cred carbon reduction 1 carbon trading a way towards carbon reduction? keith tovey ( Н.К.Тови...

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CRedcarbon reduction

Carbon Trading

A way towards Carbon Reduction?

Keith Tovey(Н.К.Тови 杜伟贤 ) M.A, PhD, CEng, MICE, CEnv

HSBC Director of Low Carbon Innovation: School of Environmental Sciences, University of East Anglia

ENV-2A33 Fossil Fuels

2008 - 2009

This presentation and related links will be available at

www2.env.uea.ac.uk/gmmc/energy/env-2a33/fossil_fuels.htm

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• Energy Intensity• Carbon Intensity• Kyoto Protocol• Issues affecting Electricity Supply Industry

in UK - sector most affected by • European Union Emission Trading System

EU-ETS• Personal Carbon Trading (DTQs) - a discussion

if time permits

Carbon Trading

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ENERGY INTENSITY

Total Energy Demand in UK

GDP changes in UK

Wealth of Country has increased faster than Energy Growth

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ENERGY INTENSITY

Wealth of UK increased uniformly with energy in 1950s and 1960s

Major infra-structure projects in late 1960s - early 1970s

1979 - 1992 restructuring followed by increase efficiency

1992 - increased conservation

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ENERGY INTENSITY

UK has become more efficient in using energy to generate wealth over past 50 years.

Generate the same wealth with 45% of energy as in 1950.

Improvement ~ 1.45% per annum

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kW per Head

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P p

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ead

(U

S$

(95)

USA

Russia

Canada

China

India

UK

Japan

Germany

Poland

France

Qatar

Other EU Countries

Nordic EU New EU

Mediterranean EU

Energy - GDP Relationships

ENERGY INTENSITY

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Primary Energy per Capita (kW)

CO

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Other EU

EU nordic

EU med

EU new

Carbon Emissions per unit of Primary Energy

Qatar

USA

Canada

Australia

Russia

Japan

France

Germany

UK

Developing Countries

Carbon Dioxide Emissions per unit of Energy

Carbon Intensity

Mix of Electricity Generating Capacity has a significant impact

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8Per capita Carbon Emissions

UK

How does UK compare with other countries?

Why do some countries emit more CO2 than others?

What is the magnitude of the CO2 problem?

China

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Carbon Emissions and Electricity

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Carbon Trading

Kyoto Protocol

• Requires carbon dioxide emission reductions from Annexe 1 countries through burden sharing.

• Non Annexe 1 countries are not included in reduction requirements.

• Participation of Non Annexe 1 Countries through the Clean Development Mechanism (CDM) and Certified Emission Reduction Certificates (CERs)

• Introduces a carbon trading system

• Annexe 1 countries invest in developing countries and claim offset reduction for their actions.

Problem of additionality

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Opportunities under Kyoto• JI (Joint Initiatives) between Annexe 1 Countries• CDM (Clean Development Mechanism)

– Annexe 1 Countries or organisations/ businesses investing in Non Annexe 1 countries in low carbon technology projects.

– Funded via the World Bank: a form of trading– Annexe 1 countries can offset some of their carbon

emissions by such investment and purchase CERs.

– Problem:• Often absolute changes/reductions in carbon emissions

are confused with reductions in carbon intensity not with reductions in emissions.

• An issue of importance for EU-ETS Phase 2

– Controlled by “Competent Authorities” in relevant countries

– Only around 20 successful schemes in China so far out of around 100 suggested.

Carbon Trading

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Problem of Additionality• Aims to combat double counting, NOT CLEAR how

successful this is.

• Schemes must show ADDITIONAL savings over business as usual.

• Reference standard must be documented standard even if it is not yet implemented.

• Scheme has been used almost exclusively for renewable energy projects

• CRed with partners in Eco-Energy Cities (China) were trying to use CDM via CERs for funding energy efficient buildings in China following success of Elizabeth Fry and ZICER, but has been confronted by many barriers.

