emissions trading - more detail
DESCRIPTION
An overview of the structure of an emissions trading system, offering more detail and some thoughts on the EU-ETS.TRANSCRIPT
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Emissions TradingEmissions TradingEmissions Trading in an energy &Emissions Trading in an energy &
climate change policy frameworkclimate change policy framework
• A policy frameworkA policy framework
• Where to use “cap-and-trade”Where to use “cap-and-trade”
• The key question - allocationThe key question - allocation
• Advantages of “cap-and-trade”Advantages of “cap-and-trade”
• The EU-ETSThe EU-ETS
David HoneGroup Climate Change AdviserShell International B.V.
2
Oil Biomass Gas Coal Nuclear Renewables
Primary Energy
Liquids
Direct combustionIndustry and
Manufacturing
Mobility
Final Energy
Agriculture and Land
Use
Energy
En
erg
y
En
erg
y
Buildings
Power Generation
Key Sectors in the “energy and CO2 economy”
3
New Energy Technologies – e.g. CCS
Power generation without CCS
Number of installations
Tec
hnol
o gy
c os t
CO2 priceEarlier deployment through demonstration
Discover & DevelopNeed to refocus and rapidly expand R&D.
Discover & DevelopNeed to refocus and rapidly expand R&D.
0
20
40
60
80
100
1 10 100 1000
DeploymentTypically driven by the CO2 market
DeploymentTypically driven by the CO2 market
DemonstrationNo early adopters and high start-up costs so this phase will need help.
DemonstrationNo early adopters and high start-up costs so this phase will need help.
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A structured policy approach is needed
Power Generation / Industry &
Manufacturing
Transport Commercial & Domestic (Buildings)
Discover & Develop • Support for infrastructure
(e.g. grids & pipelines)• Support for advanced
fuel development• Urban planning decisions.
• Education and awareness.
Demonstrate • Fiscal support for large-scale CCS demonstrations
• Fiscal support for early 2nd generation biofuel manufacture.
• Public transport infrastructure
• Encouraging radical design
Deploy • “Cap-and-Trade”
• CCS rules and recognition
• Renewable Energy Certificates
• “Fast-track” planning
• Vehicle efficiency standards
• Incentivise fuels based on W-t-W CO2 reduction.
• Consumer behaviour
• Use of public transport
• Efficiency standards (appliances, air-con)
• Use of project mechanisms linked to GHG market.
• Encouraging “electrification”.
Broad energy production and use R&D support
5
A structured policy approach is needed
A simple, high profile and credible target for the renewables’ share of power generation, supported by a range of incentives to encourage investment.
Measures to incentivise new fuels based on their “well-to-wheels” CO2 reduction potential,
implementation of vehicle efficiency standards and vehicle/road-use programs targeted at drivers
A series of robust energy standards for buildings, appliances etc. with incentives for retrofit of existing infrastructure.
"Cap and trade" emissions trading systems for power generators, most industrial facilities and large fleet transport such as aviation.
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Emissions Trading or “Cap-and-trade”
Initial emissions100 Mt p.a.
Year 5 at 95
Year 15 at 80Year 10 at 88
Offsets
Allowance trading between facilities$ CO2
Government issues 88 million allowances into
the economy
CCS Project
Efficiency Project
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Key principles of an Emissions Trading System
• The aim of an ETS is to direct investment capital towards lower CO2 emission projects, via a market price for CO2 emissions.
• Therefore, the trading system should not remove that capital from the industries or firms covered by the system.
Design Features to be Discussed
• Allocation of allowances
• Banking and borrowing
• Recognition of technologies
• Constraints and limitations
• External projects mechanisms (or offsets)
• Linkage
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The new flow of capital in the economy
CO2
Goods and services pass into the economy, with the price of CO2
embedded
Emitters buy allowances from the government through auction
Governmentrecycles auction
revenue to consumers through the tax system
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The CO2 price and allocation
Points of regulation
Resource
Power Generation
FactoriesHeavy industry Light industry
Consumer
Electricity
Tim
e CO2 price impact
• Over time, the CO2 price will impact the entire value chain.
• The rate at which this happens varies considerably.
• It can be very fast for electricity.
• It will be very slow for some products where the price is established outside the capped market.
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The CO2 price and allocation
Points of regulation
Resource
Power Generation
FactoriesHeavy industry Light industry
Consumer
Electricity
Tim
e CO2 price impactFree allocation early on as little / no price pass through
Progressive shift to auctioning as the CO2 price impacts the economy
Full auctioning as the CO2 price impacts the entire value chainAuction funds recycled to consumers through the tax system
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Banking and Borrowing in “cap-and-trade”
As a rule, banking is accepted and borrowing isn’t.• Banking brings forward emission reductions.• Borrowing delays emission reductions.• Both banking and borrowing help to limit price volatility in a
cap-and-trade system. Banking underpins the market during periods of low price. Borrowing limits price rise by adding future allowances to
the current pool.
Unlimited banking with limited borrowing is a usefulconstruction within a cap-and-trade system.
