An overview of emissions trading (cap-and-trade), how it works and a focus on allocation of allowances. This presentation was given by Shell to a group of London media representatives on February 18th 2009.
Emissions Trading <ul><li>Emissions Trading in an energy & </li></ul><ul><li>climate change policy framework </li></ul><ul><li>Where to use emissions trading </li></ul><ul><li>The key question - allocation </li></ul><ul><li>Global considerations </li></ul>David Hone Group Climate Change Adviser Shell International B.V.
Key Sectors in the “energy and CO 2 economy” Oil Biomass Gas Coal Nuclear Renewables Primary Energy Liquids Direct combustion Industry and Manufacturing Mobility Final Energy Agriculture and Land Use Energy Energy Energy Buildings Power Generation
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” CO 2 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.
Emissions Trading or “Cap-and-trade” Initial emissions 100 Mt p.a. Year 5 at 95 Year 15 at 80 Year 10 at 88 Offsets Allowance trading between facilities $ CO 2 Government issues 88 million allowances into the economy CCS Project Efficiency Project
Advantages of Emissions Trading <ul><li>It is designed to deliver an environmental outcome, in that the cap must be met. </li></ul><ul><li>It will deliver its environmental objective at lowest cost to the economy. </li></ul><ul><li>A national trading system can be linked with other such systems, delivering over time a global carbon market. </li></ul><ul><li>It works. The trading system will deliver what it is asked to do. </li></ul>
The new flow of capital in the economy CO 2 Goods and services pass into the economy, with the price of CO 2 embedded Emitters buy allowances from the government through auction Government recycles auction revenue to consumers through the tax system
The CO 2 price and allocation Points of regulation Resource Power Generation Factories Heavy industry Light industry Consumer Electricity <ul><li>Over time, the CO 2 price will impact the entire value chain. </li></ul><ul><li>The rate at which this happens varies considerably. </li></ul><ul><li>It can be very fast for electricity. </li></ul><ul><li>It will be very slow for some products where the price is established outside the capped market. </li></ul>Time CO 2 price impact
The CO 2 price and allocation Points of regulation Resource Power Generation Factories Heavy industry Light industry Consumer Electricity Time CO 2 price impact Free allocation early on as little / no price pass through Progressive shift to auctioning as the CO 2 price impacts the economy Full auctioning as the CO 2 price impacts the entire value chain Auction funds recycled to consumers through the tax system
External Projects (or offsets) <ul><li>Emission reduction projects executed outside the capped sector can offer important benefits; </li></ul><ul><ul><li>An inflow of compliance units (credits) can offer further flexibility in meeting the cap. </li></ul></ul><ul><ul><li>Access to external projects can act as an efficient cost control mechanism within the capped sector. </li></ul></ul><ul><ul><li>Projects can help developing countries begin managing emissions. </li></ul></ul><ul><ul><li>The flow of project credits can help build a global CO 2 market. </li></ul></ul><ul><li>All national emission trading systems should recognise the same global project mechanisms. </li></ul>
Going global ! 2000 2005 2010 2015 2020 2025 Pre-Kyoto Kyoto Post 2012 Linkage framework Linkages develop between all systems and more systems appear Danish-ETS UK-ETS Australian ETS US National “cap-and-trade” Norwegian ETS EU-ETS CDM CDM evolves to includes sectors Expanding EU-ETS Japan technology standards New technology mechanisms evolve (e.g. for CCS) China adopts CCS standard New Zealand ETS
Evolution of the EU Cap 2005 2006 2007 2008 2009 2010 2012 2013 2014 2015 2016 2018 2019 2020 2021 2011 2017 2180 MtCO 2 pa 2083 actual in 2005 1964 Gradient – 1.74% Phase II Phase III Phase I Start up Phase 1620 -20% -30% Trend line continues aiding predictability Not to scale!