Carbon Trading

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Using Electricity (including losses in transmission)

• Coal Generation ~ 1000 g per kWh• Oil Generation ~ 900 g per kWh• Gas Generation ~ 400 g per kWh• Nuclear Generation ~ 5 g per kWh

(including fuel fabrication and reprocessing

Overall (UK) ~ 520 g per kWh and rising significantly

Gas Supply• Gas ~ 186 g per kWh

Example

• heat a home electrically: Electricity is 100% efficient

emissions will be 520 g per kWh

• heat a home with normal gas boiler: boiler is 70% efficient

emissions will be 186 / 0.7 = 266 g per kWh a saving of 49%

• A condensing boiler is 90% efficient

emissions will be 186 / 0.9 = 207 g per kWh a saving of 60%

Carbon Intensity of Energy Use

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Issues affecting UK Carbon Emissions

• Changes in Electricity Supply Industry• Increase in Renewable Generation is not

keeping pace even with increase in demand.• Modelling assumes Government Targets for

renewables are reached and exceeded.• Currently we are well short of targets• Electricity Supply Industry in UK will receive

the brunt of the cuts in carbon allowances under EU-ETS

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Options for Electricity Generation in 2020- Non-Renewable Methods

0

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12000

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1955 1965 1975 1985 1995 2005 2015 2025 2035

Inst

all

ed C

ap

aci

ty (

MW

)New Build ?

ProjectedActual

Nuclear New Build assumes one new station is completed each year after 2017.

~20% of electricity is generated by nuclear or around 70 TWh

By 2020 this will be down to around 15 TWh

If replaced by coal CO2 emissions will rise by 54 Mtonnes

Replacement by gas rise will be 22 Mtonnes

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UK Gas Production and Demand

Import Gap

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r

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Electricity Generation i n selected Countries

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Actual Nuclear

Projected Nuclear

Actual Coal with FGD

Opted Out Coal

Renewables

New Nuclear?

New Coal ???

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2000 2005 2010 2015 2020 2025 2030

MW

• Opted Out Coal: Stations can only run for 20 000 hours more and must close by 2015• New Nuclear assumes completing 1 new nuclear station each year beyond 2018

• New Coal assumes completing 1 new coal station each year beyond 2018

Our Choices: They are difficult: Energy Security There is a looming capacity shortfall

Even with a full deployment of renewables.

A 10% reduction in demand per

house will see a rise of 7% in total demand

- Increased population decreased

household size

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Historic and Future Demand for Electricity

Number of households will rise by 17.5% by 2025 and consumption per household must fall by this amount just to remain static

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1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 2020 2025

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h)

Business as usual

Energy Efficient Future ?

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Carbon Dioxide Emissions

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1990 1995 2000 2005 2010 2015 2020 2025

MT

on

ne

s C

O2

Actual

Business as Usual

Energy Efficiency

The Gas Scenario

Assumes all new non-renewable generation is from gas.

Replacements for ageing plant

Additions to deal with demand changes

Assumes 10.4% renewables by 2010

25% renewables by 2025

Energy Efficiency – consumption capped at 420 TWh by 2010

But 68% growth in gas demand (compared to 2002)

Business as Usual

257% increase in gas consumption ( compared to 2002)

Electricity Options for the Future

Gas Consumption

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1990 1995 2000 2005 2010 2015 2020 2025

bill

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Business as Usual

Energy Efficiency

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Energy Efficiency Scenario

Other Options

Some New Nuclear needed by 2025 if CO2 levels are to fall significantly and excessive

gas demand is to be avoided

Business as Usual Scenario

New Nuclear is required even to reduce back to 1990 levels


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ActualGasNuclearCoal40:20:40 Mix


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1990 1995 2000 2005 2010 2015 2020 2025

Mto

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ActualGasNuclearCoal40:20:40 Mix

25% Renewables by 2025

• 20000 MW Wind

• 16000 MW Other Renewables inc. Tidal, hydro, biomass etc.

