WP 5 : Joint Implementation and Emissions Trading in

Eastern Europe

Jin Lee, Policy AssociateJake Schmidt, International Team Manager

********30 November 2006Brussels, Belgium

Overview of WP 5

Goals: » To assess the scope of on emissions and allowance allocation under the

Kyoto and EU ETS for Eastern European countries

» To assess cost and emission reduction potentials for Joint Implementation (JI) projects in Eastern European countries

» To examine compatibility of planned and existing trading schemes for other pollutants (SO2 and NOx) with the EU ETS

Methodologies:» Analyzed European Environment Agency and DG TREN data on current

and projected emissions of Eastern European countries

» Examined the National Allocation Plans (NAPs) - Phsse I NAPs and Phase II NAPs (assessments and proposed)

» Assessed Joint Implementation (JI) potential using GAINS model

» Reviewed the Dutch NOx Trading Scheme, Slovakian SO2 Emissions Trading Programme, and Swedish NOx Charge System

Almost All New Member States Below Kyoto Target Levels

Base Year Emissions(Mt CO2e)

GHG Emissions 2003

(Mt CO2e)

Change in 2003 Relative to Base

YearKyoto Target

Cyprus 6.0 9.2 52.8% no targetCzech Republic 192.1 145.4 -24.3% -8.0%Estonia 43.5 21.4 -50.8% -8.0%Hungary 122.2 83.2 -31.9% -6.0%Latvia 25.4 10.5 -58.5% -8.0%Lithuania 50.9 17.2 -66.2% -8.0%Malta 2.2 2.9 29.1% no targetPoland 565.3 384 -32.1% -6.0%Slovakia 72 51.7 -28.2% -8.0%Slovenia 20.2 19.8 -1.9% -8.0%EU-10 1099.8 745.5 -32.2% -6.7%New Member States with Kyoto Targets*

1091.6 733.4 -32.2% -6.7%

EU-25 5352.2 4925.1 -8.0% -7.7%* Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland, Slovak Republic and Slovenia

Most on Path to Meet Their Kyoto Targets, but what about

EU ETS Phase II?

Many of these countries expected to be below their base year levels in 2010 with existing Policies and Measures (except Slovenia)

Total surplus of emissions (difference between emissions and Kyoto target) will decline from over 30% in 2003 to 5-9% in 2010

Nevertheless, Eastern European countries will likely have excess AAUs for sale: not a surprise» Greatest net surplus in Czech Republic, Poland and Estonia

More stringent allocations for Phase II may require Eastern European countries to keep their emissions at the current levels, whether or not they may be below Kyoto targets. » Yesterday, EC kept the Phase II NAPs for Latvia, Lithuania, Malta, and

Slovakia at a level similar or lower to those in Phase I.

Modeling Emission Reduction Potentials of Eastern European

Countries

Used the Greenhouse Gas and Air Pollution Interactions and Synergies (GAINS) Model v. 1 from IIASA which provided the most comprehensive data on mitigation options and costs in Eastern European countries

Modeled 8 countries» New EU Member States: Poland, Czech Republic, Slovakia, and Hungary

» Accession Countries (or Candidate Countries): Bulgaria and Romania

» Russia and Ukraine

Considering issues of double-counting CO2 reduction for countries in (or likely to be in) the EU ETS, GAINS only considered non-CO2 gases from these countries» Both CO2 and non-CO2 gasses are considered for Russia and Ukraine

Assessed marginal abatement cost (MAC) curves

GAINS Results: MAC curve for all Gases and all Countries

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GAINS MAC Curve: CO2 Russia & Ukraine

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GAINS MAC Curve: CH4 All Countries

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Reality Check: Emission Reduction Potential vs. JI

Potential

Conducted “on-the-ground” case study in Poland to compare GAINS mitigation options with practicalities of JI» e.g., project size, existing methodologies in CDM, diffusion of reductions

Majority of F-gases emission in Poland comes from dispersed sources and does not typically lend itself easily to JI» To date, there are no known JI projects implementing abatement of

these gases. For these reasons, the emissions reduction opportunities in F-gases was left out of this consideration.

Of all the N2O abatement technical measures considered by the GAINS model, only N2O abatement technologies from nitric acid production can be considered as a potential JI project in Poland.

For CH4 abatement, reduction of methane from coal mining and reduction of methane from landfills involve technologies recognized

by approved CDM methodologies.

Reflecting “Reality” Concerns to JI Potential

Modified GAINS results based upon Poland case study and other realities of JI:» All CO2 emissions reductions from Russia and Ukraine were considered

potentially JI eligible.

» Only reduction of N2O from nitric acid and adipic acid production was included for all countries.

» For CH4, only reductions from coal mining, landfill gas recovery, capture of methane from oil and gas production, flaring instead of venting of gas in refineries, and biogas from manure management was included for all countries

» For F-Gas emissions reductions, no options were included

» For all feasible options, the full technical potential of GAINS was included

» Only emissions reductions at less than €30 per ton CO2e are shown

JI Potential for All Countries

108 mtCO2e at < €10 per ton 124 mtCO2e at < €20 per ton

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JI Potential By Country

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Bulgaria Czech Republic Hungary Poland

Romania Russia Slovakia Ukraine

JI Potential By Country (without Russia and Ukraine)

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Bulgaria Czech Republic Hungary

Poland Romania Slovakia

Potential JI Options in Eastern Europe

Low- and medium-cost options: 108 mtCO2e at < €10 per ton

» Coal bed methane recovery: 6.5 mtCO2e at a net savings

» Adipic and nitric acid plant: 7.7 mtCO2e at €0.4 per tCO2e

» Farm scale methane capture: 5.5 mtCO2e at €10 per tCO2e High-cost options

» fuel switching and industry e-saving measures in Russia and Ukraine.

In comparison, the JI project pipeline as of October 2006 showed projects totaling 16 million tCO2e per year from these countries. » Lower volume likely due to several reasons including transaction costs,

in-country capacity for JI development, etc.

Emissions Trading Systems Not Widely Used for Conventional

Pollutants in Europe

National Emissions Ceilings (NECs): a “command-and-control” type EU directives for member states to limit SO2, NOx, PM, and lead

Emissions Trading Systems are not widely used for conventional pollutants in Europe

Dutch NOx Trading Programme (2005):» More than 90% of the entrants are also under the EU ETS» similar design and legal provision with EU ETS» Difference: ex-post allocation and less flexibile in geographical scope

and tradability Slovakian SO2 Emissions Trading Programme (1998)

» Absolute cap on large sources (greater than 50 MW thermal input) Swedish NOx Charge System (1992)

» Not an ETS, but has some components similar to output-based trading programs

» €4 per 1 kg of NOx emission

Issues of Concern for Designing an ETS for Conventional

Pollutants

Timing, stringency, regulatory structure, and compatibility with the EU ETS is crucial

Similar discussion in the US on the design of a CO2 ETS that would be compatible to SO2 and NOx trading under the Acid Rain Program» How do firms respond to command-and-control programs for one type of

emissions source and cap-and-trade programs for other?

» Are investment decisions being made to address one type of emission source having impacts on firm’s ability to comply with controls for another source? Positive or Negative?

» Are allowance prices for CO2 driving those of conventional pollutants or vice versa?

» If installation coverage is different between the two systems, has this brought about any issues such as investment decisions, administrative complexity, compliance, etc?