FINAL REPORT

ENVIRONMENTAL POLICY : ANALYSIS AND

EVALUATION (ENP-34306)

THE (IN)EFFECTIVENESS OF THE EU ETS FOR THE POWER SECTOR DURING

PHASE I AND II (2005 - 2012)

A CASE STUDY OF THE EU ETS EFFECTIVENESS IN CHANGING THE CO2 EMISSIONS AND BEHAVIOUR OF
THE THREE MOST-EMITTING POWER COMPANIES IN THE EUROPEAN UNION: RWE, VATTENFALL AND E.ON

GROUP MEMBERS

Guzal Abduraupova (920622003080)

Xujun Hu (910826370090)

Max Koster (940810470080)

Kuddusbek Tashpulatov (930423823030)

Date
December 11, 2015

Supervisor
Dr. M. Smits
Abstract
This paper investigated the EU ETS effectiveness in changing the CO 2 emissions and behaviour of
three most-polluting power companies in the EU (RWE, Vattenfall and E.ON) during phase I and II. It
turns out that the three companies hardly reduced their CO2 emissions between 2005 and 2012, but
they did show some behavioural changes: They all increased their share of renewables in their energy
mix, made sustainability and green energy a major focus of their policies and invested in achieving
cleaner future energy production. On a more critical note, fossil fuels remain the backbone of their
energy production. Also, there is some greenwashing as the companies pretend to be greener than
they actually are. The prices of the emission allowances were simply too low to reduce GHG
emissions or induce greener behaviour. Besides, other factors such as renewable energy policies, the
economic recession, the companies turnover and the price of raw fuels have also influenced their
CO2 emissions and behaviour. In short, the role of the EU ETS in changing the power companies
emissions and behaviour remains somewhat unclear. The system needs important improvements in
order for it to reach its full potential in the future.

Key words: EU ETS, Power sector, Renewables, Behavioural change, Emissions reduction

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Table of contents
Abstract................................................................................................................................. 2
1. Introduction .................................................................................................................... 4
2. Evaluation Framework ................................................................................................... 6
2.1 Evaluation framework .................................................................................................. 6
2.2 Operationalisation........................................................................................................ 7
2.3 Methodology ................................................................................................................ 8
3. The change in CO2 emissions ........................................................................................ 9
4. The change in company behaviour (case studies) ....................................................... 12
4.1 RWE .......................................................................................................................... 12
4.2 Vattenfall ................................................................................................................... 15
4.3 E.ON ......................................................................................................................... 17
5. Alternative explanations ............................................................................................... 19
6. Conclusions and recommendations ............................................................................. 21
6.1 Conclusion................................................................................................................. 21
6.2 Recommendations..................................................................................................... 22
7. Challenges faced and lessons learned......................................................................... 24
Reference list ...................................................................................................................... 25

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The (in) effectiveness of the EU ETS for the
power sector during phase I and II (2005 - 2012)

1. Introduction
Climate change is one of the biggest challenges facing us today. It has a tremendous impact on
diverse aspects of society: It affects the natural world, but it also has a profound effect on the social
institutions mankind has created in it (Sherwood, 2008). The electric power industry is among the
main contributors to human-induced climate change. Electricity and heat production accounts for
almost 25% of the total worldwide greenhouse gas (GHG) emissions (IEEP, 2015). Many
governments and international bodies are trying to reduce these emissions in order to slow down
climate change processes. Besides traditional regulatory instruments like laws (command-and-control
policies), more and more economic and information-based instruments are used to regulate emissions
(Goulder and Parry, 2008). One of the most powerful tools the European Union (EU) has to offer to
reduce the emission of GHGs is the European Union Emissions Trading Scheme (EU ETS)
(European Commission, 2015).

The EU ETS is a so-called cap-and-trade program, in which a limit (or cap) is set on the total amount
of greenhouse gas emissions and the allowances to cover a certain amount of emissions are sold on
a carbon market. Companies then get to choose to either invest in cleaner technology (or to produce
more efficiently) to reduce their own emissions, or to buy allowances (emission permits) from other
companies. The power sector has been included in the EU ETS from the beginning. The power sector
was targeted by the EU ETS mainly because of three reasons: (1) the power sector does not undergo
international competition; (2) it has a huge potential for reducing of CO2 emission; and (3) it can
include the price of allowances in the price of electricity sold to the customers (PCAS, 2008).

The EU ETS system has been in place since 2005 and has undergone two major changes since then:
One in 2008, when the second phase took off; the other in 2013 with the start of the third phase
(European Commission 2015). This phase-structure creates opportunities to evaluate the
effectiveness of the policy and to measure the results during a specific time period. Moreover, it
allows for modifications during future phases. This paper will analyse the effect of the EU ETS during
the first two phases (2005-2012) on the emissions of the three most-emitting power companies (as
measured by their GHG emissions): RWE, Vattenfall and E-ON. Besides stating facts on the
development of GHG emissions, this paper aims to assess the effectiveness of the EU ETS in
changing power companies behaviour in this period. The term company behaviour is used
throughout this paper as an umbrella concept. In this paper, it is used to refer to their behaviour in the
broadest sense of the word: To the companies investment decisions, to their adoption of certain
techniques to reduce GHG emissions, to their research and development plans and to the change in
their energy mix. In essence, it is used to refer to the response of the three companies to the EU ETS:
What did they do to comply with the EU ETS? The term will be further operationalised in section 2.2.

To investigate changes in GHG emissions and company behaviour, an ex-post policy evaluation of
phase I and II will be carried out. The goal-achievement evaluation framework will be at the heart of
the conceptual framework (chapter two). In terms of methodology, a mixture of scientific and grey
literature (company websites) and available statistics will be used.

The research objective is to determine the effectiveness of the EU ETS in the power sector during
phase I and II (2005-2012) by:

- Analysing whether the GHG emissions of these three companies changed in the first two
phases of the EU ETS;

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 - Exploring if the three largest GHGs emitting power companies changed their behaviour in
response to the EU ETS;
- And investigating if this caused by the cap set by the EU- TS or due to other (external) factors

The main research question is:

How did the EU ETS affect the three most emitting power companies in the EU during phase I and II?

