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Ensuring environmental integrity in linking ETS systems penalties, banking, borrowing, ...

Exploring the Challenges and Opportunities for Establishing a North American Emissions Trading System Chicago, 14-15 November 2007 Dian Phylipsen, Ecofys. Ensuring environmental integrity in linking ETS systems penalties, banking, borrowing,. Contents. Who are we? Linking

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Ensuring environmental integrity in linking ETS systems penalties, banking, borrowing, ...

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  1. Exploring the Challenges and Opportunities for Establishing a North American Emissions Trading System Chicago, 14-15 November 2007 Dian Phylipsen, Ecofys Ensuring environmental integrity in linking ETS systemspenalties, banking, borrowing, ...

  2. Contents • Who are we? • Linking • Types of linking, types of issues • Relevant characteristics in terms of environmental integrity • Some examples of effects of linking different systems • Price effects • Timing effects • Overlap effects

  3. The sustainable energy solution provider The sustainable energy knowledge and innovation company The sustainable energy system supplier The sustainable energy project developer The sustainable energy innovation entrepreneur The sustainable credits originator Energy in the Built Environment Energy&CLimate Change Strategy Sustainable Power & Fuels Innovation in Energy Systems

  4. Founded in 1984 • ~900 employees • 17 countries Offices worldwide Antilles: Curaçao | Belgium: Brussels, Bruges | Bulgaria: Sofia | Brazil: ] Canada: Toronto, Vancouver | Chile: Santiago de Chile ] China; Beijing | France: Lyon, Paris, Soissons | Germany: Cologne, Nuerenberg, Berlin, Aachen-Heerlen | Italy: Turin, Rome | Netherlands: Utrecht, Heerlen-Aachen, Goes, Zoetermeer | Poland: Poznan, Warsaw | Spain: Barcelona, Seville, Madrid | Switzerland: Zug | Turkey: Istanbul | UK: London, Sheffield | USA: Sacramento

  5. European Commission Mid-term review of the EU ETS Monitoring & Reporting Guidelines Governments Evaluation of all 25-27 NAPs Consequences of the Linking Directive for domestic emission reductions Development of NAP Romania Role of small installations Feasibility of benchmarking in Phase III EU ETS Evaluation of NZ domestic offset scheme PRE Corporates ETS capacity building Development of marginal abatement cost curves for refineries (Shell) Carbon management projects (GlaxoSmithKline, YAM, breweries) Development, verification of monitoring plans (various energy companies) others Assess of shortage in Phase II ETS and use of JI/CDM (WWF) Development of ideal NAP for France (Greenpeace) Market assessments (various financial institutions) We are one of the leading European consultant on EU ETS & carbon market

  6. First agreement on linking ETS reached! • “The European Commission announced today that it has come to an agreement with the countries in the European Economic Area on linking their respective Emissions Trading systems, making it the first international agreement of its kind for emissions trading. The newly linked systems will cover 30 countries across the European continent.” • Announced 26 October 2007 • Linking EU ETS with Norway, Iceland and Liechtenstein • EC will ‘assist EFTA surveillance Authority in assessment of EEA allocation plans’ using EU methodology

  7. Linking is good, but… • European context: • Alternative to ETS was climate change policy without the flexibility of trading • Objective EU ETS is ‘… emission reductions …’ + ‘..cost-effective and economically efficient way …’ • Central issue is maintaining a sufficient carbon price to drive emission reductions • ‘Smaller’ design elements can have a big impact on this!

  8. Environmental integrity & linking • Direct linking • Mutual recognition of each others currencies (allowances, credits) • Indirect linking • Through JI/CDM, other offset projects • Through financial markets (swaps, derivatives) • Distinguish between • Linking 2 or more parallel systems • Overlap of systems (regional – national) • Effects of parallel systems without linking

  9. Important characteristics in linking • Type of target – absolute or relative • Price cap • Penalties • Financial penalty • Make-good provision! • Banking & borrowing • Additionality of offsets • Overlap with project-based credits

  10. Types of issues • Issue of parallel systems, not linking: • Sector coverage • New entrants • ‘Technical issues’ • Registries • Monitoring, reporting, verification • Other issues are political • Certainty on environmental outcome • Limitation of impacts on/flexibility for industry No different in North America than in EU!

