as Carbon Disclosure Project and Carbon tracker Initiative
which revealed the financial risks hanging over the actors whose business model does not take climate risk into
consideration. In the absence of a carbon price coherent with the real social cost of climate change, this risk is not
integrated into investment choices and can threaten the long-term profitability of financial portfolios. Rating agencies
such as Standard & Poors have even decided to include climate criteria in their sovereign risk assessments.

48

With the impetus given by the Governor of the Bank of England, Mark Carney, the highest financial regulation
authority (Financial Stability Board) has launched a workgroup to assess this risk and provide methodological tools
for financial actors to better integrate it into their investment decisions. Mark Carney (2015) theorised the challenge
of the climate issue for the financial sector through the concept of the tragedy of the horizon which includes three
types of risk: (i) the physical risk of climate damages on financial assets, (ii) the transition risk which may suddenly
depreciate assets if the evolution of climate policy is not anticipated in time by investors, and (iii) the legal risk for
asset managers who could be held responsible for the effects of climate change due to the make-up of their
portfolios.
The risk of transition, and by extension of lost assets, was the primary motive for raising awareness of the financial
sector to climate change.
The risk of transition is particularly critical for companies in the energy sector as 80% of fossil energy reserves (coal,
36
oil, gas) must be left underground in a 2C scenario whilst stock exchange value depends partly on the volume of
proven reserves. Because of the weight of coal and oil companies in financial indices, the argument of the risk of a
carbon bubble is increasingly taken seriously by long-term investors.
The Portfolio Decarbonisation Coalition reunites 25 investors and supervises the decarbonisation of 600 billion of
37
38
assets under their management . 120 investors have signed the Montreal Pledge . Under the influence of several
actors from civil society (including the 350.org association), the movement to divest from fossil fuel assets has
39
increased. The movement concerns 500 companies managing over 3000G$ .

3.3.

CLIMATE NEGOTIATIONS AND CARBON PRICING: PROSPECTS OPENED UP BY THE PARIS

AGREEMENT
As part of international negotiations, carbon pricing is not the subject of a dedicated discussion arena. The carbon
price is considered not as an objective of the negotiations in itself, but as a tool freely chosen to achieve national
reduction objectives. It is a sign of the ambition held by the voluntary contribution of a country and not a success
criterion for negotiations.
However, in the text of the Paris Agreement and the decisions accompanying it, there are elements which sow the
seeds of a broadening and possible acceleration of carbon pricing in the world.
Article 2 of the Agreement first of all fixes the general objective of redirection of financial flows towards sustainable
development. Then, article 6 provides for the creation of a new market mechanism, taking over from the Clean
Development Mechanism (CDM) and the Kyoto protocols Joint Implementation, which would allow trading between
countries as a result of their efforts to reduce emissions. This article echoes paragraph 108 of the decision of the
agreement which recognises the social, economic and environmental value of voluntary mitigation actions and their
co-benefits for adaptation, health and sustainable development. Finally, paragraph 136, although it does not apply to
the signatory states of the agreement, recognises the incentive virtues of carbon pricing.
Together, these legal bricks (redirecting of financial flows, trading emission reductions, social value of carbon, the
incentive effect of carbon pricing) would suggest the possibility of the introduction of innovative and efficient

36

Cf: Christophe MacGlade and Paul Ekins, The Geographical Distribution of Fossil Fuels Unused When Limiting Global
Warming to 2 C , Nature, n 517, January 8, 2015.
37

Cf: http://unepfi.org/pdc/

38

Cf: http://montrealpledge.org/

39

Cf: http://divestinvest.org/

49

economic and financial instruments. In particular, they open the door to positive forms of carbon pricing (Sirkis,
2015) to support the financing of new low-carbon investments, and in particular in countries of the South.

3.4.

SOME PATHS TO BE EXPLORED TO PROMOTE THE EXTENSION OF THE SCOPE OF

CARBON PRICING
Experiments in carbon pricing throughout the world prove that obstacles to its implementation are not theoretical.
The difficulties are practical and concern the management of the distributive effects between industrial sectors,
households and countries with different levels of development. Understanding these distributive issues is
fundamental to initiating a peaceful discussion on the broadening of the scope of carbon pricing to include countries
of the South, which are fundamentally attached to the principle of common but differentiated responsibility, and
cannot accept carbon pricing if it puts the brakes on their legitimate development objectives.
This diagnostic leads us to announce the three following avenues of exploration to reinforce the social acceptability of
carbon pricing with economic actors and states:
1.

To convince carbon-intensive sectors exposed to international competition of the benefits of carbon pricing,
it is important to promote measures that create fair conditions of competition, thus limiting the risk of
carbon leakage. In this respect, the promotion of a rapid extension of carbon pricing at least within a
coalition of countries, like the Carbon Pricing Leadership Coalition, must be a priority. It is also crucial to
encourage the regular publication of different carbon price levels applied to industrial sectors associated
with emission trends in the world.

Proposal 8: Promote a rapid extension of carbon pricing to achieve carbon pricing coverage of at
least 25% of global emissions as quickly as possible.

2.

Buy-in to the principle of carbon pricing can only be voluntary. Each country prepared to introduce a
carbon price signal must be able to adapt it to its particular situation. In order to be acceptable, carbon
pricing instruments in the countries of the South must be designed as levers for financing a low-carbon
development model. In these countries, the issue is not so much one of fixing a price for emissions on
existing equipment (they are relatively low today) but rather financing low-carbon equipment via instruments
that reward emissions avoided by adopting such equipment rather than a conventional development
scenario. These implicit carbon pricing instruments could take the form of direct financial transfers,
subsidised loans or public guarantees on investments.

3.

National expert commissions in France (Quinet report, 2009), England and the US have defined the
trajectories of the social values of carbon that are coherent with national objectives in those countries (factor
4 in France). These reference values are integrated into the economic analyses of public projects and have
been used to calibrate the trajectory of the French carbon tax, for example. At a global level, introducing a
high-level commission (appointed by the UN) to define the indicative trajectory of a corridor of social
values of carbon, aligned with the objective 2C and the North-South transfer objectives, would have a high
political impact. This commission could make proposals to address the inevitable question of discrepancies of
this social value of carbon between the major regions of the world and provide the necessary safeguards
against the risks of price destabilisation posed by the possible rapprochement of carbon markets throughout
the world. The Canfin-Grandjean report (2015), Mobilising financing for the climate, prepared for the
President of the Republic, already made the case for the creation of such a corridor. The objective is not to
define prescriptive values but values that are capable of playing a marker and coherence role in the current
50

mosaic of climate policy instruments, and to give a quantitative anchor point to paragraph 108 of the
decision of the Agreement. This corridor would send a signal to better calibrate grants and public guarantees
to new low-carbon investments and avoid excessive disparity between implicit carbon prices used in such
instruments. A signal for companies wishing to integrate an internal carbon price into their investment
choices, a signal to design innovative financial products and, in the end, something that would have a pull
back effect on actual carbon prices that are bound to get close to the social value of carbon to stay in line
with the 2C challenge.

Proposal 9: Introduce a high-level commission (appointed by the UN) to define the indicative
trajectory of a corridor of social values of carbon, aligned with the 2C objective and the NorthSouth financial transfers objectives.

