Emissions Trading - More Detail


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An overview of the structure of an emissions trading system, offering more detail and some thoughts on the EU-ETS.

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  • Emissions Trading - More Detail

    1. 1. Emissions Trading <ul><li>Emissions Trading in an energy & </li></ul><ul><li>climate change policy framework </li></ul><ul><li>A policy framework </li></ul><ul><li>Where to use “cap-and-trade” </li></ul><ul><li>The key question - allocation </li></ul><ul><li>Advantages of “cap-and-trade” </li></ul><ul><li>The EU-ETS </li></ul>David Hone Group Climate Change Adviser Shell International B.V.
    2. 2. 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
    3. 3. 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.
    4. 4. A structured policy approach is needed <ul><li>Encouraging radical design </li></ul><ul><li>Fiscal support for early 2 nd generation biofuel manufacture. </li></ul><ul><li>Public transport infrastructure </li></ul><ul><li>Fiscal support for large-scale CCS demonstrations </li></ul>Demonstrate <ul><li>Efficiency standards (appliances, air-con) </li></ul><ul><li>Use of project mechanisms linked to GHG market. </li></ul><ul><li>Encouraging “electrification”. </li></ul><ul><li>Vehicle efficiency standards </li></ul><ul><li>Incentivise fuels based on W-t-W CO 2 reduction. </li></ul><ul><li>Consumer behaviour </li></ul><ul><li>Use of public transport </li></ul><ul><li>“ Cap-and-Trade” </li></ul><ul><li>CCS rules and recognition </li></ul><ul><li>Renewable Energy Certificates </li></ul><ul><li>“ Fast-track” planning </li></ul>Deploy <ul><li>Urban planning decisions. </li></ul><ul><li>Education and awareness. </li></ul><ul><li>Support for advanced fuel development </li></ul><ul><li>Support for infrastructure (e.g. grids & pipelines) </li></ul>Discover & Develop Commercial & Domestic (Buildings) Transport Power Generation / Industry & Manufacturing Broad energy production and use R&D support
    5. 5. 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. &quot;Cap and trade&quot; emissions trading systems for power generators, most industrial facilities and large fleet transport such as aviation.
    6. 6. 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
    7. 7. Key principles of an Emissions Trading System <ul><li>The aim of an ETS is to direct investment capital towards lower CO 2 emission projects, via a market price for CO 2 emissions. </li></ul><ul><li>Therefore, the trading system should not remove that capital from the industries or firms covered by the system. </li></ul><ul><li>Design Features to be Discussed </li></ul><ul><li>Allocation of allowances </li></ul><ul><li>Banking and borrowing </li></ul><ul><li>Recognition of technologies </li></ul><ul><li>Constraints and limitations </li></ul><ul><li>External projects mechanisms (or offsets) </li></ul><ul><li>Linkage </li></ul>
    8. 8. 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
    9. 9. 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
    10. 10. 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
    11. 11. Banking and Borrowing in “cap-and-trade” <ul><li>As a rule, banking is accepted and borrowing isn’t. </li></ul><ul><li>Banking brings forward emission reductions. </li></ul><ul><li>Borrowing delays emission reductions. </li></ul><ul><li>Both banking and borrowing help to limit price volatility in a cap-and-trade system. </li></ul><ul><ul><li>Banking underpins the market during periods of low price. </li></ul></ul><ul><ul><li>Borrowing limits price rise by adding future allowances to the current pool. </li></ul></ul><ul><li>Unlimited banking with limited borrowing is a useful </li></ul><ul><li>construction within a cap-and-trade system. </li></ul>Trading period 5-7 years Annual compliance for each year Banking between years and trading periods  
    12. 12. Abatement technologies <ul><li>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. </li></ul><ul><li>Such technologies must be recognised early by the legal framework of the trading system. </li></ul>
    13. 13. CO 2 is a commodity
