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Carbon Trading A way towards Carbon Reduction?

ENV-2A33 Fossil Fuels 2008 - 2009. Carbon Trading A way towards Carbon Reduction?. This presentation and related links will be available at www2.env.uea.ac.uk/gmmc/energy/env-2a33/fossil_fuels.htm. Keith Tovey ( Н.К.Тови 杜伟贤) M.A, PhD, CEng, MICE, CEnv

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Carbon Trading A way towards Carbon Reduction?

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  1. ENV-2A33 Fossil Fuels 2008 - 2009 Carbon Trading A way towards Carbon Reduction? This presentation and related links will be available at www2.env.uea.ac.uk/gmmc/energy/env-2a33/fossil_fuels.htm • Keith Tovey(Н.К.Тови杜伟贤)M.A, PhD, CEng, MICE, CEnv • HSBC Director of Low Carbon Innovation: • School of Environmental Sciences, University of East Anglia

  2. Carbon Trading • Energy Intensity • Carbon Intensity • Kyoto Protocol • Issues affecting Electricity Supply Industry in UK - sector most affected by • European Union Emission Trading System EU-ETS • Personal Carbon Trading (DTQs) - a discussion if time permits

  3. ENERGY INTENSITY GDP changes in UK Total Energy Demand in UK Wealth of Country has increased faster than Energy Growth

  4. ENERGY INTENSITY Wealth of UK increased uniformly with energy in 1950s and 1960s Major infra-structure projects in late 1960s - early 1970s 1979 - 1992 restructuring followed by increase efficiency 1992 - increased conservation

  5. ENERGY INTENSITY UK has become more efficient in using energy to generate wealth over past 50 years. Generate the same wealth with 45% of energy as in 1950. Improvement ~ 1.45% per annum

  6. ENERGY INTENSITY 40000 USA 35000 Qatar Japan 30000 Canada UK 25000 France Other EU Countries GDP per head (US$ (95) 20000 Germany Mediterranean EU Poland Nordic EU 15000 New EU Russia 10000 China 5000 India 0 0 5 10 15 20 25 30 kW per Head Energy - GDP Relationships

  7. Carbon Intensity Qatar Developing Countries USA Australia Russia Germany Canada UK Japan France Carbon Dioxide Emissions per unit of Energy Mix of Electricity Generating Capacity has a significant impact

  8. What is the magnitude of the CO2 problem? How does UK compare with other countries? Why do some countries emit more CO2 than others? China UK Per capita Carbon Emissions 8 8

  9. Carbon Emissions and Electricity 9 9

  10. Carbon Trading Kyoto Protocol • Requires carbon dioxide emission reductions from Annexe 1 countries through burden sharing. • Non Annexe 1 countries are not included in reduction requirements. • Participation of Non Annexe 1 Countries through the Clean Development Mechanism (CDM) and Certified Emission Reduction Certificates (CERs) • Introduces a carbon trading system • Annexe 1 countries invest in developing countries and claim offset reduction for their actions. Problem of additionality

  11. Carbon Trading Opportunities under Kyoto • JI (Joint Initiatives) between Annexe 1 Countries • CDM (Clean Development Mechanism) • Annexe 1 Countries or organisations/ businesses investing in Non Annexe 1 countries in low carbon technology projects. • Funded via the World Bank: a form of trading • Annexe 1 countries can offset some of their carbon emissions by such investment and purchase CERs. • Problem: • Often absolute changes/reductions in carbon emissions are confused with reductions in carbon intensity not with reductions in emissions. • An issue of importance for EU-ETS Phase 2 • Controlled by “Competent Authorities” in relevant countries • Only around 20 successful schemes in China so far out of around 100 suggested.

  12. Carbon Trading Problem of Additionality • Aims to combat double counting, NOT CLEAR how successful this is. • Schemes must show ADDITIONAL savings over business as usual. • Reference standard must be documented standard even if it is not yet implemented. • Scheme has been used almost exclusively for renewable energy projects • CRedwith partners in Eco-Energy Cities (China) were trying to use CDM via CERs for funding energy efficient buildings in China following success of Elizabeth Fry and ZICER, but has been confronted by many barriers.

