Category: Necessity, nature and niche

Oct 08 2017

ETS Trilogue: agreement within sight on ETS Innovation Fund?

Scope-widening idea #1: products

In May, the Council agreed to extend ETS Innovation Fund’s scope beyond processes to products, proposing to insert “as well as products” into the European Commission’s proposal. At the trilogue of 27 June, the Parliament insisted on keeping its wording, “products substituting carbon intensive materials”, because it felt this would free ETS Innovation Fund to develop materials that provide the same service as ones produced by energy-intensive industries, but that come from entirely different industries and lower-carbon supply chains. The Council accepted. The Parliament’s text was taken up in the revised negotiating mandate handed by COREPER to the Estonian Presidency in Sept 2017.

Setting ETS Innovation Fund on this course will be difficult. As shown below (under heading ‘60% vs 75% and 40% vs 60%’), both Parliament and Council (known collectively as ‘the legislator’) want a considerable proportion of support to be “dependent on verified avoidance of greenhouse gas emissions”. To “verify” avoidance, the substitution of carbon-intensive materials will have to be proved. This will not be easy.

    Missing an “in”

    The current text relating to products could be interpreted in two ways. It could be, “ETS Innovation Fund supports products substituting carbon intensive ones”, which implies various market-pull policies like price support to encourage end-consumers to shift from one product to another. It could alternatively be, “ETS Innovation Fund supports innovation in products substituting carbon intensive ones”.

    It remains to be seen whether the legislator chooses to remove this ambiguity. One way to allow only the latter interpretation would be by inserting the word “in” before “products”:

    …shall be available to support innovation in low-carbon technologies and processes, including environmentally safe carbon capture and utilisation (CCU) that contributes substantially to mitigate climate change, as well as in products substituting carbon intensive ones produced, in […] sectors listed in Annex I

Scope-widening idea #2: breakthrough technologies

Another idea of the European Parliament’s to be taken by up the Council at the last minute is to open ETS Innovation Fund to “breakthrough technologies”. This text appears in the Oct 2 update to its negotiating mandate: “Technologies receiving support shall not yet be commercially available, but shall represent breakthrough solutions or be sufficiently mature to be ready for demonstration at pre-commercial scale”. The word “or” suggests that the legislator sees these categories as distinct. The EC, for its part, thinks breakthrough technology is already within the scope of its proposals for ETS Innovation Fund. This is clear from the references to “breakthrough” that appear throughout its explanation of its design, written in 2015.

If the phrase “breakthrough technologies or” nonetheless nudges ETS Innovation Fund towards less mature technologies, the need to deliver “verifiable greenhouse gas avoidance” puts a limit on how speculative they can be.

What size of fund?

Commissioner Cañete wanted Parliament and Council to meet each other somewhere between their respective positions, but Council seems willing to negotiate only on the source of the allowances, not the final amount (see Oct 2 negotiating mandate update), which is left as per the EC’s proposal of 400 M. This website made the prediction in January that allowances from both the auctioned and free-allocated parts of the ETS would feed the ETS Innovation Fund. It remains to be seen whether the second part of the prediction, namely that the origin of allowances will be used to justify an ex-ante split between the shares of the pot going to energy vs industry projects, will come to pass. The European Parliament wants allowances to be taken from the auctioned share. The Council wants the first 300 M to come from the freely-allocated share and 100 M from the auctioned share.

Council ignores “leverage instruments”

The Council has ignored the Parliament’s reference to “leverage instruments”. If the final text omits this reference, it will be difficult for the Commission to create a “fund” from ETS resources in the sense of portfolio of investments that generates a return. It would still at least be possible for part of the allowances to be put towards Innovfin EDP or a similar debt instrument. This is compatible with the primary legislation behind the NER300 Decision, which the primary legislation behind ETS Innovation Fund will closely resemble.

60% vs 75% and 40% vs 60%

The Parliament wants the relevant costs of projects to be supported up to 75%, instead of 60% as proposed by the Commission. Up to 60% of this support would be paid out on the achievement of milestones in project development on the way to becoming operational, instead of 40%. The Council is open to compromise.

All wrapped up on time?

In a statement to NER400.com just before the Sept trilogue, Fredrick Federley (MEP representing the committee with co-lead on ETS Innovation Fund, ITRE, in the trilogue) said, “We see the Council’s position as a first bid. This is not going to be settled today. The Council has moved a bit but many details remain to be sorted out, such as sourcing of the fund.” The expectation, however, is that agreement on all points will be reached at the next trilogue on October 12. This will allow the EU to go to the next major UN climate conference in Bonn 6-17 November with its house in order.

