Emissions Trading in the EU:What’s Wind Got To Do With It?

by Tallat Hussain

European Wind Energy Association Conference28 February - 2 March 2006

Athens, Greece

Misconception

• Emissions Trading is an end in itself

End

• The reduction of certain air contaminants that lead to the adverse affects of climate change and global warming

Means

• A market-based approach to achieve regulatory

compliance through cost effective means as an

alternative to traditional “command and control”

approaches

• International level

• National level

• Company level

Emissions Trading as a Tool

• Encourages investment in new technologies, DSM, use of cleaner fuels, sustainable projects, etc.

• if cost is less than market price of permits

International Imperative – Kyoto Protocol

Principle –• International commitment to sustainable development

embodying the principle of common but differentiated responsibility between states

Premise – • Annex 1 countries must ensure, either individually or

jointly, that CO2 equivalent emissions of GHGs do not exceed the amounts assigned to each country based on their qualified emissions limitation or reduction commitments (QELRCs)

• Annex 1: developed (polluter) countries• Non-Annex 1: developing (impacted) countries

International Imperative

• Kyoto Protocol Commitment: QELRCs only imposed on Annex 1 countries, for example:

• EU -8%• US -7%• Canada -6%• Japan -6%

• Achieved through domestic action or using mechanisms in Kyoto Protocol

Achieving Emissions Reductions

• Three Mechanisms to supplement to domestic action:

1. Clean Development Mechanism (CDM) • co-operative project financing for GHG abating projects

in developing countries by Annex I countries (transfer of resources and technologies for GHG reduction, sustainable development and compliance with QELRCs)

2. Joint Implementation (JI)• between Annex 1 countries only and with EIT (e.g.,

carbon sequestration projects in forestry and agriculture)

Achieving Emissions Reductions

• The resulting “commodity” = Certified Emissions Reductions (CERs) or Emissions Reduction Units (ERUs) [collectively Emissions Reduction Credits or ERCs]

3. Emissions Trading (ET)• allows countries that earn emissions reductions credits

to apply them to the QELRC• CDM/JI projects• National reduction programs

• ERCs can be purchased (limit of 10% of a country’s QELRC)

National Imperative – Implementation

International emissions trading starts at the national level: • KP is an agreement between states, not

entities within states

• National implementation programs must be designed to meet the QELRC commitments by the first KP compliance period (2008-2012)

EU Emissions Trading Regime

• Directive 2003/87/EC – the Emissions Trading Directive - establishes a scheme for GHG emission allowance trading within the Community (EU ETS)

• The first “international” emissions trading system came into force on January 1, 2005

Main Features – Cap & Trade

• a cap-and-trade system with phased-in implementation

• focuses on large industrial emitters of CO2 in EU countries

• subject installations include up to 12,000 large industrial plants in the EU• Subject activities include: energy and energy-intensive

industries [oil refineries, coke ovens, pulp and paper plants, iron and steel plants and cement, brick and ceramics manufacturers]

Cap & Trade

• CO2 emissions capped• = allowances designated• If emissions =< allowance: sell/bank • If emissions =>allowance

• Buy allowances/ERCs• Retrofit clean technologies• Invest in CDM/JI projects• Pay fines

Phased Approach

• The first phase of the EU ETS implementation runs for 3 years from 2005-2007

• The second phase runs for 5 years, coinciding

with the end of the first KP compliance period in 2012

• Subsequent implementation phases are in 5-year blocks.

Allocation of Allowances

• MS must allocate emissions allowances to subject installations

• For the 3-year period beginning 1 January 2005 MS must allocate at least 95% of the allowances free of charge and at least 90% as of 1 January 2008

• The allowances must be met through:• emissions reductions• emissions trading (purchasing excess emission

reduction credits/allowances from other installations)

• CDM/JI Projects

Allowances and Reductions

• Allowances will be valid for the implementation period in which they are issued • can be cancelled at any time at the request of

the person holding them

• MS must ensure that the operator of each installation surrenders allowances equal to the previous year’s emissions by 30 April of each year• excess emissions penalty (€40 in the first

period and €100 in the second period)• named and shamed list

Registries

• National registries must be established • Must be maintained for an accurate

accounting of the issuance, holding, transfer and cancellation of allowances

• Linked to Community Transaction Log

• Must be open to the public to view the issuance and transfer of allowances

• Any person may hold allowances under the ETS• Subject Installations have Operator Holding Accounts• Individuals/Organisations have Person Holding

Accounts

Monitoring and Reporting

• All operators must monitor and report emissions (based on Commission Guidelines)

• Operators of subject installations must submit reports to competent state authority at the end of each year

• Reports must be verified according to criteria set out in the Emissions Trading Directive

• reliability, credibility and accuracy of the monitoring system

• strategic and risk analyses of the activities• process analysis of the data• competency of the verifier

Reviewing the System

• Periodic reviews are worked into the EU ETS

• MS must report annually to the Commission• compliance with the Emissions Trading Directive and

allocation of allowances, operation of registries, monitoring, reporting and verification