    14. 14. Artificial limits within the trading system <ul><li>Although created entirely by policy makers and legislation, an emissions trading market is still a market . As such, it should not be subject to; </li></ul><ul><ul><li>Price caps; </li></ul></ul><ul><ul><li>Price floors and / or reserve prices; </li></ul></ul><ul><ul><li>Arbitrary price management by oversight bodies or parliament; </li></ul></ul><ul><ul><li>Imposition of trading limits (e.g. offsets); </li></ul></ul><ul><ul><li>Unexpected rule changes; </li></ul></ul>
    15. 15. 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>
    16. 16. Advantages of Emissions Trading <ul><li>Advantages of emissions trading are: </li></ul><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>A trading system offers both compliance and policy flexibility. </li></ul><ul><li>The structure is simple. </li></ul><ul><li>It works. The trading system will deliver what it is asked to do. </li></ul><ul><ul><li>US sulphur trading has delivered the required cuts in sulphur emissions. </li></ul></ul><ul><ul><li>The EU system has suffered early data issues, not design issues. </li></ul></ul>
    17. 17. 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
    18. 18. Linking “cap-and-trade” systems <ul><li>The key metric in determining the ability to link is price . </li></ul><ul><li>When the prices of two systems are at similar levels there is scope to link them. </li></ul><ul><li>Therefore, design elements which directly determine price should be the same. Other design parameters can be different. </li></ul><ul><li>Determines Price </li></ul><ul><li>Direct price management (e.g. caps, floors etc.). </li></ul><ul><li>Banking and borrowing rules. </li></ul><ul><li>Offset rules. </li></ul><ul><li>Penalty rules. </li></ul><ul><li>Price neutral </li></ul><ul><li>Allocation approach (e.g. auctioning, benchmarking etc.) </li></ul><ul><li>Coverage (i.e. sectors and gases covered) </li></ul>
    19. 19. Evolution of the EU-ETS <ul><li>Phase I </li></ul><ul><li>Learning by doing </li></ul><ul><li>Discrete </li></ul><ul><li>No banking </li></ul><ul><li>Allocation </li></ul><ul><li>Conservative </li></ul><ul><li>Grandfathering </li></ul><ul><li>Trial auctions </li></ul><ul><li>Member State driven </li></ul><ul><li>Commission guidance </li></ul><ul><li>Establishes capacity </li></ul><ul><li>Some CER inflow </li></ul><ul><li>Phase II </li></ul><ul><li>The real thing </li></ul><ul><li>Kyoto compliance </li></ul><ul><li>Banking to 2012+ </li></ul><ul><li>Allocation </li></ul><ul><li>Still grandfathering </li></ul><ul><li>Some benchmarking </li></ul><ul><li>Regular small auctions </li></ul><ul><li>Commission guidance </li></ul><ul><li>Member States follow </li></ul><ul><li>Active liquid market </li></ul><ul><li>CER inflow rises </li></ul><ul><li>Phase III </li></ul><ul><li>Expansion – gases & sectors </li></ul><ul><li>-20% (or –30%) by 2020 </li></ul><ul><li>EU wide cap </li></ul><ul><li>Allocation </li></ul><ul><li>100% auctioning for powergen </li></ul><ul><li>Benchmarking for industry </li></ul><ul><li>Top decile benchmarks </li></ul><ul><li>Recognition of carbon leakage </li></ul><ul><li>Commission led </li></ul><ul><li>Member State compliance </li></ul><ul><li>Limited CER inflow </li></ul><ul><li>CCS recognition </li></ul>2005 2008 2013 2020
    20. 20. 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!
    21. 21. EU ETS price and market activity Key : Dec 07 delivery Dec 08 delivery Dec 09 delivery Source: Point Carbon
    22. 22. 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 <ul><li>Demonstration </li></ul><ul><li>EU Council of Ministers announces a 10-12 large-scale project demonstration programme. </li></ul><ul><li>EU Parliament supports the programme with a pool of 300 million bonus allowances offered for CO 2 stored. </li></ul><ul><li>At €25 per tonne of CO 2 this is worth €7.5 billion. </li></ul><ul><li>No single project to be awarded more that 45 million allowances bonus allowances. </li></ul><ul><li>Deployment </li></ul><ul><li>CCS recognised within the EU-ETS. </li></ul><ul><li>New CCS legislation sets standards for storage and establishes rules for long term liability. </li></ul>
    23. 23. http://blogs.shell.com/climatechange