  11. Communicating valves • Even if systems are only linked through JI/CDM (& offsets), they will act as communicating valves, with carbon allowances/credits flowing to • System with highest carbon price • System with highest shortage • Least flexibility in terms of type of cap, time horizon • Not one-on-one relationship • Longer term strategy • Transaction cost • Lack of knowledge • Uncertainty about future developments in both systems • ‘Local sentiments’

  12. Price - Example – linking US – EU ETS Plants in EU ETS: 100Mt short penalty= E100/t + purchase @~ 20E/t (or $7) $15.7 - 18 billion Mc-L system: in balance NEA c Penalty =3x market price ($5-7) $2.1 billion Emissions increase!

  13. Aviation inclusion! Up to 150Mt additional shortage?

  14. Also without linking to EU ETS • If North American systems recognise JI/CDM credits, EU ETS is likely to offer significantly higher prices for CERs • Current prices 15-17 Euro/t (secondary CERs) • Typically 75-85% of Phase II EAU prices • Unattractive alternative in systems with expected prices $5-7

  15. Banking – borrowing - timelines • System that allows banking, can become ‘dumping ground’ of excess allowances of systems that do not • Similar effects occur when systems with different timelines are linked Options to limit effects: • Limited banking - quantitative, vintage • Banking at a cost, discount • Build in ‘grace period’? • Not allow banking in the first period systems are linked, only after a certain period when excess/shortage is clear

  16. Banking in part of the system Party X Party Y Transaction Transfer AAUs Re-issue Company C Company F Banking Company B Company E Transactions Company A Company D Excess allowances Emissions increase! Sell back

  17. Borrowing • Borrowing postpones the need to act • Why act now, unless: • It happens to coincide with natural investment cycle • There is certainty that future administrations won’t change the rules… • There is certainty that future situation will be significantly worse • Borrowing comes at a cost • Linking systems that allow borrowing with those that do not may lead to increase in overall emissions

  18. Borrowing in part of the system Party X Party Y Transaction Transfer AAUs Company C Company F Borrowing Company B Company E Transactions Company A Company D Sell borrowed allowances Emissions increase!

  19. Offsets • Crucial issue: • Are (system) emissions actually reduced? • Additionality of offsets • Double-counting of emission reductions

  20. Additionality of offsets • If projects ‘would have happened anyway’, offsets • Create emission reduction credits • Allowing more emissions in the ETS • Without (proportionally) reducing emissions outside • Additionality is by definition difficult to assess • Build in safety margin? • Linking systems with different additionality requirements may lead to differences in above effects

  21. Overlapping systems - doublecounting • Risk of double-counting if cap-and-trade systems and offset systems overlap (JI or other offsets) • In EU, distinction made between ‘direct’ and ‘indirect’ projects Direct projects Indirect projects

  22. Wind park delivers electricity to grid Reduces emissions from fossil-fired power plants by 50,000t/a = 50,000 ERUs Fossil-fired power plants under EU ETS allocated on expected electricity production excl JI project Lower fossil-based electricity production because of wind park results in lower emissions Together fossil-fired plants have 50,000 EU allowances left over Example indirect project

  23. Conclusions • Environmental integrity issues mostly political issue, not technical issue • Smaller design elements can have a big impact, leading to increased emissions • Important to take into account local situation, certainly in early phase • Avoid big differences in these elements in systems to be linked • Think about staged linking • Otherwise, linking may do more harm than good • Only ‘low-cost’ part of objective reached, not the emission reduction/limitation objective

  24. Contact details Dian Phylipsen D.Phylipsen@ecofys.com M: + 39 340 57 92 571 M: + 31 6 520 410 15 www.ecofys.com

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