  13. Carbon Intensity of Energy Use Using Electricity(including losses in transmission) • Coal Generation ~ 1000 g per kWh • Oil Generation ~ 900 g per kWh • Gas Generation ~ 400 g per kWh • Nuclear Generation ~ 5 g per kWh (including fuel fabrication and reprocessing Overall (UK) ~ 520 g per kWh and rising significantly Gas Supply • Gas ~ 186 g per kWh Example • heat a home electrically: Electricity is 100% efficient emissions will be 520 g per kWh • heat a home with normal gas boiler: boiler is 70% efficient emissions will be 186 / 0.7 = 266 g per kWh a saving of 49% • A condensing boiler is 90% efficient emissions will be 186 / 0.9 = 207 g per kWh a saving of 60%

  14. Issues affecting UK Carbon Emissions • Changes in Electricity Supply Industry • Increase in Renewable Generation is not keeping pace even with increase in demand. • Modelling assumes Government Targets for renewables are reached and exceeded. • Currently we are well short of targets • Electricity Supply Industry in UK will receive the brunt of the cuts in carbon allowances under EU-ETS

  15. Optionsfor Electricity Generation in 2020- Non-Renewable Methods Nuclear New Build assumes one new station is completed each year after 2017. ~20% of electricity is generated by nuclear or around 70 TWh By 2020 this will be down to around 15 TWh If replaced by coal CO2 emissions will rise by 54 Mtonnes Replacement by gas rise will be 22 Mtonnes

  16. UK Gas Production and Demand Import Gap 16

  17. r Electricity Generation i n selected Countries 17

  18. Our Choices: They are difficult: Energy Security There is a looming capacity shortfall Even with a full deployment of renewables. A 10% reduction in demand per house will see a rise of 7% in total demand - Increased population decreased household size • Opted Out Coal: Stations can only run for 20 000 hours more and must close by 2015 • New Nuclear assumes completing 1 new nuclear station each year beyond 2018 • New Coal assumes completing 1 new coal station each year beyond 2018 18

  19. Historic and Future Demand for Electricity Business as usual Energy Efficient Future ? Number of households will rise by 17.5% by 2025 and consumption per household must fall by this amount just to remain static

  20. Electricity Options for the Future • Energy Efficiency – consumption capped at 420 TWh by 2010 • But 68% growth in gas demand • (compared to 2002) • Business as Usual • 257% increase in gas consumption • ( compared to 2002) The Gas Scenario Assumes all new non-renewable generation is from gas. Replacements for ageing plant Additions to deal with demand changes Assumes 10.4% renewables by 2010 25% renewables by 2025

  21. Alternative Electricity Options for the Future • 25% Renewables by 2025 • 20000 MW Wind • 16000 MW Other Renewables inc. Tidal, hydro, biomass etc. Energy Efficiency Scenario Other Options Some New Nuclear needed by 2025 if CO2 levels are to fall significantly and excessive gas demand is to be avoided Business as Usual Scenario New Nuclear is required even to reduce back to 1990 levels

  22. Carbon Trading • Carbon Trading has potentialto reduce carbon emissions at cheapest cost. • Companies are given a free allowance which may be reduction on historic trends, an increase on historic trends, or at a constant level. • Carbon Trading takes place between companies. • If a company exceeds it allowance it can reduce its carbon emissions, or it can purchase allowances from someone who has a surplus. • However, there is an ultimate buy out penalty if there are too few allowances. • During Phase 1 (2005 – 2007 this penalty was €40 a tonne • In Phase 2 2008 – 2012, the penalty is currently €100 a tonne. in EU-ETS. • However, Carbon Trading as a means to reduce carbon only works if: • Sensible allocations of permits are issued • The price of carbon is realistic

  23. Carbon Trading: How it works -1 600 tonnes 500 tonnes • Example with no trading. • Requirement for a 10% cut in emissions All Examples use Euros (€ )as the currency Company B Company A 60 tonnes reduction 50 tonnes reduction Cost for reduction is say €20/tonne Total cost to company €1200 Cost for reduction is say €10/tonne Total cost to company €500 Cost to achieve 10% reduction: 110 tonnes = €1700 or €15.45 per tonne

  24. Carbon Trading – Company A: How it works -2 Tradable Value of Allowances Cost per tonne B C A D F E G Cumulative Carbon Savings • Opportunities for Energy or Carbon Reduction • Trends are same, but factors vary depending on carbon intensity 30 20 19 13 12 11 10 60 30 30 30 20 50 tonnes 10 Target Reduction is 50 tonnes – can be achieved with an investment of €500 Tradable value of allowance high: company makes profit by investing in other schemes

  25. Carbon Trading – Company B: How it works -3 Tradable Value of Allowances B G C Cost per tonne A Cumulative Carbon Savings • Opportunities for Energy or Carbon Reduction • Trends are same, but factors vary depending on carbon intensity 30 26 24 20 200 20 60 tonnes 10 Target Reduction is 60 tonnes – can be achieved with an investment of €1200 Tradable value of allowance low: company buys allowances

