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The
Eur
opea
n C
O2
Em
issi
ons T
radi
ng S
chem
e
A. D
enny
Elle
rman
MIT
Ener
gy a
nd C
limat
e Fo
rum
Tufts
Uni
vers
ityO
ctob
er 1
9, 2
006
MIT
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Top
ics
•W
hat i
s the
EU
ETS
?•
Pric
e fo
rmat
ion
and
beha
vior
•20
05 R
esul
ts: A
bate
men
t?•
Allo
catio
n ch
oice
s•
Bro
ader
impl
icat
ions
MIT
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The
EU
ET
S (1
)•
25-s
tate
mul
tinat
iona
l CO
2tra
ding
syst
em•
Cla
ssic
cap
-and
-trad
e co
verin
g la
rge
sour
ces
–A
bout
45%
of E
U C
O2
emis
sion
s•
Hyb
rid im
plem
enta
tion
of K
yoto
Pro
toco
l–
Trad
ing
and
non-
tradi
ng se
ctor
s–
Dec
entra
lized
cap
with
in a
cap
with
CD
M li
nkag
e•
2005
-07
trial
per
iod,
200
8-12
seco
nd p
erio
d,
and
post
201
2 pe
riods
MIT
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The
EU
ET
S (2
)•
A si
gnifi
cant
tech
nica
l and
pol
itica
l ac
hiev
emen
t–A
not
able
exc
eptio
n in
the
Euro
pean
co
nstru
ctio
n•
Two
sign
al a
ccom
plis
hmen
ts–A
n ef
fect
ive
cons
train
t on
CO
2em
issi
ons (
10%
of g
loba
l tot
al)
–Lin
kage
to o
utsi
de sy
stem
s, cr
edits
MIT
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Top
ics
•W
hat i
s the
EU
ETS
?•
Pric
e fo
rmat
ion
and
beha
vior
•20
05 R
esul
ts: A
bate
men
t?•
Allo
catio
n ch
oice
s•
Bro
ader
impl
icat
ions
MIT
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EU
A P
rice
sJa
n 05
–O
ct 0
6
€ 0
€ 5
€ 10
€ 15
€ 20
€ 25
€ 30
€ 35 1/
7/05
4/7/
057/
7/05
10/7
/05
1/7/
064/
7/06
7/7/
0610
/7/0
6
Wee
kly o
bser
vatio
ns
Euros
EUA
Spot
Dec
05
Dec
06
Dec
07
Dec
08
MIT
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Tw
o Pr
omin
ent F
eatu
res
•H
ighe
r tha
n ex
pect
ed p
rices
–En
ergy
pric
e re
latio
ns–
Adv
erse
wea
ther
–In
stitu
tiona
l fea
ture
s•
Shar
p ad
just
men
t upo
n re
vela
tion
of
low
er th
an e
xpec
ted
emis
sion
s–
All
prio
r inf
orm
atio
n w
as sp
ecul
ativ
e•
Sim
ilar r
espo
nse
in U
S SO
2pr
ogra
m–
Info
rmat
ion
& re
late
d m
arke
ts m
atte
r
MIT
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Tem
pora
l Tra
ding
: A
n Im
port
ant P
rici
ng F
eatu
re•
Unr
estri
cted
intra
-per
iod
bank
ing
and
borr
owin
g, b
ut n
one
betw
een
perio
ds•
Res
ult i
s inc
reas
ed p
rice
vola
tility
, esp
ecia
lly
for s
hort
1stpe
riod
•Y
et, d
efin
ite te
nden
cy fo
r 1st
and
2ndpe
riod
pric
es to
mov
e to
geth
er–
Ref
lect
s ban
king
of C
DM
cre
dits
, als
o lim
ited
bank
ing
in F
ranc
e an
d Po
land
MIT
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Tem
pora
l Res
tric
tion
Doe
s Aff
ect P
rice
s
(30
%)
(20
%)
(10
%)
0%
10
%
20
%
30
%
40
%
50
%
60
%
23
-S
ep
-0
5
21
-O
ct-
05
18
-N
ov-
05
16
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ec-
05
13
-Jan-
06
10
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eb
-0
6
10
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ar-
06
7-
Ap
r-0
6
5-
May-
06
2-
Jun-
06
30
-Jun-
06
28
-Jul-
06
25
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ug
-0
6
22
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ep
-0
6
20
-O
ct-
06
Time Premium
Sp
ot
- 07 S
pre
ad
07 -
08 S
pre
ad
MIT
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Sum
mar
y on
Pri
cing
•A
vis
ible
sing
le p
rice
thro
ugho
ut th
e EU
–A
llow
s equ
aliz
atio
n of
mar
gina
l cos
t and
le
ast-c
ost a
bate
men
t•
Trad
ed v
olum
es h
ave
been
sign
ifica
nt–
Abo
ut 2
0%, a
s in
early
yea
rs o
f SO
2tra
ding
–M
ostly
OTC
trad
ing,
but
als
o ex
chan
ges
•EU
A p
ricin
g is
mor
e ra
tiona
l tha
n no
t
MIT
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Top
ics
•W
hat i
s the
EU
ETS
?•
Pric
e fo
rmat
ion
and
beha
vior
•20
05 R
esul
ts: A
bate
men
t?•
Allo
catio
n ch
oice
s•
Bro
ader
impl
icat
ions
MIT
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Ove
r-al
loca
tion
or
Aba
tem
ent?
