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Assessment of EU-wide NOx and SO2 Emission Trading Scheme for IPPC Installations

This presentation by Alistair Ritchie from Entec UK discusses the objectives, approach, and environmental constraints of assessing the possible development of an EU-wide NOx and SO2 emission trading scheme for IPPC installations. It explores various options for emissions trading scenarios and their impacts, with the goal of providing insight on the appropriateness and feasibility of such a mechanism.

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Assessment of EU-wide NOx and SO2 Emission Trading Scheme for IPPC Installations

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  1. Assessment of the possible development of an EU-wide NOx and SO2 emission trading scheme for IPPC installations Stakeholder meeting Wednesday 10th February 2010 Presentation by Alistair Ritchie, Entec UK

  2. Agenda • Part 1 • Objectives of project • Overview of approach • Environmental constraints • Installation database and BAU scenario • Reference scenario • Part 2 • Options for emissions trading scenarios • Emissions Trading Simulation Model • Part 3 • Impacts of emission trading scenarios • Conclusions

  3. Agenda • Part 1 • Objectives of project • Overview of approach • Environmental constraints • Installation database and BAU scenario • Reference scenario • Part 2 • Options for emissions trading scenarios • Emissions Trading Simulation Model • Part 3 • Impacts of emission trading scenarios • Conclusions

  4. Objectives of project • To assess environmental, economic & social impacts of various possible designs of an ETS for SO2 and NOx under certain EU-wide rules for IPPC installations (as an alternative to individual BAT-based permitting for those pollutants) • Health & environmental impacts not to exceed those under current legislation (IPPCD, LCPD, NECD, AQD) and IED Proposal (Reference scenario) • Constraints due to potential NECD 2020 ceilings to be assessed, as well as benefits of flexible ceilings • Provide insight on whether a trading mechanism for SO2 & NOx in the EU would be appropriate. If so, under which rules, safeguarding environmental objectives & ensuring practicability & enforceability

  5. Overview of approach - scenarios

  6. Overview of approach – elements EMEP Source- Receptor modelling IPPC installation database Inform geographic / sector aspects Beyond BAU measures Options for emissions trading scenarios Specialist input Revise trading rules if necessary Emissions trading simulation model EMEP + Entec health, env & AQ modelling Costs & emissions health & env impacts Cost-benefit analysis

  7. Environmental constraints • BAT equivalence • Emissions trading should not lead to increased overall emissions compared to IED proposal • Targets equivalent to applying BAT-based permit conditions • BAT-AEL ranges - different options considered • Upper BAT-AELs • Intermediate BAT-AELs (Upper -20%) • Lower BAT-AELs • NECD • 2010 ceilings part of BAU scenario • Impact of potential 2020 ceilings needs to be considered • Assuming IPPC installations meet cost-optimised targets from GAINS • Ref scenario emissions (without flexibilities) – 16% NOx, -6% SO2 [GAINS optimisation to meet TSAP / GAINS CP] • Option for flexible national ceilings (+10% NOx, +20% SO2) • Air quality limit values • IED Proposal requires compliance with AQD limit values • Assessment against SO2, NO2, PM10, PM2.5 limit values

  8. Installation database (1) • Purpose • to provide detailed, installation level data on BAU emissions and abatement techniques • to provide basis for environmental and economic modelling of reference scenario and trading scenarios (bottom-up approach) • Fundamentally modelling is to provide comparison between scenarios, rather than focussing on absolute data • Sectors selected cover 90% of IPPC SO2 and NOx emissions • Public power & district heating (LCPs) • Refineries (inc LCPs) • Steel (integrated steelworks, inc LCPs) • Cement • Glass (NOx only) • Pulp (inc LCPs, NOx only) • Other industrial LCPs

  9. Installation database (2) • Data • Source location & stack characteristics • Current emissions • Current fuel type and quantity • BAU abatement installed / planned (LCPD, IPPCD, National legislation, etc) • Beyond BAU abatement options and costs • Activity projections (capacity, fuel, GVA) • Data sources • Consultation with MS and sector specialists • MS policy / regulatory contacts • EU industry associations • BREF review authors • Databases & studies • LCPD inventories; EPER; CoalPower • Supporting: other Entec / partner studies, in-house data & contacts; PRIMES (activity trends on basis of GVA or fuel consumption/ capacity) • Expert knowledge of project team (Entec, Okopol, Garrigues, IHE) • BAU emissions in 2020 • Approx 2,760kt SO2, 2,720kt NOx • Totals within 3% of GAINS • Differences in level of analysis, age of data, scope of data