51

CONCLUSION
Carbon pricing is an essential element to accelerate energy transition and promote the deployment of a low-carbon
economy. In order to have a real impact on economic actors, investments and behaviours, carbon prices must be
efficient, stable, foreseeable, and cover the widest scope possible.
Further to our mission, we can outline the following key messages:
1) At European level
A significant reform of the European carbon market is necessary today. Discussions in progress on revisions to the
European carbon market Directive represent the last chance to create a new impetus at European level, thereby
avoiding fragmentation of European climate policies.
In this report, we therefore defend the proposal to introduce a price corridor on the European carbon market with a
floor price between 20 and 30 in 2020 and an annual increase of 10%, and a cap of 50 which would increase in at
the same rate. This is a pragmatic, technically achievable proposal that would remedy the numerous current
operational shortcomings of the European carbon market, supplemented by an action on the quantity of quotas
available.
This proposal would also allow the European Union to return to an emission trajectory compatible with the Paris
Agreement commitments. However, and in spite of its numerous attributes, the appetite for adopting this measure
still seems limited at this stage within European institutions and amongst Member States. The auditions held during
this mission nevertheless helped open a debate which will continue all the way through the discussions on the reform.
Additional measures must also be considered:
In our report we mention the need to step up regulation via market quantities to (1) manage the market
surplus in the short term, and (2) align the European carbon market emission cap with the 2050 objectives.
We also highlighted the challenge of piloting the objective and the importance of improving the
reactiveness of the European carbon market to prices. In this sense, a reform of EU ETS governance could
push towards a simpler, more flexible EU ETS adjustment mechanism than the current system allows,
whereby reforms take several years.
To not substantially reform the European market today would have the consequence of promoting the
multiplication of national measures (such as the floor price in Great Britain, the floor price in France, Germanys
policy on coal) which would destabilise the functioning of the European market in the absence of structural reform to
market governance.
Concerning European carbon taxation, discussions should be reopened concerning the increase in the carbon
component of taxation on energy and crucial to accelerating a change in behaviour, especially in the context of low
energy prices (linked to the drop in hydrocarbon prices). France announced at the last environmental conference
(April 25-26, 2016) that the green economy committee would submit an opinion in July 2016 on the conditions
required to adapt the carbon price trajectory to a low oil price context. At the same conference, the President of the
Republic announced the presentation before the end of the year of a national 2050 horizon strategy, of which the
carbon component would be an essential element. This strategy will detail the trajectory of the carbon component
between 2030 and 2050. Under these conditions, France could play a leading role and create a knock-on effect on
other European countries.
At the very least, the introduction of harmonised carbon taxation in a group of leading volunteer European countries
has to be secured, with the possibility of creating pilot mechanisms to protect borders.

52

Proposal 10: Promote the reopening of discussions on the introduction of a carbon component
into European energy taxation as part of the dialogue which will open in 2018 on the European
climate policy ambition.
2) At the French level, regarding the mechanism to accelerate coal phaseout
Substituting coal-fired power stations by CCGTs is a good lever to reduce CO2 emissions in the electricity sector. A
taxation of 30 per tonne of CO2 exclusively on French electricity production would clearly halt the production of
electricity from coal in France. This measure, applied in the same way to coal and gas, would also considerably
weaken the French CCGT power stations, without any obvious environmental benefit. Thus, it would reduce Frances
electricity export balance, increase the price of French electricity, have a limited impact on the reduction of carbon
emissions because domestic electricity would be substituted by imported electricity thus increasing the risk of a
failure in French electricity security.
It is therefore important to design the French measure in such a way as to optimise its environmental benefit,
without destabilising energy supply security and, as the President of the Republic wanted, promote the use of gas
over coal, specifically for the electricity sector. The mission therefore proposes two types of solution: (i)
introducing a technical standard on the basis of greenhouse gas emissions from power stations, or (ii) a tax on coalfired power stations, increasing the existing tax on coal, like domestic tax consumption on coal, or introducing a
differentiated tax, the level of which would take into account the thermal performance of power stations, for
example, so as to encourage improved energy efficiency in the thermal electricity production system.

3) At the international level, In terms of carbon pricing throughout the world

At world level, carbon prices currently cover a limited, but growing, proportion of global emissions (12% in 2015).
The many carbon pricing experiments throughout the world prove that the obstacles to the introduction of carbon
prices are fundamentally derived from the management of distributive effects between industrial sectors, households
and also between countries at different stages of development. Understanding these distributive challenges is
fundamental to initiating a peaceful discussion on broadening the scope of carbon pricing.
To increase the acceptability of carbon prices, in particular in high energy-consumption industrial sectors, it is
important to promote the broadening of the carbon pricing scope at least within a coalition of countries, such as that
initiated by the Carbon Pricing Leadership Coalition. Although absent from climate negotiations, carbon pricing can
nevertheless rely on a number of central legal building blocks from the Paris Agreement (article 2, article 6) and its
accompanying Decisions (paragraphs 108 and 136) to design innovative economic and financial instruments to finance
low-carbon development.
Finally, it is important to encourage the rapid emergence of a vision on the collective wealth created by continued
low-carbon development in terms of environmental and health benefits of course, but also in terms of economic
opportunity. In this respect, the definition of an indicative corridor trajectory of the social values of carbon, aligned
with the 2C objective, and the North-South transfer objectives, would have a strong political impact. This would thus
(1) avoid the fragmentation of carbon pricing initiatives at the risk of losing coherence, (2) lend credibility to an
international commitment in favour of stabilising the climate and (3) help anticipation towards investment in lowcarbon transition converge.
Carbon pricing is a crucial element of achieving the decarbonization objectives adopted by the Paris Agreement.
The EU ETS reform is a life-size credibility test for the European Union, which must strengthen its policies to fight
climate change, thereby contributing to a broader, positive impetus developing carbon price signals throughout the
world.

53

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56

ANNEX 1: LANDSCAPE OF CARBON PRICING INSTRUMENTS AND THE RESULTING

RANGE OF EXPLICIT AND IMPLICIT PRICES

TABLE 3: RANGE OF PUBLIC AND PRIVATE CARBON PRICING INSTRUMENTS

Public

Direct carbon price (tax, emission trading scheme)

Subsidies to avoided carbon emissions (feed-in tariffs)
Regulation (emissions standards on vehicules, energy efficiency)
Social cost of carbon

Private

Internal price of carbon

Voluntary carbon markets (offset)
Divestment from fossil fuels assets

Public instruments
To minimise the cost of the low-carbon transition, the easiest solution in theory is to make polluters directly pay for
the price of carbon via
a tax system where revenue can be reused to reduce taxes elsewhere. Carbon tax in France (or the carbon
component of internal fossil fuel consumption taxes) would therefore not lead to an overall increase in tax. In
2015, the tax rate was 14.50 per tonne, and will increase to 22 in 2016. The Energy Transition for Green Growth
Act plans for this tax to increase to 56 in 2020 and, finally, 100 in 2030
emissions trading, whereby facilities emitting more than their allocated C02 emissions quota are required to
purchase permits on the market, resulting in a financial penalty to make up for their surplus emissions. On the
other hand, facilities that reduce their emissions can sell their unused quotas on the market and generate income.
In Europe, emissions trading has been introduced for the energy and industrial sectors, which generate the most
CO2 emissions. One tonne of CO2 is currently traded at around 5.
In practice, the most commonly used tools are those that reward the emissions avoided via subsidies for low-carbon
investments. In particular, these subsidies take the form of renewable energy support mechanisms and tax credits in
favour of energy efficiency. Given the difficulty to penalize emissions from the diffuse sector, the idea is to reward
those making investments to pollute less.
For sectors without explicit prices, such as agriculture, transport or waste management, standards can reflect the
implicit price of carbon at which the measure to reduce emissions was introduced at the initiative of economic
players. For example, in transport, the price would need to be over 100 per tonne, which would be difficultly
accepted, in order to offer an incentive to change behaviour or for car manufacturers to drastically reduce engine fuel
consumption. Regulation is therefore useful for accelerating the process and encouraging technological
breakthroughs.
57

In order to guide infrastructure investment decisions, the French government has included the "shadow price of
carbon" in the socio-economic assessment of projects. This price is currently estimated at around 30 and 100 in
2030. It represents the estimated price of carbon that would need to be used to meet the national target of reducing
greenhouse gas emissions by 75% by 2050.

FIGURE 9: CARBON PRICES ON THE EUROPEAN CARBON MARKET (EUA) AND INTERNATIONAL CREDIT MARKET (CER). SOURCE : DGEC.

FIGURE 10: PLANNED EVOLUTION OF THE FRENCH CARBON TAX. SOURCE : DGEC.

