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Emissions TradingEmissions TradingEmissions Trading in an energy &Emissions Trading in an energy &

climate change policy frameworkclimate change policy framework

• A policy frameworkA policy framework

• Where to use “cap-and-trade”Where to use “cap-and-trade”

• The key question - allocationThe key question - allocation

• Advantages of “cap-and-trade”Advantages of “cap-and-trade”

• The EU-ETSThe EU-ETS

David HoneGroup Climate Change AdviserShell International B.V.

2

Oil Biomass Gas Coal Nuclear Renewables

Primary Energy

Liquids

Direct combustionIndustry and

Manufacturing

Mobility

Final Energy

Agriculture and Land

Use

Energy

En

erg

y

En

erg

y

Buildings

Power Generation

Key Sectors in the “energy and CO2 economy”

3

New Energy Technologies – e.g. CCS

Power generation without CCS

Number of installations

Tec

hnol

o gy

c os t

CO2 priceEarlier deployment through demonstration

Discover & DevelopNeed to refocus and rapidly expand R&D.

Discover & DevelopNeed to refocus and rapidly expand R&D.

0

20

40

60

80

100

1 10 100 1000

DeploymentTypically driven by the CO2 market

DeploymentTypically driven by the CO2 market

DemonstrationNo early adopters and high start-up costs so this phase will need help.

DemonstrationNo early adopters and high start-up costs so this phase will need help.

4

A structured policy approach is needed

Power Generation / Industry &

Manufacturing

Transport Commercial & Domestic (Buildings)

Discover & Develop • Support for infrastructure

(e.g. grids & pipelines)• Support for advanced

fuel development• Urban planning decisions.

• Education and awareness.

Demonstrate • Fiscal support for large-scale CCS demonstrations

• Fiscal support for early 2nd generation biofuel manufacture.

• Public transport infrastructure

• Encouraging radical design

Deploy • “Cap-and-Trade”

• CCS rules and recognition

• Renewable Energy Certificates

• “Fast-track” planning

• Vehicle efficiency standards

• Incentivise fuels based on W-t-W CO2 reduction.

• Consumer behaviour

• Use of public transport

• Efficiency standards (appliances, air-con)

• Use of project mechanisms linked to GHG market.

• Encouraging “electrification”.

Broad energy production and use R&D support

5

A structured policy approach is needed

A simple, high profile and credible target for the renewables’ share of power generation, supported by a range of incentives to encourage investment.

Measures to incentivise new fuels based on their “well-to-wheels” CO2 reduction potential,

implementation of vehicle efficiency standards and vehicle/road-use programs targeted at drivers

A series of robust energy standards for buildings, appliances etc. with incentives for retrofit of existing infrastructure.

"Cap and trade" emissions trading systems for power generators, most industrial facilities and large fleet transport such as aviation.

6

Emissions Trading or “Cap-and-trade”

Initial emissions100 Mt p.a.

Year 5 at 95

Year 15 at 80Year 10 at 88

Offsets

Allowance trading between facilities$ CO2

Government issues 88 million allowances into

the economy

CCS Project

Efficiency Project

7

Key principles of an Emissions Trading System

• The aim of an ETS is to direct investment capital towards lower CO2 emission projects, via a market price for CO2 emissions.

• Therefore, the trading system should not remove that capital from the industries or firms covered by the system.

Design Features to be Discussed

• Allocation of allowances

• Banking and borrowing

• Recognition of technologies

• Constraints and limitations

• External projects mechanisms (or offsets)

• Linkage

8

The new flow of capital in the economy

CO2

Goods and services pass into the economy, with the price of CO2

embedded

Emitters buy allowances from the government through auction

Governmentrecycles auction

revenue to consumers through the tax system

9

The CO2 price and allocation

Points of regulation

Resource

Power Generation

FactoriesHeavy industry Light industry

Consumer

Electricity

Tim

e CO2 price impact

• Over time, the CO2 price will impact the entire value chain.

• The rate at which this happens varies considerably.

• It can be very fast for electricity.

• It will be very slow for some products where the price is established outside the capped market.

10

The CO2 price and allocation

Points of regulation

Resource

Power Generation

FactoriesHeavy industry Light industry

Consumer

Electricity

Tim

e CO2 price impactFree allocation early on as little / no price pass through

Progressive shift to auctioning as the CO2 price impacts the economy

Full auctioning as the CO2 price impacts the entire value chainAuction funds recycled to consumers through the tax system

11

Banking and Borrowing in “cap-and-trade”

As a rule, banking is accepted and borrowing isn’t.• Banking brings forward emission reductions.• Borrowing delays emission reductions.• Both banking and borrowing help to limit price volatility in a

cap-and-trade system. Banking underpins the market during periods of low price. Borrowing limits price rise by adding future allowances to

the current pool.

Unlimited banking with limited borrowing is a usefulconstruction within a cap-and-trade system.

