implications and opportunities for european business in a carbon constrained economy vincent...
TRANSCRIPT
Implications and Opportunities for European Business in a
Carbon constrained Economy
Vincent Dessain,
Executive Director,
Europe Research Center,
Harvard Business School
2
Summary
A. Introduction
B. GHG Emissions – The overall picture
B.1 GHG’s major emittersB.2 Potential Buyers-Potential Sellers ?B.3 Emissions Trading: Lowest-Cost Method of Reducing GHGsB.4 The implications of a Carbon-Constrained Economy on Market Dynamics
C. EU Emissions Trading Scope
C.1 EU 15: Targeted Sectors in EU Emissions Trading DirectiveC.2 EU Emissions Trading SchemeC.3 EU Emissions Trading PrinciplesC.4 National Allocation Plans PrinciplesC.5 Will the allocations be generous enough
3
Summary (continued)
D. The electricity producers – an example
D.1 Electricity ProductionD.2 Power Production DistributionD.3 Cumulative Production
D.4 5 biggest CO2 emitters in EuropeD.5 Price of ElectricityD.6 Impact of EU ETS on Power Companies Valuations
E. Trading experiences and expectations
E.1 A U.S. Example: SO2 under clean air act of 1990E.2 UK ETS experiment
E.3 How will CO2 allowances trade?
E.4 CO2 expected price 2008 - 2012E.5 Strategies adopted by market players
4
Introduction
• Observations in this presentation are based on initial discussions with EU commission officials, government representatives and market participants
• This presentation only expresses the author’s personal views and not the school’s
• Following further analysis of EU emissions trading market, we may develop a research project that looks at the criteria of success to effective design of a new market
5
GHG’s major emitters(Year 2000) (MTON CO2 Equiv)
USA40%
EU (15)23%
Russia12%
Central and
Eastern Europe
9%
Japan8%
Other4%
Canada4%
Source: Adapted from UNFCCC
6
Potential Buyers-Potential Sellers ?EU-Member State GHG emissions
1990
(M Tons)
GHG emissions 2000
(M Tons)
Target Deviation from target
Belgium 143.1 151.9 132.4 - 19.5
Denmark 69.4 68.5 54.8 - 13.7
Germany 1222.8 991.4 966.0 - 25.4
Finland 77.1 74.0 77.1 + 3.1
France 551.8 542.3 551.8 + 9.5
Greece 104.8 129.7 131.0 + 1.3
Ireland 53.4 66.3 60.4 - 5.9
Italy 522.1 543.5 488.2 - 55.3
Luxemburg 10.8 5.9 7.8 + 1.9
Austria 77.4 79.8 67.3 - 12.5
Portugal 65.1 84.7 82.7 - 2.0
Sweden 70.6 69.4 73.4 + 4.0
Spain 286.4 386.0 329.4 - 56.6
United Kingdom 742.5 649.1 649.7 + 0.6
Netherlands 210.3 216.9 197.7 -19.2
Source: Adapted from UE DG Environment
7
Potential Buyers – Potential Sellers (continued)
EU Accession State Emissions in 2000(M Tons)
Target vs 2000
Poland 386 + 37%
Romania 185 + 30%
Czech Republic 147 + 20%
Bulgaria 109 + 29%
Baltic States 88 + 32%
Hungary 84 + 13%
Slovakia 49 + 36%
Slovenia 13 + 31%
Source: Adapted from UE DG Environment
8
Emissions Trading: Lowest-Cost Method of Reducing GHGs
Source: Viewpoint/The Marsh & McLennan Companies Journal/Volume XXXII No. 1 2003
9
The implications of a Carbon-Constrained Economy on Market Dynamics
Source: Viewpoint/The Marsh & McLennan Companies Journal/Volume XXXII No. 1 2003
10
EU 15: Targeted Sectors in EU Emissions Trading Directive
Trading Sectors Emissions in 2000 MTON CO2 %
Public electricity & heat production 894 65.9%
Petroleum refining 148 10.9%
Iron & steal fuel combustion 115 8.5%
Cement 88 6.5%
Manufacture of solid fuels 51 3.8%
Pulp & paper 35 2.6%
Iron & steal production 24 1.8%
Glass 2 0.1%
1357
Source: Adapted from environmental-finance magazine
11
EU Emissions Trading SchemeEU-15 Number of installations affected
Austria 250
Belgium 260
Denmark 300
Finland 300
France 1500
Germany 7000
Greece 100
Ireland 66
Italy 2000
Luxemburg 15
Netherlands 350
Portugal 125
Spain 600
Sweden 300
UK 1750
TOTAL 14916
Source: Adapted from environmental-finance magazine
12
EU Emissions Trading Principles
• To become largest CAP and Trade Program worldwide
• NAP’s ready for review by EU commission by March 1-31, 2004
• Warm-up phase 2005-2007: Learning by doing
• Five year mandatory Kyoto phase from 2008-2012
• Start with CO2 expanding to other GHG
• Sector pooling with trustee appointment possible
• Informal multinational pooling also possible
13
National Allocation Plans Principles
• Emissions (historical base) seem to be the only viable metric rather than input, output or capacity
• Two stage process reconciling top down, bottom-up
• In warm-up phase: free of charge 95%, 5% by auction
• For 2008 – 2012: 90% free of charge, 10% that can be auctioned
• New entrants will need to buy from the market
14
Will the allocations be generous enough?