Alternative Electricity Options for the Future

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• Carbon Trading has potential to reduce carbon emissions at cheapest cost.

• Companies are given a free allowance which may be reduction on historic trends, an increase on historic trends, or at a constant level.

• Carbon Trading takes place between companies.• If a company exceeds it allowance it can reduce its carbon

emissions, or it can purchase allowances from someone who has a surplus.

• However, there is an ultimate buy out penalty if there are too few allowances.

• During Phase 1 (2005 – 2007 this penalty was €40 a tonne • In Phase 2 2008 – 2012, the penalty is currently €100 a

tonne. in EU-ETS.

Carbon Trading

However, Carbon Trading as a means to reduce carbon only works if:• Sensible allocations of permits are issued• The price of carbon is realistic

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• Example with no trading.• Requirement for a 10% cut in emissions

Carbon Trading: How it works -150

0 to

nnes

600

tonn

es

Company A Company B

50 tonnes reduction

60 tonnes reduction

Cost for reduction is say € 10/tonne

Total cost to company

€ 500

Cost for reduction is say € 20/tonne

Total cost to company

€ 1200

Cost to achieve 10% reduction: 110 tonnes = € 1700 or € 15.45 per tonne

All Examples use Euros (€ )as the currency

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• Opportunities for Energy or Carbon Reduction• Trends are same, but factors vary depending on carbon intensity

Carbon Trading – Company A: How it works -2

B C DA50 tonnes 2010 30

E F G30 3060

Cumulative Carbon Savings

Cos

t p

er t

onn

e

30

2019

13121110

Target Reduction is 50 tonnes – can be achieved with an investment of € 500

Tradable value of allowance high: company makes profit by investing in other schemes

Tradable Value of Allowances

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• Opportunities for Energy or Carbon Reduction• Trends are same, but factors vary depending on carbon intensity

Carbon Trading – Company B: How it works -3

BCA

60 tonnes 20 10

G

200

Cumulative Carbon Savings

Cos

t p

er t

onn

e

30

262420

Target Reduction is 60 tonnes – can be achieved with an investment of € 1200

Tradable value of allowance low: company buys allowances

Tradable Value of Allowances

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• Same Example with trading.• Requirement for a 10% cut in emissions

Carbon Trading: How it works -4

Company A Company B

No Trading:Cost to achieve 10% reduction: 110 tonnes = € 1700 or € 15.45 per tonne

Tonnes reduction

Cost per tonne

Total cost

Project A 50 € 10 €500Project B 10 € 11 €110Project C 20 € 12 €240Project D 30 € 13 €390TOTAL extra

60 €12.33 €740

Tonnes reduction

Cost per tonne

Total cost

Project A 60 € 20 € 1200

Cost is much more expensive than for company A.

Would it be cheaper to purchase 60 tonnes of allowances rather than implementing reduction strategies?

With Trading:Cost to achieve 10% reduction: 110 tonnes = € 1240 or € 11.27 per tonne

If Company B paid more than € 12.33 this would be possible

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Carbon Trading: How it works -5Company A Company B

Tonnes reduction

Cost per tonne

Total cost

Project A 50 €10 € 500TOTAL extra

60 €12.33 € 740

Tonnes reduction

Cost per tonne

Total cost

Project A 60 € 20 € 1200

No Trading: total cost for 110 tonnes = € 1700 or € 15.45 per tonne With Trading: total cost for 110 tonnes = € 1240 or € 11.27 per tonne

What would be a realistic trade price?

If too low: little incentive for Company A to invest in Projects b, C, and D.

