Emission trading basics. Robert Utter, 13 November 2017

Transcription

1 Emission trading basics Robert Utter, 13 November 2017

2 W/ /2 2 Background and the theory behind it How does it work in practice? EU emission trading system (EU ETS)

3 The international framework UNFCCC 1992 and Kyoto Protocol1997 Emission reduction targets for industrialized countries KP enters into force in 2005 Commitment period EU burden sharing agreement 2002 Finland s emissions capped at the level of 1990 KP flexible mechanisms International Emissions Trading Between governments; bilateral deals; not public trading CDM JI W/ /2 3

4 W/ /2 4

5 Principles of emission trading What is it about? You can trade basically any emission EU ETS is about certain greenhouse gas (GHG) emissions Who is it about? Some entities are subject to emission trasding (e.g. industry and energy sectors) General working methodology: cap-and-trade Cap = restriction on the total amount of emissions Trade = emission allowances are distributed to participants, who can then freely trade Also other methodologies are possible (e.g. benchmarking) W/ /2 5

6 How does it work in practice? Initial allocation of allowances Auction and/or free allocation If free allocation how is it done? Grandfathering / benchmarking Trading of allowances The price is set according to the law of demand Surrendering of allowances according to actual emissions An operator must (annually) surrender allowances that correspond to the actual emissions If you want to emit, you must acquire allowances Emission trading automatically through the market mechanism allocate emission reductions to the place where they can be performed most cost efficiently (according to theory). W/ /2 6

7 W/ /2 7 The theory behind it How does it work in practice? EU emission trading system (EU ETS)

8 What do you mean the most cost efficiently Everybody has the same reduction obligation Emission trading W/ /2 8 Company A Company B 10 /tonne 7 /tonne Company A 200t x 10 /t Company B 200t x 7 /t Company A Company B 10 /tonne /tonne Company A 100t x 10 /t Company B 300t x 7 /t

9 W/ /2 9 The theory behind it How does it work in practice? EU emission trading system (EU ETS)

10 EU ETS emission allowance price chart W/ /2 10 Source:

11 EU ETS Began in 2005 (just before the Kyoto Protocol entered into force In 31 (or soon 30) countries (EU + EEA countries Norway, Iceland and Liechtenstein) Brexit Includes approximately 13,000 installations (e.g. energy, metals, pulp and paper) In Finland about 570 installations Aviation also included from beginning of 2012 Cap-and-trade system Volumes In total approximately 15 billion tonnes between 2013 and 2020 Around 2 billion tonnes in 2013 Around 1.8 billion tonnes in 2020 Initial allocation of emission allowances Part is auctioned, another part are allocated for free W/ /2 11

12 Expansion of EU ETS new sectors and GHGs Industrial sectors (e.g. energy, steel, paper and pulp, cement, glass ) Only CO2 emissions 2012 Aviation 2013 Previous industrial sectors still included (but e.g. definition of combustion installation specified) New sectors (e.g. chemicals, aluminum, ammonia) New GHGs (N2O and PFC) W/ /2 12

13 Amounts of allowances Mt CO2 Vuosi W/ /2 13

14 Allocation methodologies NAP Drafted by Ministry Government decision Commission approval How many EUAs allocated, using what methodology and to whom Directive guaranteed min. 90% free allocation (95% ) some auctions have been carried out Most common allocation methodology in use: Grandfathering Auctioning is in principle the main allocation methodology Electricity generation receives no free allocation (some exceptions) Carbon leakage sector 100% free allocation based on benchmark Other sectors 80% free in % free in % free in 2027 In 2013 appr. 50% of EUAs auctioned (appr. 1 billion EUAs) W/ /2 14

15 Auctioning basics Auction platform (Finland uses the common auction platform) UK, Germany and Poland each opted to set up its own auction platform Structure of the auction 1) Single-round, 2) sealed bid, 3) uniform price auction All successful bids pay the clearing price Common auction platform organizes at least once a week (EUA) and once every two months (EUAA) EU ETS installations and operators as well as certain financial institutions can receive a permit to participate in auctions W/ /2 15

16 Benchmarking How does it work? What is a benchmark? EUA / output of production (e.g. ton of pulp) Product specific; irrespective of how the product is produced If necessary, the installation is divided into sub-installations 1) product, 2) heat, and 3) fuel benchmark, as well as 4) process emissions (each have their own benchmarks) Benchmark known Determine historic ac vity level Median annual activity level or (if greater) New installations? Calculation methodology based on sector or installation specific capacity W/ /2 16

17 Benchmarking How does it work? (cont.) Allocation = Benchmark * activity level * carbon leakage factor * correction factor (OR linear factor) Carbon leakage exposure factor Not exposed ac vity: 0.8 in in % Exposed activity: 1 Cross-sectoral correction factor needs to be applied due to the cap free allocation must be fitted within the total cap CHP plants; linear factor (1.74 %) applied to heat generation W/ /2 17

18 A few things to know Emission trading = emission tax? Amount vs. Price In emission trading the politicians set the cap (reduction) and the market set the price With an emission tax the politicians set the price and the market set the amound (reduction) Is the price sufficiently high at the moment with a view to using the potential of emission trading? Windfall profit There is one unified price for electricity (regardless of the fact that the cost of production varies between different means of production) The price of an emission allowance will be included in the price of electricity Hydropower, nuclear power, wind power do not need emission allowances, but they receive the higher price of electricity for the electricity they produce Shouldn't that profit be taxed?!? OR Is that the rationale behind emission trading? The auctioning of emission allowances removes some of the real and actual windfall profit problems W/ /2 18

19 Will we in the end achieve climate goals? W/ /2 19

20 Thank you! Robert Utter Tel: +358 (0) Keskuskatu 7A Helsinki Finland W/ /2 20