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1 Sector-Based Approach for Post-2012 Ned Heme, President Center for Cean Air Poicy EU-China Seminar Towards a Goba Carbon Market November 2005 Beijing, China Presentation Outine Sector-based approach» What is it? Overview of sector GHG emissions and projections» Goba, Non-Annex I Overa structura options» Sector-wide & Country-based sectora Straw sector proposa» Covered sectors and countries» Estabishing the No Lose Target» Technoogy Finance Package» Appication to Deveoped Countries, Emissions Trading/CDM Sectora Program s potentia to maintain 450ppm path» Three Goba Scenarios & Preiminary Resuts

2 What is a Sectora Approach to Post-2012 GHG Reductions? Bottom-up method for encouraging deveoping country sectora (e.g. stee, cement, eectricity) pedges and for deriving Annex I country targets Based on anaysis of what is technoogicay feasibe and economicay cost-effective in each industria sector both gobay and in each country For deveoping countries, goa is no-ose target pedge to reach intensity eve in given sector, rewarded if achieved, no penaty if not achieved For A1, creates buiding bock for next nationa target Goba Sector GHG Emissions (without LUCF) & Sectora CO2 Projection Residentia 6% Unaocated Non- CO2 Gas Other sectors 4% 8% 2000 Projections Eectricity 23% Agricuture 14% Unaocated Autoproducers 3% Transport 15% Other M anufacturing Industries & Construction 6% Non-CO2 Industria Processes 2% Other Energy Industries 9% Iron & Stee 3% 0 Chemica & Petrochemica % Year Non-M etaic Mineras 4% Energy Industry Transportation Other Sectors* Source: Author s cacuation, see Schmidt et a., 2005; IEA, 2002; Scheee and Kruger, 2004; Schaefer et a., 2004

3 Non-Annex I Sector GHG Emissions (w/o LUCF) & Sectora CO2 Projection Other sectors 10% Residentia 4% Agricuture 19% Unaocated Non- CO2 Gas 10% 2000 Projections Transport Other 9% M anufacturing Industries & Construction 6% Eectricity 20% Unaocated Autoproducers 1% Other Energy Industries 8% Iron & Stee 3% Chemica & Petrochemica 3% Non-M etaic M ineras 6% Non-CO2 Industria Processes 1% Year Energy Industry Transportation Other Sectors* Source: Author s cacuation, see Schmidt et a., 2005; IEA, 2002; Scheee and Kruger, 2004; Schaefer et a., 2004 Estabishing the No-Lose Sector Target A vountary no ose intensity target (e.g., CO2 / ton of stee) is estabished» No penaty for not meeting the pedge Emissions reductions beyond the vountary pedge are eigibe for sae» As emissions reductions credits (ERCs) for sae to deveoped countries» Vountary intensity target effectivey becomes the country s CDM baseine GHG Emissions Intensity Baseine No Lose Target Actua Permanenty Retired Avaiabe for Sae

4 Technoogy Financing and Assistance Package Technoogy Finance Package» avaiabe to encourage more aggressive no ose target» Package coud incude G-8 stye assistance: commitments to demonstration a poo of concessionary financing with WB, ECAs, oans, grants, & securitization etc. (more ater in Diaogue) Mutiatera or biatera? Scope of amount based upon bottom-up assessment in targeted sectors Tota GHG Emissions Baseine Actua Support from Technoogy Finance Package No Lose Target Country's Pedge Negotiation Process Negotiation of the program coud proceed as foows: 1) Agree on which countries wi participate minimum goba coverage needed in each sector 2) Independent agency defines BAT-ike energy intensity benchmark for a given sector as starting point for negotiations a a Triptych EU process 3) Negotiate a GHG intensity using such factors as the energy intensity BAT, fue mix, and cost one for new faciities and one for existing in each sector 4) Link the program to a technoogy finance package assistance from tech finance is incentive to stronger pedge eves 5) Link to Annex I target setting process 6) Agree on structure of trading, ink to CDM

5 Key Operationa Questions? What sectors? Country-based or Industry-based? Structure of the target? Creation of emissions reduction credits? What roe for Annex I? Roe and structure of a technoogy financing and assistance package? How does the sectora pedge and financing package reate to the CDM? Which Sectors Covered? Program coud focus on the Energy and Major Industry Sectors» eectricity, iron & stee, oi refining, cement & ime, paper, pup & printing» reativey sma number of entities, easier data coection, reativey homogenous products (except oi refining and pup & paper), and operate in internationa trade (except eectricity)» 32% of non-annex I emissions (2000; w/o LUCF)» 15% of goba emissions (2000; w/o LUCF)» Bottom-up definitions (e.g., eectricity faciities >20 MW) used to define individua faciities invoved in the system» Ony direct emissions (e.g., on-site fue combustion) incuded for the sectors of Non-Annex I Emissions of Goba Emissions 20.3% 9.5% 67.8% 32.2% 85.0% 15.0% 3.0% 2.7% 1.4% 1.3% 5.9% 2.7% Others Iron & Stee Cement & Limestone 0.3% Eec tricity Chemica & Petrochemica Paper, Pup and Printing Others Iron & Stee Cement & Limestone 0.1% Eec tricity Chemica & Petrochemica Paper, Pup and Printing Figure 2. Share of non-annex I and goba emissions attributed to sectors in the proposed program Source: Schmidt et a, 2005; authors cacuation

