Transcript Developments - Burges Salmon

International Emissions Schemes Update
Rachel Blackburn
Head of Climate Change and Emissions Markets
28 May 2013
Overview
 EU Emissions Trading Scheme Update
 historic evolution
 the full picture
 current obstacles
 recent developments
 North America Emissions Trading Schemes Update

regional schemes – linking progress?

Canada update

US – state schemes

US – California’s CARB as a trendsetter

US – California ETS recent developments

US – California ETS challenges
International emissions schemes update
EU ETS– historic evolution
PHASE I 2005 – 2007
PHASE II 2008 – 2012
 Pilot Phase
 Coincided with commitment under Kyoto
Protocol over the same period
 Free allocation of all allowances
 National Action Plans (NAP) - cap per
member state on basis of estimates
 In 2005: 321 million EUAs traded, with a
value of US$7.9 billion
 Allocation greatly exceeded demand and
in 2007 the price of EUAs fell to a value of
zero
 At least 90% of EUAs allocated for free
 March 2010: sale of used CER by
Hungarian government outside of EU
ETS. Used CER re-entered EU ETS – led
to partial suspension of trading
 January 2011: theft of over 2 million EUAs
led to suspension of trading in national
registries
 In 2011 there was a 19% increase in
volume of carbon traded from 2010
 Aviation allowances introduced in 2012
International emissions schemes update
EU ETS – historic evolution
PHASE III 2013 – 2020
 Single, Europe-wide cap with centralised registry
 2020: emissions to be down at least 21% from 2005
levels
 More than 40% of EUAs issued in 2013 to be auctioned
and this percentage to increase year on year
 Covers 45% of total emissions from the 27 EU
countries
 Aviation included, but transport, domestic emissions,
agriculture still outside scope
 Opt-out for small emitters and hospitals in UK
International emissions schemes update
EU ETS – the full picture
Impact:
profits and
product
prices
Why should effectiveness be a key
driver in determining future
developments of the EU ETS?
 soaring energy costs to a struggling
EU
Incentives:
low-carbon
technology
Contribution:
emissions
abatement
International emissions schemes update
 climate change crisis – EU ETS as
an answer
 risk of loss of profits to companies
 EU ETS used as a global model
EU ETS – the full picture
Contribution to emissions abatement:
 Over the past 8 years academic studies (top down, and bottom up) show abatement
attributable to the EU ETS was around 2-4% of the capped emissions – which is higher than
the impact of individual energy policies. However, scarcity of data after the financial crisis in
2008 makes it very difficult to fully measure abatement to-date.
 Developing new methods of data collection is essential to measuring effectiveness.
Incentivising the development of low-carbon technology:
 Data is scarce and long-term impact uncertain at this time.
 Evidence from surveys shows impact has been more on bringing discussions around
emissions into the boardrooms, and not directly influencing clean-tech investments.
Impact on profits and product prices:

There is evidence to show sectors are passing through costs of carbon to end users, and that
there has been a windfall effect – the ‘Carbon Fat Cats’ - in the iron, steel and cement as a
result of free allocations and current methods to address carbon leakage.
International emissions schemes update
EU-ETS – current challenges
Price abuse
and fraud
Carbon
leakage
Carbon price
Recession
Data collection
Linking
Political
challenges
International emissions schemes update
EU ETS – recent developments
 Carbon credit pricing (credit surplus)
 Aviation – EU backs-down
 Security – EUAs regulated as financial
instruments
 Linking activities
International emissions schemes update
EU ETS – recent developments
Carbon
leakage
Carbon
credit
surplus
Cap too
low
International emissions schemes update
Economic
crisis
EU ETS – recent developments

Carbon prices hit a record low just last month,
following the vote by the European Parliament to
reject the back-loading plan.

EU carbon permits plunged 43% to €2.63 ($3.44)
a metric ton before recovering slightly to €2.93
($3.83) by 1049 GMT, Reuters reports. The news
agency says German power prices fell 3% to
€39.60 ($51.77) per MWh.

For the time being the price of EUAs is still
positive - mostly due to the market’s expectation
that the Commission will take steps in the future to
re-establish scarcity.
International emissions schemes update
EU ETS – recent developments
Carbon Leakage – core assumptions in question…

Carbon leakage is a phenomenon that occurs when the decrease of GHG emissions in
one country (due to climate change policies) results in increase in the another country
that lacks such laws. The result is that certain sectors suffer a material disadvantage to
their competitors located in other regions without strict climate change laws.

Studies have shown that the analysis that was done in 2009 to assess what sectors
needed the allocation of free EUAs to avoid carbon leakage uses core assumptions
that are now outdated.

Carbon prices are much lower than the forecast, benchmarks are less stringent then
had been anticipated, and the scope of coverage widened.

