Carbon Pricing and Environmental
Federalism
KINGSTON, ONTARIO
OCTOBER 17-18
ANDREI MARCU
IETA
Global GHG Market
Kyoto Party-Level
Entity-Level
Japan
Non-Kyoto Party
European Allowances
DET
Canada
Voluntary targets
DET
USA
Domestic ETS
EU ETS
2100 Mt
Alberta
2,6 Mt
CCX
25 Mt
Mandatory Cap & Trade Schemes
Existing
Mandatory Cap & Trade Schemes
To be launched
Voluntary Cap & Trade Schemes
RGGI
188 Mt
Swiss ETS
2,4 Mt
JVETS
0,5 Mt
Australian ETS
~ 500 Mt
NZ ETS
~ 70 Mt
Upcoming national ETS ?
Source: BlueNext
Carbon Market at a Glance
2006
2007
Estimates 2008
Volume
Value
Volume
Value
Volume
Value
1 104
24 436
2 061
50 097
3 172
117 504
NSW
20
225
25
224
NA
NA
CCX
10
38
23
72
63
315
1 134
24 699
2 109
50 393
3 235
117 819
Primary CDM
537
5 804
551
7 426
565
9 501
Secondary
CDM
25
445
240
5 451
520
14 912
JI
16
141
41
499
219
3 681
Other
33
146
42
265
53
481
Offsets
Subtotal
611
6 536
874
13 641
1 358
28 576
EU ETS
Allowance
Subtotal
Total
Source: World Bank, own estimations
1 745
31 235
2 983
64 034
4 593
146 394
4
Market Volume Growth 2007
(in MtCO2e)
Allowance Markets
Project-Based Transactions x 2.5
JI
x 1.0
41
EU Emission Trading Scheme
x 10
CDM
Secondary
CDM
551
2,061
240
x2
Voluntary
& Retail
42
New South Wales
Certificates
x3
25
5
x 1.3
Trades made on secured platforms have increased continuously since 2005…
… especially on spot trading where 95% of contracts have been traded on exchanges in 2008
against 85% in 2007.
Total volumes on European market (EUA) and breakdown between OTC and exchange trades
1 800
1 600
1 400
Volume en MtCO2
•
•
The Start of Period II of EU ETS
Exchange Vs. Brokers
1 200
31%
38%
2007
2008 (août)
1 000
800
28%
600
400
200
24%
0
2005
Volumes Brokers
2006
Volumes OTC Clearing
Volumes Ecran (bourses)
Source: BlueNext from Reuters
The Start of Period II of EU ETS
Spot Vs. Futures
•
Spot market has become more financial in the last months: more and more players are doing arbitrage between spot and
futures contract. This is due to the increasing liquidity seen on the spot market and number of members on BlueNext Spot.
In the actual context of financial crisis, investors try to diversify their investments. Carbon market, spot and futures, is a way
to enlarge their product portfolio.
Market Segmentation in 2008 on EUA markets
100%
90%
80%
70%
Market shares
•
60%
50%
40%
30%
20%
10%
0%
Jan-08
Feb-08
Mar-08
Spot market
Apr-08
May-08
Jun-08
Jul-08
Aug-08
Futures market (Dec08) - Screen trades
Source: BlueNext from ECX
Futures volumes breakdown by
maturity
On EUA market, volumes are concentrated on first delivery (December 2008).
However, on CER market, volume breakdown is more homogeneous
This can be explained by the fact that, on CER market, market players need to cover their total number of CERs
whereas on EUA market, they only need to cover the difference between emissions and allocation.
