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Emissions trading: The politics of design
CAN EECCA General Assembly 21 February 2014 (Tbilisi)
Sanjeev Kumar+32 499 539731
[email protected](Skype) sanjeev.kumar.1973
www.changepartnership.orgwww.changepartnership.org
Contents
What is emissions trading?
Design elements
Politics of ETS
Post 2015
International carbon markets Clean
Development Mechanism
(CERs)
1. Annex 1 countries given Assigned Amount Units (AAUs). Tradable via Track II through proven emission reduction activities e.g. Green Investment Schemes
2. EU main market but large surplus. EU blocked Ukrainian & Russian credits entering EU 202020 targets.
Joint Implementati
on (ERUs)
Kyoto: AAUs
1. Available for transition countries who could benefit from emission reduction projects from Annex 1 countries.
2. Limited demand from EU.
3. Uncertain future due to post 2015 international treaty.
1. Credits made from emission reduction projects outside Annex 1 countries.
2. Annex 1 countries can use these allowances to meet domestic compliance requirements.
3. Many controversies. Possible evolution to sectoral crediting.
4. Demand from EU nearly over.
What is emissions trading?
Polluting installations compete to
reduce emissions
Cap on total volume of emissions within a given time period and from determined polluting sources.
Emissions turned into tradable permits
of 1 tonne CO2
Or buy allowances to cover their
emissions
ETS compared to other solutions?
Tax1. Certainty on price of tax.
2. No certainty on volume of emission reductions to be achieved.
3. Know cost of decarbonisation.
Regulation ETS1. Certainty on
emission limit.2. Everyone has to
meet it at the same time.
3. Know cost of decarbonisation.
1. Certainty on emission limit.
2. Everyone has to meet limit but at different times.
3. Don’t know cost of decarbonisation.
Contents
What is emissions trading?
Design elements
Politics of ETS
Post 2015
ETS design overviewScopeScope
Offsets/price control
Offsets/price control
Distributing allowances
Distributing allowances
Compliance rules
Compliance rules
VerificationVerification
TargetTargetPolitical commitment
Political commitment
Governance rules
Governance rules
Who? What?
Free vs buying them
ensure everyone takes part
ensure everyone takes part
Timeline
Too high vs too low
Trust in data
Trust in data
Design in detailTargetTarget
Target?Target?
Base year?Base year?
CO2e by a certain dateCO2e by a certain date
Crucial to ensuring target drives meaningful change
Crucial to ensuring target drives meaningful change
EU experience:
Target: Stabilise GHG emissions below 2,082 Million tonnes of CO2 (MtCO2) from 2005-2007 and reduce to 1,930 Mt CO2 between 2013-2020.
Base year: Originally 2005 but this data was not correct so changed to 2008 verified emissions (real emissions in ETS sectors). From this easy to measure actual reductions.
Base
EU experience:
Target: Stabilise GHG emissions below 2,082 Million tonnes of CO2 (MtCO2) from 2005-2007 and reduce to 1,930 Mt CO2 between 2013-2020.
Base year: Originally 2005 but this data was not correct so changed to 2008 verified emissions (real emissions in ETS sectors). From this easy to measure actual reductions.
Base
ScopeScope Sectors?Sectors?
Gases?Gases?
Who makes reductions?Who makes reductions?
CO2 only or other GHG gases?CO2 only or other GHG gases?
EU experience:
Sectors:- power generation, heavy industry and aviation because they are large point sources of GHG emissions. - installations covered not companies. Forces investment decisions within a plant rather than being hidden within a company. - Upstream system focused on producers of emissions. Not downstream approach on consumers which is unlikely to drive change. - Defining sectors problematic: What is a power generator? CHP generators power but is paper & pulp sector…
Gases: EU ETS started off which CO2 but now includes N2O and PFC
EU experience:
Sectors:- power generation, heavy industry and aviation because they are large point sources of GHG emissions. - installations covered not companies. Forces investment decisions within a plant rather than being hidden within a company. - Upstream system focused on producers of emissions. Not downstream approach on consumers which is unlikely to drive change. - Defining sectors problematic: What is a power generator? CHP generators power but is paper & pulp sector…
Gases: EU ETS started off which CO2 but now includes N2O and PFC
ComplianceCompliance EnforcementEnforcement
PenaltyPenalty
Ensuring everyone participates.Ensuring everyone participates.
Incentivises trading or emission reductionsIncentivises trading or emission reductions
EU experience:
Enforcement:- 2 test cases: Ireland and UK. Irish company did not want to take part saying ETS was unlawful. Irish court said that they were in breech of EU law and would face a prison sentence. UK court made similar stance but threatened large fine on company. - EU ETS has highest compliance rate than any other legislation in EU history.
