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Lessons Learned Market-Based Approaches: European Union. The Mansfield Pacific Retreat Abyd Karmali 27 August 2003. Key Messages. Governments across the European Union are increasingly experimenting with market-based mechanisms to address environmental problems - PowerPoint PPT Presentation
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Lessons Learned Market-Based Approaches: European Union
The Mansfield Pacific Retreat
Abyd Karmali27 August 2003
2
Key Messages
Governments across the European Union are increasingly experimenting with market-based mechanisms to address environmental problems
EU will shortly launch world’s first international emissions trading market for greenhouse gases
EU-based companies have been encouraging a shift from command-and-control to more market-based approaches but are only now appreciating unanticipated impacts
3
Outline of Presentation
Overview of EU Market-Based Mechanisms
Case Study: EU Emissions Trading Scheme
Lessons Learned
4
Helping clients manage the
world’s natural,
physical,economic
resources in asustainable
way
Asset Acquisition & Deployment
• Wholesale power market and renewables energy analysis
• Transmission and interconnection assessment
• Asset valuation• Due diligence• Asset & portfolio optimisation
A global environment, economics, and energy consulting firm
Network Analysis
• Regulatory strategy• Network benchmarking• Network valuation• Value of transmission
Environment and Climate Change Management
• Regulatory analysis• Environmental strategy• Value-at-stake analysis• Emissions trading
analysis• Market mechanisms
design • Corporate Responsibility
Other Services
• Transport sector analysis• Energy efficiency• Information management
systems• Economic & community
development• Emergency management• Strategic communications
5
Overview of EU Market-Based Mechanisms
6
Agencies in EU increasingly using market mechanisms
Tradable permit systems– France: tradable development rights for land preservation
– Netherlands: tradable fishery quotas
Deposit-refund systems– Austria: electric bulbs
– Denmark: beverage containers and lead batteries
Environmentally motivated subsidies– Sweden: grants for bio-fuels
– UK: enhanced capital allowance for energy efficient technology
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Heterogeneous policies used across EU for green energy
Providing direct financial incentives• Investment-based: subsidies on green
investments, tax rebates, and incentives
• Output-based: feed-in tariffs or preferential rates
Setting green energy quotas• Tradable: certificates for green electricity produced
• Not-tradable: generators bid for capacity or are set portfolio quota
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Case Study: EU Emissions Trading Scheme
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EU ETS relies on ‘cap-and-trade’ approach
Limits are set on allowed emissions, the corresponding allowances can be freely traded amongst participating companies, so that:
Imposes direct cap on aggregate emissions – the source of the problem
Efficiency emerges from free trading Market-based, lowest-cost ‘price of carbon’
emerges from the trading market Also includes “baseline and credit” mechanism
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Overview of EU Emission Trading Scheme
Government (Member states determine allocations)
Absolute Target Holders
(>20MW generators)
Verification
ReportingApproval
Projects(JI, CDM)
Market
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Strong underlying rationale for an emissions trading scheme
-0,4
-30,7
-9,3
-8,4
-1,1
-0,3
-0,2
5,7
6,1
7,3
8,5
8,8
10,2
13,5
16,3
16,5
-40,0 -30,0 -20,0 -10,0 0,0 10,0 20,0
EU-15
Luxembourg
Germany
United Kingdom
Finland
Sw eden
France
Greece
Belgium
Italy
Austria
Netherlands
Portugal
Denmark
Ireland
Spain
Distance to target indicators (DTI): difference between (linear) targets and trends in 1999:
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Typical company abatement cost curves highlight benefits
• Q1 = total negative cost level of emissions abatement;
• (1) = total cost savings to company
• Q2 = total cost-effective level of emissions abatement and
• (2) – (1) = net financial cost to company
Cost/Price(£/tonne CO2
e)
Level of GHG abatement
(1)
(2)
US$10 (market price of GHG in trading system)
QN QC
Tonnes CO2
e
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EU ETS provides significant boost to the CDM markets
The Clean Development Mechanism provides companies opportunity to generate additional revenue
First two projects recently had their methodologies approved by the CDM Executive Board– Korea HFC emissions reduction project
– Brazil landfill gas management project
CDM credits can be sold into the EU ETS starting in 2008
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Lessons Learned
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Short-term drivers of value for EU based-companies
Markets for project-based
reductions
Governmentpolicies
Stakeholder Concerns
New revenuestreams
Operating costsProduct prices
Cashflows
SalesCost of capital
Key drivers
Value impacts
Can value impact be assessed?
Can be quantified and
compared against
transaction costs
Can be quantified and
competitiveness impacts analysed
Indirect, anecdotal data
only
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Impact on UK power plant asset value from choice of allocation method
0
20
40
60
80
100
120
140
160
180
200
ReferenceCase
Va
lue
In
de
x (
Re
fere
nc
e V
alu
e =
10
0)
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Impact of market-clearing price on a German power plant asset value
-50
0
50
100
150
200
250
300
Low Price Mid Price High Price
Incremental energy value Incremental emissions value Net incremental impact
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Summary of Lessons Learned
Market-based mechanisms provide a new driver of value for companies operating in the EU
The critical interface between governments and companies relates to the method for allocating new forms of property rights– Companies need to be meaningfully engaged in the
debate
Companies are only now realising the level of analysis required to fully appreciate the implications on their competitiveness
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For More Information
Abyd Karmali
Director, ICF Consulting
Hamilton House
Mabledon Place
Bloomsbury, London
WC1H 9BB United Kingdom
+44.(0).20.7554.8752
akarmali@icfconsulting.com
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