The more specific research questions are:

- How did the GHG emissions of these power companies change between 2005 and 2012?
- What were the effects of phase I & II of the EU ETS on the behaviour of the three power
companies?
- What other factors influenced the developments in the GHG emissions in this period of these
companies?

Since this paper investigates both the intended and the realized changes in GHG emissions of the
three most-emitting power companies, it attempts to combine theory and practice into one coherent
research. It is therefore both scientifically and socially relevant: In terms of scientific relevance, it
builds upon the (limited) existing literature that has investigated the effect of the EU ETS on power
companies behaviour by means of a policy evaluation. In terms of social relevance, it evaluates
whether the intended strategies of power companies have (or have not) led to an actual change in
their emissions and behaviour. After all, Corporate Social Responsibility (CSR) statements and other
reports do not guarantee an improvement in a companys actual performance; there is always a risk
that a company is greenwashing, pretending to be greener than one actually is. By comparing
theory with practice, this paper aims to draw lessons from the first two phases of the EU ETS in the
power sector for future phases.

The rest of this paper is structured as follows: Chapter two presents the goal-achievement evaluation
framework that is used throughout the paper (section 2.1); the operationalisation of the key concepts
(section 2.2); and the research methodology (section 2.3). Chapter three covers the first sub question
by presenting data on GHG emissions by the three companies between 2005 and 2012. Chapter four
deals with the second sub question. It contains a triple case study of RWEs (4.1), Vattenfalls (4.2)
and E.ONs (4.3) behaviour in response to the EU ETS. Chapter five addresses the final sub question
by investigating other possible causes for the change in GHG emissions and behaviour. Chapter six
provides a conclusion of the results and discusses our recommendations. Finally, the seventh and
final chapter reflects on the challenges faced and the lessons learned after carrying out this policy
evaluation.

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2. Evaluation Framework
This chapter consists of three parts: the evaluation framework, the operationalisation and the
methodology. First of all, an elaborated policy evaluation framework will be presented. The framework
is selected and formed based on the theoretical basis of available literature and stems from the
research questions. Furthermore, the framework will be used as a guidance throughout the whole
process of policy evaluation. Secondly, the key concepts of this research will be operationalised. In
this part, the indicators of the key concepts are to be determined on the basis of literature review so
as to improve the face validity (linkage and coverage between indicators and concepts) of this
research. Lastly, the operationalised concepts will be integrated in the research methodology part.
This part will represent the study design, sampling strategy and data collection instruments that are
selected based on the research objective.

2.1 Evaluation framework

As mentioned in the introduction, this researchs objective is to determine whether the EU ETS was
effective in changing companies GHG emissions and behaviour during phase I and II (2005-2012).

This paper regards policy-making as a rational activity. It will therefore use the rational decision-
making model. As defined by Hoogerwerf, rational policy-making is the activity of achieving certain
goals with certain means within a certain timeframe (Hoogerwerf, 2008). For the EU ETS and the
scope of this research, the decrease of GHG emissions and the changing behaviour by power
companies are the certain goals to be achieved. In addition, the limit (or cap) set on the total
amount of greenhouse gas emissions (GHGs) and the right to trade allowances (emission permits)
with other companies correspond with the certain means determined by the EU ETS. Further, the
certain timeframe is also set by the program: 2005-2007 for phase I and 2008-2012 for phase II.

The EU-ETS can be seen in terms of a policy cycle approach. This approach captures the iterative
nature of the policy. It sees policy-making as a continuous process and suggests that problems are
not solved but addressed, revisited and readdressed (Crabb & Leroy, 2012). As for the EU-ETS, the
problem of GHG emissions is slowly tackled by reducing the total amount of allowances each year. In
other words, it is a cycle used to address, revisit and re-address the climate change issue. By now,
the EU ETS has already finished phase I and phase II and is now in its third phase (2013-2020).
During the process, problems emerged, measures were changed and new standards were set. It is a
circle of continuous improvement: Lessons learned from the previous phase were used for the
design of the later phase.

On the basis of considering the policy-making process to be a rational decision-making model, the
goal-achievement model is selected to be the policy evaluation framework for this research. The
underlying rationale of this model is Are the results in line with the policy goals? and Can results be
linked to the policy? (Mickwitz, 2003). The goal of the EU-ETS is to reduce GHG emissions from
companies or sectors included in this program. In terms of the scope of this research, the goal of this
policy is narrowed to the reduction of GHG emissions by power companies. To investigate the
effectiveness of this policy, it will be necessary to examine whether the GHG emissions of these
companies were reduced and whether these companies had changed their behaviour due to this
program.

The goal-achievement model is simple and straightforward for policy evaluation. First and foremost, at
the beginning of the research it is clear what information is needed to search for. The data of GHG
emissions of the companies and the behaviour changes in response to lower emissions are to be
obtained. Secondly, the unanticipated effects as well as the process of the EU-ETS are not taken into
account. This allows the researchers to focus full attention on the specific information. Lastly, the
effectiveness of the policy is easier to be described and compared with similar policy evaluation
programs.

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The goal-achievement evaluation of effectiveness of this policy is mainly focused on policy outcome,
which corresponds with effect on the companies GHG emissions and behaviour (for more details, see
the operationalisation part). The effect includes their change in GHG emissions and behaviour (what
they did in response to the EU ETS). Policy output and environmental impact are not taken into
account in the evaluation of this policy. Moreover, this research is an ex post evaluation. It will
evaluate the effectiveness of this policy during phase I and II. The conclusions will be used to provide
useful recommendations for further developing and modifying the program so as to better achieve its
goal in future phases.

2.2 Operationalisation
In the part, we first operationalise the concept GHG emissions. As identified in the EU-ETS
factsheet, the power sector only contributes to CO2 emissions but not to the other two type of gases
covered by the ETS (N2O and PFCs) (EU ETS factsheet, 2013). The term GHG emissions is
therefore limited to CO2 emissions in this paper. Further, the annual GHG emissions of one company
are monitored by the company itself according to its monitoring plan, reported to the EC and verified
by a third party (EU, 2012). Therefore, the change of GHG emissions is operationalised as the
changing amount of CO2 emissions verified each year by a company.

