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

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. 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.

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. "Cap and trade" emissions trading systems for power generators, most industrial facilities and large fleet transport such as aviation.

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

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

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

13. CO 2 is a commodity

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

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

23. http://blogs.shell.com/climatechange