The End of Free Carbon

Transcription

1 The End of Free Carbon Lessons from Kyoto Protocol & EU ETS ENGREF Benoît Leguet Mission climat Caisse des Dépôts Paris, 28/11/07

2 The End of Free Carbon The Kyoto Protocol: Two Innovations A «Cap and Trade» Trading System between the Annex B countries Two Project Mechanisms: Clean Development Mechanism & Joint Implementation The European Trading Scheme The Set-Up Period : The Period: Kyoto Protocol Compliance Period 2 The Non-Kyoto Markets: New South Wales (Australia), The Chicago Climate Exchange (CCX), The Regional Greenhouse Gas Initiative (RGGI), California

3 The EU ETS in the international context EU ETS Takes all: Share of Volume and Value in the Carbon Market until September 30, 2006 Volume Value Source : World Bank. Source : World Bank. 3

4 I EU ETS Issues ENGREF Mission climat Benoît Leguet

5 The EU Emission Trading Scheme : How does it work? CO2 emissions from European industries have been capped ; Every year, each industrial plant is allocated allowances corresponding to its cap (One allowance = 1 ton of CO2); The allowances are tradable all around Europe ; Every year, industrial installations have the obligation to restitute as many allowances as actual CO2 emissions ; First two market periods : and ; Free banking and borrowing during each period ; No possibility of banking and borrowing between the first two periods. 5

6 More than half of the allowances to power and heating activities NAP I Total : 2.2 billion CO2 (50 % of the EU CO2 emissions) industrial sources Breakdown per country Breakdown per industry Others 28,1% Germany 23,7% Cement, glass & lime 12% Paper 3% Others 9% Power and combustion France 7,4% Spain 8,3% UK 10,5% Italy 10,6% Poland 11,4% Metals 12% Refining 8% 56% 6 Source: National Allocation Plans

7 The Five Stages of the EU ETS Market CO2 tonne s /t of CO2 35,00 30, , , , d-04 j-05 f-05 m-05 m-05 j-05 j-05 Exchanges on market places EUA OTC prices a-05 o-05 n-05 d-05 j-06 m-06 a-06 m-06 j-06 a-06 OTC Exchanges s-06 o-06 n-06 j-07 f-07 m-07 m-07 EUA Dec- 08 futures prices on ECX 10,00 5,00 0,00 Source : Point Carbon, Powernext and ECX.

8 The Five Stages Stage 1 (Jan-Jul 05): increasing price during this phase can be explained by tightness of the market and its lack of symmetry. Demand came from power producers but supply was not there because other players generally not prepared to sell; Stage 2 (Aug 05-Mar 05): expanding market reached equilibrium with the supply at around 25/t. Demand continued to come from power producers; increasing during the winter on account of the rise in gas price; Stage 3 (Apr-May 05): market correction followed European Commission announcement of initial compliance that market was long by approximately 4%; Stage 4 (Jun-Sep 06): market stabilised at around 15/t. Demand of power producers met by increasing supply following initial compliance announcement; Stage 5 (Since Oct 06): divorce between prices for first and second periods became final. First period price fell to 0.5/t while second period price remained in the range 15-20/t. The Commission s tightening of Member State allocation caps for the second period has lead to second period allowance prices rising to 25/t in May Current prices (Nov 07) have stabilized around 22/t. 8

9 The probability of a EUA shortage at the end of the first period The ratio between the 1 st and 2 nd period prices plus the 40 of penalty expresses the probability that the market is short at the end of the 1 st period. 50% 45% 40% 35% 30% 25% 20% 15% Before the 1 st compliance, the probability was estimated at 35-45% but less than 1% since May % 5% 0% juil.-05 août-05 Pr oct.-05 déc.-05 janv.-06 mars-06 ( shortage ) mai-06 juin-06 août-06 = EUA EUA oct.-06 nov.-06 janv.-07 mars-07 9 Source : Climate task force, from the formula of Parsons et Ellerman, MIT 2006.