Penalty: Automatic fine of 40 €/t CO2 (until 2007), 100 €/t CO2 (from 2008) for every tonne of CO2 that is not matched with an ETS allowance. This drives buying and selling of allowances
EU experience:
Enforcement:- 2 test cases: Ireland and UK. Irish company did not want to take part saying ETS was unlawful. Irish court said that they were in breech of EU law and would face a prison sentence. UK court made similar stance but threatened large fine on company. - EU ETS has highest compliance rate than any other legislation in EU history.
Penalty: Automatic fine of 40 €/t CO2 (until 2007), 100 €/t CO2 (from 2008) for every tonne of CO2 that is not matched with an ETS allowance. This drives buying and selling of allowances
Distributing allowances
Distributing allowances AuctioningAuctioning
EU experience:
Auctioning:- 100% allowances given for free during 2005-2007. Companies made mega windfall profits (money for doing nothing) and encouraged power companies to invest in coal!!- 2008-2012: Power sector in Germany and the UK given 10% allowances for free. Led to carbon price of about €30. - Difference between auctioning and selling allowances: Selling based on whatever price of ETS is on the day. Auctioning, if there is scarcity of allowances, means installations could bid up the price of allowances to much higher price. - From 2013 all power companies have to purchase ETS allowances from auctions.
EU experience:
Auctioning:- 100% allowances given for free during 2005-2007. Companies made mega windfall profits (money for doing nothing) and encouraged power companies to invest in coal!!- 2008-2012: Power sector in Germany and the UK given 10% allowances for free. Led to carbon price of about €30. - Difference between auctioning and selling allowances: Selling based on whatever price of ETS is on the day. Auctioning, if there is scarcity of allowances, means installations could bid up the price of allowances to much higher price. - From 2013 all power companies have to purchase ETS allowances from auctions.
Distributing allowances
Distributing allowances Free allocationFree allocation
EU experience:
Free allocation:- Grandfathering: Giving allowances based on historic emissions. Problem is that it incentivises increasing pollution in order to get more allowances. Also, rewards the most polluting and reduces benefits to installations that have reduced emissions. - Benchmarking: introduced from 2013. 80% free allocation for industrial installations based on 10% best performing in terms of GHG (not energy efficiency). This is the threshold applied to the whole sector so more polluting installations get less allowances for free.
EU experience:
Free allocation:- Grandfathering: Giving allowances based on historic emissions. Problem is that it incentivises increasing pollution in order to get more allowances. Also, rewards the most polluting and reduces benefits to installations that have reduced emissions. - Benchmarking: introduced from 2013. 80% free allocation for industrial installations based on 10% best performing in terms of GHG (not energy efficiency). This is the threshold applied to the whole sector so more polluting installations get less allowances for free.
Monitoring, Reporting & Verification
(MRV)
Monitoring, Reporting & Verification
(MRV)
Confidence buildingConfidence building
EU experience:
Free allocation:- Key for confidence in the whole scheme. Ensures each tonne of CO2 is the same. Installations really are measuring emissions in the same way across and between sectors and that stated emissions at the end of the year are real.- Companies will only buy and sell when this data comes out. - Yearly monitoring ensures liquid market (many buyers and sellers). Data realised every May. Indicates where the market was short (undersupplied increasing demand and price for allowances) or long (over supplied so price falls).
EU experience:
Free allocation:- Key for confidence in the whole scheme. Ensures each tonne of CO2 is the same. Installations really are measuring emissions in the same way across and between sectors and that stated emissions at the end of the year are real.- Companies will only buy and sell when this data comes out. - Yearly monitoring ensures liquid market (many buyers and sellers). Data realised every May. Indicates where the market was short (undersupplied increasing demand and price for allowances) or long (over supplied so price falls).
Price management
Price management International/domestic offsets or price ceilingInternational/domestic offsets or price ceiling
EU experience:
- Relationship with target (Cap) - EU originally added CDM/JI on top of ETS cap. Increased cap by about 1 billion allowances. Reason why there is a surplus today. - From 2013, CDM/JI only 49% of ETS requirement and limited only to projects from Least Developed Countries (LDCs). From 2020 onwards virtually no demand forecast from EU.- No price ceiling in practice but this issue coming back now in post 2020 context. Price floor being introduced now. - Provision for domestic offsets and desire but currently blocked by the European Commission.
