Optimal allocation of the EU carbon budget Mr. Drin Marmullaku, IER University of Stuttgart

1. IER
OPTIMAL ALLOCATION OF THE
EU CARBON BUDGET
Drin Marmullaku
apl. Prof. Dr. Markus Blesl
Results of the Project Ariadne Supported by

2. IER UniversitätStuttgart
• Motivation
• Methodology
• Overview TIMES-PanEU
• Scenario definition
• Results
• Conclusion
Agenda
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3. Motivation

4. 1. Motivation
Greenhouse gas emission targets, trends and Member States' MMR projections in the EU, 1990-2050
IER UniversitätStuttgart
EEA (2020f, 2020j, forthcoming_b)
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5. 1. Motivation
Green New Deal – Allocation of the carbon budget
energy intensive
industries, air and
water transport
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remaining (mostly energy
related) emissions
EU carbon budget 2030 (-55% goal)
individual carbon budget for each
member state
single cap on carbon emissions in the
EU, defining the yearly emission budget
The EU needs to decide: How to allocate the carbon budget across sectors and MS?
ETS ESR /
NON ETS

6. 1. Motivation
Green New Deal
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How to allocate the
carbon budget across
sectors and MS?
EU-wide cap:
Extending EU ETS to
cover all sectors
Maintaining the
current sectoral
scopes
In the short term, a full European
trading system is politically unlikely
EU needs to decide about the carbon budget under
the EU ETS and under the ESR, respectively.
→ Depending on the allocation of the carbon
budget, the cost of the climate regulation will differ.
EC proposes to attribute 64% of total emissions to the ESR sectors and the rest to the ETS. According to the EC’s impact
assessment, this split results in ETS price estimates between 50€/tCO2 and 80€/tCO2 depending on additional measures.
Model-based analysis:
▪ What is the optimal allocation of the EU carbon budget to ETS and ESR sectors?
▪ What are the resulting carbon prices?

7. Methodology

8. 2. Methodology
TIMES-PanEU energy systemmodel: Overview
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▪ Multi-regional (EU27 +
UK, CH, NO)
▪ Time horizon 2010-
2050
▪ Commodity Trade
between regions

9. 2. Methodology
TIMES PanEU energy systemmodel: Decarbonization options via hydrogen
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*simplified overview of the
hydrogen module

10. 2. Methodology
Scenario definition
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Optimal?
climate goal: -55% in 2030 and net zero emissions in 2050
Fulltrade scenario as reference point with a
single EU carbon trading system resulting in
a single carbon price.
Split 61 Split 65 Split 70
Split 75 Split 80 Split 85
Split 55
Exogen allocation of the carbon budget for 2030 between
ETS and NON-ETS
→ 8 Scenarios in total

11. Results

12. 3. Results
Sectoral CO2-Emissions for 2030
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Split 61 Split 65 Split 70
Split 75 Split 80 Split 85
Split 55
▪ With increasing split:
▪ Emissions decrease in Industry, Electricity due to higher effort in ETS
▪ Emissions increase in Commercial, Residential and Transport due to higher effort in NON-ETS
0
100
200
300
400
500
600
700
800
900
split_55 split_61 split_65 split_70 split_75 split_81 split_85
CO
2
-Emissions
[MtCO
2
]
Industry Commercial+Residential Transport Electricity Supply

13. 3. Results
ETS & NON-ETS Carbon Price for 2030
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0
100
200
300
400
500
600
Optimal Split_55 Split_61 Split_65 Split_70 Split_75 Split_81 Split_85
Carbon
Price[
Euro/tCO
2
]
Carbon Price ETS Carbon Price ESR
▪ Carbon price ETS increases with higher Split
▪ Carbon price ESR decreases with higher Split
▪ Under full trade the model allocates 61% of the EU’s carbon budget to the ESR sectors with a resulting CO2 price of 153 Euro/tCO2
→ significantly higher than the prices assumed by the EC (50€/tCO2 and 80€/tCO2)
full trade
Split 61 Split 65 Split 70
Split 75 Split 80 Split 85
Split 55

14. 0,0%
0,5%
1,0%
1,5%
2,0%
2,5%
Split_55 Split_61 Split_65 Split_70 Split_75 Split_81 Split_85
3. Results
Annual System Cost for 2030
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Split 61 Split 65 Split 70
Split 75 Split 80 Split 85
Split 55
▪ The allocation of carbon budgets between ETS and ESR sectors has no major consequences on system cost →this implies that slight
changes of the split of several per cent do not significantly affect the system cost.
full trade
System cost change vs. optimal scenario

15. 3. Results
Electricity Generation for 2030
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Split 61 Split 65 Split 70
Split 75 Split 80 Split 85
Split 55
▪ With increasing split → two main effects:
▪ Increase of wind
▪ Decrease of natural gas
Net
electricity
generation
[TWh]

16. Conclusion

17. IER UniversitätStuttgart
• In the optimal scenario, the model allocates 61% of the EU’s carbon budget to the ESR sectors.
• No major cost disadvantage for the ESR share of around 64% currently proposed by the
Commission → this indicates flexibility to shift the budget split.
• The corresponding EU ETS price is clearly higher than the ECs “predictions” → Need to be
prepared for higher carbon prices.
3. Conclusion
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18. IER UniversitätStuttgart
• Abrell, J, Huang, P, Rausch, S, 2022: "Fixing Fragmented Carbon Marktes in Europe. Mimeo.
• Abrell, J, Rausch, S, 2021, A Smart Design of New EU Emissions Trading Could Save 61 Per Cent of Mitigation Costs, ZEW policy brief Nr. 21-05, Mannheim.
• European Environment Agency, Förster, H., Gores, S., Nissen, C., et al., Trends and projections in Europe 2020: tracking progress towards Europe's climate and energy targets, Publications
Office, 2020, https://data.europa.eu/doi/10.2800/830157
• Kopernikus-Projekt Ariadne, 2021: Ariadne-Report: Deutschland auf dem Weg zur Klimaneutralität 2045 - Szenarien und Pfade im Modellvergleich. https://doi.org/10.48485/pik.2021.006
Sources
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19. IER UniversitätStuttgart
This work is part of the Kopernikus Project Ariadne
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Supported by
Thank you!

20. Thank you for your attention!
IER Institut für Energiewirtschaft
und Rationelle Energieanwendung
Drin Marmullaku
Institute of energey economics and rational energyuse (IER)
University Stuttgart
Drin.marmullaku@ier.uni-stuttgart.de
T: +49 711 685-87827
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