  1. NER400.com’s comment

    Opaque like many other trilogues

    Last year the European Ombudsman Emily O’Reilly published recommendations on improving the transparency of trilogues. She came out against publishing the versions of the evolving agreement that are produced before each meeting because “the public” might get the idea that the text they contain is “set in stone”. Her recommendation continues,

    The public, which might not be aware of the delicate negotiating strategies of the co-legislators regarding such concessions, could be seriously misled. Facing such a risk, participants might refrain from making any serious concessions. Thus, early disclosure could potentially damage the negotiation process.

    — Para 54 OI/8/2015/JAS

    This, of course, is utterly bogus. Firstly, who is “the public”? Probably not the proverbial man-in-the-street, but the rather the policy wonk, clued-up on the lawmaking process. If a trilogue concerns a newsworthy topic, then the man-in-the-street will mostly likely learn of it through a reporter or commentator who is familiar with the workings of the EU and able to explain them. Trilogue texts already contain flags saying that the text can change, e.g. as at the link above where a compromise is offered “in the context of the overall package”.

    Secondly, even accepting that there may exist a group of people who are obsessed with following trilogues but who are too stupid to absorb the concept of nothing-being-agreed-until-everything-is-agreed, it is preposterous that lawmaking could be impaired as a consequence. This would never be allowed in any other context. Arcane procedures are used to carry out parliamentary business in democracies across the world all the time.

    To her credit, O’Reilly seems to acknowledge this. Her recommendations will allow greater scrutiny of this increasingly used procedure. The paragraph including the phrases above is the only one of the 69 to start with a qualifier: “It is arguable that…”, hinting at the arguments she may have had with those fighting to keep interim versions of the agreement secret.

    Half a year after O’Reilly published her recommendations, trilogues again came in for criticism.


    ***UPDATE 11 Oct 2017: The Ombudsman’s office has written to NER400.com referring to a letter sent to the EC insisting on timely and substantive follow-up on her recommendations. She has asked for a response from the EC by 30 November 2017, and, in identical letters, responses from the European Parliament and Council. Reference is also made to a case before the European Court of Justice, De Capitani v Parliament (T-540/15), which covers access to the evolving agreement reached between Parliament and Council during trilogues, known as the “4-column document”.

May 07 2017

Job opening at DG CLIMA

***UPDATE 28 June 2017: a new member of staff has been hired.***


DG CLIMA is looking for a replacement for one of its team managing NER300 and ETS Innovation Fund, among other responsibilities. It is offering a position for a Contract Agent (FG IV). The job description is here.

Apr 17 2016

Who wants it? Is a funding programme created from the monetisation of carbon allowances a good idea in principle?

This article is written from the published responses to the European Commission consultation on revision of the EU Emission Trading System (EU ETS) Directive, which closed on 16 March 2015.

CEPI + 2 explain the situation: “The NER300 program was funded from the sale of 300 million emission allowances from the New Entrants’ Reserve, designed to support new investments in industry, to support research programs focused on renewable energy and carbon capture and storage. As such, it represented a financial transfer from the European industry to the energy sector.” The EC, with the backing of the European Council and European Parliament, wants to broaden NER300 out to industry, yet industry continues to view NER400 with more suspicion than the power sector. The hardest line is taken by Glass for Europe: “the innovation fund should be funded by auctioning revenues and not by the diversion or use of any sort of potentially tradable allowances.” The association (but not its members) added this line: “We consider the financing scheme and the increase in the initial endowment from 300 to 400 million allowances not appropriate.” Why the hostility? Say companies in the non-ferrous metal sector among several others, “Firstly, the availability of funds will be linked to the price of emission allowances (EUAs) and thus will be very volatile, depending on the success of the EU’s climate policy. Secondly, the need for co-financing of such projects depends on the competitive position of low-carbon energy in the market, which is mainly linked to the cost of carbon emissions.”

Shell is anxious not to create redundancy in the EU’s instruments, and for the welfare of industry: “[ETS Innovation Fund should] not replace other existing or future support mechanisms at EU or MS level. The fund should continue to use allowances under the existing cap. The fund should also avoid any impact to the level of free allocation for those on the current carbon leakage list.” (For alternative points of view, see ‘Baby snatching’ on the question of coherence with existing instruments, and the statements of some Member States here and associations here on the question of carbon leakage).