10 Supply and demand in EU 25 6 EU 25 - installations compliance Allowance > t 100% Long and short installations concentration EU EU 25 Compliance by installation 4 90% 80% % 25 Net compliance (mtco2) % of sector long/short 60% 50% 40% 30% 20% 10% Emission (tco2) % 0 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% % of sector long/short inst. Allocation (tco2) Long inst. Short inst Source : Climate Task Force, Caisse des Dépôts, CITL data. Millions Among installations which are in a long position, 10% represent 77% of the total surplus (254 Mt) and 2% of them represent more than 50%. Among installations which are in a short position, 10% represent more than 90% of the total deficit (-225 Mt) and 1.5% of them represent 50%. 10

11 More than 2/3 of the allowances to power and heating activities NAP II Total : 2.1 billion CO2 (50 % of the EU CO2 emissions) industrial sources Breakdown per country Breakdown per industry Others 28,2% Germany 23,7% Cement, glass and lime 11% Paper 2% Other 1% France 7,4% Spain 8,2% UK 10,1% Italy 10,1% Poland 11,7% Metals 9% Refineries 8% Energy - combusti n 69% 11 Source: CITL (2007)

12 The mean trend of the second period prices expectations. 45,00 40,00 35,00 30,00 33,3 /t 28,6 /t 39,6 /t 34,6 /t 29,6 /t 25,00 20,00 15,00 23,9 /t Standard deviation 10,00 5,00 0,00 janv.-05 janv.-06 janv.-07 janv.-08 janv.-09 janv.-10 janv.-11 janv.-12 janv.-13 Powernext Spot ECX Futures Dec 08 Moyenne Moyenne - Ecart type Moyenne + Ecart type 12 Source : Mission Climat de la Caisse des Dépôts

13 II The Kyoto Project-Based Mechanisms ENGREF Mission climat Benoît Leguet

14 Project mechanisms - boundary 14 Source : MIES, Guide on project mechanisms

15 Project mechanisms avoided emissions 15 Source : MIES, Guide on project mechanisms

16 Project mechanisms simplified process 16 Source : MIES, Guide on Project mechanisms

17 Nb 17 The implementation of Clean Development Mechanism Projects Evolution of registered Kyoto CDM projects (cumulative) >2 600 CDM projects in the «pipeline» (827 registered) representing 2.5 Gt* CO2 until end of 2012 *1,06Gt from registered projects déc-04 févr-05 avr-05 juin-05 août-05 oct-05 déc-05 févr-06 avr-06 juin-06 août-06 oct-06 déc-06 févr-07 avr-07 juin-07 août-07 oct Source: UNFCCC

18 Registered project activities by host country (29 October 2007) Number of projects (Total: 827) Average annual CERs (Total: Mon CERs) South Korea 2% Philippines 2% Malaysia 2% others 16% Brazil 13% Chile 2% Honduras 1% Mexico 11% others; 10% Qatar; 1% South Africa; 1% South Korea; 9% Argentina; 2% Brazil; 10% Chile; 2% Mexico; 4% India; 17% India 36% China 15% China; 45% 18 Source: UNFCCC

19 19 Distribution of registered projects by scope (29 October 2007) Number of projects (Total: 827) Average annual CERs (Total: Mon CERs) N2O 2% Landfill gas 7% HFCs 2% Hydro 18% Fossil fuel switch 2% Wind 14% EE supply side 1% others 3% Agriculture 12% Biogas 6% Biomass energy 21% Cement EE industry EE own generation5% 5% Only 7 HFCs projects -in India (4), China, Republic of Korea and Brazil provide 41% of the credits issued. N2O 15% Wind 6% Agriculture others 8% 3% Biomass energy 6% EE own generation 4% Fugitive 3% 2% Landfill gas 9% HFCs Hydro 41% 5% Source: CDM pipeline-unep RISOE

20 Distribution of JI projects by scope (October ) Number of projects (Total: 188*) Average annual ERUs (Total: 38.5Mons ERUs) Fossil fuel switch 5% EE Supply side 6% Coal bed/mine methane 7% Energy distrib. 5% EE Industry 7% Fugitive 10% others 8% Hydro 16% Biomass energy 10% Wind 13% Landfill gas 13% Landfill gas 7% Hydro 5% Fossil fuel switch 9% EE supply side 5% EE industry 6% N2O 7% Wind 6% Others 4% Biomass energy 9% Coal bed/mine methane 6% Energy distribution 36% 20 *Only 1 registered Source: JI pipeline-unep RISOE