Private instruments
Business Climate Week was introduced at France's initiative for top-level dialogue between businesses and
governments for climate negotiations, with a session organised in May 2015 in Paris. This demonstrated that carbon
pricing was no longer a taboo for businesses and that many of them (25 networks representing 6.5 million businesses)
are prepared to commit to carbon pricing
Some businesses have already incorporated carbon pricing in their business models, without waiting for it to be
introduced by the public authorities. The price may be defined based on carbon market prices, by matching the
shadow price of carbon, or alternatively, according to business-specific criteria. Carbon emissions are counted as
58

costs, giving an advantage to projects with relatively fewer emissions. This ensures that the climate risk is included in
decisions and helps anticipate regulatory changes that could affect the future profitability of unprepared businesses.
In France, the Energy Transition for Green Growth Act requires institutional investors to disclose to their beneficiaries
their portfolio's exposure to climate-related risks and on the contribution to climate targets (Article 173).
Some businesses adopt a more voluntary approach by setting themselves a sort of internal tax on carbon activities.
Revenue from this internal tax is then reinvested in internal energy efficiency projects or carbon offsetting projects on
voluntary carbon markets. The financial sector has also largely become aware of the risks that climate change poses
for its stability, as demonstrated by the increasing movement of major banks towards disinvestment in the coal sector
and the fossil fuels sector in general, whose long-term profitability is threatened. On 10 September 2015, the French
President announced the end of export credits from France for coal-fired power stations unless they are equipped
with carbon capture and storage technology.

Complementarities between carbon pricing instruments and other policies

Carbon prices, by their own, can hardly spontaneously trigger smooth transition toward a low-carbon
economy. Complementary measures such as regulation, R&D support, finance, investment in transport and
information infrastructure are useful for the following reasons:

different sectors need to see different levels of carbon prices to cut down their emissions
(see table 1) ;

the regulatory approach is more efficient for some actions (emissions standard for vehicule for
instance)

the necessity to integrate dynamic impacts of the transition toward a low-carbon economy
(lock-in effects, CGDD, 2016) ;

the existence of non-financial barriers : changes in behaviours, path dependancy of exisiting

transport infrastructures, technological lock-ins;

the existence of financial barriers: investment barriers, adverse risk/returns ratio. Integrating
social or internal values of carbon into business models can help overcome those barriers.
Financial mechanisms backed upon public guarantee proportionate to emissions reduction
realized by investments can also have a strong leverage effect (CGDD-France Stratgie, 2015 ;
Rapport Canfin-Grandjean, 2015).

59

ANNEX 2: INTERNATIONAL EXPRIENCES

RGGI in 9 States in the USA (North-East)
40

RGGI initiative ( Regional Greenhouse Gas Initiative ) started in 2009 with the first auctions in 2008. RGGI was the
first emission trading scheme to implement a price control mechanism which could be qualified as a soft price collar.
Quarterly auctions are held with an auction reserve price (2.10$ in 2016, i.e. 188, increased by 2.5% each year): no
quota can be sold at a price lower than the auction reserve price.
Since 2013, there is also a price ceiling which takes the form of a reserve ( Cost Containment Reserve or CCR) in
which quotas are placed every year. Those quotas are auctioned when the auction price is higher than the ceiling price
(4$ -358- in 2014, 6$ -537- in 2015, 8$ -716- in 2016, 10$ -896- in 2017, then an increase of 2.5% year
afterwards). However, if the reserve is empty, quotas cannot be sold from that reserve if the price is higher that the
ceiling price until the following year.
This system is very useful to understand the functioning of a price corridor, as the market price has followed for a few
months the price floor, before evolving between the floor and the ceiling, and even going beyond the ceiling. Indeed,
41

the figure below shows that prices were very close for a long time to the price floor before reaching the ceiling price.
Those price movements are highly related to the levels chosen for the floor and the ceiling, very close to each other,
which only allows for small price variations.
FIGURE 11: CARBON PRICE ON RGGI MARKET SINCE 2012. SOURCE: MINISTERE DE LENVIRONNEMENT, DE LENERGIE ET DE LA MER.

40

I4CE case study on RGGI

41

Data from Thomson Reuters

60

California and Qubec

42

The Californian market implemented from the start (2013, with the first auctions being held in 2012) a soft price
collar with an auction reserve price (price floor) and a reserve of quotas (price ceiling).
The price floor is set at $12.73 (1141) in 2016 and increases by 5% each year in addition to inflation. When the
auction price is lower that the auction reserve price, quotas are withheld on the systems registry and auctioned again
later when two successive auctions have led to an auction price higher than the auction reserve price. However, the
volume of quotas auctioned cannot be more the 25% higher than what was initially planned, which distributes the
volume of quotas over the following quarters.
Regarding the price ceiling, the reserve of quotas (Price Containment Reserve or PCR) is separated into three subreserves containing quotas which are offered for sale after each auction for $47,54, $53,49 and $59,43 in 2016
(those price increase by 5% each year in addition to inflation).
Until now, no quota was sold at a price lower than the auction reserve price and no quota from the price containment
reserve was bought at the ceiling price. However, the market price has remained very close, although higher until
recently, to the auction reserve price. During the last two auctions (February 2016 and May 2016), not all quotas were
sold: only 95% and 11% respectively of the total amount of quotas were bought. In practice, no bid is made at a price
lower than the reserve price, but the amount of bids is lower than the supply of quotas. The figure below actually
shows that current prices on secondary markets are lower than the price floor.
FIGURE 12: CARBON PRICE ON THE CALIFORNIAN MARKET SINCE 2011. SOURCE: MINISTERE DE LENVIRONNEMENT, DE LENERGIE ET DE LA MER.

43

The Californian system is linked to Quebec since January 2014, the 1st (the first common auction was held in
November 2014), without a major impact on price. The market in Quebec now has the soft price collar which was
initially adopted by California.
Regional pilots in China

42

I4CE case study on California, and the Californian legislation available at :

http://www.arb.ca.gov/cc/capandtrade/capandtrade/unofficial_ct_030116.pdf

43

I4CE case study on Quebec

61

44

In China , 7 regional pilots were launched since 2013, in the view of introducing a national ETS in 2017. Price control
mechanisms are implemented in various forms in several pilots:
TABLEAU 4: PRICE CONTROL MECANISMS IN CHINESES REGIONAL PILOTS

Pilot

Description

Prix floor

Prix ceiling

Beijing

Adjustment reserve in which

up to 5% of annual allocation
ca be placed.

The government buys

quotas if the mean price of
the last 10 days is lower
than 20 yuan (272).

The government sells

quotas if the mean price of
the last 10 days is higher
than 150 yuan (2038)

Chongqing

No mechanism.

Guangdong

Adjustment reserve.
Auction reserve price
(auctioning volumes are very
low compared to free
allocation).
Auction reserve price.

Hubei

3% of a reserve (in which 8% of

annual allocation can be
placed) can be auctioned.

Auction reserve price in

2014 which increases from
25 yuan (339) to 40 yuan
(543) during the year (+ 5
yuan, i.e. 068, at each
quarterly auction).
Auction reserve price at 20
yuan (272).

Shangai

Auction reserve price

(auctioning volumes are very
low compared to free
allocation).

Auction reserve price at 46

yuan (624) in 2014.

Shenzhen

Adjustment reserve (containing

2% of the quotas).

Auction reserve price at

35,4 yuan (480) in 2014.

Auction reserve price

(auctioning volumes are very
low compared to free
allocation).
No mechanism.

Tianjin

South Korea
45

South Korea , which carbon market was put in place in 2015, has designed a unique system of price stabilization.
Several temporary measures

46

can be taken in case of excessive price movements (prices three times higher for 6

44

I4CE case study on Chines ETS pilots

45

I4CE case study on South Korea

46

Article 23 of the legislative act (http://elaw.klri.re.kr/kor_service/lawView.do?hseq=24561&lang=ENG), and article 30 of

the application act (http://elaw.klri.re.kr/kor_service/lawView.do?hseq=27386&lang=ENG).