Réparition des volumes négociés par échéances (ECX)
du 14 mars au 14 septembre 2008
Millions
•
•
•
800
700
600
500
400
300
200
100
0
Vol Dec08
Vol Dec09
Vol Dec10
Volumes EUA (ECX)
Vol Dec11
Volumes CER (ECX)
Vol Dec12
Source: BlueNext à partir d’ECX
The Start of Period II of EU ETS
Prices Growing Oil price
Rumours on French
Conection to ITL
Moves in energy
prices
EUA Spot and Futures prices (€/t) and volumes
30
25
20
15
10
Spot EUA 05-07 prices (€/t)
Spot EUA 08-12 prices (€/t)
Jun-08
Apr-08
Feb-08
Dec-07
Oct-07
Aug-07
Jun-07
Apr-07
Feb-07
Dec-06
Oct-06
Aug-06
Jun-06
Apr-06
Feb-06
Dec-05
Oct-05
Aug-05
0
Jun-05
5
Futures EUA front settlement (€/t)
Source: BlueNext, ECX
Supply/demand outlook until 2012
The Kyoto Balance
4000
3500
870,0
1325,0
3000
413,0
2500
201,0
189,0
248,0
2000
763,0
4,0
454,0
101,0
1500
8,0
1000
1208,2
1 510,0
500
279,8
0
EU Gap
Japan's
Gap
ROE &
NZ
Canada's EU Policy
Gap
Steps
Japan
Policy
Steps
EU Sinks
Japan
Sinks
ROE/NZ EU CER &
Sinks
ERU
Japan
CER &
ERU
ROE/NZ
CER &
ERU
CER &
Current
ERU
Shortfall
Credits
Available
Now
EU and Member State Targets for 2012 (Kyoto Protocol targets)
Russia Kyoto
target: + 5%
EU 15: -8%
10%
0%
1%
4%
-8%
-8%
- 21%
13%
-8%
-12,5%
-6%
-6%
-7,5%
-8%
-21%
- 28%
-8%
-13%
-6%
0%
- 8%
- 8%
- 8%
27%
- 6,5%
25%
15%
Cyprus and Malta
have no targets
The EU ETS – history, assessment and future developments
EU ETS – original piece of legislation was approved in 2003.
EU ETS is structured in separate phases:
Phase I or pilot phase – ran from 1 January 2005 to end 2007.
Learning by doing phase, not linked to the Kyoto protocol, separated
from following phases or trading periods.
• Phase II – ongoing – 2008 to end 2012, based on existing directive,
builds on experience gathered in phase I, linked to Kyoto protocol.
• Phase III – under negotiation, object of review of Emissions Trading
System – 2013 to…??
•
•
•
•
Key features of Phase I and II
• Emission permits “ EU Allowances - EUAs” distributed by Member
States (MS)
• Total amounts of EUAs negotiated between MS and European
Commission – competitive distortions within sectors across MS
• Most emission permits distributed for free – only about 3 % now
auctioned
• Access to Kyoto Protocol flexible mechanisms – cheaper
compliance means,ensures involvement of developing countries in
international negotiations
• Establishment of solid Monitoring, Reporting and Verification
system
• High penalties – 40 €/Tonnes + “make good” provision
EU ETS – blueprint for a global C+T ?
• Is the EU ETS a success so far ?
• Are there lessons to be learned from P1 and beginning of P2 ?
• What are the key areas and how do they differ from jurisdiction to
jurisdiction
• How compatible must it be with other DETs ?
• Can it be a docking station for global C+T ?