  10. Reference scenario (1) • IED Proposal • text on which Council reached political agreement June 2009 • Approach for LCPs • Applied ‘minimum requirement’ ELVs (Annex V) • Accounted for: • Minimum desulphurisation rate option • Less stringent ELVs for LCPs at refineries and plants firing gases other than natural gas • Not accounted for: • Derogation for certain district heating plants • Low load factor and limited life derogations • Transitional National Plan • If BAU emissions below ELVs, applied BAU emissions • Approach for non-LCPs • Assumed permit ELVs based on techniques equivalent to Upper BAT-AELs from latest BREFs

  11. Reference scenario (2) Comparison with GAINS • Emissions comparisons • Within approximately 10% of GAINS for EU27 • Differences in level of analysis (bottom-up vs top down), age of data, scope of data, policy assumptions • Cost comparisons • Comparison for LCPs, with €1.7bn (this study) vs €2.1bn (IIASA study for IED IA) • Lower costs (approx 20%) in this study due to desulphurisation rate approach and refinery LCPs (not going beyond LCPD) • Overall, different sets of costs considered reasonably consistent

  12. Agenda • Part 1 • Objectives of project • Overview of approach • Environmental constraints • Installation database and BAU scenario • Reference scenario • Part 2 • Options for emissions trading scenarios • Emissions Trading Simulation Model • Part 3 • Impacts of emission trading scenarios • Conclusions

  13. Options for trading scenarios (1) • General approach • Review lessons from existing trading schemes • Generate long-list of options • Assess performance against evaluation criteriato develop short-list • Feedback at 1st stakeholder meeting • Main aspects to cover - Type of scheme - Banking & borrowing - Allocation level - Phase duration - Allocation method - New entrants - Sectoral coverage - Closures - Trading zones - MRV - Opt-in & opt-out

  14. Options for trading scenarios (2) Type of Scheme Cap & Trade: Design Risks Higher cost/ unit of product than projected • Cap and Trade (C&T) Allocation = Emission rate * Production (historical) • Baseline and Credit (B&C) Allocation =Emission rate * Production (actual) • Hybrid Allocation = Emission rate * Production * Adjustment Factor (to achieve emissions target) Windfall profit (under free allocation) Baseline & Credit: Design Risks Lower emission reductions than anticipated

  15. Options for trading scenarios (3) Type of Scheme (cont'd) • Certainty: • of emission levels: high under C&T, low under B&C • of emission location: low under C&T and B&C • If activity rate higher / lower than expected: • Under C&T operators can face higher / lower costs per unit of production than initially envisaged; • under B&C emission reductions are less / more than C&T • Under C&T operators have more long term certainty about emission reductions required, likely allowance price, attractiveness of investments, but this depends on policy signals. Incentive to keep emissions low even under high production levels leads to more incentive for innovation

  16. Options for trading scenarios (4) Allocation level

  17. Options for trading scenarios (5) Allocation Method • All allocation methods apply to all types of trading schemes

  18. Options for trading scenarios (6)Sectoral coverage • All IPPC installations covered by Revised EU ETS • All IPPC installations covered by Revised EU ETS (excl 20-50 MW combustion installations) • Installations that meet specific coverage criteria, eg • Average emissions per installation above certain % of average across all sectors (50% in this study) • Total emissions per sector above certain % of emissions from all sectors (1% in this study)

  19. Options for trading scenarios (7)Sectoral coverage (cont'd) • Inclusion of IPPC sectors meeting specific criteria would be appropriate if desired to limit coverage to most significant sectors in terms of emissions • Could consider pilot phase with small number of sectors, then expand in later phases • Inclusion of IPPC sectors covered by Revised EU ETS including 20 to 50MW combustion plants would go beyond current scope of IED • Inclusion of IPPC sectors covered by Revised EU ETS excluding 20 to 50MW combustion plants makes scope consistent with EU ETS & boundary of coverage (potentially) easier to define, but would bring in small emitters with proportionately high unit costs for monitoring, reporting and verification

