Post on 10-May-2018
6 February 2014
Divya Reddy
Director, Global Energy & Natural Resources
202-903-0017
reddy@eurasiagroup.net
Global CO2 Policy Challenges and lessons learned
Prepared for The Gasification Technologies Council
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Prepared for The Gasification Technologies Council
Global Climate Change Policy
I. Multilateral negotiations
II. United States
III. European Emissions Trading System
IV. China
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Prepared for The Gasification Technologies Council
I. Multilateral climate policy faltering
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• Lack of confidence in an international climate framework following weak outcome at
Copenhagen conference in 2009
• Fragile economic recoveries will prevent ambition on climate policies
• Developing-developed country divide will be tough to overcome
• UNFCCC talks continue to fail to show results, but expectations could build up ahead
of 2015 summit in Paris
• Uncoordinated actions from various countries continue, but lack of an overarching
global agreement likely lower ambition and make policies more vulnerable to reversal
Source: EIA
Prepared for The Gasification Technologies Council
Second-term Obama climate policy centered on power
sector regulations
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• Key component is GHG performance
standards for power plants (New Source
Performance Standards), though standards
for existing plants likely to be modest due
to power reliability concerns
• Stated timeline :
• September 2012: NSPS proposal for new
power plants
• June 2014: NSPS draft rule for existing
power plants
• June 2015: Finalize NSPS for existing plants
• NSPS for new plants to be aggressive and
costly for coal, even though new draft rule
will issue separate standards for coal and
gas plants
Prepared for The Gasification Technologies Council
EU ETS design overview • Who’s covered: Power and industrial facilities; airlines
• Emissions reduction target: 20% reduction from 1990
levels by 2020
• Basic mechanics:
• Introduce a fixed number of emissions allowances into the market
each year
• Obligated facilities have targets that they can meet by buying
allowances or cutting emissions and selling allowances
• Three phases:
• Phase I (2005-2007)—pilot phase
• Phase II (2008-2012)—Kyoto phase
• Phase III (2013-2020)—current phase 8
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EU emissions in decline since 1990
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Source: European Commission
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Phase I (2005-2007) • Countries allocated allowances under national allocation plans
• Nearly all allowances given to business free of charge
• Non-compliance penalty set at €40/tonne
• Unreliable emissions data led to an overallocation—prices plunged to zero
• But pilot phase established trading infrastructure and allowed for better data
collection
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Phase II (2008-2012) • NAPs still used for allocations
• Free allowance share falls to at least 90%
• Kyoto Protocol offset introduced into market (CDM and JI)
• Penalty for non-compliance increased to €100/tonne
• Addressed overallocation by cutting supply by 6.5% from 2005 level
• But 2008 Eurozone crisis and ensuing economic downturn reduced
emissions—demand for allowances fell with price, again.
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Source: Bloomberg
Prepared for The Gasification Technologies Council
Phase IIII (2013-2020)
• Under EU ETS Directive from Dec 2008, significant reforms enacted:
• Longer compliance timeframe
• Centralized, EU-wide cap and allowance allocation (discarded NAPs)
• Move away from free allocations toward full auctioning of allowances
• International offset reduced to 50% of compliance obligation
• But ongoing economic crisis continues to keep prices depressed, prompting
calls for structural reforms
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Source: Bloomberg
Prepared for The Gasification Technologies Council
EU ETS in practice: Challenges • Price fluctuations: Data deficiencies and changes in economic outlook created major price swings
• Government intervention: The low carbon price has prompted efforts to intervene in the market to
prop up prices
• Carbon leakage: As energy-intensive industrial facilities see free allocations phased out, concerns
over carbon leakage will grow and could prompt renewed calls for a border carbon price for imports
• Energy costs: The issue of Europe losing competitiveness in manufacturing is becoming more
salient, and the ETS is in the crosshairs as a contributing factor
• Fuel mix: Disadvantages coal in the fuel mix, but keeps coal in the game if prices are low; fuel-
switching to renewables requires higher prices
• Political support: Various member states hold different positions, challenging agreement on reforms
• Member-state policy: Some countries like the UK and France have considered separate carbon
policies, challenging compliance
• International linkages: Given limited schemes outside of EU and unique considerations for each
program, linkages will prove challenges (Australia)
• Eurozone crisis: In addition to sending prices lower, the crisis has tested political backing for the
program and raised competitiveness concerns
• Emissions reductions: Given low price and other challenges, not clear how much of a motivating
factor the ETS has been
• Trading fraud: Incidents of tax fraud and stolen credits arose in 2010
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Prepared for The Gasification Technologies Council
EU power prices challenging competitiveness
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Source: European Commission
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ETS reforms
• Short-term fix: Backloading
• Longer-term fixes: Structural reform; post-2020 targets
• Backloading plan picks up steam
• Initial vote in April failed
• Revisions to water down—delays auctioning 900 million
allowances in 2013-2015 and reintroduce them in 2016-17
• Passed in European Parliament on 3 July
• Next step is passage in European Council—German position key
• Structural reforms more challenging
• Proposal for 40% reduction from 1990 levels by 2030
• 2030 targets will not be finalized until 2015
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Prepared for The Gasification Technologies Council
Lessons learned
• Commodity created by government decree will be exposed to government intervention
risk—program changes will cause price volatility and challenge predictability
• Short compliance phases limit predictability for longer term corporate decision making
• Accurate emissions data is key to ensuring adequate supply to meet targets and
create a robust market
• Robust oversight required to avoid trading fraud that distorts the market for companies
trading for compliance purposes
• Free allocations can create windfalls for some companies whose allocation exceeds
their emissions
• Economic fluctuations that are not baked into emissions caps could send prices low
enough to fail to incentivize emissions reduction behaviors and investments
• Utilities were better placed to trade on data compared to industrial companies
• Although they lower compliance costs, offsets can prevent companies from
undertaking mitigation, especially if offset prices are low
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Prepared for The Gasification Technologies Council
“Airpocalypse” drives environmental policy • Beijing is committed to addressing mounting
public concerns over air quality
• Policy goals include:
• Industrial consolidation
• Fuel-switching away from coal in the power
sector
• Efficiency and fuel quality improvements
• Plan to cut coal as share of energy mix from
67% in 2012 to 65% in 2017
• Focus on northern China—25% reduction in air
pollution between 2012-2017 (compared to 7%
under 12th FYP)
• Policy measures will include:
• Beijing is reforming fuel, gas and electricity
prices
• Pilot carbon trading started in Shenzhen, more
to follow
• Carbon/environmental tax likely next year
• Resource tax likely to be extended to include
coal
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Prepared for The Gasification Technologies Council
Cap-and-trade pilot schemes • Seven pilot schemes to be launched:
• Shenzhen, Beijing, Shanghai, Guangdong, Tianjin, Chongqing, and Hubei
• Five schemes underway so far:
• Shenzhen, Beijing, Shanghai, Guangdong and Tianjin
• Some systems based on absolute emissions, others on carbon-intensity
• Disparity in systems will make national plan more challenging
• Trading platforms will extend beyond carbon to pollution and water permits.
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Source: EIA
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