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Project-based mechanisms for climate protection (3): Demand Side Optimisation
 

Project-based mechanisms for climate protection (3): Demand Side Optimisation

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This presentation is part III of a threefold presentation set that stems from the workshop "Further Development of the Joint Implementation (JI) Mechanism: Net mitigation effects and other Quality ...

This presentation is part III of a threefold presentation set that stems from the workshop "Further Development of the Joint Implementation (JI) Mechanism: Net mitigation effects and other Quality Criteria". This third part deals with demand side optimisation proposals. Carsten Warnecke, Senior Consultant International Climate Policies at Ecofys, gave these presentations at the joint workshop of the Federal German Environment Agency and the German Emission Trading Authority on 24 September 2012.

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Project-based mechanisms for climate protection (3): Demand Side Optimisation Project-based mechanisms for climate protection (3): Demand Side Optimisation Presentation Transcript

  • Demand side optimisationproposalsPart III of the project:“Project-based mechanism for climateprotection in Europe: Net-mitigation-effectsand further development of the JointImplementation (JI) Mechanism”Carsten Warnecke24.09.2012
  • © ECOFYS | |Content> Background & Objectives> Demand and supply balance:status quo and potential future> Optimisation proposals> Summary & conclusions> Overall project conclusions24.09.2012 Carsten Warnecke
  • © ECOFYS | |Background & Objectives> Mechanism success requires healthy demand> Current supply and demand unbalanced> The current price level and high volatility hinder privateinvestments> Innovative mitigation opportunities require more funds> An enhanced mechanism which creates additional values (NME,further quality/sustainability, domestic character) should allowdisconnecting from the international price levels> Moving “beyond pure offsetting” could potentially be monetized> Expected supply and demand differs in future scenarios24.09.2012 Carsten Warnecke
  • © ECOFYS | |Demand and supply balance:status quo and potential future24.09.2012 Carsten Warnecke
  • © ECOFYS | |Current supply and demand situation (pre 2013)24.09.2012 Carsten Warnecke
  • © ECOFYS | |Currently no distinction and general oversupply> Offset supply mainly by CDM (>80%) and JI(We distinguish domestic and international JI while there iscurrently no such distinction in the market)> EU ETS phase 2 sets quantitative limits– Offsets on average are allowed to a share of 13.7% of the freeallocation and in Germany up to 22%> Only a few reduction opportunities pre 2013 are competitiveagainst CDM opportunities> EU ETS phase 2 is oversupplied by 1,300-1,600 MtCO2(Worldbank 2012), increased use of offsets at the end of phase 2due to restrictions in phase 3, offset oversupply lowers prices andincreases spread between offsets and EUAs> Kyoto-1 is oversupplied; not all AAU surplus will be sold> But also EU-15 in total will over-achieve Kyoto targets> Only limited demand for offsets24.09.2012 Carsten Warnecke
  • © ECOFYS | |Demand and supply in a continued JI scenario24.09.2012 Carsten Warnecke
  • © ECOFYS | |Fewer competition, new demand but low ambition> EU ETS phase 3 additionally sets qualitative restrictions withphase out of large and potentially cheap mitigation opportunities> EU ETS likely still oversupplied due to banked EUAs from phase 2and still available eligible offsets (750-1,300 MtCO2; WB 2012)> Kyoto-2 with fewer Parties and probably lower ambition> Majority of Parties might voluntarily follow EU ETS restrictions> New demand market created trough Effort Sharing Decision(406/2009/EC)– EU average is committed to reduce emissions in non-EU ETSsectors by 10% by 2020 (base year 2005); Germany 14%– "Annual Emission Allocation" (AEA) can be traded betweenMember States and CER/ERU use as flexible element allowed– CER/ERU use is quantitatively and qualitatively restricted– EEA (2011) projections raise doubts that current ESD ambitionlevel will lead to substantial offset demand24.09.2012 Carsten Warnecke
  • © ECOFYS | |Demand and supply in an Article 24a scenario24.09.2012 Carsten Warnecke
  • © ECOFYS | |Environment changes but barriers remain> Article 24a of the EU ETS Directive provides the basis for a newdomestic offsetting mechanism potentially replacing domestic JI> Article 24a units might be eligible in the EU ETS and withoutlimitation for the ESD targets> Oversupply in the EU ETS and low ambition of the ESD does stillexist similar to the continued JI scenario> No demand from or connection to the IET> Unlimited use for the ESD targets might become an advantage ina more ambitious scenario> AEA trades between Member States are quantitatively limited> The current situation as well as both future scenarios do notresult in sufficient demand without further changes oroptimisations24.09.2012 Carsten Warnecke