• first report deadline for MS was June 2005

• Commission must report on progress achieved and experience gained in applying the Emissions Trading Directive• first report deadline to Parliament is June 2006

General Obligations - Permits

• MS must issue to every installation undertaking subject activities a permit to emit GHGs (even if the installation does not have an allowance cap)

• Permits must include information on • the installation, its activities and technology

used• materials used that could emit listed GHGs• emissions sources• measures planned for monitoring and

reporting emissions

National and International Links

• Two of the most controversial features of the EU ETS are:

1. the Linking Directive to connect the EU ETS to the project-based mechanisms of the KP

2. national allocation plans (NAPs) developed by MS to bring national policies in line with EU requirements

The Linking Directive

• Finalised in November 2004 as Directive 2004/101/EC, connecting EU ETS to KP

• Allows credits from CDM and JI projects to be recognized in the EU ETS on a one-for-one basis

• supplemental to domestic action by MS

• CERs from CDM projects can be used starting in 2005• ERUs from JI projects can be used starting in 2008• Credits resulting from nuclear facilities, land use, land

use change and forestry projects will not be allowed.

National Allocation Programmes

• NAPs describing total quantity of allowances a country will issue and how they will be allocated must be submitted to Commission for approval before participation in the ETS is permitted

• consistent with the national climate programs, taking into account national energy policies (Renewable Energy Sources Directive: 2001/77/EC)

• based on objective and transparent criteria and not discriminate between companies or sectors

• list of installations (and allowance amounts) published and NAPs must be available for public comment

Additional Information

• With Linking Directive, MS must publish intended use of CERs and ERUs under the KP• Plus, percentage of allowances to

operators that will be designated for CERs and ERUs

• Second Phase NAPs (2008-2012) must substantiate emissions and reductions from other national policies and measures

What’s wind got to do with it?

• GHG emissions by sector for 1990 and 2002 (in MT CO2e emissions) for EU-15

Source 2002 total % 1990-2002 (%)

Energy ( - transp.) 2480 61 -4.9 Transport 869 21 +21.9 Indust. processes 248 6 -18.2 agriculture 416 10 -8.8 Waste 100 2 -27.6

Wind is a Star Performer

• 2004 – EU had 73% of world’s total installed wind capacity (> in 2005)

• Denmark being credited for its contribution to assisting EU in achieving KP target through wind power and other renewables

• EU looking to develop off-shore wind policy• Many EU MS using CDM for wind power projects

European Policies and Wind

• EU ETS, Linking Directive and KP• €2.7 billion over 5 year commitment period => emissions

reductions of over 100 MTCO2e per year from 2008-2010• EU 7th Framework Programme (2007-2013)

• €72.7 billion, focussing on energy, environment (incl. climate change) and transport

• Intelligent Energy Europe• promoting sustainable development in energy, including new and

renewable energy sources• Renewable Energy Sources Directive

• promoting electricity produced from renewable energy sources (21% by 2010)

• European Regional Development Fund – contributing > €800 million for renewable energy and energy efficiency

Examples - Community Progress

Netherlands• CDM projects

• Inner Mongolia wind farm with 22 turbines generating a total of 25.8 MW of electricity

• yield estimated at 513,914 credits (CERs) from 2004–13 • produces clean power (replacing generation by CO2 emitting

fossil fuel-based plant)• New Zealand wind farm with 91 MW capacity, with annual

output estimated at 325 GWh• Yield estimated at 530,000 ERUs annually from 2008–12• avoids the replacement of natural gas with coal • to delay the building future coal plants

Community Progress

Denmark • Financial support for commercial wind farm in

Egypt• designed to contribute to Egypt’s national

development• supplying clean, cost-efficient energy (as alternative to

fossil fuels)• demonstrating sustainable production potentials for

other large wind farms

• provides technical knowledge to New and Renewable Energy Authority in Egypt

• some funding by Spain through a Development Assistance Fund Credit

Community Progress

Germany • €500 M contribution for renewable energies and energy

efficiency)• through special facility as part for Bonn Action Program • assisting partner countries with improved access to

environmentally friendly energy, replacing harmful forms of power generation and to combat poverty

• Party to Renewable Energy Technology Deployment (RETD) implementation agreement (as part of International Energy Agency)• with France, Denmark, Italy, Netherlands, Norway, Ireland,

Canada and UK• to assist countries in overcoming administrative, technical,

trade and other barriers to renewable energy deployment

Final Words

“Considering that the Kyoto Protocol has only recently entered into force … [t]he total of the projections for the EU-15 Member States show that the Kyoto target of -8%, can be met if Member States implement additional domestic measures and use flexible mechanisms, as planned.”

• European Commission Report on Demonstrable Progress under the Kyoto Protocol 1 December 2005

Thank you

Tallat HussainMcCarthy Tétrault LLP

5 Old Bailey2nd Floor

London EnglandEC4M 7BA

thussain@mccarthy.ca+44 207 489 5705 (Direct)

+44 207 489 5777 (Fax)