Potential solutions: The Carbon Market Report (EC 2012) provided 6 options for
restructuring, none of which have been well received. Back-loading was the least
opposed option, but was still not able to pass through Parliament.
International emissions schemes update
EU ETS – recent developments
Carbon surplus crisis – different perspectives
On the dark side…
On the bright side…
 The Mid-Term Review falls during an
election year and a new Commission won’t
be in place, which will result in very little
action taken until 2015
 The Mid-Term Review in 2014 offers a
chance to correct the carbon leakage
analysis to better reflect the current market,
which would help remedy the surplus
 Without back-loading, the market could
collapse and will fluctuate on political
speculation alone
 Back-loading was a temporary fix and only
bought time for further delays in long-term
reform
 There is substantial political support for
doing nothing and waiting for the ‘market
correct itself’, which avoids dealing with
structural inaccuracies in the long-term
 The EU is committed to finding a permanent
structural reform and less concerned with
temporary fixes
International emissions schemes update
EU ETS – recent developments
Aviation: EU backs-down

‘Stop the Clock’ – EU has allowed a one year suspension from inclusion in the EU ETS for
non- EU aircraft operators using EU airports. No changes were made to the regulation of
internal EU flights.

Low-fare airlines in EU threatening to sue the Commission over unfair impact resulting from
the suspension of the regulations for non-EU operators only.

The MBMs were narrowed down to four options including an emissions trading (cap and
trade) scheme.

Aviation emissions reduction is scheduled to be given top priority at ICAO’s next General
Assembly in October 2013.

US airline lobby, Airlines for America, may stall any efforts by ICAO to reach agreement on a
global emissions trading scheme, should it succeed in encouraging the US Government to
bring a challenge against the EU ETS under ICAO’s Article 84.
International emissions schemes update
EU ETS – recent developments
Linking activities
 California puts its focus on Quebec
as first-resort linking partner –
switching directions from the 2011
talks with the EU
 EU pushing to have new market
mechanisms implemented in
developing countries – these
mechanisms would cover whole
economic sectors, not only projects
(as the CDM does)
International emissions schemes update
 the Commission and Australia
announced agreement in August
2012 on a pathway for linking the
EU ETS and the Australian ETS.
A full two-way link between the
two cap-and-trade systems will
start no later than 1 July 2018
 Switzerland is expected to link to
the EU ETS in 2014
EU ETS – recent developments
Security – EUAs regulated as financial instruments
 Key proposal: EUAs to become financial instruments under Markets in Financial Instruments
Directive (MiFID) – MiFID regulates trade in financial instruments such as transferable
securities and derivatives.
 Bulk of carbon trading already falls under MiFID (bidding at auction as well as trade in EUA
derivatives). Key impact will be on spot trades.
 Proposals yet to be finalised:
 Parliament to consider proposals in plenary session - October 2013
 No timetable for agreement on Council’s version of proposals – still key issues to be
resolved
 Once the Council and Parliament have agreed respective proposals, discussions with the
Commission can commence
International emissions schemes update
EU ETS – recent developments
Security – EUAs regulated as financial instruments
Impact:
 Trading venues specialising in EUA spot trades will need appropriate MiFID authorisation
(as regulated market, multilateral trading facility or organised trading facility)
 Intermediaries providing spot trading services would need to hold a MiFID licence
 Installations that use EUAs do not need to be authorised – subject to any trading activity
remaining ancillary to their main business – but will need to abide by market abuse rules
under Market Abuse Directive (MAD)
 Proposals for review of MAD include several carbon-specific elements, including
complete coverage of the auctioning market
 Parliament to consider in plenary sessions in July and October 2013
 MiFID compliance in the UK is under the FCA
International emissions schemes update
North America Update

North America Emissions Trading Schemes
Update

regional schemes

Canada update

US – state schemes

US – California’s CARB as a trendsetter

California ETS recent developments

California ETS challenges
International emissions schemes update
North America – regional schemes

The Western Climate Initiative (WCI), a cooperative initiative to design a regional emissions
trading scheme, began in 2007 among US states and Canadian provinces.

Linking - The Canadian provinces of British Columbia and Ontario alongside California and
Quebec, have established a non-profit organization, WCI Inc., that will help administer the
regionally linked programme.

The initial Board of Directors of WCI, Inc. includes officials from California and the provinces
of Quebec and British Columbia, the three jurisdictions planning to require compliance with
cap-and-trade regulations by 2013.

The 2050 Initiative is made of 20 states/provinces from Canada and the US, the group has a
number of very active working groups that help the governments in aspects of the energy,
climate, and economic challenges that they face.

22 March 2013 - the California Air Resources Board (CARB) released an amended
regulation to the cap-and-trade regulation that will authorise ‘linking’ with other jurisdictions –
starting with Quebec in 2014. The release signals that the Governor should shortly issue the
authorising ARB to officially link with Quebec. Regulations in Quebec are already in place.
International emissions schemes update
Canada Update

The Canadian province of Quebec is the first jurisdiction
to implement emissions trading, which commenced on 1
January 2013.

The Canadian provinces of British Columbia and Ontario
have passed legislation to establish emissions trading in
line with the WCI, but are lagging behind other
jurisdictions in implementing any further steps to do so.