•20
05 d
ata
show
ed e
mis
sion
s abo
ut 7
5 M
t or
4% le
ss th
an a
llow
ance
s•
Wid
ely
seen
as e
vide
nce
of “
over
-allo
catio
n”–
But
aba
tem
ent w
ould
look
the
sam
e–
Nev
er p
erfe
ctly
mat
ched
; alw
ays l
ongs
& sh
orts
•A
look
at m
icro
, ins
talla
tion
data
to ju
dge
over
-allo
catio
n•
And
, mac
ro d
ata
to e
valu
ate
abat
emen
t
MIT
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Agg
rega
te E
U25
Pos
ition
, 200
5Su
m o
f sho
rts,
long
s, an
d ne
t
-300
-200
-100
0100
200
300
Mil
lio
n t
on
s-C
O2/E
UA
s
Su
m o
f L
on
gs
25
4.0
Mt
12
.9%
Su
m o
f S
hort
s1
79
.4 M
t9
.1%
Net
74
.6 M
t3
.8%
MIT
Join
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-30
-20
-10
010
2030
4050
60
TOTA
L
Lith
uani
aLa
tvia
Denm
ark
Finl
and
Esto
nia
Pola
ndLu
xem
bour
gSl
ovak
iaCz
ech
Repu
blic
Hung
ary
Swed
enFr
ance
Neth
erla
nds
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man
yBe
lgiu
mSl
oven
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rtuga
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reec
eAu
stria
Italy
Spai
nIre
land UK
Perc
ent
Net
Sho
rtN
et L
ong
Gro
ss S
hort
Gro
ss L
ong
2005
All
Mem
ber
Stat
esSh
ort/L
ong
Posi
tions
MIT
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Shor
t/Lon
g Po
sitio
ns b
y Se
ctor
, E
U25
200
5
-160
-120
-80
-40
040
8012
0
Pow
er a
nd H
eat
U/I,
Oth
ers
Iron,
Ste
el &
Cok
e
Cem
ent &
Lim
e
Ref
iner
ies
Pulp
& P
aper
Gla
ss
Cer
amic
s, B
ricks
& T
iles
MtC
O2
Net
sho
rtN
et lo
ngG
ross
sho
rtG
ross
long
MIT
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Reg
iona
l-Sec
tor
Bre
akdo
wn
of
Shor
t/Lon
g Po
sitio
ns, 2
005
-20
0-1
50
-10
0-5
00
50
10
01
50
EE
8 I
ndus
EE
8 P
&H
EU
15
Indus
EU
15
P&
H
ME
UA
s
Ne
t S
ho
rtG
ross S
ho
rtN
et L
ong
Gro
ss L
ong
LO
NG
SH
OR
T
-.4
1
+ .
78
+ .
95
+ .
99
MIT
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gram
A N
ote
on A
bate
men
t•
Aba
tem
ent m
ust b
e ju
dged
rela
tive
to a
n un
obse
rved
cou
nter
fact
ual
•In
here
ntly
spec
ulat
ive,
but
goo
d es
timat
es a
re
poss
ible
•A
lway
s nee
d so
me
pre-
polic
y hi
stor
ical
re
fere
nce
poin
t•
Not
ava
ilabl
e in
EU
ETS
; res
ult o
f par
tial c
ap•
NA
P1 b
asel
ine
estim
ates
hav
e m
any
prob
lem
s bu
t are
the
only
thin
g av
aila
ble
MIT
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His
tori
c E
mis
sion
s, A
llow
ance
s &
2005
Em
issi
ons:
EU
23
0
50
0
1,0
00
1,5
00
2,0
00
2,5
00
02
-03
Base
line
Allo
wance
sE
mis
sio
ns
Million metric tons CO2
+4
.5%
-0,6
%
-4.5
%
MIT
Join
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gram
Are
200
5 B
AU
Em
issi
ons D
iffer
ent
from
His
tori
cal E
mis
sion
s?