Another key concept to be operationalised is behaviour based on literature review. It is worthwhile to

mention a research done by Rogge (2011). Rogge (2011) operationalised the changing behaviour of
power companies according to his research in three dimensions, including RD&D (Research,
Development and Demonstration), adoption, and organizational change (Rogge, 2011). RD&D was
conducted for CO2 capture technologies, coal efficiency improvements, gas efficiency improvements
and wind turbine installations. New coal power plants, new gas power plants, coal plant retrofits and
portfolio shift towards renewables all together constitute the adoption-dimension. The dimension of
organizational change consists of procedural change, vision change and structural change. The
search for available information about company behaviour change in this research is based on
Rogges (2011) operationalisation.

Combining Rogges operationalisation with the available information retrieved from grey literature
and scientific papers (see Table 1), this research operationalises the change of company behaviour
into four indicators: the vision change of the companies, the share of renewable energy (wind power,
hydropower, solar power and biomass) in the energy mix, the development of fuel efficiency (coal and
gas) and the installation of CO2 capture equipments by the three companies.

Rogge (2011)s operationalisation Existing information

RD&D CO2 capture technologies Found

Coal efficiency improvements Found

Gas efficiency improvements Found

Turbine installations Found

Adoption New coal power plants Not clear

New gas power plants Not clear

Coal plant retrofits Not clear

Portfolio shift towards renewables Found

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 Organizational change Procedural change Not clear

Vision change Found

Structural change Not clear

Others Hydropower investment

Biomass energy investment

Table 1: Comparing Rogges operationalisation with existing information.

Source: Rogge, 2011.

2.3 Methodology
The study design selected for this research is a triple case study. A case here refers to one power
company. The case study approach was chosen as it provides a more holistic approach to fully
understanding the effect of the EU ETS on power companies.

As mentioned before, multiple parallel cases are selected. The sampling strategy is based on the
purpose of selecting typical cases for this research. One big power company usually contributes more
to the CO2 emissions than several small power companies. Therefore, the behavioural change of big
power companies is more essential than the small ones. Based on the EU ETS Company Rankings
from 2007 and 2013, three cases are picked due to the ranking of their CO2 emissions (Carbon
Market Data, 2007-2013). The three companies are RWE, Vattenfall and E.ON. Between 2008 and
2013, they were the top three CO2 -emitting companies.

The main instrument used for data collection is content analysis. The content analysis consist of a mix
of grey literature (company websites and reports) as well as scientific papers and reports. The data
concerning changes of CO2 emissions can be acquired from the EU ETS Company Database, on the
website of Carbon Market Data. To determine the change of company policies, grey literature and
scientific papers are used.

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3. The change in CO2 emissions
In this chapter, the change of the total allocated and verified GHG emissions of the EU ETS is
provided first. This change is then compared with the allocated and verified GHG emissions of the
three companies (RWE, Vattenfall and E.ON) in order to investigate the effectiveness of the EU-ETS
on the emissions generated by the them. Some possible reasons affecting the effectiveness of this
policy are also integrated.

The EU-ETS started in 2005, and as can be seen in figure 1, there was no obvious decrease of the
verified emissions in phase I (2005-2007). In phase II (2008-2012), though, the verified emissions
reduced dramatically and continued to decline in 2013 and 2014 during the third phase. The
regulation of CO2 emissions from power sector also had a significant effects during the first two
phases. By the end of the second phase of the EU ETS the power sector experienced downtrend in
CO2 emission production by 14.2% compared to the phase I (Berghmans et al., 2013).

Figure 1: Total allowances and verified emissions (2005-2014)

Source: CITL.

When comparing the change in CO2 emissions of RWE, Vattenfall and E.ON (see Figure 2) with the
total emissions reduction of the EU ETS and of the power companies, there is an evident difference
between their trends. For RWE, its CO2 emissions were stable throughout phase I and II as well as
post phase II (2013 and 2014). Vattenfall, which was not on the top three emitters list on 2006 and
2007, started to show up on the list from 2008 onwards (Carbon Market Data, 2006 & 2008). Its total
amount of emissions seems to be a rising trend in the graph. The verified emissions of E.ON,
however, have greatly reduced since 2008. As can be seen in the graph, the three different
companies had different behaviour in terms of their CO2 emissions throughout the years.

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Figure 2: CO2 emissions of RWE, Vattenfall and E.ON between 2006 and 2014.
Source: Carbon Market Data, 2006-2014.1

Though the total allocated allowances in phase I and II are above the total verified emissions (as can
be seen in Figure 1), the allocated allowances for these three companies are below their verified
emissions each year (Figure 3). In terms of the allocated allowances, the EU-ETS should have some
effects on the three companies. The free allowances allocated to RWE decreased tremendously in
phase II compared to phase I. However, the allocated allowances to both Vattenfall and E.ON kept
stable in all these years.

In the first two phases of the EU ETS, the amount of allowances each installation received was
decided via National Allocation Plans (NAPs) (EU ETS Handbook, 2015). Each country has different
strategies to allocate the allowances. Thus, the difference of the allocated allowances received by
each company might due to their distribution of installations in different countries. In phase III (year
2013 and 2014 in Figure 3) of the EU-ETS, a big change in terms of the free allowances allocated to
the three companies can be observed. It is because the power sector will receive 100% auctioning
from 2013 onwards as a rule (EU ETS Handbook, 2015). Though it is not the focus of this paper, it is
still worth noticing that there is a sharp change of the policy.

In phase I the allocated allowances and the verified emission are quite close for both RWE and E.ON.
In phase II, however, the gap between allocated allowances and the verified emissions is much bigger
for RWE compared with Vattenfall and E.ON. This means that RWE needed to purchase more
allowances in the market or credits from CDM. During phase II, prices of emissions fell from 30 per
tonne in 2008 to below 10 in 2012 (EESI, 2012). It seems that the price of GHG emissions traded in
the market can hardly be an incentive for the companies to reduce their emissions.

1
Though the EU ETS was launched in 2005, the annual verified emission data of the different companies
provided by Carbon Market Data only started in 2006. The data are obtained from annual EU ETS Company
Ranking reports, without access to the database. As the reports do not include Vattenfall in 2006 and 2007, the
emission data is missing for it. Since there is always a time lag between the policy implementation and the
change of CO2 emissions, we consider it interesting to include the data in 2013 and 2014 as well.