The governments of Canada and Quebec are having
conversations with other cap-and-trade jurisdictions
around the world as they are developing similar climate
regulations. Among these: the EU, China, Australia and
Japan.
International emissions schemes update
US – regional state scheme
The Regional Greenhouse Gas Initiative has
been in place since 2009 and covers the
electricity generation sectors in 9 US states:
 Connecticut
 Delaware
 Maine
 Maryland
 Massachusetts
 New Hampshire
 New York
 Rhode Island
 Vermont
International emissions schemes update
Aim: These states have capped emissions
from their electricity sectors and aim to reduce
emissions from fossil fuel energy generation by
10 per cent of 2009 levels by 2018.
Developments: RGGI has suffered with the
same issues with over allocation as the EU
ETS, and has seen prices steadily below $2 a
ton for most of the past 3 years. Recently, it
took steps to lower the annual cap and hold
back excess allowances from the past years,
which has nudged prices above $3.35, and
may have fixed the problem through 2020.
US – California’s CARB as a trendsetter?

In the mid-1990s, California became the first state
to ban smoking tobacco in bars, clubs and
restaurants - within a short period most other
states followed.

California is known as a trendsetter for the other
states and willing tackle issues the federal
government will not touch – from stem cell
research to minimum wage.

It has the 9th biggest economy in the world, and by
linking with Quebec it will have the world’s largest
ETS, surpassing the EU.

In reference to the recent GHG legislation Gov.
Arnold Schwarzenegger said: "This will lead to us
leading the way for other states and for other
nations"
International emissions schemes update
US – California Overview

In 2006, California passed a law to introduce an
ETS as part of a broad package of reforms
designed to reduce the state’s emissions to
1990 levels by the year 2020 with a further
reduction of 50 per cent by 2050.

Rules to establish California’s emissions trading
scheme were finalised in 2011 and the scheme
has applied since 1 January 2013.

The scheme involves setting a limit (a ‘cap’) on
the total amount of emissions that can be
generated. Sectors covered by the scheme can
then buy and sell (or ‘trade’) emission
allowances to meet the set cap.
International emissions schemes update
US – CARB recent developments
Developments
 California carbon permits sell for record high price of $14/t for the right to release carbon
this year, a record-high price that narrowly beat market expectations, the state said on the
21st of May.
 In 2011 Climate Action, Connie Hedegaard, met with California’s governor Jerry Brown and
confirmed plans to link the EU emission trading system (EU ETS) with California’s
emerging carbon market. However, the focus of California is on Quebec and in the shortterm not much action has been taken to further linking activities.
 Lawsuits remain a source of uncertainty – the lawsuits directed at the cap-and-trade
program itself are not so much the worry as the lawsuit against the Low Carbon Fuel
Standard (LCFS). A successful challenge to the LCFS would send a major bullish signal to
the market as it would mean higher emissions from the transportation sector through 2020.
International emissions schemes update
US – California ETS recent developments
Developments (con’t)
 The regulatory amendment package could in practice
be an implementation mechanism for the $50 price
ceiling could impact long term supply, while the
increase in free allocation to industrial players could
limit the incentive to abate emissions within those
industries, potentially putting upward pressure on
prices
 Prices of carbon went up slightly following the
confirmation of the linkage with Quebec, but the linking
will unlikely have a noticeable impact on prices until the
markets are actually linked, in January 2014
International emissions schemes update
California ETS – Challenges
Challenges
 Carbon Leakage - The Supreme Court’s landmark decision in Massachusetts v. Environmental
Protection Agency, 549 U.S. 497, 519 (2007) limits the options for states to enforce against
other states GHG reductions measures, and states cannot enter treaties with other countries.
Any efforts to expand the regional schemes will probably be met with judicial scrutiny.
 Continued lobbying from a number of oil companies to change the cap-and-trade provisions for
2015 and after - this could bring sudden shifts in supply and demand outlook if the Government
reacts to the concerns of the oil industry and agrees to change the way oil companies are
covered in future compliance periods.
 Protocols currently in the rules won’t be enough to provide sufficient supply to the market
according to the American Carbon Registry, which is an issue that will only be partially dealt
with in the current rule making that adds two new protocols to the program.
 The Energy Institute at Haas (UC Berkley) has raised concerns over the price of carbon
becoming too high and scarcity of credits.
International emissions schemes update
Conclusion
Headlines – front page news…wasted capital:
The Guardian, Friday 19 April 2013
Carbon bubble will plunge the world into another financial crisis – report
Trillions of dollars at risk as stock markets inflate value of fossil fuels that may
have to remain buried forever, experts warn
International emissions schemes update
Conclusion
 This Guardian article was based on new research from Carbon Tracker and the
Grantham Research Institute on Climate Change and the Environment at LSE.
 It calls for regulators, governments and investors to re-evaluate energy
business models against carbon budgets, to prevent $6trillion carbon bubble in
the next decade.
 It finds that ‘Wasted capital and stranded assets has revealed that fossil fuel
reserves already far exceed the carbon budget to avoid global warming of 2°C,
but in spite of this, spent $674billion last year to find and develop new
potentially stranded assets’
 Conclusion – Emissions Trading Schemes are not a trend but are setting
trends on a global level, which should no longer be ignored.
International emissions schemes update
Contact
Rachel Blackburn
Head of Climate Change and
Emissions Markets
Direct dial: +44 (0) 117 939 2225
Email: [email protected]
International emissions schemes update