62

successive months than the mean price of the two previous years, excessive monthly volumes of transfers and
excessive prices compared to the two previous years, mean monthly price lower than 60% of the mean of the two
previous years):

Allocation of at most 25% of the quotas of the reserve ;

Limits to the volume of quotas that can be detained;

Increases or decreases in the limit up to which quotas can be borrowed from the following years ;

Increases or decreases in the limit of quotas use ;

Implementation of minimum or maximum buying or selling prices.

A revision of the system is taking place in 2016, in particular to increase the supply of quotas in order to adapt to
47

demand . Indeed, the Korean market is facing some challenges. The price of the quotas went from 10 100 won [8]
when the market was launched at the beginning of 2015, to 18 500 won [14] now, but traded volumes are almost
zero.
New-Zealand
48

Several measures were introduced to adapt the price signal of the carbon market on New-Zealand , which started in
2008. In particular, since 2009, there is an obligation to surrender two quotas for each ton of greenhouse gases
emitted for non-forestry sectors. Quotas are also offered for sale at a fixed price of 25 NZD (1571), which serves as a
price ceiling.
FIGURE 13: CARBON PRICE ON THE CARBON MARKET IN NEW-ZELAND SINCE 2013. SOURCE: WWW.CARBONFORESTSERVICES.CO.NZ

47

https://icapcarbonaction.com/en/news-archive/389-korean-cabinet-approves-revisions-to-ets-framework

48

I4CE case study on New-Zealand

63

ANNEX 3: HISTORY OF THE EUROPEAN CARBON MARKET FROM PHASE 1 TO PHASE 3,

AND PERSPECTIVES FOR PHASE 4
Carbon markets, also called emission trading schemes (ETS), are regulatory instruments used to facilitate the
achievement of politically determined targets to reduce the emissions of greenhouse gases. They set an emissions
cap that limits the amount of emitted greenhouse gases. This limit is translated into an amount of quotas released
into the market. Participants can buy or sell allowances, and must surrender an amount of allowances equivalent to
their emissions. Each participant has an interest in reducing the share of emissions whose cost is less than the market
price of the quota, through operational adjustments or through investments in low carbon technologies.
TABLE 5: EUROPEAN CLIMATE TARGETS.

Total emissions reduction

compared to 1990 levels

Reduction of emissions
covered by the EU ETS
compared to 2005 levels

Reduction of emissions
not covered by the EU ETS
compared to 2005 levels

2020

-20%

-21%

-10%

2030

At least -40%

-43%

-30%

2050

From -80% to -95%

At least -90%

The European carbon market, or European Union Emissions Trading Scheme (EU ETS) entered into force in 2005.
This instrument aims at fighting climate change by capping emissions of greenhouse gases for the electricity sector
and the main industrial sectors in a harmonized way in the 28 Member States of the European Union and Norway,
Iceland and Liechtenstein. The cap is set according to the climate goals of the EU for sectors covered by the EU ETS: 21% in 2020 and - 43% in 2030 compared to 2005 emissions, which corresponds to a reduction in the annual emission
cap of respectively 1.74% / year and 2.2% / year. This concerns mainly the CO2 emissions from energy production and
industrial sectors, the aviation industry since 2012 and, since 2013, emissions of N2O and perfluorocarbons (PFCs)
from the chemical sector and the aluminum sector. Greenhouse gases emissions of over 11,000 European installations
are covered, representing approximately 45% of greenhouse gases emissions in the European Union, or equivalently
about 2 billion CO2 eq. per year.
The EU ETS operating rules are set by periods: phase 1 from 2005 to 2007, phase 2 from 2008 to 2012, phase 3 from
2013 to 2020 and Phase 4 from 2021 to 2030.
Covered facilities must return every year as many allowances as their verified emissions for the previous year (1 quota
= 1t CO2 eq emitted). Since 2008 (the start of phase 2), they also have the opportunity to use international credits for
49

their compliance .

49

Under the Kyoto Protocol, market mechanisms have been put in place. They allow to create credits for emissions
reductions and exchange them. Some of these credits can be used in the European carbon market under certain conditions.

64

FIGURE 14: EMISSIONS COVERED BY THE EU ETS. SOURCE: DGEC

Almost all of quotas were allocated for free until 2012. Since the beginning of phase 3 in 2013, more than half of the
quotas are auctioned, with the aim to increase this level gradually. To protect some sectors which are exposed to a
risk of carbon leakage, free allocation has been maintained. Auction revenues are then redistributed among Member
States. While industrial sectors continue to receive at least partially a free allocation, this is not the case for the
electricity sector which is considered to pass the cost of carbon in its prices, and thus not be exposed to a risk of
carbon leakage.
TABLEAU 6: FREE ALLOCATION FOR SECTORS COVERED BY THE EU ETS, SOURCE: MINISTERE DE LENVIRONNEMENT, DE LENERGIE ET DE LA MER,
DGEC.

Sector

Free allocation

Share of emissions covered by the

EU ETS

Electricity

No free allocation except in the

poorest Member States

50%

Exposed industrial sectors (steel,

cement, refining, chemicals, etc.)

Free allocation up to 100% of the

European benchmark

42%

Non exposed industrial sectors and

urban heating

Decreasing free allocation from 80%

in 2013 to 30% in 2020

8% (among which more than 6%

comes from urban heating)

An exception is however made for the less wealthy Member States of the European Union, to enable them to
modernize their electricity system. Indeed, some Member States may allocate free allowances for electricity
generation. In return, the Member States must invest in the modernization of their electricity sector and the
diversification of their energy mix. This exemption should continue until 2030 for those Member States whose
GDP/capita is below 60% of the average of the European Union, with increased transparency regarding investments.
The EU ETS is also designed to support innovation, through a fund dedicated to innovative projects, known as
NER300 (New Entrant Reserve 300). It is composed of 300 million allowances which were sold to replenish the fund
for a total of 2.1 billion. It aims at financing carbon capture and storage demonstrators (CCS) and innovative
renewable energy projects of commercial size. Two calls for projects have taken place at this stage.
After reaching more than 30 per ton of CO2 eq. in mid-2008, the price of quotas dropped to levels close to 3 in April
2013. The analysis of this price collapse concluded on an imbalance between supply and demand that has led to a
surplus which would only be absorbed between 2025 and 2030. A first short-term action ("backloading") was
decided in January 2014 by postponing the auctioning of some allowances to the end of phase III (2013 - 2020). This
decision was followed by the decision in October 2015 to establish a market stability reserve. This mechanism,
65

st

which will come into force on the 1 of January 2019, establishes a maximum and minimum threshold of quotas in the
market. The excess of quotas is placed into a reserve and put back into the market when the minimum threshold is
reached. Quotas whose auctions were postponed due to the "backloading" decision will also be placed in the market
stability reserve, together with the quotas unallocated between 2013 and 2020.
FIGURE 15: CARBON PRICE ON THE EU ETS MARKET SINCE 2008. SOURCE: MINISTERE DE LENVIRONNEMENT, DE LENERGIE ET DE LA MER, DGEC.