  • © ECOFYS | |Optimisation proposals24.09.2012 Carsten Warnecke
  • © ECOFYS | |Option 1: Increasing the ambition levels> Obvious and straightforward> From a European perspective the different targets are mostlyconnected> EU ETS and ESD targets are broken down from the overallcommitment of the EU to reduce emissions by 20% in 2020 (baseyear 1990) which is also unconditionally pledged on internationallevel> Most likely is an increase of the EU target from 20% to 30%> This gives an important signal to the markets but considering– that MS could meet the 20% energy efficiency target in 2020which might reduce GHG emissions already by 25%,– that implementation of Art. 28(3) ETS Directive might allowadditional offsets,– that the expected CER/ERU supply post 2012 is in the range ofthe EU credit demand (Worldbank 2012)> Option seems insufficient for innovative domestic offsetting24.09.2012 Carsten Warnecke
  • © ECOFYS | |Option 2: Quota and limitations> Differentiation from international offsets to overcome competitivedisadvantage with reservation of a percentage of the allowedinternational offset limits for domestic offsets only> Competition situation changes for domestic offsets> Mitigation measures in ETS installations and ESD sectors will takeplace under conditions similar to domestic project-based activities> A specific trading category will increase recognition and allows topromote additional values> International examples for offset differentiation according to theplace of generation exist> Article 24a scenario might facilitate this approach but depends onfinal implementation> A combination of this approach with an increased ambition levelseems most promising24.09.2012 Carsten Warnecke
  • © ECOFYS | |Option 3: Increased voluntary demand> The voluntary market (VM) could generate additional demand butneeds to be actively enabled> “Double counting” issues currently hinder voluntary projects inthe capped environment> This barrier disappears if host countries agree to cancelAAUs/AEAs for the amount of issued VERs.> AAU cancelation is justified if voluntary activities comply with thehost countries’ requirements> AAU cancelation might be attractive for countries with AAU/AEAsurplus but no intention to market the surplus> VER buyers often use voluntary activities in communication andfor marketing; this provides the opportunity to market project co-benefits and the place of generation> VM is independent from international agreements and scenarios> Unclear if VM alone can absorb domestic offset potential butimplementation could be additional to further optimisation options24.09.2012 Carsten Warnecke
  • © ECOFYS | |Option 4: Government purchase programme> National governments can(1) purchase and resell or (2) purchase and cancel> Both cases provide opportunity to disconnect from the marketsand agree on prices which promote domestic activities> Purchase programmes (2) can apply more pragmatic rules withreduced transaction costs> Without a trading component emission reductions do not need tobe transformed into carbon credits> Government opportunity to incentive specific technologies andco-benefits (e.g. via tender process; NME only relevant in case 1)> Government funding is required> Cost efficient approach compared to existing emission reductionprogrammes, e.g. support programme for energy efficientrenovation of buidlings (€ per ton of reduced emissions)24.09.2012 Carsten Warnecke
  • © ECOFYS | |Summary & conclusions> Demand optimisation is required in any future scenario> Distinction and marketing of co-benefits is essential> Combination of measures seems promising> Not all measures are realistic on short term> Different decision levels for measures– increased ambition is desirable in any scenario but limitedopportunities for mechanism administrator> Activation of voluntary market and government purchaseprogrammes are independent from international frameworks andfuture scenarios– Well suited framework for the marketing of co-benefits– Parallel implementation to any other measure possible> Further detailed assessment of actual potential & opportunities ofoptions is required> Preparatory work could start immediately24.09.2012 Carsten Warnecke
  • © ECOFYS | |Overall project conclusions> Contributions “beyond pure offsetting” should be carefullybalanced against the capability of projects> Only GHG reductions are currently monetised> Risk of discouraging promising project activities can be managedby allowing flexible approaches and taking the profitabilitysituation into account> Cost-efficient implementation with the aim to not increasetransaction costs is the key– Discounts and additional standardisation– Use of existing standards, frameworks and requirements tothe extent possible– Ex-ante assessments rather than ex-post> Higher & differentiated prices increase the capability of projects24.09.2012 Carsten Warnecke
  • © ECOFYS | |24.09.2012 Carsten WarneckeThank you.Contact:Carsten WarneckeSenior ConsultantInternational Climate PoliciesT: +49 (0)221 270 70 204M: +49 (0)172 297 39 08E: c.warnecke@ecofys.com