Emissions Trading - More Detail

Emissions Trading
Emissions Trading in an energy &
climate change policy framework
A policy framework
Where to use “cap-and-trade”
The key question - allocation
Advantages of “cap-and-trade”
The EU-ETS
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

New Energy Technologies – e.g. CCS Power generation without CCS Number of installations Technology cost 0 20 40 60 80 100 1 10 100 1000 CO 2 price Earlier deployment through demonstration Discover & Develop Need to refocus and rapidly expand R&D. Deployment Typically driven by the CO 2 market Demonstration No early adopters and high start-up costs so this phase will need help.

A structured policy approach is needed
Encouraging radical design
Fiscal support for early 2 nd generation biofuel manufacture.
Public transport infrastructure
Fiscal support for large-scale CCS demonstrations
Demonstrate
Efficiency standards (appliances, air-con)
Use of project mechanisms linked to GHG market.
Encouraging “electrification”.
Vehicle efficiency standards
Incentivise fuels based on W-t-W CO 2 reduction.
Consumer behaviour
Use of public transport
“ Cap-and-Trade”
CCS rules and recognition
Renewable Energy Certificates
“ Fast-track” planning
Deploy
Urban planning decisions.
Education and awareness.
Support for advanced fuel development
Support for infrastructure (e.g. grids & pipelines)
Discover & Develop Commercial & Domestic (Buildings) Transport Power Generation / Industry & Manufacturing Broad energy production and use R&D support

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

Key principles of an Emissions Trading System
The aim of an ETS is to direct investment capital towards lower CO 2 emission projects, via a market price for CO 2 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

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
Over time, the CO 2 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.
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

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 useful
construction within a cap-and-trade system.
Trading period 5-7 years Annual compliance for each year Banking between years and trading periods  

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.

CO 2 is a commodity

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;

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 CO 2 market.
All national emission trading systems should recognise the same global project mechanisms.

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.

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 or North American “cap-and-trade” Norwegian ETS EU-ETS CDM CDM evolves to include clean electricity mechanism Expanding EU-ETS Japan technology standards New technology mechanisms evolve (e.g. for CCS) China adopts CCS standard New Zealand ETS

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)

Evolution of the EU-ETS
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
2005 2008 2013 2020

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!

EU ETS price and market activity Key : Dec 07 delivery Dec 08 delivery Dec 09 delivery Source: Point Carbon

Carbon Capture & Storage and the EU-ETS Power generation without CCS Number of installations Technology cost 0 20 40 60 80 100 1 10 100 1000 CO 2 price Earlier deployment through demonstration
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 CO 2 stored.
At €25 per tonne of CO 2 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.

http://blogs.shell.com/climatechange

Emissions Trading - More Detail

by David Hone on Mar 10, 2009

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