If too high Company B might be prepared to pay full cost rather than have the hassle

What happens if neither Company does anything? Under EU ETS they will have to pay fine of: €40 per tonne (phase 1) or €100 (phase 2)

In absence of brokers, optimum price is (€12.333 + € 20 ) / 2 = €16.167

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Tonnes reduction

Cost per tonne

Total cost

Project A 50 €10 €500TOTAL extra

60 €12.33 €740

Tonnes reduction

Cost per tonne

Total cost

Project A 60 € 20 €1200


In absence of brokers, optimum price is €16.167

Company A are not obliged to do more than Project A

Cost for Projects B, C, and D would be €740

However, A sells allowances @ €16.167 >> gives an income of €970

i.e. Total cost of extra projects is paid for and there is also a profit of € 230

Company B will also benefit

Paying €970 will save them €230 compared to implementing a 10% cut

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Tonnes reduction

Cost per tonne

Total cost

TOTAL extra

60 €12.33 €740

Tonnes reduction

Cost per tonne

Total cost

Project A 60 € 20 €1200


In absence of brokers, optimum price is €16.167

Company A has all extra projects paid for and makes a profit of € 230

Company B saves € 230 compared to making saving

Schemes with and without trading result in same reduction, but Trading hopefully ensures cheapest options are implemented.

Case with brokers with commission @ 10% of trade value

Assume Commission is shared between sellers and buyers. Commission: €1.6167: Buying Price 16.975 (=16.167 + 1.6167/2): Selling Price 15.358

Profit now falls to €181.50 for Company A and saving is €181.50 for Company B

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EU Emission Trading System: EU - ETS• Phase 1: 1st Jan 2005 – 31st December 2007• Phase 2: 1st Jan 2008 – 31st December 2012• Phase 1:

o All EU 15 countries required to submit National Allocation Plans (NAPs) to EU Commission for approval by early 2004

o Accession 10 countries were given an extra 3 monthso NAPs had to be consistent with the declared Kyoto targets for

2008 – 2012.o All industries with installed plant exceeding 20 MWth were to

be included.

• Each country had to declare its overall target emission level allocate targets for each sector of the economy allocate allowances for each plant specify the methodology it planned to use in

allocations

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EU-ETS: UK NAP: Phase 1 Allocation Method

Phase 1 UK approach:. Kyoto Commitment -8.2% (14.8%)

Without ETS estimated emission by 2010

572 Mtonnes – 5.4% reduction• Take average emissions for each organisation over five years 1998

– 2002 (rejecting the highest and lowest). Use this as benchmark.

• Check how UK is doing on road to Kyoto commitment.

• Impose an overall reduction consistent with above.

• Decide on sectorial changes within overall allocation.

• one or two sectors actually saw a small increase

• others including Power Generation – a substantial decrease

• Reduce sector totals by around 7.7% to allow for new entrants.

• Allocate organisation emission levels according to this reduced allocation

• Address issue of what happens to allowances if plants close.

Retain allowances in year of closure, but none allocated thereafter

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EU-ETS: UK NAP: Projections

From UK NAP Phase 1

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Average Emissions

(1998 – 2002)

Emissions (2002)

Initial Allocation

New Entry Reserve

Allocation to existing plants

change on 2002

Mtonnes Mtonnes Mtonnes % Mtonnes %

Power stations 152.4 158.2 143.7 8.0% 132.2 -16.4%

Oil and Gas 36.3 38.2 40.0 19.8% 38.8 1.6%

Chemicals/ Cement/ Ceramics/ Glass 25.0 26.0 27.3 26.1% 25.8 -0.8%

Pulp/ Paper/ Food/ Drink 7.6 8.2 8.2 5.8% 8.0 -2.4%

Metals 22.2 19.6 23.8 20.8% 19.4 -1.0%

Engineering & Vehicles 1.0 1.0 1.0 4.0% 1.0 0.0%

Others 1.5 1.7 1.5 0.0% 1.5 -11.8%

TOTAL 246.0 252.9 245.5 7.7% 226.7 -10.4%

EU-ETS: UK NAP: Phase 1 Sector Allocations

Annual Allocations for 2005 – 2007 inclusive

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• Compared to other countries UK target was tough: Many were over generous

• Some took 2002 as baseline• Estimated emissions in Business as Usual scenario by 2010 – say

10% higher.• Reduced 2010 project emissions by say 8% - but that leaves an increase in emissions – not a

decrease!!