To continue the gradual strengthening of the EU ETS, the European negotiations are ongoing as part of the revision
rd
th
of the system for its phase 4 (2021-2030). The European Council of the 23 and 24 of October 2014 adopted a
climate and energy framework for 2030. This framework establishes a binding EU target of reducing by at least 40%
domestic emissions of greenhouse gases compared to 1990 levels. This objective is decomposed into the following
reductions compared to 2005:

-43% for sectors covered by the EU ETS. It is indicated that the reformed EU ETS will be
the main instrument to reduce European emissions;
-30% for sectors not covered by the EU ETS (including transport, buildings and agriculture).
th

A proposal for the revision of the Directive on the European carbon market was made on the 15 of July 2015. Its
main proposals are:

To introduce the objective approved by the European Council of 43% emission reduction in
2030 compared to 2005 for the sectors covered by the EU ETS. This induces a change in the
annual reduction of emission cap of 1.74% / year to 2.2% / year;
To put in place a strengthened innovation fund in favor of low carbon technologies,
including in industrial sectors, which is a continuation of the NER300 fund;
To continue the free allocation of quotas as a transitional measure for the electricity sector
and to establish a fund for the modernization of energy systems for the benefit of countries
of the European Union whose incomes are the lowest;
To protect the industry against a risk of carbon leakage.
The negotiations on the text began in the Council and the Parliament in September 2015 and should continue in
2016 and 2017. The measures of protection against a risk of carbon leakage, and funding mechanisms are among the
66

main topics, but the negotiation does not take place without raising the question of ambition, and in particular the
coherence of the EU ETS with the ambition of the Paris Agreement adopted at COP21.
Climate and energy European policy instruments
In 2007, the EU has set three targets for 2020: a 20% reduction in emissions of greenhouse gases compared to
1990 levels, an increase by 20% of the share of renewable energy and 20% of energy savings.
The "energy-climate" package adopted in 2008 introduces instruments to achieve these goals in several texts
concerning:
- Climate: these include the directive on the European Union Emission Trading Scheme (EU ETS), and the 2009
decision called the "effort sharing" decision, which indicates the targets for each Member State to reduce
emissions of greenhouse gases by 2020 in sectors not covered by the EU ETS.
- Energy, in particular with the Directive on energy efficiency and the directive on renewable energy.
The 2030 energy climate framework adopted by the European Council in October 2014 now brings European
institutions revise these tools to reach the EU 2030 objectives.

67

ANNEX 4: AMENDMENT PROPOSAL FOR A SOFT PRICE COLLAR FOR THE EU

68

69

ANNEX 5: ANSWERS TO THREE FREQUENTLY ASKED QUESTIONS

"This is a price intervention in a market mechanism"
The European carbon market is a regulated system which aims at delivering a price signal to incentivize specific
economic choices. When the price signal moves away from price levels consistent with the long-term objectives of
the European Union, it is legitimate to implement a mechanism to fix the price signal. This control is implemented in
most emission trading schemes worldwide. The mechanism presented in this report allows the market to freely set
prices within the corridor, and occasionally out of the corridor (although the mechanism tends to bring prices
within the range of the price corridor).
"What is the right price level?
The question of the choice of the price trajectory has been addressed in this report in section 1.4. Note, however, that
determining the "right" level of regulation is not specific to a price corridor. During negotiations on the MSR, it was
also necessary to define the reserve activation thresholds. Since this is the price signal which drives the choice of
actors and therefore determines the acceptability of reform, a discussion directly on price levels seems more
desirable that a discussion on quantities, whose effect on prices is not controlled.
"The price will be equal to the floor price
Some stakeholders fear that prices will remain at the price floor or price ceiling, and not evolve within the corridor.
North American examples prove that the choice of thresholds for the corridor has a major impact on price trends. In
California, the market price tends to approach the price floor, while in the RGGI market prices have reached both the
price floor and ceiling prices at some point.
Besides the choice of the thresholds for the corridor, price trends also depend on what is done with quotas that are
not placed on the market if an auction is canceled. Permanent withdrawal of quotas (which however represent a
strengthening of the climate target agreed by Member States) or placement in a reserve would be more effective to
raise prices in the European carbon market than if quotas are quickly put back in the auctioning pot.

70

ANNEX 6: COMPARISON OF MODELING RESULTS ON A UNIFORM TAX AFFECTING

ELECTRICITY PRODUCTION FROM GAS AND COAL

Source

ENGIE

EDF

Chaire
Economie
Climat

Impact on
electricity
production
from coal.

Almost no
production

Coal : 200h =
0,5TWh

- 5,6 TWh

Impact on
electricity
production
from gas.

CCGT : ~100h
of functioning

CCGT : 500h =
2TWh

- 8,9 TWh

Impact on
exports

17TWh/year
which
corresponds to
an increase of
imports of
4 TWh from
coal and
13 TWh from
gas

Spain : +5 TWh
of gas exports

Decrease by
14,5 TWh of
electricity
production in
France

Global CO2
emissions
(Mt/an)
France CO2
emissions
(Mt/an)
Impact on
wholesale
prices in
France
(/MWh)

-3,5

- 12

+3

Italy : + 7 TWh
of gas exports
Germany : +1
TWh of coal
exports

-4

- 12

+1,7

- 2,8

- 8,7

+3,2

Direct Energie

UFE

Compass
Lexecon

-10 -13
TWh

Almost no
production

Closure of CCGT

-7 -8 TWh

Almost no
production

Decrease of exports by 25
TWh which corresponds
to higher imports

Decrease by

Decrease of
400 M for
exports

Increase in electricity
production from coal (DE)
and gas (BE, IT, Esp, NL,
GB)

-6

+2

17 to 21
TWh of
electricity
production in
France

-3,5 -6
MtCO2/year
in Europe
-12 -14
MtCO2/year
in France
+1,7 3
/MWh

-5

+2

71

ANNEXE 7: ELECTRICITY PRICES FORMATION

The electricity supply market analyzed by CRE (the Franch TSO) is divided into four segments:
-

Large non residential sites (40.5% of national consumption): sites whose power level is equal to 250kW.
These sites include large industrial sites, hospitals, hypermarkets, large buildings ... (annual consumption
greater than 1 GWh).
Medium non residential sites (13.5% of national consumption): sites whose demand is between 36 and 250
kW. These sites correspond for instance to the premises of SMEs (annual consumption generally between
0.15 GWh and 1 GWh).
Small non residential sites (11% of national consumption): sites whose power level is below 36 kVA. These
sites correspond to the mass non-residential market (liberal professions, craftsmen, etc.) Their annual
consumption is generally under 0.15 GWh.
Residential sites (35% of national consumption): Residential sites whose power is less than 36 kVA. Their
annual consumption is generally under 10 MWh.

Regulated tariffs disappeared for large and medium non residential sites which are therefore exposed to fluctuations
in wholesale prices, unless they can pass cost through to their consumers (the extent of cost pass-through is
controversial among economists).
50

According to the Market Observatory of CRE , during the first quarter 2016, the increase in sites with a market
contract continued with 157,000 additional customers (+ 4.2%) against 169 000 in the fourth quarter of 2015. At the
end of the first quarter of 2016, 3.846 million residential consumer sites, on a total of 31.8 million, had chosen a
market contract. Almost all of them (3,837,000) have chosen an alternative supplier to EDF.
st

Since the 1 of January 2016, electricity consumers whose contracted power is greater than 36 kVA are no longer
eligible to regulated tariffs. Customers who had not signed a market contract before that automatically switched to a
th
transitional contract, on average 5% more expensive than the price they had. This transitional offer will expire on 30
of June 2016.
Of a total of 4.9 million non-residential sites using electricity, 1.417 million sites have a market contract. Of the
468,000 sites affected by the end of regulated tariffs, 62 500 benefit from the temporary offer.
th

51

In its report on regulated tariffs for electricity published on the 15 of January 2015 CRE analyzed each component
of the tariffs. It assessed the changes in regulated tariffs induced by the methodology and the increase in prices
needed to cover EDF costs.
Among the components of the tariffs, there is obviously the energy supply cost that is can be decomposed into:
-

The cost of supply for nuclear energy (ARENH) whose price is set by ministerial order52 and would not be
affected by a measure concerning the carbon price;

50

http://www.cre.fr/marches/observatoire-des-marches

51

Available at http://www.cre.fr/documents/publications/rapports-thematiques

52

According to article L. 337-14 of the energy code, this price must be representative of the economic conditions of electricity
generation from nuclear power plants, taking into account the four following elements:
- The remuneration of capital taking into account the nature of the activity;
- Operating costs;
- Maintenance investments or costs required for the extension of the duration of the operating license;

72

The cost of additional supply, depending on wholesale electricity markets53 which would be affected by such
a measure; but whose prices are currently at historically low levels.

For EDF, the average level of an electricity bill in France is 135/MWh (160/MWh for residentials). Even in the
context of wholesale prices lower than ARENH prices, an increase by 1 to 2/MWh of market prices will lead to an
increase by about 1% of the bill of consumers with a market contract. For residential consumers with regulated tariffs,
this impact will be close to 0.

- The estimated costs of long-term burden on the operators of nuclear installations.

53

In January 2016, the wholesale electricity price was 28 /MWh.