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The emissions of the companies can be affected by many other factors, such as their market share,
the type of power plant and the fuel they use. While the oil and gas-fired power plants decreased
sharply in their CO2 emissions, the emissions from coal-fired power plants increased greatly in phase
II, mainly due to the export of the excess coal from US increasing coals competitiveness (Bergmans
& Alberola, 2013). The change of emissions was also thanks to companys attitude and strategy
towards this policy. If they are fully aware of the purpose of this policy, they would act more actively.
And if they have a long-term vision instead of a short-term one, the change of the CO2 emissions may
emerge slowly. In the graph, however, there is no clear relation between the free allocated allowance
and the change of the emissions from the three companies.

Figure 3: The comparison between free allowances allocated and verified emission.
Source: Carbon Market Data, 2006-2014.

In this part of analysis, the most interesting observation is that although the total verified emissions
were decreasing in phase II of the EU ETS, the emissions of the three companies remained stable.
Vattenfall had an increasing trend in emissions while E.ON had a decreasing tendency.

Though the allocated allowances for the EU as a whole were beyond the verified emissions, the free
allowances allocated to the three companies were below their annual emissions, meaning that they
needed to buy allowances in the market. There was a sharp change of the allowances allocated to
RWE in phase II, while for Vattenfall and E.ON the condition kept stable.

RWE needs to buy more allowances from the market compared with the other two companies,
however the price of the allowances in the market does not seem to be an incentive. Many factors
could affect the change of CO2 emission, and in the graphs displayed above there is no clear relation
between free allocated allowances and the change of emissions from the companies.

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4. The change in company behaviour (case studies)
In this chapter, the three companies behavioural change in response to the EU ETS will be
highlighted. Section 4.1 discusses RWEs change in behaviour; section 4.2 reviews the same for
Vattenfall and section 4.3 concludes with E.ONs change in behaviour. Each section will start by
providing a background information about the companies. Secondly, the current energy mix (sources
used for electricity generation) is displayed. Thirdly, the companys statements about sustainability
and the EU ETS will be mentioned. Fourthly, the companys behaviour is operationalized. For RWE
and Vattenfall, this is operationalised by showing how their energy mix has changed during phase I
and II of the EU ETS. As these data were not available for E.ON, this part is not included in section
4.3. Finally, a short conclusion will be given for each case: Did the companies change their behaviour
or not?

4.1 RWE
RWE AG is a German power company with headquarters in North Rhine-Westphalia. In terms of
RWEs 2014 energy mix, the main sources used for energy production were lignite (28%), hard coal
(18%), and gas (14%) nuclear power (11%). Renewables amount to 4% of RWEs energy mix. The
remaining 1% consists of pumped storage, oil and other sources. 24% of the energy was purchased
from third parties but the sources used to generate this energy are not further specified.

Figure 4: Share of each resource in RWEs energy mix in 2014

Source: RWE, 2015a

RWE produced a total of around 273 billion kWh in 2014, 64.8 kWh of which came from purchased
electricity. The company is the second largest company in terms of electricity generation in the EU,
after EdF (nergie de France) and holds a market share of 6.9%. It might come as a surprise that EdF
is not one of the top three polluting energy companies in the EU and therefore not part of this
research, despite its market share of 19.3%. This is because EdF uses a lot of nuclear power, which
emits practically no GHGs.

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Although RWE has a moderate share of renewables (4% as of 2014) in its energy mix, it does not
hesitate to promote its green ambitions. On its website, RWE states that society expects from RWE
to provide solutions for protecting the climate (RWE 2015b). The company advertises itself as your
competent partner in emission trading (RWE 2015c). RWE further stresses that it is currently active
in both the compliance and in voluntary carbon markets (RWE 2015b). As for their long-term goals,
RWE states that it wants to reduce its carbon emissions to 0.62 metric tons of CO2 per megawatt
hour (MWh) in 2020, and that it emitted 0.76 metric tons in 2013 (RWE 2015b). RWE does not
mention, however, that these emission reduction policies were developed because of the EU ETS.
Other possible causes will be mentioned in chapter 5.

The company has two main strategies to achieve this goal. In the first place, it invests billions of
euros in new cutting-edge gas and coal-fired power plants, which emit less carbon dioxide than old
stations and replace some of them (RWE 2015b). Secondly, RWE is expanding its renewable energy
portfolio. Also worth noticing is that the share of renewables has more than doubled, both in absolute
and in relative terms (compared to the total electricity production) in six years time (see Table 2).
However, it still accounts for only a marginal amount in the total energy production.

2007 2008 2009 2010 2011 2012

Electricity generation 5.2 5.3 6.5 8.9 8.8 12.4

(billions of kWh)

Share in total 2.4 2.4 3.5 4.0 4.3 5.5

production (%)

Table 2: Share of renewables in RWEs total electricity production

Source: RWE, 2005-2012

Further, it invested in more than 100 climate protection projects globally, both as an investor and
developer of projects and as a carbon tax credit buyer from local initiatives (RWE 2015c). Two of its
main projects are Carbon Egypt Ltd. and CDM Korea Ltd, where RWE helps their partners to avoid
nitrous oxide in nitric-acid production at the plants (RWE 2015d).

In the graph below, RWEs total energy production per source is displayed during the first two phases
of the EU ETS. The main trend to be noticed is that the use of lignite, hard coal, nuclear power and
gas has remained fairly constant during the first two phases of the EU ETS. Besides, as was also
clear from Table 2, the share of renewables has increased.

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Figure 5: Development of RWEs energy mix in phase I and II of the EU ETS2.
Source: RWE, 2005-2012

RWE did change its behaviour in terms of vision change, its investments in renewable energies and
the development of fuel efficiency. However, the EU ETS does not seem to be the main driver behind
RWEs behaviour change. RWEs CEO Peter Terium stated during the Business and Climate Summit
in Paris that "we started with the ETS 10 year ago, but we are not getting our act together". One of the
reasons Terium mentions this is that the market does not believe it [getting alignment on solving the
ETS issue] is going to happen because CO2 prices are still at an all-time low.