  26. Carbon Trading: How it works -4 • Same Example with trading. • Requirement for a 10% cut in emissions Company A Company B Cost is much more expensive than for company A. Would it be cheaper to purchase 60 tonnes of allowances rather than implementing reduction strategies? No Trading: Cost to achieve 10% reduction: 110 tonnes = €1700 or €15.45 per tonne With Trading: Cost to achieve 10% reduction: 110 tonnes = €1240 or €11.27 per tonne If Company B paid more than €12.33 this would be possible

  27. Carbon Trading: How it works -5 Company A Company B No Trading: total cost for 110 tonnes = €1700 or €15.45 per tonne With Trading: total cost for 110 tonnes = €1240 or €11.27 per tonne What happens if neither Company does anything? Under EU ETS they will have to pay fine of: €40 per tonne (phase 1) or €100 (phase 2) What would be a realistic trade price? If too low: little incentive for Company A to invest in Projects b, C, and D. If too high Company B might be prepared to pay full cost rather than have the hassle In absence of brokers, optimum price is (€12.333 + € 20 ) / 2 = €16.167

  28. Carbon Trading: How it works -6 Company A Company B No Trading: total cost for 110 tonnes = €1700 or €15.45 per tonne With Trading: total cost for 110 tonnes = €1240 or €11.27 per tonne In absence of brokers, optimum price is €16.167 Company A are not obliged to do more than Project A Cost for Projects B, C, and D would be €740 However, A sells allowances @ €16.167 >> gives an income of€970 i.e. Total cost of extra projects is paid for and there is also a profit of €230 Company B will also benefit Paying €970 will save them €230 compared to implementing a 10% cut

  29. Carbon Trading: How it works -7 Company A Company B No Trading: total cost for 110 tonnes = €1700 or €15.45 per tonne With Trading: total cost for 110 tonnes = €1240 or €11.27 per tonne In absence of brokers, optimum price is €16.167 Company A has all extra projects paid for and makes a profit of€230 Company B saves €230 compared to making saving Schemes with and without trading result in same reduction, but Trading hopefully ensures cheapest options are implemented. Case with brokers with commission @ 10% of trade value Assume Commission is shared between sellers and buyers. Commission: €1.6167: Buying Price 16.975 (=16.167 + 1.6167/2): Selling Price 15.358 Profit now falls to €181.50 for Company A and saving is €181.50 for Company B

  30. EU Emission Trading System: EU - ETS • Phase 1: 1st Jan 2005 – 31st December 2007 • Phase 2: 1st Jan 2008 – 31st December 2012 • Phase 1: • All EU 15 countries required to submit National Allocation Plans (NAPs) to EU Commission for approval by early 2004 • Accession 10 countries were given an extra 3 months • NAPs had to be consistent with the declared Kyoto targets for 2008 – 2012. • All industries with installed plant exceeding 20 MWth were to be included. • Each country had to • declare its overall target emission level • allocate targets for each sector of the economy • allocate allowances for each plant • specify the methodology it planned to use in allocations

  31. EU-ETS: UK NAP: Phase 1 Allocation Method Phase 1 UK approach:. Kyoto Commitment -8.2% (14.8%) Without ETS estimated emission by 2010 572 Mtonnes – 5.4% reduction • Take average emissions for each organisation over five years 1998 – 2002 (rejecting the highest and lowest). Use this as benchmark. • Check how UK is doing on road to Kyoto commitment. • Impose an overall reduction consistent with above. • Decide on sectorial changes within overall allocation. • one or two sectors actually saw a small increase • others including Power Generation – a substantial decrease • Reduce sector totals by around 7.7% to allow for new entrants. • Allocate organisation emission levels according to this reduced allocation • Address issue of what happens to allowances if plants close. Retain allowances in year of closure, but none allocated thereafter

  32. EU-ETS: UK NAP: Projections From UK NAP Phase 1

  33. EU-ETS: UK NAP: Phase 1 Sector Allocations Annual Allocations for 2005 – 2007 inclusive

  34. EU-ETS: Other Countries Phase 1 Overall Allocations • Compared to other countries UK target was tough: Many were over generous • Some took 2002 as baseline • Estimated emissions in Business as Usual scenario by 2010 – say 10% higher. • Reduced 2010 project emissions by say 8% - but that leaves an increase in emissions – not a decrease!! UK objected, but were not allowed to change its allocation Differences in allocation methods can adversely affect one country compared to another • In 2005 trading started at around 6 € a tonne. • Rose progressively to around 20 € • rose to over 30 € in early April 2006 (heading for buy price of 40 € ) Many countries used cheaper CDM credits extensively as a means to comply. UK did not resort to this

  35. Price of Carbon on EU-ETs €14.90 at 08:00 on 2nd Dec. 2008 Reached ~ 32 Euros/tonne 1.5 Eurocents/tonne Price crash in April 2006 resulted from a gross allocation of permits in some countries such as Italy