•Ec
onom
ic g
row
th ⇒
+++
•H
ighe
r nat
ural
gas
/oil
pric
es ⇒
+++
•U
nfav
orab
le w
eath
er c
ondi
tions
⇒++
+•
Con
tinui
ng d
eclin
e in
EU
15 in
dust
ry
emis
sion
s ⇒--
-•
Con
tinui
ng st
ruct
ural
cha
nges
in E
aste
rn
Euro
pe ⇒
---
MIT
Join
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gram
EU
23
GD
P G
row
th
2002
-20
06
90
95
10
0
10
5
11
0
11
5
12
0
20
02
20
03
20
04
20
05
100 = 2002
EU
23
EE
8
EU
15
Sour
ce: I
MF
MIT
Join
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gram
Indi
cato
rs o
f EU
25 E
cono
mic
Act
ivity
, 20
02 -
2006
949698100
102
104
106
108
110
2002
m01 2002
m04 2002
m07 2002
m10 2003
m01 2003
m04 2003
m07 2003
m10 2004
m01 2004
m04 2004
m07 2004
m10 2005
m01 2005
m04 2005
m07 2005
m10 2006
m01 2006
m04 2006
m07
Volume index of production; average 2002=100
2005
Tota
l ind
ustr
y
Prod
uctio
n &
dis
trib
utio
nof
ele
ctric
ity
MIT
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gram
EU
25 C
O2
Inte
nsity
Tre
nds
(Ann
ual R
ates
of C
hang
e)
-1.2
%-4
.7%
CO
2/GD
P
-0.7
%-2
.8%
CO
2/Ene
rgy
-0.5
%-1
.9%
Ene
rgy/
GD
P
2000
-200
419
95-2
000
MIT
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Wha
t Wou
ld B
AU
Em
issi
ons H
ave
Bee
n w
ithou
t the
EU
ET
S?
0
50
0
10
00
15
00
20
00
25
00
His
tori
c2
00
5
Mt CO2/MEUAs
+2
.0%
p.a
.
- 1
.0%
p.a
.
EU
ET
SB
ase
line
Em
issio
ns
20
05
Ve
rifie
dE
mis
sio
ns
30
to
22
0 M
t o
f A
ba
tem
ent
(1.5
% t
o 1
0%
)
BA
U E
mis
sio
n G
row
th?
MIT
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Sum
mar
y on
Aba
tem
ent
•Th
e ba
sic
case
for a
bate
men
t–
A si
gnifi
cant
pos
itive
pric
e is
bei
ng in
curr
ed–
Emis
sion
s are
low
er th
an h
isto
rical
leve
ls a
nd–
Econ
omic
act
ivity
has
incr
ease
d•
Prel
imin
ary
eval
uatio
n w
ould
sugg
est f
rom
1.
5% to
10%
, per
haps
aro
und
5%•
Ove
r-al
loca
tion
also
exi
sted
to in
dust
ry &
in
East
ern
Euro
pe•
Ove
r-al
loca
tion
affe
cts p
rice,
not
aba
tem
ent
MIT
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Top
ics
•W
hat i
s the
EU
ETS
?•
Pric
e fo
rmat
ion
and
beha
vior
•20
05 R
esul
ts: A
bate
men
t?•
Allo
catio
n ch
oice
s•
Bro
ader
impl
icat
ions
MIT
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Wha
t is A
lloca
tion?