EU experience:
- Relationship with target (Cap) - EU originally added CDM/JI on top of ETS cap. Increased cap by about 1 billion allowances. Reason why there is a surplus today. - From 2013, CDM/JI only 49% of ETS requirement and limited only to projects from Least Developed Countries (LDCs). From 2020 onwards virtually no demand forecast from EU.- No price ceiling in practice but this issue coming back now in post 2020 context. Price floor being introduced now. - Provision for domestic offsets and desire but currently blocked by the European Commission.
BiomassBiomass Impact on actual emission reductionsImpact on actual emission reductions
EU experience:
- biomass classed at GHG neutral. Big incentive to use biomass for coal-fired power generation. In real terms this increases GHG emissions and keeps coal-fired power generation capacity longer. Big mistake in EU ETS scheme.
EU experience:
- biomass classed at GHG neutral. Big incentive to use biomass for coal-fired power generation. In real terms this increases GHG emissions and keeps coal-fired power generation capacity longer. Big mistake in EU ETS scheme.
Domestic offsets
Domestic offsets Accounting trick or real emission reductionsAccounting trick or real emission reductions
- Likely to be an option for EECA region. Included in Kazakstan scheme.
- Not used in EU ETS at present. Controversial solution. Key block is that it puts pressure on governments to make up the shortfall in emissions taken out of their management and used for compliance in the EU ETS.
- Also, lack of certainty on marginal cost of abatement for these projects and whether they can be produced at scale. If they are, they increase the supply for allowances and therefore should reduce the price.
- Likely to be an option for EECA region. Included in Kazakstan scheme.
- Not used in EU ETS at present. Controversial solution. Key block is that it puts pressure on governments to make up the shortfall in emissions taken out of their management and used for compliance in the EU ETS.
- Also, lack of certainty on marginal cost of abatement for these projects and whether they can be produced at scale. If they are, they increase the supply for allowances and therefore should reduce the price.
Contents
What is emissions trading?
Design elements
Politics of ETS
Post 2015
Climate decision makersMerkelTusk
HollandeCameron
MerkelTusk
HollandeCameron
Van RompuyVan Rompuy
BarrosoBarroso
FaithFaith UnionsUnionsNGOsNGOs HealthHealth SkepticsSkepticsScienceScience EconomistsEconomists MediaMedia
Key players
SteelSteel RefineriesRefineries Paper & pulpPaper & pulpCementCement
Power generatorsPower generators
Envi ministries
Envi ministries
IndustryministriesIndustry
ministriesFinance
ministriesFinance
ministries
AviationAviation
International offsets
International offsets
NGOsNGOs
Developing countries
Developing countries
BanksBanks
Trade UnionsTrade Unions
Institutional investors
Institutional investors
Financial advisors
Financial advisors
AcademiaAcademia
Technology developers
Technology developers
EU ETS
FaithsFaiths
Health community
Health community
ScientistsScientists
EconomistsEconomists
GermanyGermany PolandPolandFranceFrance UKUK
MediaMedia
ETS narrative battlegroundCarbon leakageCarbon leakage
doesn’t incentivise decarbonisation
doesn’t incentivise decarbonisation
Needed to manage priceNeeded to manage price
OffsetsOffsets
Investment out of countryInvestment out of country
cost pass-throughcost pass-through
Competitors don’t have legislationCompetitors don’t have legislation
Windfall profitsWindfall profits
Industry viewIndustry view Our viewOur view
High electricity prices
High electricity prices
Burdens poorest consumersBurdens poorest consumers
186 countries legislate on climate
186 countries legislate on climate
Economy worse off in long-runEconomy worse off in long-runDomestic offsets incentivise investment
in other sectorsDomestic offsets incentivise investment
in other sectors
Artificial low price without externalities
Artificial low price without externalities
Right price needed for EE & RES
Right price needed for EE & RES
Makes industry uncompetitiveMakes industry uncompetitive
Contents
What is emissions trading?
Design elements
Politics of ETS
Post 2015
Global ETS development
2013
IETA 2013
Post 2015 confusion & chaos No clarity on what post 2015 will look like but key questions to guide thinking:
• World Bank Partnerships for Market Readiness: To continue to support establishment of carbon markets globally.
• Nationally Appropriate Mitigation Acts (NAMAs): Will these generate credits? Volume, transaction costs? Crowding out by REDD+ credits? what is the demand going to be like?
• CDM: What will happen to the CDM? Will it be reformed? will it be replace by NAMA credits? who will buy CDM allowances?
• Deforestation and degradation (REDD+): Strong financial and political lobby for REDD+ credits. EU ETS reform to be first major test for international take up. What will this do for non-REDD+ credits?
• Future of Kyoto Protocol Assigned Amount Units (AAUs) in new international treaty?
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