21 JI project activities by host countries (October ) Number of projects(total: 188*) Average annual ERUs(Total: 38.5 Mon ERUs) Hungary 6% Poland 8% Latvia, Lithuania and Slovakia 6% Germany and NZ Estonia 4% 6% Russia 25% Estonia Hungary 2% Poland4% 2% Romania 4% Czech Republic 2% Bulgaria 9% Germany and NZ 1% Latvia, Lithuania and Slovakia 3% Russia 48% Romania 8% Ukraine 14% Czech Republic 11% Bulgaria 12% Ukraine 25% 21 *Only 1 registered Source: JI pipeline-unep RISOE

22 Observed prices for project-based transactions U S $ /tc O 2 e O b se rve d p ric es for p ro jec ts-b a se d tra n sa c tio n s in Q Ve rif ie d E m is s i o n R e d u c tio n s (V ER ) 5,0 C e rtifi e d E m i s s io n R e d u c tio n s (C ER ) 1 1,6 E m i s s io n R e d u c ti o n U n it s ( E R U ) 7,2 Se c o n d a ry M a rk e t C E R 23,3 30,7 E u ro p e a n U n i o n A ll o w a n c e s ( EU A ) High price Average price Low price Average exchange rate on the period: 1 = US$ 22 Sources: World Bank, Powernext

23 III - Post 2012 Issues ENGREF Mission climat Benoît Leguet

24 The CDM Assessment * Source : WRI, World Development Indicators2006, UNFCCC. * according to Carbon Finance March 2007 CDM Projects are growing quite fast Nevertheless, their impact is a symbolic part of total investments in developing countries 24

25 The Chinese Case lg CO2/US $ ,5 2 1,5 1 Russie Chine Inde In most emerging countries, carbon economic intensity has been decreasing since the 1990s. China has also followed the trend 0, Brésil Source : CDIAC, Groningen Growth and Development Centre, WRI The overheating of the Chinese economy has triggered a new increase in carbon intensity since

26 26 The US evolution

27 A huge carbon emission reduction potential in the US Carbon intensity in developed countries CO2 intensity (kg CO2 / 1990 US$) 2 USA 1,5 EU 15 1 Japan 0, For years, Parallel progress in carbon efficiency have been observed in the US and in the EU Today US carbon intensity (CO2 emissions per PIB Unit) is 60% above EU A national cap and trade system in the US would create huge new opportunities of CO2 emission reductions. 27 Source: Mission Climat

28 What will the post-kyoto world look like? No return to the free carbon economy prevailing before 2005 Three possible scenarios : Kyoto agreement is saved : very unlikely Several carbon markets in the world, without multilateral agreement : possible but not desirable A new international climate agreement with a strong commitment of industrial countries (US included) and efficient ways to associate emerging countries Two important issues : Russian harming ability Difficulty to include the developing countries with grandfathering allocation 28

29 How to engage the right transition? Two main basis of the world carbon finance in 2012 : The EU-ETS The Kyoto international project based credits (JI/CDM) What is needed : To make the second period of EU-ETS a success, economically and ecologically Investments in post-2012 carbon assets, especially CERs Too risky for most of private investors Key measure for governments, public and multilateral agencies 29

30 The EU-ETS Medium and Long Term Issues Thank you for your attention Benoît Leguet Mission climat - Caisse des Dépôts benoit.leguet@caissedesdepots.fr Phone : +33 [0]

31 IV - ANNEXES Benoît Leguet

32 What we have learned : Four main market drivers Long term Level of carbon constraint Economic growth Energy relative prices Short term Temperatures and rainfall 32

33 EU 2005 Emissions vs. Allocation : carbon constraint distribution Globally : 80 Mt long (less than 4%) + 3,0 + 11,5-3,2-36,4 + 11,2 + 6,1 + 33,7 + 4,1 + 1,2 + 6,9 Short : UK, Ireland, Spain, Austria + 0,5-9,1 + 3,0 +0,6 + 19,1 + 21,3 + 14,6 + 4,6-1,0 + 0,3 + 4,5 + 0,4 Long : Germany, France, Nordic countries, Eastern countries + 0,1 33 Source: Mission Climat

