Transcript Le grand prix de l`entreprise patrimoniale

Carbon Emission Trading:
A New Financial Market
Spring Meeting 2007 Oïkos International
“Sustainable Development: What role to play for finance”
Laurent Viguier
INV – Buy-side Equity Research
April 19, 2007
Timetable
1. Climate Change: Scientific Evidences and Economic Impacts
2. The Kyoto protocol: Architecture and Commitments
3. Why Should We Trade Emissions?
4. CO2 Trading in Practice: The EU ETS
5. Conclusion
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1. Climate Change: Scientific Evidences
and Economic Impacts
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Evidence from Direct Observation of Climate Change
> The total temperature increase
from 1850 – 1899 to 2001 – 2005
is 0.76°C.
> Global average sea level rose
at an average rate of 1.8 mm
per year over 1961 to 2003.
> Mountain glaciers and snow
cover have declined on average
in both hemispheres.
Source: IPCC WGI Fourth Assessment Report, 2007
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Projections of Future Changes in Climate
> For the next two decades a
warming of about 0.2°C per
decade is projected for a large
set of emission scenarios
> For the low scenario (B1)
surface warming for the end of
the 21st century is 1.8°C
> For the high scenario (A1FI),
the best estimate is 4.0°C
Source: IPCC WGI Fourth Assessment Report, 2007
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The Impacts of Climate Change on GDP Growth
> Economic models agree that the effects of warming above 2 - 3°C
would reduce global welfare
> Models also agree that poor countries will suffer the highest costs
Percentage of World GDP
3
2
1
0
-1
-2
-3
-4
-5
-6
-7
-8
-9
-10
-11
0
1
2
3
o
Global Mean Temperature ( C )
4
5
Mendelsohn, output
Nordhaus, output
Nordhaus, population
Tol, output
Tol, equity
6
Source: Smith et al., 2006
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Costs of Stabilizing Greenhouse Gases Concentrations
> The GDP costs of stabilizing GHG concentrations are expected to be
high
> For 2025, costs range from 0 to 3.5% of GDP
% Reduction from Reference in Global GDP in CO 2-Only (solid) and Multigas (dashed) Scenarios
2000
2025
2050
2075
2100
0%
AIM
AMIGA
COMBAT
EDGE
EPPA
FUND
GEMINI-E3
GRAPE
GTEM
IMAGE
IPAC
MERGE
MESSAGE
MiniCAM
POLES
SGM
WIAGEM
AIM
AMIGA
COMBAT
EDGE
EPPA
FUND
GEMINI-E3
GRAPE
GTEM
IMAGE
IPAC
MERGE
MESSAGE
MiniCAM
POLES
SGM
WIAGEM
-2%
-4%
-6%
-8%
-10%
Source: Barker, 2006
-12%
Source: EMF21, 2006
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Flexibility is necessary
> Uncertainty and irreversibility  Temporal flexibility
> Cost divergence across sectors and regions  Spatial flexibility
> Emission Trading contributes to:
– Spatial flexibility: trading of permits across regions
– Temporal flexibility: i.e. banking and borrowing of permits
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2. The Kyoto Protocol: Architecture and
Commitments
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Basics of the Kyoto Protocol
After Russia’s ratification, the Kyoto Protocol became a legally binding agreement
in February 2005, committing signatories to greenhouse gas (GHG) emission
limits
The Kyoto Protocol:
• Targets emissions of the six main GHGs:
– carbon dioxide (CO2), methane (CH4), nitrous oxide (NOx), hydrofluorocarbons, (HFCs),
perfluorocarbons (PFCs) and sulphur hexafluoride (SF6)
• Represents 55% of developed countries’ GHG emissions of 1990 levels
• Does not include the United States or Australia
Commitments of Phase I of Kyoto Protocol (2008-2012):
• EU Average -8% (with Germany and Denmark -21%, Portugal +27%)
• Japan -6%
• Annex I countries (most developed countries) average -5.2%
Emissions Reduction Targets are relative to 1990 (base year)
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Members of the Kyoto Protocol
Annex B
Countries with
Commitments
Non-Annex B
Countries = No
Commitments
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Reaching the Kyoto Targets: The 3 Flexible Mechanisms
Annex 1 parties must establish domestic policies and measures to cut GHG
emissions (‘Green policies’) and establish national agencies to monitor and report
emissions
Countries can meet their emissions targets using the three Flexible Mechanisms:
1. Emission Trading- Annex I countries can buy and sell emission rights
– The EU Trade Allowance (EUA) represents 1 tonne of CO2
2. Clean Development Mechanism (CDM)- Annex 1 Parties implementing emission
reducing projects in non-Annex 1 countries (i.e. developing countries).
– The Carbon Credits are called: CERs = Certified Emission Reductions
3. Joint Implementation (JI)- Annex 1 Parties undertaking net greenhouse-gas
emission reducing projects in other Annex 1 countries (often emerging economies).