  36. EU-ETS: Issues about UK NAP Phase 1 Cost per tonne Cumulative Savings B C A D F E G • Reduction measures become more costly and more difficult the more reduction is made. • UK NAP Phase 1 did not make allowance for efficiency of plant. • Using Historic basis for allocation • rewards inefficient plant • penalises efficient plant • Overall allocation for the Netherlands, Sweden, Slovenia and Denmark were not that tough • But allocation to different plant took account of relative efficiency i.e. allocations were based on internal benchmark values

  37. N.K. Tovey’s Question to Margaret Beckett: 13th July 2004 • The UK should be congratulated on setting stiff targets in their EU-ETS NAP, • but what steps will the Government take to ensure that the UK's efforts are not watered down by other countries over generous allocations, • and, as the UK Plan has been approved only in provisional form, • will steps now be taken to ensure that the UK follows the exemplar lead of The Netherlands by incorporating a proportion of benchmarking into the allocations to the individual installations?. The response was not worth the paper it was written on!! It was ceremoniously torn up by N.K. Tovey

  38. EU-ETS: Phase 2 Commission Decisions • 29th November 2006: Brussels • The EU Commission issued decisions on the following countries. • Germany, Greece, Ireland, Latvia, Lithuania, Luxembourg, Malta, Slovakia, Sweden and the UK. • Only the UK plan was approved. Other countries had to reduce their overall allocations by around 7%, and cut their use of Kyoto CDMs to no more than 10% • Plans from Belgium, Cyprus, Estonia, Finland, The Netherlands, Poland, Slovenia were approved early in 2007 • Remaining countries were very tardy and some were threatened with fines.

  39. EU-ETS: Comments about UK NAP Phase 2 • Methodology follows Phase 1 • No use of CDM allowances • All reductions are to come from Electricity Supply Industry • No reductions from other sectors • New Entrant Reserve reduces all sectors as in Phase 1 • Argument for whole reduction on Electricity Supply Industry • Unlike other sectors: open to very little competition – the inter-connector to France only accounts for 3.9%. • Additional charges can be passed on to consumers. • Benchmarking is now used in Electricity Supply Industry. • Coal fired plant has an average efficiency of 35%: gas 46.8% • Emission factor = capacity * Standard Load Factor * Emission Factor • Removes the objection raised by N.K. Tovey regarding rewarding inefficient plant. However, other sectors are not included. • Should be based on carbon intensity • e.g. for Universities: carbon emission per student

  40. Carbon Trading: Web Links

  41. 11th December 2006 Europe May Require That 20% of Power Comes From Renewable Energy 2006-12-11 07:28 (New York) by Mathew Carr and Lars Paulsson Dec. 11 (Bloomberg) • The European Commission may propose as early as this week a law requiring that at least 20 percent of the continent's power come from renewable energy by 2020, Eluned Morgan, a member of European Parliament said today. • Subsequently EU target became 15% of all energy demand and in recent Renewable Energy Strategy, UK is aiming to achieve over 30% renewable electricity generation by 2020. • Is this achieveable????? • Carbon dioxide emission permits need to be higher than 20 euros a metric ton to prompt the investment required in low-fossil fuelled power generation, said Morgan today in a meeting with reporters in London. • If left to Market forces what would the price have to be to properly encourage investment in low carbon technologies?

  42. What prices does EU-ETS need to be to stimulate low carbon technologies? Solar Collectors installed 27th January 2004 Annual Solar Gain 910 kWh

  43. What prices does EU-ETS need to be to stimulate low carbon technologies? • Example: solar thermal • Produces ~ 900 kWh per year • Over life time of say 25 years ~ 22 500 kWh • Allowing for an efficiency of older boilers of 70% (compared to 90% for modern ones) • Delivered energy requirement is 22500/0.7 = 32143 kWh gas • Emission factor for gas = 0.186 kg/kWh • So saving over lifetime = 32143 * 0.186 kg • = 5.978 tonnes • Capital cost is ~ £4000 • Cost per tonne saved = £670 which would have to be trading price to achieve desired reduction. • Many other technologies are much more expensive – most offset or trading prices are around £10!

  44. The Future • Discussions are ongoing about EU-ETS Phase 3. 2013 – 2020 • All Electricity Generators may have to purchase all their permits via auction – will lead to higher generation costs for coal in particular • Discussions relating to reducing threshold of 20 MW Th – would include many more businesses • Inclusion of Transport (air transport in particular?????). • Has EU-ETS trading really worked • Generally NO. • Grossly over generous allocations in Phase 1 by some countries • Penalty on early movers reduces incentives for further investment by leading companies in future. • Prices are too low to assist deployment of low carbon technologies, but some (renewable electricity generation) are covered by other incentives

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