Divya Reddy Director, Global Energy & Natural … February 2014 Divya Reddy Director, Global Energy & Natural Resources 202-903-0017 [email protected] Global CO 2 Policy Challenges

6 February 2014

Divya Reddy

Director, Global Energy & Natural Resources

202-903-0017

[email protected]

Global CO2 Policy Challenges and lessons learned

Prepared for The Gasification Technologies Council

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Global Climate Change Policy

I. Multilateral negotiations

II. United States

III. European Emissions Trading System

IV. China

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I: MULTILATERAL NEGOTIATIONS

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I. Multilateral climate policy faltering

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• Lack of confidence in an international climate framework following weak outcome at

Copenhagen conference in 2009

• Fragile economic recoveries will prevent ambition on climate policies

• Developing-developed country divide will be tough to overcome

• UNFCCC talks continue to fail to show results, but expectations could build up ahead

of 2015 summit in Paris

• Uncoordinated actions from various countries continue, but lack of an overarching

global agreement likely lower ambition and make policies more vulnerable to reversal

Source: EIA


II. UNITED STATES

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Second-term Obama climate policy centered on power

sector regulations

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• Key component is GHG performance

standards for power plants (New Source

Performance Standards), though standards

for existing plants likely to be modest due

to power reliability concerns

• Stated timeline :

• September 2012: NSPS proposal for new

power plants

• June 2014: NSPS draft rule for existing

power plants

• June 2015: Finalize NSPS for existing plants

• NSPS for new plants to be aggressive and

costly for coal, even though new draft rule

will issue separate standards for coal and

gas plants


III: EU EMISSIONS TRADING SCHEME

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EU ETS design overview • Who’s covered: Power and industrial facilities; airlines

• Emissions reduction target: 20% reduction from 1990

levels by 2020

• Basic mechanics:

• Introduce a fixed number of emissions allowances into the market

each year

• Obligated facilities have targets that they can meet by buying

allowances or cutting emissions and selling allowances

• Three phases:

• Phase I (2005-2007)—pilot phase

• Phase II (2008-2012)—Kyoto phase

• Phase III (2013-2020)—current phase 8


EU emissions in decline since 1990

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Source: European Commission


Phase I (2005-2007) • Countries allocated allowances under national allocation plans

• Nearly all allowances given to business free of charge

• Non-compliance penalty set at €40/tonne

• Unreliable emissions data led to an overallocation—prices plunged to zero

• But pilot phase established trading infrastructure and allowed for better data

collection

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Phase II (2008-2012) • NAPs still used for allocations

• Free allowance share falls to at least 90%

• Kyoto Protocol offset introduced into market (CDM and JI)

• Penalty for non-compliance increased to €100/tonne

• Addressed overallocation by cutting supply by 6.5% from 2005 level

• But 2008 Eurozone crisis and ensuing economic downturn reduced

emissions—demand for allowances fell with price, again.

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Source: Bloomberg


Phase IIII (2013-2020)

• Under EU ETS Directive from Dec 2008, significant reforms enacted:

• Longer compliance timeframe

• Centralized, EU-wide cap and allowance allocation (discarded NAPs)

• Move away from free allocations toward full auctioning of allowances

• International offset reduced to 50% of compliance obligation

• But ongoing economic crisis continues to keep prices depressed, prompting

calls for structural reforms

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Source: Bloomberg


EU ETS in practice: Challenges • Price fluctuations: Data deficiencies and changes in economic outlook created major price swings

• Government intervention: The low carbon price has prompted efforts to intervene in the market to

prop up prices

• Carbon leakage: As energy-intensive industrial facilities see free allocations phased out, concerns

over carbon leakage will grow and could prompt renewed calls for a border carbon price for imports

• Energy costs: The issue of Europe losing competitiveness in manufacturing is becoming more

salient, and the ETS is in the crosshairs as a contributing factor

• Fuel mix: Disadvantages coal in the fuel mix, but keeps coal in the game if prices are low; fuel-

switching to renewables requires higher prices

• Political support: Various member states hold different positions, challenging agreement on reforms

• Member-state policy: Some countries like the UK and France have considered separate carbon

policies, challenging compliance

• International linkages: Given limited schemes outside of EU and unique considerations for each

program, linkages will prove challenges (Australia)

• Eurozone crisis: In addition to sending prices lower, the crisis has tested political backing for the

program and raised competitiveness concerns

• Emissions reductions: Given low price and other challenges, not clear how much of a motivating

factor the ETS has been

• Trading fraud: Incidents of tax fraud and stolen credits arose in 2010

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EU power prices challenging competitiveness

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Source: European Commission


ETS reforms

• Short-term fix: Backloading

• Longer-term fixes: Structural reform; post-2020 targets

• Backloading plan picks up steam

• Initial vote in April failed

• Revisions to water down—delays auctioning 900 million

allowances in 2013-2015 and reintroduce them in 2016-17

• Passed in European Parliament on 3 July

• Next step is passage in European Council—German position key

• Structural reforms more challenging

• Proposal for 40% reduction from 1990 levels by 2030

• 2030 targets will not be finalized until 2015

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Lessons learned

• Commodity created by government decree will be exposed to government intervention

risk—program changes will cause price volatility and challenge predictability

• Short compliance phases limit predictability for longer term corporate decision making

• Accurate emissions data is key to ensuring adequate supply to meet targets and

create a robust market

• Robust oversight required to avoid trading fraud that distorts the market for companies

trading for compliance purposes

• Free allocations can create windfalls for some companies whose allocation exceeds

their emissions

• Economic fluctuations that are not baked into emissions caps could send prices low

enough to fail to incentivize emissions reduction behaviors and investments

• Utilities were better placed to trade on data compared to industrial companies

• Although they lower compliance costs, offsets can prevent companies from

undertaking mitigation, especially if offset prices are low

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III: CHINA

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“Airpocalypse” drives environmental policy • Beijing is committed to addressing mounting

public concerns over air quality

• Policy goals include:

• Industrial consolidation

• Fuel-switching away from coal in the power

sector

• Efficiency and fuel quality improvements

• Plan to cut coal as share of energy mix from

67% in 2012 to 65% in 2017

• Focus on northern China—25% reduction in air

pollution between 2012-2017 (compared to 7%

under 12th FYP)

• Policy measures will include:

• Beijing is reforming fuel, gas and electricity

prices

• Pilot carbon trading started in Shenzhen, more

to follow

• Carbon/environmental tax likely next year

• Resource tax likely to be extended to include

coal

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Cap-and-trade pilot schemes • Seven pilot schemes to be launched:

• Shenzhen, Beijing, Shanghai, Guangdong, Tianjin, Chongqing, and Hubei

• Five schemes underway so far:

• Shenzhen, Beijing, Shanghai, Guangdong and Tianjin

• Some systems based on absolute emissions, others on carbon-intensity

• Disparity in systems will make national plan more challenging

• Trading platforms will extend beyond carbon to pollution and water permits.

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Source: EIA

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Documents

Divya Reddy Director, Global Energy & Natural … February 2014 Divya Reddy Director, Global Energy & Natural Resources 202-903-0017 [email protected] Global CO 2 Policy Challenges