  20. Options for trading scenarios (7)Trading zones • All EU27 Member States together (ie one overall zone) • An intermediate level • Based on large optimal control areas from TNO study: North West, North East and South • Each individual Member State (ie 27 individual zones)

  21. Options for trading scenarios (9) Opt-ins and opt-outs • Opt-ins • MS / regional level • No opt-ins (all MSs covered) • Voluntary opt-in at MS level • Installation level • C&T: • No opt-ins • Opt-ins as offset projects • B&C: • No opt-ins • Opt-in and stay in • Opt-in as offset • Opt-outs • Opt-outs not allowed

  22. Options for trading scenarios (10) Opt-ins and opt-outs (cont'd) • Ideally no opt-ins and opt-outs allowed – to allow EU-wide harmonisation and predictability and market liquidity • Allowing opt-ins at installation level would create perverse incentives - only installations to benefit would join, especially in the case of C&T, thus jeopardising environmental outcomes

  23. Options for trading scenarios (11) Banking & borrowing • Banking • No banking across trading phases, but banking across trading periods • Unlimited banking across trading periods and trading phases • Borrowing • No borrowing across trading periods or phases • Embedded borrowing between trading years

  24. Options for trading scenarios (12) Banking & borrowing (cont'd) • Recommend banking year to year is allowed – to prevent allowance price volatility and encourage early abatement action • Banking phase to phase expected to be beneficial but modelled only one trading phase so no conclusions drawn • Recommend borrowing from year to year is allowed – to prevent allowance price volatility • Borrowing from phase to phase has legal liability implications and discourages early action – not recommended

  25. Options for trading scenarios (13) Phase Duration • Pilot phase • Inclusion of pilot phase (of 3 years) • No pilot phase • Normal phase • 8 years

  26. Options for trading scenarios (14) Phase Duration (cont'd) • Should provide sufficient allowance price signals to investors and therefore be sufficiently long, whilst allowing regulators to make adjustments eg due to BAT progress • 8 year trading period may be practical • Pilot phase should be considered, particularly if: • Complicated allocation methods (eg partial free allocation) • New types of benchmarking • Revenue recycling under auctioning • Potential issues with tiered MRV approach

  27. Options for trading scenarios (15) New entrants & closures • New entrants (for C&T with full or partial free allocation) • Creation of new entrant reserve and equal treatment as for incumbents on a first come first served basis • Closures • Allowances transferred to new entrant reserve • Allowances transferred to auction pool • Allowances kept by operators after closure allowing them to sell them after closure: • For remainder of trading period

  28. Options for trading scenarios (16) Monitoring, reporting and verification (MRV) • Monitoring • >100MWth LCPs and non-LCPs with equivalent emissions (eg >150tpa NOx) • As per LCPD / IED for LCPs • Continuous emissions monitoring (CEM) – QA based on EN14181 • Excluding SO2 for nat gas and fuel with known S and no abatement • 50 - 100MWth LCPs and non-LCPs with equivalent emissions (eg <150tpa NOx) • As above (ie CEMs) • Or, measurements once every 6 months (as per LCPD / IED for LCPs) • Process conditions giving highest emissions for specified modes • Predictive emission monitoring (PEM) potential alternative • Reporting and verification • Consistent with EU ETS Monitoring and Reporting Guidelines, where appropriate • Integrated permit, monitoring plan, annual report, etc for SO2, NOx and CO2

  29. Trading Simulation ModelApproach to modelling • Aims to meet emission limits imposed on it while minimising compliance (abatement) costs • Key inputs • BAU emissions and abatement for each installation • Emission limits and reduction requirements: • Under ref scenario emission limits apply at installation level • Under C&T and B&C overall allowance pool limit applies at trading zone level • NECD ceilings apply at MS level (2010 ceilings are BAU; potential 2020 ceilings apply to some scenarios) • Beyond BAU emission reduction measures (abatement potential and costs) • Key outputs • Abatement measures, emissions reductions and costs at each installation

