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“ Using Carbon Markets to Encourage the Uptake of Low Carbon Vehicles ” Meeting the Low Carbon Challenge The Low Carbon Vehicle Partnership PowerPoint PPT Presentation


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“ Using Carbon Markets to Encourage the Uptake of Low Carbon Vehicles ” Meeting the Low Carbon Challenge The Low Carbon Vehicle Partnership Third Annual Conference Thursday 15 June 2006. Robert Rabinowitz, PhD ECX Associate Membership Ltd. [email protected] +44 (0)20 7382 7803.

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“ Using Carbon Markets to Encourage the Uptake of Low Carbon Vehicles ” Meeting the Low Carbon Challenge The Low Carbon Vehicle Partnership

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“Using Carbon Markets to Encourage

the Uptake of Low Carbon Vehicles”

Meeting the Low Carbon Challenge

The Low Carbon Vehicle Partnership

Third Annual Conference

Thursday 15 June 2006

Robert Rabinowitz, PhD

ECX Associate Membership Ltd.

[email protected]

+44 (0)20 7382 7803


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The world’s first and North America’s only voluntary, legally binding rules-based greenhouse gas emission reduction and trading system.

The most liquid, pan-European platform

for carbon emissions trading

cleared | quoted | liquid | transparent | regulated


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What is Emissions Trading?

A mechanism for efficient allocation of capital to reduce greenhouse gas emissions

  • New regulations: each plant cuts 1 tonne.

  • Total Cost to Society:

  • No trading = €40

  • Trading = €20

pollution

control

cost structure

€40

€30 per tonne

€30

€30

€20

(Plant B)

€10 per tonne

€10

€10

€10

€10

(Plant A)

€0

No

Plant A

Plant B

Trading

Trading


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“Cap and Trade” Emissions Markets

Emission target: 95 tons (5% cut)

100 ton baseline

10 ton shortage

10 ton surplus

105 tons

85 tons


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Successful US Environmental Markets

  • PHASING OUT LEADED GASOLINE (1982-1987)

  • 100% compliance

  • 10 billion allowances banked to offset later costs

  • Saved $250 million vs. “command-and-control” regulation

  • ACID RAIN PROGRAMME (1995-)

  • Sulphur dioxide emissions reduced 38%

  • Compliance levels exceed 99%

  • Costs≈30% of lowest estimate prior to launch

  • Health benefits exceed costs by a ratio of 40:1

  • LESSONS LEARNED:

  • Flexibility on “when,” “where” and “how” is viable and enforceable

  • Multiple participants creates market liquidity

  • Essentially 100% compliance

  • Targets met early

  • Significant cost-savings


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The Global Carbon Market Today

  • EU EMISSIONS TRADING SCHEME

  • Volume > 600 million tonnes

  • Notional value > €12 billion

  • Price: €7-€30

  • UN CLEAN DEVELOPMENT MECHANISM

  • Volume > 500 million tonnes (mostly forward contracts)

  • Average Price: $5 in 2004, $12 in Q1 2006

  • Major “north-south” capital flows for sustainable development

  • CHICAGO CLIMATE EXCHANGE

  • All 6 GHGs, major multinationals, independent audit & regulation

  • Included emissions ≈ UK National Allocation Plan

  • Over 10 million tonnes traded

  • Price: $0.8 per tonne at launch, now at $4


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Precedents in the US Auto Sector

  • CORPORATE AVERAGE FUEL ECONOMY (CAFE)

  • Sales weighted annual average fleet fuel economy

  • Credits for exceeding target, alternative fuel vehicles

  • Since 1983 more than $618 million paid in penalties

  • AVERAGING, BANKING AND TRADING

  • Applies to emissions from engine families

  • Use of standard factors such as mileage and engine life

  • LESSONS LEARNED:

  • Use of fleet averages + standardized factors

  • Credits earned for actions apart from meeting direct targets

  • CAFE: Lack of trading + penalties = failure to meet target

  • ABT: Few participants = no liquidity = ineffective market

  • Disconnect from other sectors restricts flexibility + liquidity


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Key Design Principles

  • Inclusion of multiple emission sources with different mitigation costs

  • Minimal transaction barriers

  • Certainty over rules, targets and compliance value of traded instrument

  • Liquidity (necessary for actual transactions and risk management)

  • CONCLUSION:

  • LINK TO GLOBAL CARBON MARKETS


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Trading Scenario

  • Manufacturer A

  • 2010 Vehicle Sales:1,000,000

  • Baseline Emissions:200 g/km

  • 2010 Emission Target:188 g/km (-6%)

  • 2010 Actual Emissions:192 g/km (-4%)

% Improvement per $1,000 of Sales

  • Manufacturer B

  • 2010 Vehicle Sales:500,000

  • Baseline Emissions:150 g/km

  • 2010 Emission Target:141 g/km (-6%)

  • 2010 Actual Emissions:129 g/km (-14%)


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Calculating Compliance Positions

Manufacturer A

-4 g/km

1,000,000

160,000 km

.9

-576,000 tonnes CO2

-0.576 tonnes per vehicle

-€11,520,000

-€11.52 per vehicle

Manufacturer B

12 g/km

500,000

160,000 km

.9

864,000 tonnes CO2

1.728 tonnes per vehicle

€17,280,000

€34.56 per vehicle

Difference between fleet average and target

% Improvement per $1,000 of Sales

Number of vehicles

sold

Mileage multiplier

Carbon intensity of fuel

CO2 = €20 per tonne


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Example of a Transaction

€9.52 million

% Improvement per $1,000 of Sales

Manufacturer A

Total Liability = 576,000

Manufacturer B

Total Credit = 864,000

Carbon credits =

476,000 tonnes of CO2

100,000 tonnes CO2 credits for alternative actions

388,000 tonnes CO2 banked

The Global Carbon Market


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Design Options

Target: Existing voluntary targets? Absolute or relative targets?

Credits: Reward for early action? Credits for scrapping most polluting vehicles or other activities?

Banking: Unlimited? Time limits? Absolute limits? Flow control? Borrowing?

Mileage Multiplier: 1 year or entire vehicle life?

Relation to Global Carbon Market:

Problem 1:Auto sector demand for credits increases burden on other sectors

Answer 1:Set achievable targets that enable leaders to earn credits

Problem 2:Rising sales offsets efficiency gains - auto sector earns credits while emissions increase

Answer 2:Tightened targets to account for fleet growth or “gateway”

% Improvement per $1,000 of Sales


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Conclusion

  • Using carbon markets to achieve a product standard is an innovative regulatory approach

  • Clear regulatory metric: emissions per kilometre

  • Cost-effective, high compliance levels

  • Provides incentives to exceed targets

  • Flexibility on how to achieve goal: e.g. manufacturing, consumer marketing and education, credits for other actions, reducing carbon intensity of fuels

  • Need not be in conflict with use of carbon market to cap transport emissions

% Improvement per $1,000 of Sales


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