73

ANNEXE 8: CGE STUDY ON CARBON PRICING AND COMPETITIVENESS

1. CARBON EMISSIONS AND THE ECONOMY OF ETS PARTICIPATING COUNTRIES.

54

France is the European country with the lowest ratio of energy and industry carbon emissions over GDP.

The low carbon level of the ETS-covered French industry segments increases carbon leaks when domestic production
is substituted by imports from countries with more carbon emissions.

1.1. THE EU EMISSIONS TRADING SYSTEM AND THE PARTICIPATING COUNTRIES.

Industry segments that are covered by the EU Emissions Trading System (hereafter the covered segments), caused
55
emissions amounting to 1776 Mt CO2 eq. in 2015, approximately 45% of the total emissions of the 31 participating
countries (UE 28 + Iceland, Liechtenstein and Norway). Figures 1 to 4 illustrate the great disparity among the
countries and segments contributions to the ETS-covered emissions.
Figure 1. Countries and economic segments contributions to 2015 verified emissions in the segments covered by the
EU ETS.

54

With the exception of Luxemburg

Covered gases are as follows: CO2 produced by combustion, industry and aviation, N2O produced by chemistry and
perfluorocarbons from aluminium industry.
55

74

2015 Verifi ed emi s s ions

i n Mt CO2 eq.

Avi a ti on

Combus tion of
fuel s

Refi ni ng of
mi neral oi l + Meta l l urgy
coke

Non-meta l li c
mi nera ls
Pul p a nd
(i ncl . cement pa per
a nd l i me)

Chemi cal s

Other a cti vi ty
opted-i n
Total
under Art. 24

Austria
Belgium
Bulgaria
Croatia
Cyprus
Czech Republic
Denmark
Estonia
Finland
France
Germany
Greece
Hungary
Iceland
Ireland
Italy
Latvia
Lithuania
Luxembourg
Malta
Netherlands
Norway
Poland
Portugal
Romania
Slovakia
Slovenia
Spain
Sweden
United Kingdom
Total

1,005
1,272
0,262
0,154
0,003
0,423
0,532
0,073
0,952
3,873
8,912
0,934
0,000
0,548
8,525
1,976
0,011
0,055
0,239
0,245
2,334
2,247
0,216
1,275
0,571
0,021
0,088
4,102
2,786
10,978
54,613

7,514
20,341
17,070
3,270
3,023
53,279
12,757
10,764
12,751
38,619
333,376
36,819
11,317
0,001
13,601
95,413
1,218
1,277
0,419
0,890
64,047
14,246
136,257
16,819
33,699
14,519
4,653
80,814
4,533
127,501
1170,805

2,804
10,255
0,007
1,320
0,000
1,028
0,991
0,626
2,913
10,179
27,385
5,517
0,022
0,000
0,358
18,989
0,000
1,756
0,000
0,000
11,229
0,328
2,641
2,547
1,201
1,146
0,000
14,379
2,865
16,433
136,922

12,174
1,355
0,054
0,023
0,000
5,837
0,000
0,000
4,866
12,206
35,905
1,056
6,450
0,000
0,000
11,177
0,023
0,000
0,472
0,000
6,503
4,877
5,863
0,191
0,880
0,658
0,422
10,341
5,290
12,610
139,231

4,238
7,455
1,796
2,255
1,346
4,666
2,034
0,458
1,406
15,048
34,695
6,093
1,226
0,000
2,874
20,426
0,750
1,010
0,770
0,000
1,700
1,597
10,144
2,854
6,218
3,287
0,740
22,193
3,337
11,842
172,459

1,644
0,784
0,094
0,457
0,000
0,019
0,013
0,047
2,568
2,055
5,587
0,109
0,230
0,000
0,000
4,000
0,000
0,030
0,000
0,000
1,054
0,147
1,418
0,473
0,122
0,131
0,294
3,003
0,644
1,483
26,406

1,004
4,440
0,000
1,519
0,000
1,281
0,000
0,000
0,943
4,975
17,504
0,282
0,239
0,000
0,000
5,690
0,002
2,772
0,000
0,000
9,637
2,069
5,382
0,091
0,272
1,440
0,000
6,542
0,853
5,642
72,579

0,114
0,074
0,000
0,000
0,000
0,062
0,000
0,000
0,041
0,000
0,000
0,000
0,000
1,811
0,000
0,453
0,040
0,000
0,000
0,000
0,000
0,000
0,000
0,000
0,000
0,000
0,000
0,000
0,061
0,271
2,927

30,497
45,978
19,281
8,998
4,372
66,595
16,327
11,968
26,439
86,955
463,365
50,810
19,483
2,360
25,359
158,125
2,044
6,900
1,900
1,135
96,503
25,512
161,921
24,251
42,963
21,203
6,197
141,374
20,370
186,761
1775,943

3,08%

65,93%

7,71%

7,84%

9,71%

1,49%

4,09%

0,16%

100,00%

1,72%
2,59%
1,09%
0,51%
0,25%
3,75%
0,92%
0,67%
1,49%
4,90%
26,09%
2,86%
1,10%
0,13%
1,43%
8,90%
0,12%
0,39%
0,11%
0,06%
5,43%
1,44%
9,12%
1,37%
2,42%
1,19%
0,35%
7,96%
1,15%
10,52%
100,00%

Sources : European Environment Agency, authors calculations.

Note : Combustion covers power and heat generation 20 MW, with the exception of municipal plants and hazardous
waste incineration. With respect to aviation, each country is given the emissions of the operators it licenses and the
emissions of those non european operators that attribute to the considered country the biggest share in their
European emissions. Liechtenstein emissions have been accounted for zero in 2015.
Figure 2. Countries contributions to the 2015 verified emissions in the segments covered by the EU ETS.

75

Romania
2%

Others
15%

Germany
26%

Belgium
3%
Greece
3%
Czech Republic
4%
France
5%
Netherlands
5%

United
Kingdom
11%
Spain
8%

Italy
9%

Poland
9%

Sources : European Environment Agency, authors calculations.

Figure 3. Covered segments contributions to the 2015 verified emissions.

Chemicals
4%

Aviation
3%

Pulp and paper

1%

Refining of
mineral oil + coke
8%
Metallurgy
8%
Non-metallic
minerals (incl.
cement and lime)
10%

Other
activity
opted-in
under Art.
24
0%

Combustion of
fuels
66%

Sources : European Environment Agency, authors calculations.

Figure 4. Country economic segments contributions to the 2015 verified emissions.

76

100%

90%

80%

Others (below 1%)

Refining and coke / Italie

70%

Combustion / Belgium
Non-metallic minerals / Italy
Refining and coke / Germany

60%

Combustion / Romania
Non-metallic minerals / Germany
Metallurgy / Germany

50%

Combustion / Greece
Combustion / France

40%

Combustion / Czech Republic

Combustion / The Netherlands
Combustion / Spain

30%

Combustion / Italy
Combustion / UK
Combustion / Poland

20%

Combustion / Germany

10%

0%

Sources : European Environment Agency, authors calculations.

1.2. COUNTRIES RELATIVE POSITIONING WITH RESPECT TO CO2 EQ. EMISSIONS IN THE COVERED
SEGMENTS.
Countries contributions are very heterogeneous because of two factors :

The weight of the covered segments in a given countrys GDP;

The carbon emissions levels of the covered segments in a given country.
Figures 5 and 6 illustrate the diversity among the main ETS countries and the low French emissions levels compared
with those of the other countries.
Figure 5. Carbon emissions levels in the covered segments, weight of covered segments in country GDP and covered
segments emissions relative to GDP in the main ETS countries.

77

Carbon emissions levels in the covered segments

(kg of CO2 eq. for 1 of the segments contribution to GDP)
BU

kg of CO2 eq. produced by

the covered segments for 1
of country GDP

GR

POL
CZ

0,45
0,40
0,35

RO
SL

IR

NL
POR
SP

0,25
GE

UK

0,20
FI

BE

IT

DE

0,30

HU

0,15

AU

0,10
SW

FR

0,05

0
0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

10%

Weight of covered segments in country GDP

Sources : European Environment Agency, Eurostat, authors calculations.