•C
ap-a
nd-tr
ade
syst
ems o
pera
te b
y tra
dabl
e em
issi
on ri
ghts
or a
llow
ance
s•
Thes
e rig
hts m
ust b
e di
strib
uted
som
ehow
–A
uctio
n or
gra
ndfa
ther
ing
•In
US
SO2
prog
ram
, dec
ided
by
Con
gres
s and
gr
andf
athe
red
•In
US
NO
xpr
ogra
m, d
ecid
ed b
y St
ates
with
in
Fede
ral b
udge
ts a
nd g
rand
fath
ered
MIT
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Allo
catio
n in
the
EU
ET
S
•D
eleg
atio
n to
mem
ber s
tate
s to
deci
de to
tal
and
dist
ribut
ion
with
≥95
% g
rand
fath
ered
•M
embe
r sta
te d
ecis
ions
subj
ect t
o re
view
by
the
Euro
pean
Com
mis
sion
–In
pra
ctic
e, li
mite
d to
the
prop
osed
tota
ls, a
nd–
No
ex p
ost a
djus
tmen
t or q
uota
man
agem
ent
•H
uge
data
pro
blem
s at i
nsta
llatio
n le
vel
•Ex
tend
ed d
iscu
ssio
n be
twee
n in
dust
ry a
nd
gove
rnm
ent o
n da
ta a
nd a
lloca
tion
prin
cipl
es
MIT
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Wha
t Cho
ices
wer
e M
ade?
•A
lloca
tions
bas
ed o
n re
cent
em
issi
ons
–B
ench
mar
king
pro
ved
infe
asib
le•
Shor
tage
allo
cate
d to
the
pow
er se
ctor
–M
ore
abat
emen
t pos
sibi
litie
s & n
o co
mpe
titiv
e pr
oble
ms
•V
ery
little
auc
tioni
ng (0
.13%
of t
otal
!)•
New
ent
rant
and
clo
sure
pro
visi
ons
–Po
tent
ially
dis
torti
ng e
ffec
ts b
ut u
biqu
itous
MIT
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Prin
cipl
es o
r Po
litic
s?•
Nea
r uni
vers
al d
isap
prov
al o
f gra
ndfa
ther
ing,
ye
t alw
ays c
hose
n–
Is th
ere
mor
e th
an ju
st p
oliti
cs &
lobb
ying
?•
Una
ckno
wle
dged
soci
al n
orm
s?–
Lock
ean
prio
r use
and
squa
tter r
ight
s–
EU v
aria
nt: p
rodu
ctio
n co
nvey
s the
righ
t•
A c
onve
rgen
ce o
f fai
rnes
s and
exp
edie
ncy?
–A
llow
ance
s per
mit
Coa
sian
sepa
ratio
n of
ef
ficie
ncy
and
equi
ty–
Ass
ign
right
s to
miti
gate
fina
ncia
l im
pact
of t
he
chan
ge in
pric
es a
nd ru
les
MIT
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Top
ics
•W
hat i
s the
EU
ETS
?•
Pric
e fo
rmat
ion
and
beha
vior
•20
05 R
esul
ts: A
bate
men
t?•
Allo
catio
n ch
oice
s•
Bro
ader
impl
icat
ions
MIT
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gram
The
EU
ET
S as
Pro
toty
pe•
A m
ultin
atio
nal t
radi
ng sy
stem
with
a u
nifo
rm
pric
e on
car
bon
thro
ugho
ut th
e EU
•Th
e ea
st/w
est p
aral
lel t
o th
e gl
obal
no
rth/s
outh
div
ide
–D
iffer
ing
crite
ria fo
r EU
15 a
nd A
cces
sion
-10
–D
iffer
ing
resp
onsi
bilit
ies f
or n
on-c
over
ed
emis
sion
s•
Wha
t mad
e al
l 25
join
up?
–Th
e Eu
rope
an id
ea?
–O
r the
ben
efits
of t
he c
lub?
MIT
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The
Geo
polit
ical
Impo
rtan
ce
of th
e E
U E
TS
•Th
e Fa
ct o
n th
e G
roun
d•
The
Pion
eerin
g Ex
ampl
e–
Lear
ning
exp
erie
nce
for t
hose
who
follo
w–
The
subt
le in
fluen
ce o
n th
e A
mer
ican
deb
ate
•Th
e €2
0/to
nne
ince
ntiv
e an
d th
e C
DM
–A
ttrac
ting
inte
rest
from
thos
e ou
tsid
e –
Influ
enci
ng C
hine
se a
nd In
dian
pre
fere
nces
MIT
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Wha
t Mus
t Hap
pen?
•W
aitin
g fo
r the
US
–N
o pr
ogre
ss c
an b
e m
ade
with
out t
he U
S–
CO
2ca
p-an
d-tra
de sy
stem
is b
eing
di
scus
sed
–Th
e pr
oble
m is
inte
rnal
and
pol
itica
l•
Brin
ging
Chi
na, I
ndia
, et a
l. ab
oard
–C
omm
on b
ut d
iffer
entia
ted
resp
onsi
bilit
ies
–B
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NA
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NA
P2 v
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