• Lessons important in a number of areas
– Allocation
– Data availability
– Interaction with other policies and measures
Assessment of Phase I
Phase I a success – although there is scope for improvement
1. Incorporated price of carbon in products – price of carbon now high on
Board agendas and key for investment decisions
2. Set up MRV system: backbone of ETS, ensures that a tonne of carbon is
a tonne of carbon and can be traded
3. Engine of CDM system – key for international negotiation and to rach
an international agreement
Main criticisms:
• EU ETS a failure because price crashed - unfounded
• No abatement in GHG emissions - unfounded
• Windfall profits for electricity firms – partially true but addressed in
EU ETS review
• Competitive distortions among sectors in the EU – partially true but
addressed in EU ETS review
Allocation Experiences
Learning from Phase 1
• Working environment
• Short time frames
• Lack of actual data
• Choices
–
–
–
–
–
Highest demand on power sector
Use of recent data
Little auctioning
Entrance/closure provisions
Unclear boundaries/coverage
• Process
Allocation Experiences
Learning from Phase 1
• Role of stakeholders
• Coordination role of the EC
• Lessons Learned
•
•
•
•
•
•
•
Pilot phase was useful
Conditions for creating “windfall profits”
Impact of new entrance/closure provisions
Importance of actual data
Competitive impacts limited
Impact of political advocacy at local/national level
Role of EC to enforce environmental delivery
Allocation Experiences
Learning from Phase 1
• Lessons Learned
•
•
•
•
More use of ET
Use by government of CERs and ERUs
No use of post adjustment
Allocation plans too complex
The Emerging Verdict on Phase 1
• The ambition level was
modest and the price
impact was only felt in
the first half
• Nevertheless, some
emissions reduction
from BAU took place
• Impact on investment
understandably slight
EU-ETS Phase 2 Levels of Ambition
A much tougher approach...
MS
2005
allowances
2005
Verified
Emissions
NAP 2
As
submitted
European
C’ion
response
CER/ERU
limit
(%)
Belgium
62.9
55.4
60.8
58.5
8.4
Czech R
97.6
82.5
102
86.8
10.0
Germany
499.0
474.6
482
453.1
22.0
Spain
174.4
183.6
152.7
152.3
20.0
UK
245.3
242.5
245.4
246.2
8.0
TOTAL
EU27
2313.9
2137.1
2351.9
2081.3
13.7
New Guidance for P2
•
•
•
•
•
•
•
•
Progress towards KP targets trajectory
Setting national caps according with potential
Substantiation of government purchases
Substantiation of other policies and measures
Guidance on CDM/JI
Use of benchmarking
Definition – e.g. combustion installation
Installation size
Review of the EU Emission Trading
Scheme
EU Commission proposal published on 23 January 2008.
Based on unilateral EU reduction goal: -20 or - 30% agreed in March 2007
Main elements of EU ETS phase III:
- Centralised cap – reduction factor set until 2028
- Longer allocation periods – 8 years
- Auctioning for power & CCS sectors: 100%
- ‘Suggested’ Earmarking of revenues+ some auctioning to ‘poor’ Member States
- Potential Benchmarking for energy intensive sectors – 20% initial auctioning
- Up to 100% free allowances for sectors exposed to carbon leakage
- Broadening of scope for combustion plant, new sectors e.g. Chemicals, Aluminium, CCS
and other KP gases e.g N2O, PFCs
- Quantitative and qualitative limits to CDM-JI access
- Banking: Specifically allowed from Phase II in Phase III
- EUETS Projects to be considered, exclusion of small emitters with conditions
- Linking to emerging international schemes
•
•
•
•
•
•
•
•
•
•
•
Where were the Political Problem
Areas?
Level of ambition vs competitiveness
Auctioning vs free or benchmarked
allocation
Application of auction revenues
Forestry – “something must be done”
CDM – suddenly come alive
Speculators!
Special weighting for CCS or other favoured technologies
Carbon leakage, and the international negotiations
Border adjustments diminishing
Special member-state circumstances (eg dependence on
Russian gas) and ...getting it all done by December 08
Source: Mission
Climat/Caisse des
Depots
CAP
•
•
•
•
•
•
•
•
•
- 21 % below 2005 emissions ( vs 10% for the non-trading sectors)
Max. cap : 1720 MT by 2020, yearly average:1846 MT
Reduction of about 11% compared to Phase II cap
From 2010 the total number of allowances to decrease by 1.74% /yr - ~37 Mt with
current ETS coverage
Starting point for reductions: average quantity of allowances of cap of Phase II
Reduction factor valid until 2028 – EC to propose review by 2025
8-year trading periods
Total quantity of allowances to be adjusted to take account of enlarged scope in phase
II and III
Cap to be strengthened if international agreement is reached
Centralised cap coupled with medium and LT targets, and linear factor until 2028 give
certainty in terms of environmental goal and investments- key positive aspects of the
proposal
How will allowances be distributed?