The use of traditional power, however, has still remained major contribution to the overall electric
generation. This seems to be intentional, as Terium declared that if RWE were to shut its lignite and
coal-fired power plants, the company would go bankrupt, lights would go out in Germany and Europe
and electricity prices would double or triple for chemical, steel and other companies (De Clercq
2015). Remarkably, the CEOs words suggest a far more conservative approach to reduce the use
fossil-fuelled energy than the picture RWE tries to sketch on its website, where they make statements
like ecological sustainability and environmental and climate protection are among the major concerns
of RWE (RWE 2015e) and RWE - your competent partner in emissions trading (RWE 2015c). In
other words, there seems to be a difference between the positive tone the company uses to present
its green ambitions on its website and the negative tone its CEO uses in reality.

In short, it is likely that the EU ETS has had an effect on RWEs behaviour on paper (which probably
explains why the company makes all these green statements), but the effect in practice seems to be
limited as CO2 emissions have not declined (Figure 2). Moreover, other causes such as national
policies will have played a major role in RWEs investment decisions as well. These alternative
explanations will be addressed in chapter 5.

2
Data on the amount of renewable energy generated in 2005 and 2006 was not available as it was part of a
category labelled other in the annual reports that also included pumped storage and oil.

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4.2 Vattenfall
Vattenfall is a Swedish power company that started operating in 1902. Today, it is considered to be
one of the largest generators of electricity, heat and gas. The company is fully owned by the Swedish
government and has branches in multiple countries: Denmark, Finland, Germany, Poland, the United
Kingdom and the Netherlands (Annual Report, 2010). According to Vattenfalls Annual and
sustainability report 2014, its total number of customers equals to about 6.2 million (Annual and
sustainability report 2014). Of these 6.2 million, 4.3 million and 1.9 million are customers of its
electricity and gas respectively.

In terms of Vattenfalls 2014 energy mix, the main sources used for energy production were fossil
fuels (48%), followed by nuclear power (29%), hydro power (20%) and wind power (2%). Biomass and
waste equals to only 1% of Vattenfalls 2014 energy mix (see Figure 6).

Figure 6: Share of each resource in Vattenfalls energy mix in 2014.

Source: Vattenfall, 2015

Like RWE, Vattenfall is keen to promote its sustainable ambitions. The company states: Vattenfall's
assignment is to generate a market rate of return by operating an energy business in such a way that
the company is among the leaders in developing environmentally sustainable energy production
(Vattenfall, 2015). Aiming to produce energy in environmentally sustainable way, Vattenfall takes into
account the EU 20-20-20 targets. According to the companys website, Vattenfall plans to decrease
its absolute CO2 emission rate by up to 65 million tonnes by 2020 (Vattenfall, 2015).

Vattenfalls view on the EU ETS is positive, as the company states that the EU ETS is one of the
most long-term, cost-effective, environmentally reliable and internal market compatible policies at
hand to significantly reduce the GHG emissions in line with the EUs climate targets (EC, 2013). Like
RWE, Vattenfall says that its your partner in the carbon market and advertises itself as one of the
main and most experienced compliance players in Europe. Furthermore, Vattenfall is convinced that
climate targets based on long-lasting effects are important (EC, 2013). The company is active in the
Clean Development Mechanism (CDM) and sources carbon credits from projects throughout the
world (Vattenfall 2015b). Besides EU emission allowances (EUAs) and carbon credits (CERs),
Vattenfall also sells Voluntary Emission Reduction certificates (VERs) (Vattenfall 2015b).

Vattenfall actively installs renewable technologies, and forecasts that Vattenfall's growth rate of
installed renewable capacity will be higher than the average growth rate for ten defined countries in

15
northern and central Europe (Vattenfall, 2015). In 2005, when the first pilot phase of the EU ETS
was running, Vattenfall already fully or partly owned 59 small-scale hydro power plants in Sweden and
Finland as well as six small-scale plants in Germany (Annual Report, 2005). Moreover, Vattenfall had
approximately 90 biofuel-fired plants. At the end of the phase I, Vattenfall planned to produce 10 TWh
of electricity from renewable energy sources (Annual Report, 2005). In recent years the company
installed 54 megawatts of new renewable capacity (Vattenfall, 2015), which is a big addition in
comparison with the previous years. During the second phase of the EU-ETS, Vattenfall continued to
install new power plants. Meanwhile, it kept improving and enhancing existing generation equipments
(EMCC, 2008; RI, 2010; Ormiston, 2012).

When reading Vattenfalls sustainability policies concerning investments in renewables, one might get
high hopes of its actual achievements. However, these achievements turns out to be quite a
deception. With regards to phase I (2005-2008), the electricity production rose mainly thanks to an
increased use of fossil fuels. The share of hydropower increased slightly, the share of nuclear power
decreased a little bit and the use of renewables increased marginally. With regards to phase II (2009-
2012), the share of fossil fuel grew even more, accounting for more than 50% of the energy
production in 2009, 2010 and 2011. The share of nuclear and hydro power remained about the same
in the second phase; the share of renewables increased quite a lot but still accounts for less than 5%
of the total energy generation (see Figure 7).

The share of carbon fuels for energy production changed from 42% in 2005 to 47 % in 2008 and hit
52% in 2010 (Annual Report, 2005; Annual Report, 2008). Moreover, in 2008 23% of the total energy
came from gas. This dropped to just 8% in 2010 (Annual Report, 2010). The share of coal,
meanwhile, increased from 28% in 2008 to 44% (!) in 2010 (Annual Report, 2010). So instead of
switching from coal to cleaner fuels like gas, it went the other way around. This means that even
though Vattenfall was promoting its sustainable plans on GHGs emission reduction through installing
green technologies, the actual achievements were remarkably negative.

Figure 7: Development of Vattenfall's energy mix in phase I and II of the EU ETS.

Source: Vattenfall, 2005-2012.

16
On a more positive note, the company did change its behaviour in terms of vision change, its
investments in renewable energies (especially hydropower) and the development of fuel efficiency.
However, while grey literature taken from the website and annual reports of Vattenfall point about
successful and ambitious plans of the company, Oei et al., (2014), prepared by the German Institute
for Economic Research and Carbon Pulse (2015), gave a more critical review on the activities of
Vattenfall. According to the authors, Vattenfall overestimated its ability to reduce CO2 emissions by 65
million tons. Its absolute CO2 emissions were 85 million tonnes in 2012, which is still 20 million tonnes
higher that the target Vattenfall has for 2020 (Annual report, 2012). On the other hand, Carbon Pulse
(2015) claims that Vattenfalls emission rate declines with 2,4% annually, thereby reducing its harmful
outputs to the environment. Still, Vattenfall remains one of the most polluting energy companies in the
EU.