  30. Trading Simulation Model General structure of trading simulation model

  31. Trading Simulation Model Modelling notes • Model run for year 2020 • BAT-AELs as in current BREFs • Model couldn’t fully solve for some installations under ref scenario and most stringent trading scenarios - for these instances model reduced the reduction requirement to maximum abatement potential in database • NOx run 1st, SO2 run 2nd – measures taken up by NOx but affecting SO2 shown at zero cost for SO2. Modelling not sensitive to sequence of pollutants

  32. Health & environmental impact modelling (1) • EMEP model (Met.no) • Applications • Source–receptor analysis to understand environmental sensitivity and drivers for impacts • Detailed AQ, health and env impact modelling of trading scenarios • Emissions data • All key pollutants inc SO2, NOx and primary PM • IPPC installations - from database • Non-IPPC sources – EMEP / TNO estimates • Outputs: • 50x50km2 for source–receptor analysis; • 10x10km2 for impact modelling • Includes secondary particulates from SO2 and NOx • Ecosystem damage: exceedances of critical loads • Health damage: YOLL from PM; O3; AQ impacts of SO2, NO2, PM2.5, PM10 • Areas with exceedances of AQ LVs • Maps of changes in AQ vs Ref scenario

  33. Health & environmental impact modelling (2) • Monetary valuation • Health • PM related impacts • Years of Life Lost (YOLL) * valuation (see below) • Low estimate of mortality using Value of Life Year (VOLY) (€40k from NEEDS) + factor for morbidity effects, giving €64k • High estimate of mortality using Value of Statistical Life (VOSL) + factor for morbidity effects, giving €129k (inc correction to link VOSL to YOLL) • Ozone related impacts • SOMO35 (Sum of ozone means over 35ppb) * population * valuation factor (0.0024) • Crops • Ozone (from NOx) related impacts on crops covered • Materials • SO2 related impacts on materials in utilitarian applications covered • Value of damage to buildings of cultural importance not covered

  34. Agenda • Part 1 • Objectives of project • Overview of approach • Environmental constraints • Installation database and BAU scenario • Reference scenario • Part 2 • Options for emissions trading scenarios • Emissions Trading Simulation Model • Part 3 • Impacts of emission trading scenarios • Conclusions

  35. Costs vs reference scenario BAU Ref C&T C&T C&T Cap= Cap= B&C B&C B&C U I L NECD Ref U I Dutch 2020 Sc Ref + C&T + C&T + 3z 27z Opt-in NECD NECD NECD 3MS Opt-in 2020 2020 2020 5MS Flex

  36. Emissions vs reference scenario BAU Ref C&T C&T C&T Cap= Cap= B&C B&C B&C U I L NECD Ref U I Dutch 2020 Sc Ref + C&T + C&T + 3z 27z Opt-in Opt-in NECD NECD NECD 3 MS 5 MS 2020 2020 2020 Flex

  37. C&T vs B&C; Level of cap - NOx B&C C&T C&TB&C C&T C&T C&T Ref+ C&T C&T C&T Ref U Cap U I U Cap I NECD U L U Ref 3z NECD 2020 Opt-in Opt-in Sc 2020 5MS 3MS

  38. C&T vs B&C; Level of cap – SO2 B&C C&T C&T C&T B&C C&T C&T Ref Ref+ B&C C&T U Cap U U I Cap I NECD Dutch L Ref 3z NECD 2020 Sc 2020

  39. Trading zones - NOx C&T C&T B&C C&T U U Dutch U NECD NECD 27z 2020 2020 Flex B&C C&T C&T B&C C&T C&T C&T Ref+ C&T C&T C&T Ref U Cap U I U Cap I NECD U L U Ref 3z NECD 2020 Opt-in Opt-in Sc 2020 5MS 3MS

  40. Trading zones – SO2 C&T C&T C&T C&T C&T U U U U U NECD NECD 27z Opt-in Opt-in 2020 2020 5MS 3MS Flex B&C C&T C&T C&T B&C C&T C&T Ref Ref+ B&C C&T U Cap U U I Cap I NECD Dutch L Ref 3z NECD 2020 Sc 2020

