climate change - emissions trading and policy frameworks
DESCRIPTION
This slide-deck explains the role that emissions trading can play in a policy framework aimed at addressing climate change.TRANSCRIPT
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Emissions TradingEmissions TradingEmissions Trading in an energy &Emissions Trading in an energy &
climate change policy frameworkclimate change policy framework
•Directions to 2050Directions to 2050
•Where to use emissions tradingWhere to use emissions trading
•Key design elementsKey design elements
•Global considerationsGlobal considerations
David Hone Group Climate Change Adviser
. .Shell International B V
2
A new direction
is needed
The way we produce and use energy today is not sustainable
3
Pathways to 2050 for Australia
0
50
100
150
200
250
300
350
400
$0 $20,000 $40,000 $60,000 $80,000
GDP per capita, US$ 2000 (ppp)
En
erg
y p
er c
apit
a, G
JA significant shift required in both “energy per GDP” and “CO2 per unit of energy used”
1971
Improving energy
efficiency
2025
20501990
2004
CO2 per energy unit used, t / TJ
Slope
= Ener
gy per
GDP
4
Australia 2004
Solar (5 GW)
Wind (5 GW)
Coal / CCS (5 GW)
Hydro (5 GW)
Biomass (5 GW)
Coal (5 GW)
Gas (5 GW)
Direct use (0.2 EJ)
Vehicle (2 million)
High efficiency vehicle
Alternative fuel vehicle
~ 2GW capacity
20 million people
3.25 EJ Final Energy
GDP $US 30 K per capita*
350 MT energy CO2
* USD 2000 (ppp)
5
Australia 2025
Solar (5 GW)
Wind (5 GW)
Coal / CCS (5 GW)
Hydro (5 GW)
Biomass (5 GW)
Coal (5 GW)
Gas (5 GW)
Direct use (0.2 EJ)
Vehicle (2 million)
High efficiency vehicle
Alternative fuel vehicle
~ 2GW capacity
25 million people
3.45 EJ Final Energy
GDP $US 45 K per capita*
300 MT energy CO2
6
Australia 2050
Solar (5 GW)
Wind (5 GW)
Coal / CCS (5 GW)
Hydro (5 GW)
Biomass (5 GW)
Coal (5 GW)
Gas (5 GW)
Direct use (0.2 EJ)
Vehicle (2 million)
High efficiency vehicle
Alternative fuel vehicle
~ 2GW capacity
28 million people
3.27 EJ Final Energy
GDP $US 74 K per capita*
168 MT energy CO2
7
Pathways to 2050 for the USA (illustrative)
0
50
100
150
200
250
300
350
400
$0 $20,000 $40,000 $60,000 $80,000 $100,000
GDP per capita, US$ 2000 (ppp)
En
erg
y p
er c
apit
a, G
J
2025
2050
A significant shift required in both “energy per GDP” and “CO2 per unit of energy used”
1971
CO2 per energy unit used, t / TJ
1990 2004
Slo
pe
= E
ner
gy
per
GD
P
Improving energy
efficiency
8
USA 2004
Solar (50 GW)
Wind (50 GW)
Coal / CCS (50 GW)
Hydro (50 GW)
Biomass (50 GW)
Nuclear (50 GW)
Coal (50 GW)
Gas (50 GW)
Direct use (5 EJ)
Vehicle (20 million)
High efficiency vehicle
Alternative fuel vehicle
294 million people
66.5 EJ Final Energy
GDP $US 36 K per capita*
5.8 billion tonnes energy CO2
* USD 2000 (ppp)
9
USA 2025 (illustrative)
Solar (50 GW)
Wind (50 GW)
Coal / CCS (50 GW)
Hydro (50 GW)
Biomass (50 GW)
Nuclear (50 GW)
Coal (50 GW)
Gas (50 GW)
Direct use (5 EJ)
Vehicle (20 million)
High efficiency vehicle
Alternative fuel vehicle
335 million people
65.5 EJ Final Energy
GDP $US 57 K per capita*
4.9 billion tonnes energy CO2
* USD 2000 (ppp)
10
USA 2050 (illustrative)
Solar (50 GW)
Wind (50 GW)
Coal / CCS (50 GW)
Hydro (50 GW)
Biomass (50 GW)
Nuclear (50 GW)
Coal (50 GW)
Gas (50 GW)
Direct use (5 EJ)
Vehicle (20 million)
High efficiency vehicle
Alternative fuel vehicle
400 million people
60.1 EJ Final Energy
GDP $US 88 K per capita*
2.4 billion tonnes energy CO2
* USD 2000 (ppp)
11
Oil Biomass Gas Coal Nuclear Renewables
Primary Energy
Liquids
Direct combustionIndustry and
Manufacturing
Mobility
Final Energy
Agriculture and Land
Use
Energy
En
erg
y
En
erg
y
Buildings
Power Generation
Key Sectors in the “energy and CO2 economy”
12
A structured policy approach is needed
A simple, high profile and credible target for the renewables’ share of power generation, supported by a range of incentives to encourage investment.
