Phase 3 of EU ETS: Change of Gear18 May 2011

Simone Ruiz - EU Policy Director - IETA – ruiz@ieta.org

WHO ARE IETA?

Only cross–sectoral, private sector international organisation promoting emissions trading to secure environmental goals

Founded in 1999 Membership: ~165 companies

50% emitters 50% project developers, intermediaries, financial

institutions, brokers, verifiers, legal firms 60% EU, 30% US/Canada, 10% Asia

Swiss non profit Offices: Geneva, Brussels, Washington, Toronto Role in Australia, Japan

2

IETA membership spans the carbon market

Industry, finance and trading: providing an effective business voice to emissions trading

Oil (BP, Shell, Conoco Phillips, Chevron, Hess, StatoilHydro, Total, Hess...) Electricity (American Electric Power, RWE, Vattenfall, EDF, Tokyo Electric...) Banking (JP Morgan, Morgan Stanley, Deutsche Bank, Goldman Sachs...) Industry (Dow Chemical, Holcim, Lafarge, Mitsubishi, GE, RioTinto,

Alstom...) Traders and Brokers (Mercuria, Cargill, Natsource, Evolution Markets...) Law (Baker&McKenzie, Clifford Chance, Hunton&Williams, Norton Rose...) Consulting (ICF International, ERM, Climate Change Capital...) Project Developers (Ecosecurities, Camco, Tricorona, MGM, Bluesource...) Exchanges (Bluenext, ECX, CME...) Emission verifiers (DNV, SGS, Bureau Veritas, Deloittes…)

138%

67%

80%5%

5%

15%

12

28

47

8589

93

107

0

20

40

60

80

100

120

2005 2006 2007 2008 2009 2010 2011

Forecast

AAUs

Others

RGGI

pCERs

sCERs

EU ETS

€bn

Source: Bloomberg New Energy Finance, Jan 2011

Carbon market size: 15% growth 2011

EU ETS

Phase I: 2005-2007 / Phase II: 2008-2012 / Phase III: 2013-2020

Currently covers 41% of EU CO2 emissions

Flexible mechanism linkage (CERs and ERUs)

but offset use limit: 2008-10 only 5.1% of total surrender

Linear emission reduction factor (-1.74%) from 2013

Review in 2025

CONTINUES BEYOND 2020

Fixing difficulties

Overallocation

Carbon leakage

Fraud

…

EU-wide allocation

Auctioning power sector (transitionary rules for some)

EU benchmarks for free allocation

Compensation for electricity costs

Same rules for auction platform(s)

Offset restrictions

EU-wide MRV standards

Enhanced security in registries

What remains to be agreed?Among others….

Issue Legal (realistic) deadline

Auctioning method, early volume Spring 2011 (June, early auction???)

Registry rules early 2011 2nd amendment (May/June)

CDM eligibility Further restrictions to follow? (no date)

State aid guidelines for compensation of indirect costs

Dec 2011

Oversight of market/financial regultion

Dec 2010 (mid-2011)

Transitional derogation from auctioning for power sector

March 2012

MR/V rules (2 sets of regulation) December 2011

30% reduction target??

Benchmarks for free allocation

Derogation from full auctioningfor power sector

Member States to submit application by 30 September 2011

Value of free emission allowances must be used for investments1

Maximum amount declining to zero by 2020 Installation based allocation determined by

Commission Decision Correction factor applied if allocation exceeds

maximum amount Allocation to installations on basis of

EU-wide benchmark or national benchmark determined historical emissions 05-07 (& emissions performance of

installations)

Eligible investment types: see Annex V of guidance document

I – if conditionality criteria not respected, state aid investigations possible

Auctioning rules

Volumes: - 2013 and 2014 amounts re-balanced if early auctioning- Rough estimate : 60-70% of allowances through auction- Revenue: around €25 billion (at CO2 price of €20/t)

Product:- Spot: delivery within a maximum of 5 days (financial

instrument??)- Future and/or forward pre-2013 for a transitional basis by

each MS- But transitional auctions only under certain conditions

Auction Format:- single-round, sealed bid, uniform price and weekly- Platform(s): possibility for opt-out from common EU-wide

platform Germany, Poland, UK yes (but not sure if they’ll do it)

- but: must be in conformity with Regulation & coordinated

Review of ‘arrangements’ every 5 years

Source: Bluenext

Single EU ETS Registry (2012)

Offset eligibility post-2012

No direct surrender of offsets for compliance!

1. Operators can swap into phase 3 allowances until 31 March 2015 : *- Credits issued 2008-12- Credits issued from 2013 onwards if registration pre-2012 - New credits from new projects in LDCs from 2013 (UN LDC list if ratified KP )

2. Non-LDC: bilateral agreements with third Parties in absence of international agreement by 31 December 2012

- Sectoral baselines?- Which countries?

3. If international agreement: only credits from countries that ratified that agreement

IF AGREEMENT IN DURBAN, WHAT THEN?

* no nuclear, forestry and land-use plus HFC23, N2O from adipic acid production

First of its kind: ban on credits from industrial gases

Commission Regulation as adopted in Climate Change Committee

From 1 January 2013, the use of international credits from projects involving the destruction of trifluormethane (HFC-23) and nitrous oxide (N2O) from adipic acid production […] is prohibited, except for the use of credits in respect of emission reductions before 2013 from existing projects of these types for use in respect of emissions from EU ETS installations that took place during 2012 which shall be allowed until 30 April 2013 inclusive.

In short:- Ban on specified credits from ER in 2012 applies from 1/05/13- Only for compliance use not for swapping into phase 3 EUAs

Just a hiccough or a major trend?

Market oversight

Objective: to prevent market abuse in spot market – insider trading and market manipulation (cornering)

Stakeholder meeting on 4 May 2011: 2 options

Option 1: MiFID regulation through classification of EU emission allowances as financial instruments

Option II: Tailor made regime (like for power and gas wholesale markets ‘REMIT’)

Commission preference for MiFID regulation

IETA view: unintended consequences and not appropriate

EU ETS & CCS

EU ETS Directive on CCS:

No surrender of allowances for emissions verified as captured and transported for permanent storage §12.3(a)

Every ton of CO2 captured and stored frees up an emission allowance

NER 300 - support of 12 CCS demonstration projects §10.a(8)

Around €4.5 billion, only for verified avoidance of emissions

At least 50% of auction revenue to be earmarked to carbon-reducing projects, a.o. CCS §10.3(e)

Caution: MS to determine the use of revenues from auctioning

Want to know more? Join us in Barcelona!

1-3 June 2011

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