  41. Opt-in for MSs - NOx C&T C&T B&C C&T U U Dutch U NECD NECD 27z 2020 2020 Flex B&C C&T C&T B&C C&T C&T C&T Ref+ C&T C&T C&T Ref U Cap U I U Cap I NECD U L U Ref 3z NECD 2020 Opt-inOpt-in Sc 2020 5MS 3MS

  42. Opt-in for MSs – SO2 C&T C&T C&T C&T C&T U U U U U NECD NECD 27z Opt-in Opt-in 2020 2020 5MS 3MS Flex B&C C&T C&T C&T B&C C&T C&T Ref Ref+ B&C C&T U Cap U U I Cap I NECD Dutch L Ref 3z NECD 2020 Sc 2020

  43. Impact of NECD 2020 ceilings - NOx C&T C&T B&C C&T U U Dutch U NECDNECD 27z 20202020 Flex B&C C&T C&T B&C C&T C&T C&T Ref+ C&T C&T C&T Ref U Cap U I U Cap I NECD U L U Ref 3z NECD 2020 Opt-in Opt-in Sc 2020 5MS 3MS

  44. Impact of NECD 2020 ceilings – SO2 C&T C&T C&T C&T C&T U U U U U NECD NECD 27z Opt-in Opt-in 2020 2020 5MS 3MS Flex B&C C&T C&T C&T B&C C&T C&T Ref Ref+ B&C C&T U Cap U U I Cap I NECD Dutch L Ref 3z NECD 2020 Sc 2020

  45. Impact of allocation options (1)Preliminary assessment of distribution of savings (positive) & costs (negative) vs Ref scenario

  46. Impact of allocation options (2)Key points • Sectoral impacts depend on reference scenario costs, abatement costs, overall cap and allocation method • All sectors benefit compared to the reference scenario under free allocation and many sectors benefit under one variant of the partial free allocation (on basis of the Upper BAT-AEL) • Figures are preliminary as there is considerable uncertainty with regards to scheme design, particularly in the case of partial free allocation, auctioning and revenue recycling • Subsequent study to include more realistic revenue recycling scenarios and to provide more detail on the likely impacts

  47. Sensitivity analysis for compliance costs and financial impacts • Costs of abatement options in reference scenario • Main cost estimates relatively consistent with figures in IIASA study for IED IA • However, we examined no take up of additional measures for non-LCPs at refineries and lower costs for NOx abatement for gas boilers / CCGT • 38% reduction in cost of reference scenario • Investment sensitivity analysis • Main analysis assumes a perfect market • Uncertainty leads to reduced cost-effectiveness – cost of trading increases by 10 to 15% for NOx and SO2 • Impacts of SO2 and NOx abatement measures on CO2 costs • Main analysis excludes CO2 allowance price impacts as CO2 measures included in PRIMES baseline and carbon prices uncertain • Cost saving of C&T Upper BAT-AEL vs Ref scenario reduces by 10%

  48. Administrative impacts • Operators • Measures • CEMs or periodic monitoring for non-LCPs, inc maintenance, calibration etc, • Integrated SO2, NOx and CO2 permit, monitoring plan, emissions report • Verification costs • Estimated costs €32mpa for installations in database • Competent Authorities / EC • Set up • CAs - Approve monitoring plans / issue permits • EC / MSs - Develop guidance documents / stakeholder info • EC / MSs - Develop / adapt IT systems (automated workflow approach and IT governance) • Annual • CAs - Deal with operator queries • CAs - Approve annual reports • EC / MSs / CAs - Administrative operation / helpdesk / registry • Estimated costs €3mpa for installations in database, sensitive to specific implementation approaches

  49. Years of Life Lost (YOLL) vs reference scenario BAU C&T C&T C&T Cap= Cap= B&C B&C B&C U I L NECD Ref U I Dutch 2020 Sc Ref + C&T + C&T + 3z 27z Opt-in Opt-in NECD NECD NECD 3MS 5MS 2020 2020 2020 Flex

  50. Air quality impacts • Relatively limited impacts on compliance with air quality limit values in comparison to the reference scenario • All trading scenarios estimated to result in fewer areas of exceedence of AQ limit values compared to BAU • Maps in Appendix A show areas with increased and decreased (mainly) ambient air concentrations compared to reference scenario • Under IED Proposal, in event of exceedances, additional measures will be required to safeguard air quality

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