Figure 6. Covered segments emissions in kg of CO2 per of GDP in the main ETS countries.

France

Sweden

Denmark

UK

Austria

Italy

Belgium

Ireland

Finnland

Spain

Portugal

The Netherlands

Hungary

Germany

Rumania

Slovakia

Greece

Poland

Czech republic

Bulgary

0,45
0,4
0,35
0,3
0,25
0,2
0,15
0,1
0,05
0

Sources : European Environment Agency, Eurostat, authors calculations.

Taking a closer look at the French situation, it can be observed that the covered segments, with the exception of
chemistry and of combustion to a lesser extent, are stagnant or declining in terms of revenue and much exposed to
international competition (figure 7).

78

Figure 7. France, covered segments (aviation excluded) : 2006-2013 compound annual growth rate, international
exposure ratio (exports + imports)/domestic production, emissions level.

Segment
Combus ti on
Refi ni ng + coke
Mta l l urgy
Non meta l l i c mi nera l s
(cement i ncl .)
Pul p and pa per
Chemi s try

Segment GDP International kg CO2 per

06-13 CAGR exposure ratio segment GDP

0,4%
0,0%
-0,9%

3%
88%
83%

1,2
5,4
0,5

-1,2%

76%

2,0

-1,3%
2,4%

56%
142%

0,5
0,3

Sources : European Environment Agency, Eurostat, Kolda (Gilles), Allgements du cot du travail : pour une voie
favorable la comptitivit franaise, La Fabrique de lIndustrie, 2015, authors calculations.

2. IMPACTS OF A CARBON LEVY ON ECONOMIC COMPETITIVENESS.

2.1. ECONOMIC IMPACT OF A CARBON LEVY ON THE ELECTRICITY SECTOR.

A carbon levy on the electric utilities might change the merit order of the power stations but the levy level required to
achieve substitution of a coal-fired station by a gas-fired station depends on the highly volatile fuel prices, both in
absolute and relative terms. The increase in electricity prices also contributes to less demand and diminished carbon
emissions. Increased marginal costs of power generation however bring about more imports and carbon leaks, those
being all the more significant than imported electricity has a bigger carbon content than domestic switched-off
electricity.
56

A carbon levy of 30 per ton is frequently mentioned as allowing substitution of coal by gas in power generation.
This would be true since early 2016 because of the absolute and relative levels of gas and coal prices but such a levy, if
retroactively applied on 2006-2016, would not have achieved substitution for the most part of the period. Particularly
in 2011-2015, a substantially higher levy would have been needed (figure 9), with still stronger impacts on electricity
price increases.
This result is true with various assumptions on efficiency of gas or coal-fired power stations, the one favourable to
coal with a 50% efficiency for gas and a 38% efficiency for coal, the other one favourable to gas with a 52% efficiency
.
for gas and a 36% efficiency for coal Explanations lie in the absolute and relative variations of gas and coal prices
(figure 8), which cause considerable variations in the level of carbon levy that would achieve neutrality between gas
and coal (figure 9).

56

RTE, Signal prix du CO2, analyse de son impact sur le systme lectrique europen, 2016

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01/04/2016

01/07/2008
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01/04/2013
01/07/2013
01/10/2013
01/01/2014
01/04/2014
01/07/2014
01/10/2014
01/01/2015
01/04/2015
01/07/2015
01/10/2015
01/01/2016
01/04/2016

Figure 8. Evolution of gas and coal prices in per MWh (July 2006 May 2016).

01/04/2013

01/04/2008

35

01/01/2013

01/01/2008

30

01/10/2012

01/10/2007

25

01/07/2012

01/07/2007

20

01/04/2012

01/04/2007

15

01/01/2012

01/01/2007

10

carbon neutrality
( / t CO2) gas 52 coal 36

01/10/2011

01/10/2006

Coal /MWh

01/07/2011

01/07/2006

01/04/2011

01/01/2011

/ MWh

Gas /MWh

01/10/2010

80

01/07/2010

75

01/04/2010

70

01/01/2010

65

carbon neutrality
( / t CO2) gas 50 coal 38

01/10/2009

60

01/07/2009

55

01/04/2009

50

01/01/2009

45

01/10/2008

40

01/07/2008

35

01/04/2008

30

01/01/2008

25

01/10/2007

20

01/07/2007

15

01/04/2007

01/01/2007

10

01/10/2006

-5

-10

-15

01/07/2006

80

Figure 9. Evolution of the carbon levy that would have achieved neutrality between gas and coal under two efficiency
assumptions (July 2006 May 2016).

/ Ton CO2

Source : Authors calculations. Production from coal is less costly than from gas when actual carbon levy is below
neutrality curve. It is more costly wen carbon levy is above the curve.
Besides, tax levy increases the stations marginal costs and therefore reduces their annual functioning time, as
illustrated by figure 10.
Figure 10. Functioning time of a power station with and without carbon levy, depending on electricity price ( cm is
the marginal cost and e the carbon price).

Without carbon levy

Functioning time (cm < p)
Electricity price

With carbon levy

Functioning time (cm + e < p)
Electricity price

81

2.2. MODEL RESULTS : IMPACTS ON COMPETITIVENESS AS MEASURED BY STUDIES

2.2.1. REVIEW OF RECENT STUDIES.
We carried out a non-exhaustive review of 23 studies realized over the last five years about the impact of carbon
levies on economic competitiveness. We ranked them by ascending level of the analyzed rate of levy per ton of CO2.
The following table mentions publication years, author references, countries concerned and the studies main results.
Most of those studies are academic, those that are not are signaled by a star after the author references (figure 11).
The studies can be classified in two broad categories:
Ex post empirical studies, most of which cover the EU ETS over the past years (average price per ton of 10). Almost all
of them conclude to a low impact on competitiveness.
Ex ante models, which analyze impact of prices above 13 and generally conclude to a more significant negative
impact in various countries and industry segments.
Figure 11. Studies carried out over the last five years about the impact of carbon levies on economic competitiveness.

82

Price of CO2
Publication
Type of study
Study authors
year
per ton

Covered
countries

Covered
economic
segments

Main results

ETS (ca. 10)

Ex post
empirical

2013

Bassi et al

UK

Energy and
industry

No noticeable economic impact of the EU ETS in the UK over 2005-2010

ETS (ca. 10)

Ex post
empirical

2013

Branger et al

EU

Steel and
cement

No noticeable economic impact of the ETS in the EU on decline in cement and steel productions and increase in
imports over 2004-2012

ETS (ca. 10)

Ex post
empirical

2014

Petrick et al

Germany

Industry

No noticeable economic impact of the EU ETS over 2007-2010 sur German industrial employment, production or
exports

ETS (ca. 10)

Ex post
empirical

2014

Wagner et al

France

Industry

Over 2005-2010 employment in ETS-covered French plants has declined more than in non-covered plants

ETS (ca. 10)

Ex post
empirical

2015

Dechezleprtre
EU
et al

Industry

No noticeable economic impact of the EU ETS on carbon leaks at the level of multinational enterprises over 20072014

2015

European
Commission (CE
EU
Delft & OekoInstitut)

Cement,
petrochemicals,
Study is about the ability of businesses to transfer carbon costs and concludes to pass-through rates between 20%
iron and steel,
and 100%.
fertilizers,
refineries, glass

Ex post
ETS (ca. 10)
empirical

Impact of a $15 carbon price in the US: average 1.5% decline in industrial average output
3-5% decline in industrial output for the most energy intensive segments (steel, aluminium, paper, cement, glass,
chemistry).
In those energy intensive segments, decline compensated by no more than 1/6 by more imports

13

Ex ante
modelization

2011

Aldy et al

US

Industry

16

Ex post
empirical

2014

O'Gorman et al

Australia

Electricity

Australian carbon price impact 1st July 2012 to 30 June 2014: 1,3% to 2,3% decrease in electricity demand, 10%
increase in electricity price for households and 15% increase of electricity price for industrial clients

