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Workshop on Institutional options for the Carbon market: Can financial markets and institutions be a model? Is there a need for more market oversight and regulation in the EU ETS?. Barbara Buchner, PhD Climate Policy Initiative Graz, 25 November 2010. The EU ETS. - PowerPoint PPT Presentation
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Workshop on Institutional options for the Carbon market: Can financial
markets and institutions be a model?
Is there a need for more market oversight and regulation in the EU ETS?
Barbara Buchner, PhDClimate Policy InitiativeGraz, 25 November 2010
The EU ETS Mandatory system in place since January 2005 Legislation agreed by Member State Ministers (Council) and
European Parliament in ‘co-decision’ Extensive stakeholder dialogue
Covers currently 40% of EU GHG emissions Cap on emissions from ~11,500 energy-intensive installations
across EU Direct: regulated at source of pollution
Single largest market for GHG emissions True multi-national scheme (25/27 MSs) Link to Norway, Iceland, Liechtenstein
A “Linking Directive” governs the relationships between EU ETS & Kyoto Protocol EU ETS stimulates overall carbon market
2008 20122005 2007 20202013
EU energy & climate policy objectives
Jan 1: Start of phase I Jan 1: Start of phase II Jan 1: Start of phase III
Jan 1: Start of 1st CP of KP
Feb 15: Entry into force of Kyoto Pr.
Dec: end of 1st CP
A “broad then deep” strategy All inclusive, non-demanding beginning Increasing differentiation with greater stringency Participation of the less committed in decisions
Highly decentralized implementation MRV and enforcement by Member States But: highly uniform infrastructure for registries And: importance of central coordination (EC)
Towards harmonization and centralization From country ‘caps’ to EU-wide cap From national allocation plans towards EU-wide auctioning
and harmonized benchmarks Differentiate through auction rights
Towards common definitions, scope and criteria for inclusion
3
A phased approach
learning the lessons from the pilot phase
Who? Industrial companies Energy companies Banks/intermediaries
What? Spot - a commodity Derivatives – financial instruments Standardized and non-standardized contracts
Where? Exchanges – regulated markets, MTFs OTC – brokered/non-brokered, unregulated exchanges
4
The carbon market – who, what, where?
Art. 12(1a) of Dir 2009/29/EC: “Commission shall by 31 Dec 2010, examine whether the market for emission allowances is sufficiently protected from insider dealing or market manipulation….”
0
500
1,000
1,500
2,000
2,500
3,000
2005 2010 2015 2020 2025 2030 2035 2040 2045 2050
mln
t C
O2e
EU ETS phase 1 & 2 cap
EU ETS phase 3+ cap based on linear reduction factor 2.4%
EU ETS phase 3+ cap based on linear reduction factor 1.74%
-96% vs 2005
-71% vs 2005
Scope changes
Adoption of adjusted linear reduction factor(Art 9 ETS Directive)
30% adjustment
Pilot 2nd Phase 3rd Phase 4th+ Phases
Source: Öko-Institut 2010
Note…• Linear factor to be reviewed by 2025 • Aviation to be included; will change figures correspondingly but cap not
reduced• Uncertainty re move to 30% GHG reduction target
A single, accountable long-term cap and a longer time horizon
A pilot phase is useful. Trading infrastructure and experience Data issues Everything doesn’t have to be ready on Day 1 Learning by Doing: A phased approach- allows learning and
revision Carbon now has a real price.