34 Supply and demand : the energy sector in EU 6 EU 6 - installations compliance - Energy sectors - Allowance > t Long and short installations concentration EU 6 energy sector EU 6 Compliance by installation - Energy sector % % 80% Net position (tco2) Source : Climate Task Force, Caisse des Dépôts, CITL data. %of sector long/short position. 70% 60% 50% 40% 30% 20% 10% 0% 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% %of sector long/short installations Long inst. In the energy production sector, of installations which are in long positions, 10 % represent 70% of the total sector surplus (90 Mt) and 3% of them represent 50%. Of installations which are in a short position, 10% represent more 90% of the total sector deficit (-120 Mt) and 2% of them represent 50%. Short inst. Emisssion Allocation

35 Environmental Performance of EU ETS 2005 verified emissions showed the market to be long by 80Mt. Was the EU ETS overallocated and did it induce any emissions reductions? Ellerman & Buchner (MIT) : Potential overallocation of 100Mt EU ETS did in fact induce abatement during Evidence that indicates abatement of approximately 73Mt during This equates to 3.5% of the 2005 emissions cap. Emissions abatement is most likely to have taken place in the power sector. In addition to being the largest sector in the EU ETS, the power sector can have a big impact on emissions abatement because of fuel switching or changes in merit order. 35

36 From First Period to Second Period: What will change? Industries coverage : Towards limited extension (Air transportation starting in 2011, chemical industry) Some countries will experiment with Domestic offset projects Level of carbon constraint has increased for the period : The emissions cap for the second period is 10% lower compared to the first period cap 1st Period Emission Cap (Mt of CO2) 2005/2006 Average Verified Emissions (Mt of CO2) Commission Approved 2 nd Period Cap (Mt of CO2) Emissions Difference (Mt & %): 1st Period Cap v Approved 2 nd Period Cap Mt (9.7%) The figures in this table are based on the 21 NAP IIs that the European Commission has approved thus far. Linkage with Kyoto projects mechanisms An important issue for post-2012 outlooks Providing long term incentives New entrants and plants closures rules Post-2012 issues 36

37 Post 2012 Issues & Long Term Incentives Post 2012 issues: European Council has committed to reducing EU GHG emissions by 20% relative to 1990 by 2020; However, there remains great uncertainty at the international level regarding future GHG emission reduction commitments. Free banking is a condition for long term price signals New entrants: Free allowances allocation for new entrants could have undesirable effects on investment decisions : Subsidizing carbon-intensive investment (ecological damage) ; Inciting to over-investment (economic damage) Plants closure: As yet no European common rules In most countries : restitution of allowances to the Government in case of plants closure 37

38 Post 2012 Issues (2): Main points of discussion in the European Commission EU ETS Working Group Allocation issues: EU Commission favors a more centralized process to allocation; While the second period will be 5 years there is a growing desire among participants that future trading periods should be longer in duration, i.e. 8, 10 years at a minimum. Free allocation vs. auctioning: Power sector has made significant windfall profits because of free allocation; Free allocation hurts the carbon price signal. Allocation method should be an incentive to carbon intensive industry to reduce emissions. Alternative allocation methods such as benchmarking, fixed or output based may be more appropriate than grandfathering at providing this incentive. Difficulty of managing a trading scheme where participating sectors are exposed to different degrees of competition: Because the power sector is limited in exposure to competition it is able to pass through allocation costs to consumers; With energy intensive sectors such as cement and steel exposed to international competition they are forced to absorb allocation costs without passing them on to consumers; Possible solution considered by working group: Setting up border taxes; or Different rules for different sectors 38

39 Domestic Offset Projects Greenhouse gas emissions in France Waste 39 Sector Energy production Industry Agriculture Transport Buildings TOTAL France Greenhouse gas emissions in 2003 tco 2 eq millions % 13% 20% 19% 27% 18% 3% 100% Change (metric tonnes, millions) 1990 to Share of emissions under NAP 100% 70% 0% 0% 0% 0% 27% Interests of DOPs: Create a price signal for fields where emissions are growing and uncovered by the ETS Reduce the overall cost of emission reductions Extend the possibility for States to reduce emissions in their own territory Source: Climate Task Force s report on domestic offset projects

40 Caisse des Dépôts involvement in carbon finance Development and Management of National registries (Seringas) : France : on behalf of the Central Government EU: 10 countries use Seringas (60 % of the EU allowances) Associated with Powernext carbon Leading spot carbon market in Europe Sponsor of the European Carbon Fund : million to be invested ( 25 million from CDC) Promotion of CO2 Domestic offset Projects in France Research and analysis 40