– For the current EU-ETS Phase I until 2007, only CDMs are permitted.
– The Carbon Credits are called: ERUs = Emission Reduction Units
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The Kyoto Mechanisms
Emissions Trading (EU ETS)
Annex B Country
Joint Implementation (JI)
(industry)
(transport, etc)
Clean Development
mechanism (CDM)
Exchange of
CO2 quotas
Annex B Country
(industry)
Annex B Country
Clean Development
mechanism (CDM)
Non-Annex B country
(All sectors)
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3. Why Should We Trade Emissions?
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Tradable Emission Permits (QET)
> John Dales (1968)
> Maths by David Montgomery (1972)
> First experiments in the USA since 1974 (SO2 from electric utilities)
> Main argument for TEP:
Minimize the economic cost while reaching the global
environmental target
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The Problem of Allocating Abatement
Assumptions:
> Two emitters
> Damages are additives: DT = D1+D2 (ex: CO2)
> Marginal costs of reductions differ among emitters (i.e. technology,
resources, etc)
> Global reduction target is 50%
> How to allocate the effort? 50% each?
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Polluter 1 (High MACs)
Dollars
Polluter 1
MAC1
P150
Δ150
Δ10
Abatement
50% reduction  Marginal abatement cost is P150
 TOTAL abatement cost for polluter 1 is the pink triangle
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Polluter 2 (Low MACs)
Dollars
Polluter 2
MAC1
MAC2
P250
Δ250
Δ20
Abatement
50% reduction  Marginal abatement cost id P250
 Total abatement cost for polluter 2 is the pink triangle
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Inefficient Allocation
Dollars
MAC1
MAC2
P150
P250
Δ250
Δ20
Abatement
P150 > P250
 Global cost of the total reduction is not minimized
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Equilibrium in the Emission Market
Francs
MAC1
Gains of the buyer
Volume of traded
quotas =
MAC2
Gains of the seller
ΔA* - ΔA1
P*
ΔA*
Abatement A2
ΔA1
Abatement A1
ΔA2
At the equilibrium, Supply = Demand and the price is P*
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Research I SRI I March 2007 I 20
Every polluter gains from the exchange
of Equity
quotas!!
Efficient Allocation under different instruments
> Tax:
Uniform tax rate applied to all emitters  optimal reductions
> Standard:
Optimal targets that equalize MACs among polluters
Information problem + equity issues
> Emission trading:
Whatever the initial allocation, the MACs are equalized through the
market and the optimal solution is obtained
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Example of MACs for CO2 in Japan, Europe and USA
EU
JPN
400
USA
Carbon value in US$95/ tC
350
300
250
200
150
100
50
0
0%
5%
10%
15%
20%
25%
30%
35%
40%
Carbon emissions reductions (in %)
Source: Viguier et al., 2001.
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4. CO2 Trading in Practice: The EU ETS
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European Emissions Trading Scheme (EU ETS)
From January 1, 2005, the EU has operated an emissions trading system:
Phase I runs from 2005-2007
Phase II will run from 2008-2012
Only CO2 emissions from large emitters:
Other industries that might be affected:
Power stations
Boilers > 20MW thermal input
Oil refineries and Coke ovens
Iron and steel plants > 2.5 t/hr
Glass factories > 20t/d
Ceramic, bricks and porcelain factories
Cement factories > 500 t/d
Wood pulping and paper manufacturing > 20t/d
The transport sector, especially Aviation
The petrochemical industry
Aluminium smelting
Waste disposal
Agriculture
EU-ETS Phase II corresponds to the
Kyoto Protocol Implementation Phase
2.2 bn allowances allocated annually.
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Carbon Market Dynamics
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CO2 Quotas Traded since January 2005
(cumulative, MtCO2)
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CO2 Price in the EU Market
Two different markets:
No banking
35
30
25
20
15
10
5
0
9.3.07
9.12.06
9.9.06
9.6.06
9.3.06
9.12.05
9.9.05
9.6.05
Spot price (contract Dec.07)
Future price (Dec. 08)
9.3.05
CO2 price (€/tCO2)
First emission inventories
 no shortage!
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Why the spot price collapsed?
>
Structural reasons:
1. In May 2006, the market understood the phase to be long (initial
allocation was too generous)
2. No banking  prices will necessary end up at a very low price
at Dec. 07
>
Short term trends:
1. Climatic conditions (hot winter)
2. Energy market: coal/gas spread
Coal price
Gas price
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5. Concluding Remarks
> Kyoto did not collapse after US withdrawal
> The EU successfully implemented the first international ETS:
> Improvement are required tor reduce uncertainty and volatility in the
EU ETS: i.e. NAPs, reserves for new entrants, banking, etc
> CO2  commodity  “Business-As-Usual” for the financial market
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