Despite having a share of almost 50% fossil fuels in its energy mix, with coal making up the largest
part of it, the company asked its Nordic consumers to sign a Climate Manifesto pledge. According to a
case study of the US Reputation Institute (RI), this was one of the main reasons for the fact that
Vattenfalls reputation among customers has decreased in Sweden. It scored 46.78 points out of 100
in the Global Pulse Reputation ranking of 2010 (RI, 2010: 1). Vattenfalls performance in the category
citizenship was especially poor. Not very surprising, because a year earlier, Vattenfall won the 2009
Climate Greenwash Awards for "its mastery of spin on climate change, portraying itself as a climate
champion while lobbying to continue business as usual, using coal, nuclear power, and pseudo-
solutions such as agrofuels and carbon capture and storage" (RI, 2010: 6). The situation at the end of
phase II did not show considerable changes regarding the reputation issue of Vattenfall.

4.3 E.ON
E.ON SE (Societas Europaea) is an international privately-owned electric utility service provider with
its main headquarters in Dusseldorf, North Rhine-Westphalia. The company is ranked third in the
world in the offshore wind energy sector and has one of the biggest generation fleets in Europe.

E.ON used gas (41%), hard coal (19%), hydro- and wind power (16%) and nuclear power (14%) as a
main electricity-generating sources in 2014. Oil, lignite and others combined amounted to the
remaining 10 % of generating capacity of the company in 2014 (see in Figure 8).

Figure 8. E.ON groups attributable generating capacity.

Source: E.ON, 2014

17
One of E.ONs key objectives is to make energy cleaner and better wherever we operate (E.ON, 2015f). In the
2009 annual results press conference, Dr. Wilf H. Bernotat, member of the board of management, noted: our
large-scale coal-fired power stations will remain the backbone of our power generation business in Europe. But
we need to radically reduce their carbon emissions (E.ON annual press conference, 2009). Surprisingly, besides
welcoming the EU Climate Change and Energy Package for 2030, the company even pleaded to raise the
climate change protection. E.ON wants to reduce up to 45 50 percent of its GHG emissions, although the
package itself only aimed to achieve a 40 percent reduction by 2030 compared to 1990s levels (E.ON, 2015c).

The company intends to achieve its objective of lower emission no later than 2020 by means of new, very
efficient power plants and projects aimed at developing carbon capture and storage technology (E.ON annual
press conference, 2009). E.ON is also implementing a new strategy leading to a more fundamental change. In
the future, the energy company will be focusing entirely on renewables, energy networks and customer
solutions (E.ON, 2015a). Regarding the renewables, the company considers itself to be one of the world leaders
in wind energy and currently is the third largest offshore wind farm company (E.ON, 2015b). In 2011 E.ON
invested 1.114 million euros in renewables. The following year, this figure rose by 61 percent to reach 1.791
million euros (E.ON full year results, 2012).

Renewables aside, it is evident from Table 3 that during the first phase of EU ETS energy, in Central Europe,
was mainly generated from nuclear and hard coal. Although E.ONs objective is to make energy cleaner and
better wherever we operate, the companys consistent reliance on nuclear power and hard coal did not indicate
a priority for renewable energy during the first phase of EU ETS.

Percentages (%) 2005 2006 2007

Nuclear 48 47.8 46.2

Hard coal 30.5 30.3 31.6
Lignite 6.6 6.6 6.4
Oil and natural gas 6.9 6.4 6.9
Hydro 5.5 5.6 5.4
Others 2.5 3.3 3.5
Table 3. Sources of owned generation in Central Europe during the first phase of EU ETS.
Source: E.ON annual reports, 2005-2007

The company did change its behaviour in terms of vision change, its investments in renewable
energies (especially wind energy), the development of fuel efficiency and installation of carbon
capture technologies. Dr. Johannes Teyssen also mentioned that: we need to revitalize the ETS,
which for several years has been slinking towards an ignominious failure (E.ON, 2015d). In his
opinion the ETSs dysfunctionality is demonstrated by the fact that lignite is currently (in 2013) the
most cost-efficient fuel (E.ON, 2015d).

18
5. Alternative explanations
The change of the GHG emissions and strategic behaviour in response to the emissions of the three
above mentioned companies is not only caused by the implementation of the EU ETS but also by the
larger economic, political and social context.

The economic recession can be considered to be one of the most crucial economic aspects affecting
the total emissions reduction in phase II (European Commission, 2012; Berghmans et al., 2013).
There was a significant decrease in power demand (gas and coal) because of the economic recession
in Europe from 2008 to 2012. In 2009, the power consumption rate in EU experienced a fall of 5.2%
compared to the base year due to the economic crisis, which led directly to a reduction of emissions
from the power sector (Climate Report, 2013).

During the period in which the EU ETS was formulated and implemented, there were also many
relevant policies affecting the power sectors GHG emissions. National and international renewable
energy policies have set constraints for industries including the power sector to reduce their
emissions. According to the International Energy Agency (IEA), the German Renewable Energy
Sources Act (Erneuerbare Energien Gesetz, EEG), which has been effectively operating since the last
year of the phase II, aims at reducing GHG emissions by 35% in 2020, and up to 80% in 2050 by
providing renewable energies in the power supply system IEA (2013). Hoffmann (2007) corroborates
this opinion by stating that the EEG gives a guarantee on long lasting subsidized revenues and that
this has increased the willingness of companies to invest money in renewable energy sources,
particularly solar and wind power.

The movements and campaigns driven by civil society also help to raise the awareness of sustainable
development of energy companies management executives. For example, the yearly conferences
held by the United Nations Climate Change Conference (UNFCCC), especially the fifteenth
conference in Copenhagen, during which 138 countries had either formally signed an agreement or
signalled they would, helped involving society to pay closer attention to this topic. Michael Zammit
Cutajar, the Malta's Ambassador for Climate Change, suggested that "the shock has made people
more open to dialogue" (Sheppard, 2010 & Bonn, 2010). Another effective individual campaigns was,
for example, the famous Al Gore movie titled An Inconvenient Truth that was released in 2006. It
caught significant attention from (civil) society regarding the severe consequences of global warming
and climate change.

