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Implications and Opportunities for European Business in a Carbon constrained Economy. Vincent Dessain, Executive Director, Europe Research Center, Harvard Business School. Introduction GHG Emissions – The overall picture B.1 GHG’s major emitters B.2 Potential Buyers-Potential Sellers ?

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implications and opportunities for european business in a carbon constrained economy

Implications and Opportunities for European Business in a Carbon constrained Economy

Vincent Dessain,

Executive Director,

Europe Research Center,

Harvard Business School

summary
Introduction

GHG Emissions – The overall picture

B.1 GHG’s major emitters

B.2 Potential Buyers-Potential Sellers ?

B.3 Emissions Trading: Lowest-Cost Method of Reducing GHGs

B.4 The implications of a Carbon-Constrained Economy on Market Dynamics

EU Emissions Trading Scope

C.1 EU 15: Targeted Sectors in EU Emissions Trading Directive

C.2 EU Emissions Trading Scheme

C.3 EU Emissions Trading Principles

C.4 National Allocation Plans Principles

C.5 Will the allocations be generous enough

Summary
summary continued
D. The electricity producers – an example

D.1 Electricity Production

D.2 Power Production Distribution

D.3 Cumulative Production

D.4 5 biggest CO2 emitters in Europe

D.5 Price of Electricity

D.6 Impact of EU ETS on Power Companies Valuations

Trading experiences and expectations

E.1 A U.S. Example: SO2 under clean air act of 1990

E.2 UK ETS experiment

E.3 How will CO2 allowances trade?

E.4 CO2 expected price 2008 - 2012

E.5 Strategies adopted by market players

Summary (continued)
introduction
Observations in this presentation are based on initial discussions with EU commission officials, government representatives and market participants

This presentation only expresses the author’s personal views and not the school’s

Following further analysis of EU emissions trading market, we may develop a research project that looks at the criteria of success to effective design of a new market

Introduction
potential buyers potential sellers
Potential Buyers-Potential Sellers ?

Source: Adapted from UE DG Environment

potential buyers potential sellers continued
Potential Buyers – Potential Sellers (continued)

Source: Adapted from UE DG Environment

emissions trading lowest cost method of reducing ghgs
Emissions Trading: Lowest-Cost Method of Reducing GHGs

Source: Viewpoint/The Marsh & McLennan Companies Journal/Volume XXXII No. 1 2003

the implications of a carbon constrained economy on market dynamics
The implications of a Carbon-Constrained Economy on Market Dynamics

Source: Viewpoint/The Marsh & McLennan Companies Journal/Volume XXXII No. 1 2003

eu 15 targeted sectors in eu emissions trading directive
EU 15: Targeted Sectors in EU Emissions Trading Directive

Source: Adapted from environmental-finance magazine

eu emissions trading scheme
EU Emissions Trading Scheme

Source: Adapted from environmental-finance magazine

eu emissions trading principles
To become largest CAP and Trade Program worldwide

NAP’s ready for review by EU commission by March 1-31, 2004

Warm-up phase 2005-2007: Learning by doing

Five year mandatory Kyoto phase from 2008-2012

Start with CO2 expanding to other GHG

Sector pooling with trustee appointment possible

Informal multinational pooling also possible

EU Emissions Trading Principles
national allocation plans principles
Emissions (historical base) seem to be the only viable metric rather than input, output or capacity

Two stage process reconciling top down, bottom-up

In warm-up phase: free of charge 95%, 5% by auction

For 2008 – 2012: 90% free of charge, 10% that can be auctioned

New entrants will need to buy from the market

National Allocation Plans Principles
will the allocations be generous enough
Will the allocations be generous enough?

Carbon constraint (Mton CO2)

10% surplus over b-a-u

In between Kyoto &

National targets

Source: Adapted from DKW

electricity production
C02 emission per type of production

In grams Hydro Nuclear Wind Combined Natural Coal Lignite

per KW/h cycle gas

CO2 emission

per par kWh 4 6 3 à 22 427 883 978 1 120

Source :Adapted from ACV Study– CDC Report

Electricity Production
power production distribution
Power Production Distribution

Source: Annual Reports

cumulative production
Cumulative Production

Fuel, Coal, Gas (TWh)

Enel

RWE

E.ON

Endesa

EDP

Iberdrola

Electrabel

Verbund

Source: CDC Reports

price of electricity
Price of Electricity

Source: Vattenfall

impact of eu ets on power companies valuations
Impact of EU ETS on Power Companies Valuations

Verbund

EDP

EDF

Endesa

Vattenfall

EVN

Suez

E.ON

Electrabel

Iberdrola

RWE

Enel

Source: CDC Reports

a u s example so 2 under clean air act of 1990
Principle of Allowances under CAP and Trade system

Allocated "free" to incumbents, "bankable" and "fully tradable"  

Market started to become reasonably efficient by 1994

Market prices much lower than expected

Relatively efficient private market developed in four years

1993: Third party brokers start to disclose prices

Transactions cost from $ 3.50 per allowance per trade to $ 1.50 per allowance per trade (1994 – 1996)

Bid-ask spreads go from $ 20 in 1994 to $ 1.50 in 1997

Active SWAPS markets developed

A U.S. Example: SO2 under clean air act of 1990
uk ets experiment
34 participants, voluntary and capped, 400 trading accounts, 300,000 – 1000,000 allowances traded, through 150-200 trades

Few bidding strategies where company decides on amount of emission reductions achievable through a project, the average cost of each ton of emission reduction and the price at which they would drop out of auction

Several participants had not yet developed a precise analysis of their abatement cost through a marginal abatement cost curve

UK ETS experiment
slide23
How will CO2 allowances trade?

Allowance Allocation

Economic Conditions

Germany

hot cold year

UK

growth

Accession MS

fuel costs

0 5 10 15 20 25

0 5 10 15 20 25 30

CO2 price (€/tonne)

CO2 price (€/tonne)

Source: Adapted from DRK

co 2 expected price 2008 2012
CO2 expected price 2008 - 2012

Market Source Expected price (€ton CO2)

Ecofys 20 - 42

EU CO2 Mc Kinsey 18 - 25

Emission EU 20 – 83

Certificate Penalty* 100

CDM Ecofys 5-7

JI Ecofys 5-10

* The penalty does not release the operator from the obligation to surrender its allowances

Source: Adapted from BA Power - Strategic Planning

strategies adopted by market players
Case 1: Market price higher than abatement marginal cost

Strategy: Reduce emissions more than your target and sell extra allowances

Case 2: Market price lower than abatement marginal cost

Strategy: Buy allowances to reduce total cost to meet reduction target

Case 3: Market price equal to abatement marginal cost

Strategy: Reduce emissions at break-even point

Case 4: Two main choices to meet your emissions target

Target: Either purchase allowances on the market or reduce emissions (production reduction, fuel switch or technology investment)

Strategies adopted by market players
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