10% surplus over b-a-u
In between Kyoto & National targets
Source: Adapted from DKW
Carbon constraint (Mton CO2)
15
Electricity Production
C02 emission per type of production
In grams Hydro Nuclear Wind Combined Natural Coal Lignite
per KW/h cycle gas
CO2 emissionper par kWh 4 6 3 à 22 427 883 978 1 120
Source :Adapted from ACV Study– CDC Report
16
Power Production Distribution
In % E.ON
EDP Electrabel
Endesa
Enel Iberdrola
RWE
Verbund
Produced volumes: TWh
96 26 68 59 179 41 178 24
Nuclear 51 - 39 22 - 57 18 -
Fuel 11 - 39 - 80 1 - -
Coal 35 69 - 66 - 14 70 6
Gas - - - - - - 7 -
Combined - - 9 - - - - -
Hydro 3 31 11 12 20 27 4 94
Other Renew - - - - - - - -
Other - - 2 - - - 1 -
Source: Annual Reports
17
Cumulative ProductionFuel, Coal, Gas (TWh)
Enel
RWE
E.ON
Endesa
EDP
Iberdrola
Electrabel
Verbund
Source: CDC Reports
18
5 biggest CO2 emitters in Europe
Companies MTon % or Euro total
RWE 126 3.08
Enel 99 2.41
E.ON 76 1.86
Endesa 73 1.77
Vattenfall 71 1.73
Source: CDC Reports
19
Price of Electricity
Type of Unit Power Gen cost w/o emissions allow (cents/MWh)
Power Gen cost w/ emissions allow (cents/MWh
Var (%)
Combined 2.9 3.6 24.1
Coal 2.6 4.0 53.8
Lignite 2.3 3.9 69.6
Coal (CHP) 1.9 2.9 52.6
Gas (CHP) 2.7 3.2 18.5
Wind 5.2 5.2 0.0
Source: Vattenfall
20
Impact of EU ETS on Power Companies Valuations
Source: CDC Reports
Verbund
EDP
EDF
Endesa
Vattenfall
EVN
Suez
E.ON
Electrabel
Iberdrola
RWE
Enel
21
A U.S. Example: SO2 under clean air act of 1990
• Principle of Allowances under CAP and Trade system
• Allocated "free" to incumbents, "bankable" and "fully tradable"
• Market started to become reasonably efficient by 1994
• Market prices much lower than expected
• Relatively efficient private market developed in four years– 1993: Third party brokers start to disclose prices– Transactions cost from $ 3.50 per allowance per trade to $ 1.50 per
allowance per trade (1994 – 1996)– Bid-ask spreads go from $ 20 in 1994 to $ 1.50 in 1997– Active SWAPS markets developed
22
UK ETS experiment
• 34 participants, voluntary and capped, 400 trading accounts, 300,000 – 1000,000 allowances traded, through 150-200 trades
• Few bidding strategies where company decides on amount of emission reductions achievable through a project, the average cost of each ton of emission reduction and the price at which they would drop out of auction
• Several participants had not yet developed a precise analysis of their abatement cost through a marginal abatement cost curve
23
0 5 10 15 20 25 30 0 5 10 15 20 25
How will CO2 allowances trade?
Germany
UK
Accession MS
CO2 price (€/tonne)
Allowance Allocation Economic Conditions
hot cold year
growth
fuel costs
CO2 price (€/tonne)
Source: Adapted from DRK
24
CO2 expected price 2008 - 2012
Source: Adapted from BA Power - Strategic Planning
Market Source Expected price (€ton CO2)
Ecofys 20 - 42EU CO2 Mc Kinsey 18 - 25Emission EU 20 – 83Certificate Penalty* 100
CDM Ecofys 5-7JI Ecofys 5-10
* The penalty does not release the operator from the obligation to surrender its allowances
25
Strategies adopted by market players
Case 1: Market price higher than abatement marginal costStrategy: Reduce emissions more than your target and sell extra allowances
Case 2: Market price lower than abatement marginal costStrategy: Buy allowances to reduce total cost to meet reduction target
Case 3: Market price equal to abatement marginal costStrategy: Reduce emissions at break-even point
Case 4: Two main choices to meet your emissions targetTarget: Either purchase allowances on the market or reduce emissions
(production reduction, fuel switch or technology investment)