Trading period 5-7 years
Annual compliance for each year
Banking between years and trading periods
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Abatement technologies
• Certain abatement technologies will be key to the long term viability of the emissions trading system. Carbon Dioxide Capture and Storage is one of these.
• Such technologies must be recognised early by the legal framework of the trading system.
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CO2 is a commodity
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Artificial limits within the trading system
Although created entirely by policy makers and legislation, an emissions trading market is still a market. As such, it should not be subject to;
• Price caps;
• Price floors and / or reserve prices;
• Arbitrary price management by oversight bodies or parliament;
• Imposition of trading limits (e.g. offsets);
• Unexpected rule changes;
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External Projects (or offsets)
Emission reduction projects executed outside the capped sector can offer important benefits;
• An inflow of compliance units (credits) can offer further flexibility in meeting the cap.
• Access to external projects can act as an efficient cost control mechanism within the capped sector.
• Projects can help developing countries begin managing emissions.
• The flow of project credits can help build a global CO2 market.
All national emission trading systems should recognise the same global project mechanisms.
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Advantages of Emissions Trading
Advantages of emissions trading are:
• It is designed to deliver an environmental outcome, in that the cap must be met.
• It will deliver its environmental objective at lowest cost to the economy.
• A national trading system can be linked with other such systems, delivering over time a global carbon market.
• A trading system offers both compliance and policy flexibility.
• The structure is simple.
• It works. The trading system will deliver what it is asked to do.
US sulphur trading has delivered the required cuts in sulphur emissions.
The EU system has suffered early data issues, not design issues.
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Going global !
Linkages develop between all systems and more systems appear
2000 2005 2010 2015 2020 2025
Danish-ETS
UK-ETSAustralian ETS
US National or North American “cap-and-trade”
Norwegian ETS
EU-ETS
CDM
CDM evolves to include clean electricity mechanism
Pre-Kyoto Kyoto Post 2012
Expanding EU-ETS
Japan technology standards
Linkage framework
New technology mechanisms evolve (e.g. for CCS)
China adopts CCS standard
New Zealand ETS
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Linking “cap-and-trade” systems
The key metric in determining the ability to link is price.• When the prices of two systems are at similar levels
there is scope to link them.• Therefore, design elements which directly determine
price should be the same. Other design parameters can be different.
Determines Price• Direct price management
(e.g. caps, floors etc.).• Banking and borrowing
rules.• Offset rules.• Penalty rules.
Price neutral• Allocation approach (e.g.
auctioning, benchmarking etc.)
• Coverage (i.e. sectors and gases covered)
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Evolution of the EU-ETS
2005 2008 2013 2020
Phase I
Learning by doing
Discrete
• No banking
Allocation
• Conservative
• Grandfathering
• Trial auctions
Member State driven
Commission guidance
Establishes capacity
Some CER inflow
Phase II
The real thing
Kyoto compliance
• Banking to 2012+
Allocation
• Still grandfathering
• Some benchmarking
• Regular small auctions
Commission guidance
Member States follow
Active liquid market
CER inflow rises
Phase III
Expansion – gases & sectors
-20% (or –30%) by 2020
• EU wide cap
Allocation
• 100% auctioning for powergen
• Benchmarking for industry
• Top decile benchmarks
• Recognition of carbon leakage
Commission led
Member State compliance
Limited CER inflow
CCS recognition
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Evolution of the EU Cap
2005
2006
2007 20
08
2009
2010 20
12
2013
2014 20
1520
16
2018
2019
2020
2021
2011
2017
2180
MtCO2pa
2083actual in
20051964
Gradient – 1.74%
Phase II Phase IIIPhase I Start up Phase
1620-20%
-30%
Trend line continues
aiding predictability
Not to scale!
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EU ETS price and market activity
Key:
Dec 07 delivery
Dec 08 delivery
Dec 09 delivery
Source: Point Carbon
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Carbon Capture & Storage and the EU-ETS
Power generation without CCS
Number of installations
Tec
hnol
o gy
c os t
CO2 priceEarlier deployment through demonstration
0
20
40
60
80
100
1 10 100 1000
Demonstration• EU Council of Ministers announces a 10-12 large-
scale project demonstration programme.• EU Parliament supports the programme with a pool of
300 million bonus allowances offered for CO2 stored.
• At €25 per tonne of CO2 this is worth €7.5 billion.
• No single project to be awarded more that 45 million allowances bonus allowances.
Demonstration• EU Council of Ministers announces a 10-12 large-
scale project demonstration programme.• EU Parliament supports the programme with a pool of
300 million bonus allowances offered for CO2 stored.
• At €25 per tonne of CO2 this is worth €7.5 billion.
• No single project to be awarded more that 45 million allowances bonus allowances.
Deployment• CCS recognised within the EU-ETS.• New CCS legislation sets standards for
storage and establishes rules for long term liability.
Deployment• CCS recognised within the EU-ETS.• New CCS legislation sets standards for
storage and establishes rules for long term liability.
http://blogs.shell.com/climatechange