• The power sector and CCS to be fully auctioned from
2013 – exception for heat emissions from high
efficiency CHP installations
• Other sectors including refining, shall receive 80% of
the free allocation benchmark in 2013. This
percentage will be reduced gradually - no free
allowances by 2020.
• Sectors exposed to the risk of leakage may receive up
to 100% free allowances
Allocation methods
• Auctioning will be the preferred tool for allocation (“it
is the simplest and most economically efficient
system”)
• At least 60% of allowances should be auctioned in
2013. Of these:
• Member States will receive 90% of the total quantity
of allowances to be auctioned according to their
relative share of 2005 emissions in the EU ETS.
• 10% of the quantity of allowances to be auctioned
should be distributed to poorer Member States for
the ‘purpose of solidarity and growth’, to reduce
emissions and adapt to climate change.
Revenues from auctioning
At least 20% of the revenues should be earmarked to:
• Reduce GHG emissions, to adapt to climate change and to
fund R&D
• To meet the EU 2020 targets for renewable energies and
energy efficiency
• For CCS, in particular from coal power stations;
• For measures to avoid deforestation, in particular in LDCs
• To address social aspects in lower and middle income
households, e.g. by increasing energy efficiency and
insulation
• To cover administrative expenses of the management of
the ETS
Carbon Leakage
•
•
•
By 30 June 2010: EC to identify which the energy intensive industry sectors or sub
sectors are exposed to carbon leakage.
Assessment based on “inability of each sector to pass through costs” ”without
significant loss of market share” to other installations in jurisdictions that do not apply
a price to carbon”
Specific criteria to assess leakage will cover:
– (a) the extent to which auctioning would lead to a substantial increase in production cost;
– (b) GHG reduction potential of individual installations in the sector concerned
– (c) market structure, relevant geographic and product market, the exposure of the sectors to
international competition;
– (d) the effect of climate change and energy policies implemented outside the EU in the
sectors concerned.
•
By June 2011 at the latest the EC will submit a report and propose measures: i.e.
– distributing these sectors up to 100% free allowances or
– setting up a “carbon equalisation system”
– indirect emissions may be taken into account (recital 19):
The Competitiveness Puzzle – not many sectors seriously affected but the effect
is real
100% @
€45/tCO2
Cement
Note: Trade sensitivities estimated from range of historical variability
Source: Data from CIRED, as presented in Carbon Trust (2008)
100% @
€45/tCO2
Steel
Addressing Competitiveness Issues
• Cross border taxation schemes
• Production based allocation with benchmarking
OR redistribution of proceedings
• Global sectoral agreements
Instruments relevant to UK business sector energy use – current
and potential new ones
Target segments
Energy
intensive
Existing measures
New
measures
• CCL/carbon tax
• CCA
• UK ETS
• EU ETS
• Building regulations
• Enhanced capital allowances
• Funded programmes (CT)







• Buildings - business rates / standards
• Project based trading
• SME White certificate trading
• Product standards

Large
non-energy
intensive

SMEs














Instruments relevant to UK generation
Existing measures
New
measures
• EU ETS & variants:
• Allocation & new entrant principles
• Auctioning
• Renewable obligation certificates (ROCs)
• LCPD
• NETA balancing / other rules
• Transmission charging regime
• Distribution & connection charging regimes
• Funded programmes (CT)
• Carbon tax??
• Banded ROCs?
• Nuclear incentives (insurance, disposal, etc ..?)
• End-use related measures (Cogen, PV, ..?)