Trading period 5-7 years

Annual compliance for each year

Banking between years and trading periods

12

Abatement technologies

• Certain abatement technologies will be key to the long term viability of the emissions trading system. Carbon Dioxide Capture and Storage is one of these.

• Such technologies must be recognised early by the legal framework of the trading system.

13

CO2 is a commodity

14

Artificial limits within the trading system

Although created entirely by policy makers and legislation, an emissions trading market is still a market. As such, it should not be subject to;

• Price caps;

• Price floors and / or reserve prices;

• Arbitrary price management by oversight bodies or parliament;

• Imposition of trading limits (e.g. offsets);

• Unexpected rule changes;

15

External Projects (or offsets)

Emission reduction projects executed outside the capped sector can offer important benefits;

• An inflow of compliance units (credits) can offer further flexibility in meeting the cap.

• Access to external projects can act as an efficient cost control mechanism within the capped sector.

• Projects can help developing countries begin managing emissions.

• The flow of project credits can help build a global CO2 market.

All national emission trading systems should recognise the same global project mechanisms.

16

Advantages of Emissions Trading

Advantages of emissions trading are:

• It is designed to deliver an environmental outcome, in that the cap must be met.

• It will deliver its environmental objective at lowest cost to the economy.

• A national trading system can be linked with other such systems, delivering over time a global carbon market.

• A trading system offers both compliance and policy flexibility.

• The structure is simple.

• It works. The trading system will deliver what it is asked to do.

US sulphur trading has delivered the required cuts in sulphur emissions.

The EU system has suffered early data issues, not design issues.

17

Going global !

Linkages develop between all systems and more systems appear

2000 2005 2010 2015 2020 2025

Danish-ETS

UK-ETSAustralian ETS

US National or North American “cap-and-trade”

Norwegian ETS

EU-ETS

CDM

CDM evolves to include clean electricity mechanism

Pre-Kyoto Kyoto Post 2012

Expanding EU-ETS

Japan technology standards

Linkage framework

New technology mechanisms evolve (e.g. for CCS)

China adopts CCS standard

New Zealand ETS

18

Linking “cap-and-trade” systems

The key metric in determining the ability to link is price.• When the prices of two systems are at similar levels

there is scope to link them.• Therefore, design elements which directly determine

price should be the same. Other design parameters can be different.

Determines Price• Direct price management

(e.g. caps, floors etc.).• Banking and borrowing

rules.• Offset rules.• Penalty rules.

Price neutral• Allocation approach (e.g.

auctioning, benchmarking etc.)

• Coverage (i.e. sectors and gases covered)

19

Evolution of the EU-ETS

2005 2008 2013 2020

Phase I

Learning by doing

Discrete

• No banking

Allocation

• Conservative

• Grandfathering

• Trial auctions

Member State driven

Commission guidance

Establishes capacity

Some CER inflow

Phase II

The real thing

Kyoto compliance

• Banking to 2012+

Allocation

• Still grandfathering

• Some benchmarking

• Regular small auctions

Commission guidance

Member States follow

Active liquid market

CER inflow rises

Phase III

Expansion – gases & sectors

-20% (or –30%) by 2020

• EU wide cap

Allocation

• 100% auctioning for powergen

• Benchmarking for industry

• Top decile benchmarks

• Recognition of carbon leakage

Commission led

Member State compliance

Limited CER inflow

CCS recognition

20

Evolution of the EU Cap

2005

2006

2007 20

08

2009

2010 20

12

2013

2014 20

1520

16

2018

2019

2020

2021

2011

2017

2180

MtCO2pa

2083actual in

20051964

Gradient – 1.74%

Phase II Phase IIIPhase I Start up Phase

1620-20%

-30%

Trend line continues

aiding predictability

Not to scale!

21

EU ETS price and market activity

Key:

Dec 07 delivery

Dec 08 delivery

Dec 09 delivery

Source: Point Carbon

22

Carbon Capture & Storage and the EU-ETS

Power generation without CCS

Number of installations

Tec

hnol

o gy

c os t

CO2 priceEarlier deployment through demonstration

0

20

40

60

80

100

1 10 100 1000

Demonstration• EU Council of Ministers announces a 10-12 large-

scale project demonstration programme.• EU Parliament supports the programme with a pool of

300 million bonus allowances offered for CO2 stored.

• At €25 per tonne of CO2 this is worth €7.5 billion.

• No single project to be awarded more that 45 million allowances bonus allowances.

Demonstration• EU Council of Ministers announces a 10-12 large-

scale project demonstration programme.• EU Parliament supports the programme with a pool of

300 million bonus allowances offered for CO2 stored.

• At €25 per tonne of CO2 this is worth €7.5 billion.

• No single project to be awarded more that 45 million allowances bonus allowances.

Deployment• CCS recognised within the EU-ETS.• New CCS legislation sets standards for

storage and establishes rules for long term liability.

Deployment• CCS recognised within the EU-ETS.• New CCS legislation sets standards for

storage and establishes rules for long term liability.

http://blogs.shell.com/climatechange