For individual companies, their turnover is also one of the causes influencing their emissions. In 2014,
RWE held a share of 6.9% in the total EU electricity generation. Vattenfalls share amounted to 5.7%
for and E.ONs share was 5.1% (RWE, 2015a). More electricity generated by the companies probably
leads to an increase of their GHG emissions, as long as they stick with their current technologies and
energy composition.

Finally, the price of energy resources (e.g. the price for coal or gas) is likely to have played an
important role in the companies energy mix decisions. One might have expected the EU ETS to
induce a short-term switch to more natural gas as this emits less CO2 than hard coal or lignite, but this
was not per se the case. In the case of Vattenfall, the company chose to reduce the share of natural
gas in their energy mix in favour of more coal because this was cheaper for them, even with the extra
allowances needed to cover their higher CO2 emissions. Such a response is quite the opposite of
what the EU ETS tries to achieve.

The reaction of the German power sector is quite interesting in this respect, as there seem to have
been diverging strategies among the four biggest power companies within the country, though they
were all facing the same renewable energy regulations and policies. Some companies in Hoffmans
(2007) research on the effect of the EU ETS in the first phase on the power sector did indeed invest
more in gas. Others, however, chose the opposite route. One interviewed respondent said: Gas

19
power plants would be more profitable if the gas prices did not rise. This happens especially due to
liberalization of the gas market. Due to this, ironically, lignite and hard coal power plants are built
under the influence of emission trading (Hoffmann, 2007).

20
6. Conclusions and recommendations
The central objective of this paper was to determine the effectiveness of the EU ETS during phase I
and II in the power sector. Based on our research of the three most-emitting power companies during
this timeframe (RWE, Vattenfall and E.ON), a number of conclusions can be drawn with regards to the
main research question (How did the EU ETS affect the three most emitting power companies in the
EU during phase I and II?) and the three research questions mentioned in the first chapter. Section
6.1 will summarize the answers to the three sub questions. Section 6.2 discusses our
recommendations for further research and suggest improvements for future phases of the EU ETS.

6.1 Conclusion
Regarding the first sub question (How did the CO2 emissions of these power companies change
between 2005 and 2012?) that was addressed in chapter 3, there is no clear declining trend in the
three companies CO2 emissions visible between 2005 and 2012. CO2 emissions seem to have been
fairly constant. The total amount of allowances that were allocated was lower than needed to cover
the power companies emissions. However, the price of the allowances in the market was too low to
exert an obvious influence on the change of their emissions.

With respect to the second sub question (What were the effects of phase I & II of the EU ETS on the
behaviour of the three power companies?) that was analysed in chapter 4, the case studies (sections
4.1-4.3) provided a couple of important insights. In each case, the energy mix (share of each resource
contributing to the total electricity generation), company statements (their views on sustainability and
their views on the EU ETS) and their behavioural change (more investments in renewables, more
efficient technology, carbon capture and storage) were investigated. There were general and
company-specific trends visible.

Regarding the general trends that were visible for all three companies, four main trends were found.
Firstly, all three companies still mainly use fossil fuel to generate electricity. For RWE and Vattenfall,
the main sources are hard coal and lignite; for E.ON, the main source is natural gas. Secondly, all
three companies mention the EU ETS positively on their websites and in reports. RWE, Vattenfall and
E.ON all claim to be a leader in the carbon market or something along those lines. Moreover, all
three companies are making use of the Clean Development Mechanism (CDM) and Joint
Implementation (JI) possibilities. RWE, E.ON and Vattenfall have all set up carbon tax credit programs
in non-EU countries to reduce their CO2 emissions. Thirdly, all three power companies chose to
increase their share of renewable energy generation between 2005 and 2012. E.ON chose to focus
mainly on off-shore windfarms; Vattenfall invested in hydropower and biomass and RWE also focused
on wind power, though it also uses biomass CHP (combined heat and power) and hydropower.
Interestingly, some greenwashing seems to be occurring when it comes the difference in tone used
in policies statements on the companies websites and their actual performance (virtually no decline in
GHG emissions). As a fourth and final general trend, all three companies are exploring technological
possibilities such as carbon capture and storage (RD&D) to reduce their GHG emissions in the future,
but they also want to make incremental rather than radical changes as their CEOs still consider fossil
fuels to be the backbone of their electricity production.

In terms of the company-specific results, three important remarks are in place. To start with, the share
of coal in the energy mix of Vattenfall increased during the first two phases of the EU ETS. This is
noteworthy, to say the least, as one does not expect the EU ETS to lead to an increased use of coal
when cleaner alternatives are available. Secondly, RWE and Vattenfall mentioned that they want to
improve the efficiency of their existing power plants by improving the process technology, whereas
E.ON did not mention this. Thirdly, ambition levels with respect to future reduction of GHG emissions
are divergent. E.ON and Vattenfall state that they want to reduce 45-50% (E.ON) and 50% (Vattenfall)
of their GHG emissions by 2030 compared to the 1990 level. Since the EU target for 2030 is a 40%
reduction of GHG emissions compared to the 1990 level, both companies present themselves as

21
more ambitious than the EU target. RWE, on the other hand, does not mention anything about its
emission reduction target for 2030. The company only mentions an emissions reduction target for
2020, which is 18,4% lower than their emissions in 2013. In other words, we dont know RWEs
ambitions for 2030 so it could still go in either direction.

Alternative explanations mentioned in chapter 5 were used to try and answer the third sub question
(What other factors influenced the developments in the GHG emissions in this period of these
companies?). Five main other causes were put forward: (1) The economic recession, that reduced
the demand of energy and thus lowered GHG emissions; (2) existing national and international
regulatory frameworks like the German EEG that seem to have played a major role in promoting
renewables; (3) civil society initiatives that put pressure on the power sector to reduce its greenhouse
gas emissions; (4) the companies turnover, that is related to their GHG emissions and (5) the prices
of resources (e.g. lignite) and expected future developments of these fuel prices, that led to different
strategies regarding how the companies changed their energy mix.