6 Sector Coverage (2) Other sectors (transportation, residentia & commercia)» eigibe to participate in project- or sector-based credit generation mechanism (e.g., Sector-CDM) OR Sectora approach for transportation and LUCF?» Transportation sectora approach options incude: Greenhouse gas vehice standards Aternative fue standards Upstream reguation of oi refineries.» LUCF sectora approach coud invove the deveopment of targets based upon country-wide net carbon fows. The key question is how to hande different deforestation rates. Country based Structure Program wi aim to incude a major deveoping countries, but at east 80% of sector s emissions Variety of approaches coud be used:» A countries» Ten deveoping countries w/ the highest emissions in each sector» Sufficient countries to cover 80% of sector s DC emissions Key is to cover enough of the sector to address eakage concerns Seect internationay competitive industry sectors - for many sectors, sma number of countries account for a arge share of emissions» What if one key country hods out?» What if other countries want to opt in?

7 Possibe Threshods: Top 10 Share of Emissions Covered 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% % of DC % of Word Share of Non-Annex I and Word Emissions from the Covered Sectors Accounted for by the Ten Highest Emitting Non-Annex I Countries for each Sector in 2000 Eectricity Chemica & Petrochemica Paper, Pup and Printing Iron & Stee Non-Metaic Mineras Source: Author s Cacuation based upon data in Schmidt et a., 2005 Aternative Structure: Goba Industry-based Covers a or major actors in the goba sector to address concerns of» Leakage: e.g., firms moving operations from covered to noncovered countries» Competitiveness: e.g., one firm is covered, but its competitor are not Can be managed simiary to a country-based approach that invoves a or a major countries Enforcement» Countries responsibe for companies in their jurisdiction OR» New internationa ega framework?

8 How is the Target Estabished? Independent agency (e.g., IEA) assesses and defines a best avaiabe technoogy (BAT) benchmark using commerciay avaiabe technoogy.» Defined as energy intensity of commerciay avaiabe technoogy» Updated every 7 years (simiar to the CDM) Participating countries pedge a GHG intensity target (e.g., GHG / ton of stee) for each sector based upon the BAT benchmark, fue mix, and cost impact of chosen eve Based on:» New faciities: BAT intensity Coud aso be based upon support of technoogy financing and assistance package given difficuties in accessing BAT for new faciities» Existing faciities: negotiation of the technoogy financing and assistance package that refects the pace that existing faciities retired or retrofit cost effectivey Likey negotiation wi produce different no ose targets for each country Emissions Trading Emissions Reduction Credits (ERCs)» Earned sector-wide; managed by individua participating countries» Need to be converted from rate-based to a fixed quantity of reductions Ex-post conversion conducted every two years» ERCs equa difference b/t no ose target and actua intensity target mutipied by actua operations in previous two years» Therefore ERCs cacuated two years into the five year target period and at the end ERCs eigibe into other trading systems (e.g., EU ETS) Tota GHG Emissions Baseine No Lose Target Actua Permanenty Retired Avaiabe for Sae

9 Deveoped Countries Retain hard economy-wide targets use BAT Benchmarks as buiding bock simiar to the EU Triptych approach» Bottom-up deveopment of the sectors AAUs (e.g., nationa aocation pans) using the BAT energy-intensity benchmark Requiring BAT Benchmark in A1 as a minimum threshod for new faciities» Leves the paying fied since the covered sector in both deveoping and deveoped countries have the same minimum requirement Trading aowed to provide covered sectors fexibiity to improve cost-effectiveness, heps to offset disadvantage that DCs have sectora intensity targets rather than hard targets No Lose Target and CDM New pedge process woud repace CDM in the sectors and countries participating deveoping countries» ERCs in these sectors generated by exceeding the sectora intensity target For sectors not incuded in the proposa, CDM woud proceed as in the past For countries not participating in sectora pedge:» Energy-intensity benchmark deveoped in pedge process woud become minimum threshod for CDM baseine for new faciities» CDM Meth process woud continue to set precedents for the fina CDM project baseine on a project, country, or regiona basis as appropriate» Sectora pedge coud create a new sectora CDM process for these countries

10 Aternative Sectora Designs Process outined coud be viewed as too compex to negotiate Simiar advantages might be gained by other aternative approaches to sectora focus:» Negotiate sectora approach to eectricity as outined above, cover other sectors via a sector-based, standardized baseines approach to CDM where a faciities in a given sector are incuded in the program» Deveop agreement on harmonized poicies and measures for key sectors e.g. renewabe portfoio standard for a countries, goba automobie efficiency standards, etc. Emissions Impications of the Sectora Program Top-down anaysis conducted by ECOFYS» Evauated impications of sector-based proposa on emissions eve in key countries & goba CO2 stabiization trajectories Data, Sectors, & Countries used in the anaysis» Data: physica production, energy use, and GHG emissions» Sectors: eectricity, iron & stee, cement 91% of emissions covered in this proposa» Countries: Annex I: EU-15, USA, Japan, Canada, Russia Non-Annex I: Brazi, China, India, Mexico, South Africa, South Korea 72% of tota goba emissions; 79% of three sectors goba emissions Three Goba Scenarios» Mid, Strong, and Sectora Ony