Twenty-one organisations, many from the materials sector and chambers of commerce, say that while “the ETS directive states that half of auctioning revenues should be spent on decarbonisation measures, this has not been the case so far.” BP believes it has economic theory on its side when it says that even this would have been too much. “BP’s preference for EU ETS revenues is that they should be returned to the economy in a non-distortionary manner, e.g. via corporation and income tax reductions.”

Cembureau can say…

“There is a strong argument that with the high carbon prices that MSR [Market Stability Reserve] will generate that power generation does not need a high level of innovation funding and could justify investments using the higher EUA price and their ability to pass on the full EUA cost.”

… but the new reality, accepted by many more today than before the European Council Conclusions of October 2014 (see the responses to the ETS consultation of 2014 on post-2020 carbon leakage provisions), is that ETS Innovation Fund is on its way. Its arrival is greeted with a tone of heavy resignation by GSV

“The steel industry does not in principle support the removal of ETS allowances from the wider market […], but if allowances are to be removed it is vital that there is fair access to innovation funding for all sectors impacted by the EU ETS.”

…and cheerfully by Austrian Federal Economic Chamber — Wirtschaftskammer Österreich (WKÖ)…

“We explicitly welcome the creation of the innovation fund, especially the extended scope to include low-carbon innovation in industrial sectors!”

Apr 17 2016

Merging: towards a “NER 2020” and a “Horizon 400”?

NER400 projects are set to look more like Framework Programme demonstration projects (FP7, Horizon 2020) than NER300 projects do. They will share more of the same features.

Ocean Energy Europe, representing the tidal stream and wave energy sectors, appreciated NER300’s positioning: It “plugs the gap between Horizon 2020, which lacks the scale needed for energy demonstration/pilot projects, and revenue support instruments such as Member States’ renewable energy support schemes, which do not address the risks of early-stage technologies.” ETS Innovation Fund will look more like Horizon 2020 than NER300 does (but enough of its unique features will be retained to keep Ocean Energy Europe happy):

  • The EC proposes that the Innovation Fund allow up to 40% of any award to be disbursed dependent on Project Sponsor effort rather than project performance (ETS proposal, p19). This will add burden to project reporting obligations because (in contrast to NER300) effort will now also have to be proved instead of performance alone. EU Research Framework Programme projects (Horizon 2020 projects) also pay out on effort rather than result.
  • Guided by a mandate from the European Council, the Innovation Fund will be sure to “include small-scale“ projects. It remains to be seen how this will be interpreted. The text in the ETS Directive of 2009, which paved the way for NER300, did not include a reference to small-scale projects. Horizon 2020 also funds projects smaller than many of those funded under NER300.

These proposals are popular with stakeholders (for details on the appeal of small-scale projects, see future article ‘What size of projects for ETS Innovation Fund?’).

Milestones for money

Cembureau wants NER300’s successor to “acknowledge the technical risks involved and provide financing for the development stage without coupling the actual payment to a successful outcome.” CCSA, Scotland Europa, GSV, WWF, Fortum, Fertilizers Europe and two of its members say the same. Électricité de France would additionally like periodic “reviews” at which “one should think about allowing changing the power output of a power generation installation during the development phase, because of technology improvements.”

The renewable energy associations Wind Europe, EGEC, Solar Power Europe and Ocean Energy Europe are also all keen on shifting project risk away from project sponsors, with Solar Power Europe more inclined than the others to look to the Member States to take on risk: “In the future there should be better arrangements between the Member States and the project promoters to alleviate the project failure risk and to cover part of the upfront investment cost.” Svebio will be content with the EC’s proposals, having called for “Payments to the projects [to] be made at least partly up-front, not only after start-up of the operation.”

As for the Member States, one of them, Estonia, proposes a mechanism to pass on its risk to a third party, the European Investment Bank: “We suggest to consider the approach where the EIB alone or EIB together with the Member State are co-guarantors of the project. The risks would be shared so that the risk of the Member State will not exceed 50% and will enable the project to receive crucial pre-operation investment.” (This is not the only example of a move to push risk onto the EIB — see ‘When is the right time to monetise allowances?’.)

Apr 17 2016

Baby-snatching

This article presents the views of stakeholders on the potential for aligning ETS Innovation Fund with other programmes, and their views on which part of the European Commission should be in charge of administering it.

Connie Hedegaard, the Commissioner responsible for NER300 in the second Barroso Commission, avoided any reference to the SET Plan in either of the two press conferences she gave (Dec 2012, July 2014) unveiling winning projects. This suggests she wanted it to be seen as an instrument that stood apart from the SET Plan, which was (and is) managed chiefly by DG Energy and DG Research & Innovation as a vehicle for coordinating energy research between stakeholders and public administrations, including the EC.