Looking back at the main research question of the effectiveness of the EU ETS in reducing GHG
emissions from the power sector and altering their behaviour, the answer remains somewhat unclear.
We know for a fact that RWEs, Vattenfalls and E.ONs GHG emissions did not really decline between
2005 and 2012, but they do seem to have changed their behaviour in terms of statements,
sustainability policies and future plans to reduce emissions. In that sense, the EU ETS might have
served more as an agenda-setting policy instrument that has underlined the importance of GHG
emission reductions in the future than a real sound economic reason to start reducing emissions
today. The prices of the EUAs were simply too low to effectively steer the power sector in a more
sustainable direction.

6.2 Recommendations
A lesson that could be learnt from the unwanted increase of coal-powered electricity is that the EU
ETS should get some kind of mechanism that ensures high enough carbon prices (e.g. by
establishing a minimum price), because the system will not lead to the desired outcome of reducing
GHG emissions when prices are as low as they are now. In the beginning 2008 the price of 1 tonne of
CO2 was 30 euros, while 6 years later it plunged to as low as 5 euros (Carbon Market Watch Policy
Briefing, 2014). In other words, we recommend that the carbon price in the trading market should be
guaranteed. The stable price of allowances would also provide incentives for emitters to invest on
renewable energies, improve the fuel efficiency and realize carbon capture technologies. If a minimum
price would lead to higher energy costs, this cannot be fully avoided. Fortunately, there seems to be
some support among civil society actors to pay a little extra for cleaner energy too. Farhar (1999)
found out that about 20 percent of customers are willing to pay 10-20 percent more for their electricity
if its generation process is environmentally friendly (Farhar, 1999). Still, as some power companies
are quick to demonstrate their sustainability through all kinds of exaggerated statements and claims in
their official communication, the EU ETS could benefit from an independent authority providing more
objective fact-based data on the power sectors environmental performance.

Our second recommendation is that the amount of CDM credits that can be bought by companies
from the international market should be brought down to zero. As of now, 6% of the allowances are
covered for by carbon credits. These extra allowances enter the EU ETS market, lowering the price of
EUAs. In Australia, the ETS was ruined mainly because unlimited credits could be channelled into the
system, resulting in an excess supply and prices that were too low to change companies behaviour
(Newell, Pizer & Raimi, 2013).

Our third recommendation is stop the backloading mechanism and replace it with the Market Stability
Reserve (MSR) mechanism. Right now, excess allowances are removed temporarily through
backloading. The long-term effectiveness of the backloading mechanism is highly contested. This
doubt is predominantly due to the expected return of 900 million allowances in the years 2019 and

22
2020 (Schleicher et al, 2015). Besides, the Market Stability Reserve could be considered as a more
flexible method than backloading. The MSR is a rule-based flexibility mechanism that will
automatically release or take allowance if they reach predetermined level. If the surplus of allowances
in the market exceeds 833 million in any year, 12 percent of surplus allowances are placed in the
reserve; while if the surplus gets below 400 million, 100 million allowances are automatically released
from the market back into the ETS (Schleicher et al, 2015). MSR is expected to stabilize prices and
will start its functioning from 2021. Some power companies including E.ON supports this mechanism
and underline that it brings stability to EUA market. Additionally, many companies call for earlier
commencement of MSR, e.g. as early as 2017 (E.ON SE, 2015e). We certainly agree with them that
earlier implementation of the mechanism will bring better regulation in the short term and are therefore
in favour of this idea.

All in all, the EU ETS can be a helpful economic instrument to combat climate change by reducing
GHG emissions. It does, however, need some crucial modifications before it can reach its full
potential. We hope our recommendations will help in achieving that.

23
7. Challenges faced and lessons learned
There are several challenges that we faced in evaluating the EU-ETS. First and foremost, it is hard to
decide to what extent that one policy affects the change of companies behaviour in a larger political,
economic and social context. The change of companies behaviour could simply be due to managers
attitude change, but it could also be affected by other things like renewable energy policies. And as
was determined by many scholars, the decreasing of CO2 emissions in phase II was mainly thanks to
economic crisis (Berghmans, 2013).

Secondly, there is no standard procedure or method to operationalise a goal-achievement model into

a comprehensive policy evaluation. It is not clear what elements should be taken into account and
what should be ignored. Therefore, it is hard to decide what to include when operationalise the
concept of companies behaviour. It is easy to overlook some aspects and the coverage of the
indicators might have been insufficient.

Lastly, not enough specific information is accessible about what we wanted to find out. Information
offered by companies might be biased. Information from scientific papers is more objective, but does
not always focus on the things that were important for our research. The level of detail we needed
(three case studies of three different companies) simply was not available. Many useful research
papers concealed companies names for confidentiality reasons.

Throughout the whole process of evaluating the EU-ETS, we also learned some lessons regarding
further designing a policy or evaluating one policy. For designing a policy, more data should be
obtained in the beginning of the policy design. Getting more data is essential in reducing the
knowledge uncertainty of a problem. As mentioned by Ellerman (2010), the goals of the EU-ETS for
emission reduction in the pilot program were set with a shortage of reliable data because of time
pressure (Ellerman, 2010).

We are surprised to find that even though it is hard to determine the effectiveness of the EU-ETS by
analysing the changing of the total emissions as a whole, it is easier to see some policy outcome in a
smaller vision. As discussed in the previous chapters, the CO2 released by those three companies
remained quite stable during phase I and II. And we can also find that companies are acting to invest
on renewable energies or improve fuel efficiency. Though there is not an obvious change in a short-
term, there is an intention for reform in a long-term.

When doing content analysis, it is interesting to find that for environmental friendly policies like the
EU-ETS, companies are always speaking louder than actually doing. Take Vattenfall as an example,
though most of the information they release in their home page is about sustainable and renewable
policies, however in their annual report, 92% of the continental/UK electricity is generated by fossil-
based power (Vattenfall, 2015). This can be seen as a strategy to gain reputation among customers
and respond to governmental regulations. It taught us to always be critical about the trustworthiness
of grey literature as this information can be framed in a too optimistic way.

One challenging lesson we learned is that content analysis is far not enough acquiring useful
information when doing a case study for companies. Field interviews or other forms of direct
observation are needed to get more in-depth information about their behaviour change. More time
should be reserved in advance for multiple methods of data collection in future researches (e.g.
through triangulation).

24
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