11 Three Goba Scenarios Scenario Mid Annex I exc. USA -30% beow 1990 eve in 2020 Strong USA +0% at 1990 eve in 2020 Sector ony -15% beow 1990 eve in Annex I exc. USA 2020 USA Non-Annex I Non-Annex I A countries Condition +10% above 1990 eve in 2020 Reference Sectora for eectricity, iron & stee and cement Sectora for eectricity, iron & stee and cement Eectricity Iron & Stee Cement Reduce carbon intensity of production (C/kWh) by 3% per year; growth in eectricity production reduced by 0.5% for EE improvements Convergence in CO 2 /t stee by 2025 to 0.80 (today s avg. 1.63) Convergence in CO 2 /tcement by 2020 to 0.60 (today s avg. 0.78) Annex I countries economy-wide emissions are imited to fixed quantities» NOT impied that emissions reductions must be achieved» Domestic emissions coud exceed these eves if additiona ERCs were purchased Annex I countries can purchase ERCs from both covered sectors w/ No Lose target or other sectors (e.g., transportation through sectora CDM) Preiminary Resuts: Through 2020 Mt CO2 eq. a sectors exc. LUCF Reference Mid Ony sectora Strong Figure 7. Goba GHG Emissions Under the Sector Anaysis Source: Höhne et a., 2005 Mt CO Iron and stee Cement Eectricity Reference Case Sector Program Figure 8. Sector Emissions Leves in 2020 Achieved in Non-Annex I Countries in Eectricity, Cement, and Iron & Stee Source: Author s cacuation; Höhne et a., 2005

12 Impications for Emissions Stabiization Leves: Preiminary Resuts Goba CO2 emissions (GtC) Goba CO2 Emissions under the Anaysis to Stabiize CO2 at 450 ppm Reference Mid Ony sectora Strong Required reductions for goba CO2 stabiization eves after 2020:» 450ppm: Strong 6.5% per year; Mid: 2.2% per year» 550ppm: Strong 0.9% per year; Mid: 0.6% per yea Source: Höhne et a., 2005 Concusions and Key Questions Sectora No-Lose target approach can maintain needed progress in 2020 to stay on course for 450 ppm CO2 concentration goa provided A1 countries take strong targets for 2020 No-ose target has poitica and cost-effectiveness attractions simpifies current CDM issues Invoving the broadest set of countries and under what structure for each country? Incusion of which sectors and under what structure for each sector?» Eectricity and major industry sectors?» LULUCF?» Transportation?» Others? Key to negotiating DC pedges ies in design of technoogy finance package & individua negotiations» What wi the G8 financing package ook ike? What are the appropriate carrots for encouraging aggressive targets?

13 References For more information, visit our website: IEA. (2003b). CO2 Emissions from Fue Combustion, Paris, France. Marand, G., T.A. Boden, and R. J. Andres. (2003). "Goba, Regiona, and Nationa Fossi Fue CO2 Emissions." In Trends: A Compendium of Data on Goba Change. Carbon Dioxide Information Anaysis Center, Oak Ridge Nationa Laboratory, U.S. Department of Energy, Oak Ridge, Tenn., U.S.A. Avaiabe onine at: Schaefer, D. O., D. Godwin, and J. Harnisch (2004). "Estimating Future Emissions and Potentia Reductions of HFCs, PFCs, and SF6." Energy Journa (forthcoming). Scheehe, E. A. and Kruger, D. (2004). Goba antropogenic methane and nitrous oxide emissions. Energy Journa (forthcoming). Schmidt, J. and J. Lee. (2005). Sector-Based Greenhouse Gas Emissions Reduction Approach: Some Options. Future Actions Diaogue Working Paper. May. [forthcoming]. Schmidt, J., K. Lawson, J. Lee. (2004). Sector-Based Greenhouse Gas Emissions Reduction Approach for Deveoping Countries: Some Options. Working paper prepared for the November meeting of the Future Actions Diaogue. November. U.S. EPA (2005). Inventory of U.S. Greenhouse Gas Emissions and Sinks: Appendix A: Goba Sector Emissions

14 Goba Sector Emissions in 2000 (without LUCF) Word Annex I Non-Annex I MMTCO2 Eectricity Unaocated Autoproducers Other Energy Industries Iron & Stee Chemica & Petrochemica Non-Metaic Mineras Non-CO2 Industria Processes Other Manufacturing Industries & Construction Transport Agricuture Residentia Other sectors Unaocated Non-CO2 Gas Source: Author s cacuation, see Schmidt et a., 2005; IEA, 2002; Scheee and Kruger, 2004; Schaefer et a., 2004