Eurelectric + 2 say, “The new NER400 mechanism needs to be much more aligned with the EU’s wider RD&D priorities for the energy sector and should be designed in such a way that it helps deliver these priorities alongside other key EU innovation funding mechanism such as the EU SET Plan [Editor’s note: which DECC also clocked] and Horizon2020. It should also be evaluated whether the integration of the new ETS Innovation Fund into existing funds (e.g. Horizon 2020, SET Plan etc.) at EU level would be appropriate. This could reduce the complexity when seeking funding for projects and enable a simpler bidding process.” The EC insisted that NER300 was not part of the EU’s Multiannual Financial Framework (7-year budget). Alstom wants a different approach with ETS Innovation Fund: “The Commission should in any case include funding for the EU Innovation Fund in its proposal for the next MFF (starting 2021) to be submitted at the [latest] on 1 January 2018.”

The same thought occurred to stakeholders from industry. CEFIC: “This fund should be also complementary and in full co-ordination with existing EU Research and Innovation programs, such as Horizon 2020, as well as the [Juncker] Investment Plan.” Fuels Europe and its member BP go one step further and call for the aggregation of ETS Innovation Fund with other funds “to minimise administration costs.” “In any case,” says ENAGAS, “it is essential to make sure that EU keeps an overall list of priorities when providing EU funds from NER300/400, Horizon 2020, CEF, or any other.”

The principle of “full coordination” applies within the Emissions Trading Scheme family of instruments, too, with Lewiatan, Bellona, Alstom and ZEP, saying “Member States […] should be given the possibility to combine the [Modernisation and NER400 Innovation] funds and use the revenues in the most efficient way.” This means, says Bellona, that the possibility should exist for funding from the two schemes to be cumulative.

One aspect of coordination is timing. Fuels Europe calls for the timetables of ETS Innovation Fund to be “shared with MSs as early as possible (so these can be accounted for in MSs support schemes).”

The possibility exists to look beyond R&D and climate policy to the approach taken for funding Trans-European Networks in Energy. E3G recommends “that different levels and forms of funding should be available, akin to the approach taken [for] PCIs.” Vattenfall also references these ‘Projects of Common Interest‘, which are energy-interconnection projects that, when approved by the EC, can benefit from a fast-track permitting regime or sometimes grants: “The guiding principles for granting support from the NER400 should be that the projects should be of common interest for the EU, preferably supporting more integration of the internal market.” CEPS notes that European State Aid law refers to another similar-sounding concept, the Important Project of Common European Interest. CEPS says that all ETS Innovation Fund projects should be recognised as IPCEIs, enabling them to quality for the ‘block exemption’ from State Aid rules.

Whose baby should it be?

Given the express desire of many stakeholders to see ETS Innovation Fund articulate with (and in a few cases, carry out the same work as) other instruments and strategies, it is no surprise that some want to see responsibility for ETS Innovation Fund taken away from DG CLIMA.

ZEP wants “The [eligibility] evaluation [to] be made by all relevant DGs.” CEEP: “[The] leading role (primary role) should be played by DG Grow with whom all projects should be co-ordinated in co-operation with DG Energy. The role of DG Clima should be secondary.”

DG CLIMA, for its part, has become somewhat more conscientious in name-checking the SET Plan since Connie Hedegaard’s speeches: references to it do appear in the ETS Innovation Fund Impact Assessment (SWD (2015) 135).

Oct 09 2015

An NER1000?

The EC’s proposals for Europe’s Emissions Trading Scheme for the period 2021-2030 would give away too many carbon allowances for free, says Carbon Market Watch. Many of the 6.3 bn allowances to be given to companies at risk of carbon leakage will inhibit them from producing more efficiently or investing in innovative technologies that reduce CO2 says the campaigning organisation. “A wide range of technological options to reduce emissions in these carbon-intensive sectors are available that remain unexploited. Free allocation shields industrial sectors from the carbon price signal and puts European industry at risk of falling behind in deploying low-carbon, state-of-the-art technologies compared to their competitors abroad.”

Carbon Market Watch calls for free allocation of allowances only for those sectors that are both heavily reliant on exports (or exposed to imports) and very carbon-intense, and even then, only for “the share of carbon costs that are not passed on to customers”. On the other hand, it calls for ETS Innovation Fund to be boosted to a fund of 1000 million allowances, ‘NER1000’, to help industry innovate and regain technological prowess in efficient production.

Its report, Carbon leakage myth buster, is here.