Phase 2 tightened overall cap (-6% wrt 2005) Agreed amendments add to scarcity (-1.74%/year)
A new commodity and liquid market emerged. Price behavior has been rational
Steady growth in volume and products Volatility not extraordinary (less than in other commodity
markets) Widespread participation in the trading
6
Some conclusions from Phase I
A price signal
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35
Dec-04
J an-05
Feb-05
Apr-05
May-05J ul-05
Aug-05
Sep-05
Nov-05
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Jan-06
Mar-06
Apr-06
Jun-06Jul-06
Aug-06
Oct-06
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Jan-07
Feb-07
Mar-07
May-07
J un-07
Aug-07
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€/t
Phase I Allowances (2005-2007)
OTC and BlueNext Spot
Phase II Allowances (2008-2012)
ECX Dec-08 Futures
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May 15, 2006: verified emissions
Data and design matter !• Reliable information - MRV• Market infrastructure• Flexibility/certainty/predictability
Allocation is controversial. Free allocation was price of acceptance
Also, many choices impractical due to data constraints But subsequently very controversial
Abatement occurred. A significant positive price Emissions are lower than historical levels (even after allowing for
plausible bias), despite robust economic growth and adverse energy price developments
Probably 120-300 MtCO2/year (2-5%) in 2005-2007: modest, but in line with modest ambition
Too early to observe investment effects Carbon price has had limited impact on industrial
competitiveness. No empirical evidence of market share loss due to carbon pricing:
only one price among many But: may change in the longer term 8
Some more conclusions from Phase I
The principles Simplicity & Transparency
The conditions Suitable club benefits: broader benefits than GHG Actors with varying marginal abatement costs Low transaction costs Good data availability Good decision process (a ‘center’, coordinating mechanisms)
The choices A robust, binding cap Predictability/certainty Flexibility: scope, linking, international offsets (with limits to
ensure sustained effort) Effective monitoring, reporting, verification
9
Learning the lessons for carbon markets governance
Secure long term carbon price
stability & integrity of system
Combination solution Permits & “ safety valve”
Implementation Along with emission targets, government sets a “trigger price” If price of permits > trigger, government guarantees the
“safety” price Theory…
On economic grounds, they can be helpful to lower cost of achieving ambitious targets
Quantitative analysis: price floor much higher than price levels experienced in EU ETS • EUR 35/tCO2 in 2011, to EUR 120 in 2050 to reach 50% from
2005 levels by 2050• also higher than some suggested caps in other legislations (US
price collar in Senate bill: US$ 28) 10
What if…more oversight through price floors/caps/collars?
…and practice: what if we had adopted some? Implications for compliance costs: the market has worked
well, lowering cost of compliance when entities had economic difficulties
Practical implications: floor/cap levels determined by national circumstances, not science
• Linking of trading systems proves challenging (environmental ambition, GHGs, activities, etc.)
– Collars, here but not there, make linking unwieldy/meaningless
– Coordinating floor/cap levels unlikely to facilitate matters• The issue of the rents: a reserve price in auctioning has a value …
especially for sellers into the system (CDM, AAUs?)
11
More oversight through price floors/caps/collars?
Do not address the wrong issues Low prices criticized for lack of sufficient signal: blame the
target, not the mechanism Maximize confidence in system
Learn from mistakes, allow adjustments Consider that regulatory interference with the carbon price
undermines the market and investment decisions, and thus confidence from the beginning
Important to set proper instruments to hedge against future risk What hedging instruments in presence of gov’t guaranteed
prices?Experience tells us that markets can deal with price
uncertainty, while policy uncertainty is much more difficult to handle
12
How to optimize market regulation?
CO2-emissions are no longer free in the European Union Importance not so much in price per se, but in institutions &
thinking From rather dubious initiative to accepted fact and
cornerstone of EU policy Achieved despite significant obstacles and problems
Pre-existing institutions, powerful club benefits facilitated EU ETS But significant obstacles: time schedule, inexperience with trading
Importance of pilot phase Provided infrastructure and lessons: balance flexibility & regulation Illustrates incentives: carbon price has induced some abatement
Importance of continuous learning by doing Market oversight – based on stocktaking exercise
EU ETS shows that multi-national systems can be successfully implemented
13
Bottom line
more than least-cost abatement
Thank [email protected] www.climatepolicyinitiative.org