Measures to incentivise new fuels based on their “well-to-wheels” CO2 reduction potential,
implementation of vehicle efficiency standards and vehicle/road-use programs targeted at drivers
A series of robust energy standards for buildings, appliances etc. with incentives for retrofit of existing infrastructure.
"Cap and trade" emissions trading systems for power generators, most industrial facilities and large fleet transport such as aviation.
13
Emissions Trading or “Cap-and-trade”
Initial emissions100 Mt p.a.
Year 5 at 95
Year 15 at 80Year 10 at 88
Offsets
Allowance trading between facilities$ CO2
Government issues 88 million allowances into
the economy
CCS Project
Efficiency Project
14
Key principles of an Emissions Trading System
• The aim of an ETS is to direct investment capital towards lower CO2 emission projects, via a market price for CO2
emissions.
• Therefore, the trading system should not remove that capital from the industries or firms covered by the system.
Design Features to be Discussed
• The point of regulation
• Allocation of allowances
• Recognition of technologies
• Constraints and limitations
• External projects mechanisms (or offsets)
15
The point of regulation
The preferred design for cap-and-trade is to have the point of regulation the same as the point of emissions.
This means the emitter:
• Is directly responsible for emissions;
• Is required to hold one allowance for each tonne of CO2 emitted;
• Clearly sees the CO2 price.
• Can implement and directly benefit from emission reduction projects.
16
The CO2 price and allocationPoints of regulation
Resource
Power Generation
FactoriesHeavy industry Light industry
Consumer
Electricity
Tim
e CO2 price impact
• Over time, the CO2 price will impact the entire value chain.
• The rate at which this happens varies considerably.
• It can be very fast for electricity.
• It will be very slow for some products where the price is established outside the capped market.
17
Global competition issues
$ US product price
€ EU product price (+ €C)
EU installation – carbon constrained
ME Installation – no carbon constraint
The facility without a CO2 constraint has a competitive advantage into both domestic and export markets, leading to either or both CO2 leakage and profit leakage.
18
The CO2 price and allocationPoints of regulation
Resource
Power Generation
FactoriesHeavy industry Light industry
Consumer
Electricity
Tim
e CO2 price impactFree allocation early on as little / no price pass through
Progressive shift to auctioning as the CO2 price impacts the economy
Full auctioning as the CO2 price impacts the entire value chainAuction funds recycled to consumers through the tax system
19
A profit neutral approach
CO2
allowances
a $ = b $
a $ % $ CO2
+ Product
b $
$ Recycled, e.g. through the tax system
% auctioning Some pass-through
20
How to allocate - Approaches
A measured approach over time:
• Allowances granted free (grandfathering) at the start based on historical emissions. This minimises disruption and allows a smooth transition for the capped sector.
• Longer term, allocation should not withdraw capital from the firms and industries covered by the scheme, nor should it grant windfall profits.
• Allocation design and the use of auctioning should consider the ability of the sector to pass through costs to the consumer.
21
Abatement technologies
• Certain abatement technologies will be key to the long term viability of the emissions trading system. Carbon Dioxide Capture and Storage is one of these.
• Such technologies must be recognised early by the legal framework of the trading system.
22
Artificial limits within the trading system
Although created entirely by policy makers and legislation, an emissions trading market is still a market. As such, it should not be subject to;
• Price caps;
• Price floors and / or reserve prices;
• Arbitrary price management by oversight bodies or parliament;
• Imposition of trading limits (e.g. offsets);
• Unexpected rule changes;
23
External Projects (or offsets)
Emission reduction projects executed outside the capped sector can offer important benefits;
• An inflow of compliance units (credits) can offer further flexibility in meeting the cap.
• Access to external projects can act as an efficient cost control mechanism within the capped sector.
• Projects can help developing countries begin managing emissions.
• The flow of project credits can help build a global CO2 market.
All national emission trading systems should recognise the same global project mechanisms.
24
Going global !
Linkages develop between all systems and more systems appear
2000 2005 2010 2015 2020 2025
Danish-ETS
UK-ETSAustralian ETS
US National “cap-and-trade”
Norwegian ETS
EU-ETS
CDM
CDM evolves to includes sectors
Pre-Kyoto Kyoto Post 2012
Expanding EU-ETS
Japan technology standards
Linkage framework
New technology mechanisms evolve (e.g. for CCS)
China adopts CCS standard
New Zealand ETS