Market research suggests a combination of business needs,
regulation, fiscal and support measures drive energy efficiency uptake
Derived importance of factors in influencing energy efficiency decisions
Energy price and cost savings
Other current regulation/Company policy
Competitiveness / Investors expectations
Future impact and risk of climate change
Climate Change levy
Customer requirements/Brand and PR
Support provided by Action Energy
What is the most effective
combination of factors?
Climate change agreements
Enhanced Capital Allowances
General economic outlook of the UK
Environmental interest groups
Increasing importance
Source: NOP research and conjoint analysis June 2003; sample of 1332 organisations across industry, commercial and public sectors
Avoiding Double Counting Between CCA & EU ETS
• Issue
– Operator reduces emissions under EU ETS
– Can use that under CCA
– Can be double counted under UK ETS
– Double counting is avoided by adjusting CCA
target
Summary of the Market Sentiment
Survey
-
• Strong confidence in the longevity of
the market;
• Continuing strong growth in trading
volumes up to and beyond 2012;
• Significantly higher prices beyond 2012;
• Continued significant role for project
based credits, but less optimistic about
growth post-2012;
• A greater demand for VERs, and the
appropriate infrastructure to set up a
robust and reliable market.
73%
+
April
2008
79%
April
2007
Source: IETA
IETA Vision: Global GHG Market Post
2012
Canada Japan
?
EU ETS
CO2 Only
?
EU ETS
CO2 only,
Full Global
Trading
Large Sources of
CO2, CH4, N2O
HFC, PFC, SF6
All Major Emitting
Countries
CDM: Any gas, any sector
Non-EU JI:
Any gas, any sector
Phase 1
Phase 2
Beyond 2012
Eligibility of Project-Based Instruments
Post 2012
China
India
NIS
High Emissions
Low Wealth
Emissions
?
Brazil
?
Ukraine
High Emissions
High Wealth
Korea, Mexico,
South Africa
OPEC
Kyoto Protocol
Annex B
Latin America
?
Small Island States
Low Emissions
High Wealth
Israel
Singapore
?
LDC Africa
CDM/JI Credits
37
Allowances
Asian Tigers
Low Emissions
Low Emissions
Low Wealth
Low Wealth
37
OECD
Russia
Wealth
Post 2012
Agreement?
Do you know if you are in the grace of God ?
• Heavily criticized – death by a thousand cuts
• They will always be more complex than C+T
• Play an important role in addressing climate
change for certain sectors and countries
• Part of the current and likely future
international & national regimes
• Press & academic studies (e.g. Wara & Victor)
• There are issues that can and should be solved
Do Offsets Deliver ?
Arguments For CDM
• Lower the cost of compliance in Annex 1 –
good cost control mechanism
• Support SD development
• Engage non Annex 1 in fighting CC
Do Offsets Deliver ?
Arguments Against CDM/Offsets
• No environmental integrity – Chinese projects/non industrial gases
projects would take place anyway
• Additionality impossible to show
• Cannot produce enough and on time to act as a control mechanism
• HFC – a rip off
• Concentrated projects
• Little time in KP1, high uncertainty
• Subsidy for China
• Voluntary markets are full of charlatans
Therefore they cannot be useful in one of its main roles and we need
another mechanism – safety valve
Death by a thousand cuts
• Circular arguments
• No desire to help reform the instrument – simple
but effective remedies available
• Born out of an academic view – not a
practitioner’s perspective
• Many good projects do not get funded
• Real competition at assets allocation
• Many factors – GHG will always be only one
• Speed of change is critical as change itself
Reality of CDM
• An imperfect mechanism – offsets will always be less than C+T and a
transitory measure
• Added complexity due to institutional arrangements
• Problems in communication
• No predictatibility and precedent setting
• Long lead times for projects
• No clear accountability
Conclusion – need for reform
• More Board-like behavior
• Move away from project by project
• Trust DOEs
• Clear accountaibility