18

Modlisation
ex ante

2012

Linares et al

Spain

Cement

Spain would import all its clinker

21

Ex ante
modelization

2012

Linares et al

Spain

Steel

Spain would import all its steel

26

Ex ante
modelization

2016

Grover et al

UK

Industry

30

Ex ante
modelization

2016

RTE*

Western Europe Electricity

A 20/ton carbone price causes an increase of production costs between 2,1% and 3,4% for cement, chemistry and
metallurgy, and a 0,9% increase in production costs of the economy as a whole

15% reduction of carbon emissions caused by electricity production in Western Europe. Higher electrcity prices in
France due to an increase in marginal costs (ca. 12/MWh)

83

Covered
countries

Covered
economic
segments

Main results

30

Ex ante
modelization

2015

Trotignon et al

France,
Germany, UK,
Poland

Electricity

If measure is applied solely on electricity sectors of France, Germany, the UK and Poland, emissions reduction of de
36 Mt CO2 per year. If measure is applied solely to the French electricity sector, almost 100% substitution by
imports from neighbour countries

30

Ex ante
modelization

2016

Thomson
Reuters*

France

Electricity

A 30 floor price on French electricity would increase French electricity price by 8% and halve French electricity net
exports. French reduction in emissions would largely be compensated by imports.

30

Ex ante
modelization

2016

Engie*

France

Electricity

A 30 floor price on French electricity would increase price of French electricity by 2,5/MWh. French reduction in
carbon emissions would be largely compensated outside France. Coal and gas-fired Frenc production would be
largely impacted.

30

Ex ante
modelization

2016

Direct Energie* France and EU

Electricity

A 30 levy on French electricity would increase French electricity price by 2 /MWh and diminish by 40% French
electricity net exports. French reductions in carbon emissions would be largely compensated outside France. A 30
European levy would increase French electricity price by 12 / MWh.

30

Ex ante
modelization

2016

EDF*

Electricity

A 30 floor price would increase French electricity price by 1,5/MWh. French reduction in carbon emissions would
be largely compensated outside France.

30

Ex ante
modelization

2016

de Perthuis et al EU and France

Electricity

See below

33

Ex ante
modelization

2013

Allevi et al

Italy and EU

Cement

Under scenario of high sea transportation costs (the more favorable one): 48% decrease in Italian cement
production, entirely compensated by imports (100% carbon leaks), 17% decline in European cement production,
partially compensated by imports (64% carbon leaks)

40

Ex ante
modelization

2012

Linares et al

Spain

Refining

Spanish refining industry in losses

41

Ex ante
modelization

2013

UK Committee
on Climate
Change*

UK

Energy and
industry

Impact of a 32 carbon price in 2020: cost increases, more or less transferred to the consumer until 2020, for paper,
cement, glass, chemistry, steel, plasics. Energy costs higher by 20 - 25% for industrial clients between 2011 and 2020

54

Ex ante
modelization

2013

Allevi et al

Italy and EU

Cement

Under scenario of high sea transportation costs (the more favorable one): 51% decrease in Italian cement
production, 9% decline in Italian cement demand, increase in imports (91% carbon leaks), 55% decline in European
cement production, 20% decline in European demand, strong increase in imports (64% carbon leaks)

66 - 79
depending Ex ante
modelization
on the
model

2015

Boitier et al

France

Whole economy Decline in French GDP over 3 years between 0,6 and 2% compared to reference scenario without carbon levy

France

Figure 11 (contd). Studies carried out over the last five years about the impact of carbon levies on economic
competitiveness.

Source : Authors review.

84

Note : Conversion rates used to calculate carbon prices in Euro were those of 18.05.16 and are as follows : 1
Australian dollar for 0,65 , 1 US dollar for 0,88 and 1 for 1,28 .

Price of CO2
Publication
Type of study
Study authors
year
per ton

2.2.2. THE CONSEQUENCES OF A 30 CARBON LEVY APPLIED SOLELY ON FRENCH ELECTRICITY PRODUCTION.
A levy of 30 per ton of CO2 , if applied on the sole French power generation, would weaken French gas-fired as well as
coal-fired power stations, diminish French power net exports and slightly increase French electricity price while having
a limited impact on carbon emissions. Substitution of domestic electricity by imported electricity explains such limited
impact.
The Climate Economics Chair (Paris-Dauphine & CDC Climat) was asked to study the consequences of a 30 levy
applied solely on French electricity production. The studys main results are on figure 12. Gas-fired stations are still
more impacted than coal-fired stations because the measure would not change merit order between the two fuels.
Figure 12. Central scenarios results of the Climate Economics Chair on a 30 levy applied solely on French electricity
production.
Domestic electricity production in TWh
of which coal-fired
of which gas-fired
Electricity imports in TWh
Total emissions in MtCO2
of which domestic
of which imported
Average price of electricity in /MWh

2015 reference scenario

French 30 floor price
533,6
8,6
12
29,6
36,3
13,4
22,9
33,2

Absolute change
519,1
3
3,1
44,1
33,5
4,8
28,7
36,4

-14,5
-5,6
-8,9
14,5
-2,8
-8,7
5,8
3,2

Relative change
-2,7%
-65,5%
-74,2%
49,0%
-7,8%
-65,5%
25,4%
9,7%

The results obtained by the Climate Economics Chair are consistent with those obtained by other studies (figure 13).
Figure 13. 30 /ton levy solely applied on French power generation. Impacts of French electricity price, French
electricity balance of trade and carbon emissions.

Increase in French electricity

Impact on balance of trade
price
Climate Economics Chair (Dauphine & CDC Climat)
9,7% 49% increase in electricity imports
51% reduction in French net
electricity exports

Thomson Reuters

8,0%

EDF
Engie

4,5% Not evaluated

9,0% Not evaluated
41% reduction in French net
5% electricity exports des exportations
nettes franaises d'lectricit

Direct Energie

Impact on carbon
emissions in MtCO2
-2,8
French emissions
reduced but
comensated by
-4
-3,5
-6

It is worth noting that the operators of French coal or gas fired stations warned us about the potential impacts of a
French unilateral decision on jobs and investment decisions in a sector with 1,500 direct or indirect employees.
It therefore seems reasonable to avoid a discrepancy between French and European carbon prices.

85

2.2.3. CONSEQUENCES OF A 30/TON CARBON LEVY APPLIED ON EUROPEAN ELECTRICITY PRODUCTION.

A 30 levy would induce, according to the Climate Economics Chair (Paris-Dauphine University & CDC Climat), an
increase of almost 35% in French electricity price (figure 14). Such result is consistent with the 31% size order implied
57
by the RTE simulations .
Figure 14. French impacts of a levy of 30 / ton applied on European power generation.

Domestic electricity production in TWh

of which coal-fired
of which gas-fired
Electricity imports in TWh
Total emissions in MtCO2
of which domestic
of which imported
Average price of electricity in /MWh

2015 reference scenario

European Union 30 floor price
Absolute change Relative change
533,6
534,5
0,8
0,2%
8,6
7,6
-1
-11,6%
12
13,8
1,8
14,9%
29,6
28,8
-0,8
-2,7%
36,3
35,1
-1,2
-3,3%
13,4
13,2
-0,2
-1,6%
22,9
21,9
-1
-4,3%
33,2
44,8
11,6
34,9%

Source: Climate Economics Chair.

An increase of 11,6 /MWh on a French consumption of 475 TWh corresponds to an extra cost of 5,5 bn for the
electricity consumers (households and businesses). A 25 increase (difference between 30 and current market
average) of the ton of CO2 on the European power generation would give France an additional revenue (assuming no
hang-over of unused emission rights) of 875m (25 multiplied by 35 Mt CO2 emitted).

RTE, Signal prix du CO2, op. cit., p, 24. For a 30 levy, RTE calculates an increase from 39 to 51 /MWh in the power
generation marginal cost, i. e. a 30,8% increase. RTE considers that this increase in marginal costs could bring about an
increase of the same magnitude in the bills to the clients whose contracts are indexed on market price.
57

86

87