UK objected, but were not allowed to change its allocationDifferences in allocation methods can adversely affect one country

compared to another• In 2005 trading started at around 6 € a tonne.• Rose progressively to around 20 € • rose to over 30 € in early April 2006 (heading for buy price of 40

€ )

Many countries used cheaper CDM credits extensively as a means to comply.

UK did not resort to this

EU-ETS: Other Countries Phase 1 Overall Allocations

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Price of Carbon on EU-ETs

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2005 2006 2007 2008 2009

Euro

s a

tonn

ePhaes 1 (2005 - 2007)

Phase 2 (2008 - 2012)

Price crash in April 2006 resulted from a gross allocation of permits in some countries such as Italy

1.5 Eurocents/tonne

Reached ~ 32 Euros/tonne

€14.90 at 08:00 on 2nd Dec. 2008

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• Reduction measures become more costly and more difficult the more reduction is made.

• UK NAP Phase 1 did not make allowance for efficiency of plant.

• Using Historic basis for allocation

– rewards inefficient plant

– penalises efficient plant

EU-ETS: Issues about UK NAP Phase 1

BC DA E F G

Cumulative Savings

Cos

t p

er t

onn

e• Overall allocation for the Netherlands, Sweden, Slovenia and

Denmark were not that tough

• But allocation to different plant took account of relative efficiency

i.e. allocations were based on internal benchmark values

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• The UK should be congratulated on setting stiff targets in their EU-ETS NAP,

• but what steps will the Government take to ensure that the UK's efforts are not watered down by other countries over generous allocations,

• and, as the UK Plan has been approved only in provisional form,

• will steps now be taken to ensure that the UK follows the exemplar lead of The Netherlands by incorporating a proportion of benchmarking into the allocations to the individual installations?.

N.K. Tovey’s Question to Margaret Beckett: 13th July 2004

The response was not worth the paper it was written on!!

It was ceremoniously torn up by N.K. Tovey

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• 29th November 2006: Brussels• The EU Commission issued decisions on the

following countries.• Germany, Greece, Ireland, Latvia, Lithuania,

Luxembourg, Malta, Slovakia, Sweden and the UK.• Only the UK plan was approved. Other countries

had to reduce their overall allocations by around 7%, and cut their use of Kyoto CDMs to no more than 10%

• Plans from Belgium, Cyprus, Estonia, Finland, The Netherlands, Poland, Slovenia were approved early in 2007

• Remaining countries were very tardy and some were threatened with fines.

EU-ETS: Phase 2 Commission Decisions

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• Methodology follows Phase 1– No use of CDM allowances– All reductions are to come from Electricity Supply Industry– No reductions from other sectors– New Entrant Reserve reduces all sectors as in Phase 1

• Argument for whole reduction on Electricity Supply Industry– Unlike other sectors: open to very little competition – the

inter-connector to France only accounts for 3.9%.– Additional charges can be passed on to consumers.

• Benchmarking is now used in Electricity Supply Industry.– Coal fired plant has an average efficiency of 35%: gas 46.8%– Emission factor = capacity * Standard Load Factor * Emission Factor

• Removes the objection raised by N.K. Tovey regarding rewarding inefficient plant. However, other sectors are not included.

» Should be based on carbon intensity» e.g. for Universities: carbon emission per student

EU-ETS: Comments about UK NAP Phase 2

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Carbon Trading: Web Links

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Europe May Require That 20% of Power Comes From Renewable Energy 2006-12-11 07:28 (New York)

by Mathew Carr and Lars Paulsson Dec. 11 (Bloomberg)

11th December 2006

• Carbon dioxide emission permits need to be higher than 20 euros a metric ton to prompt the investment required in low-fossil fuelled power generation, said Morgan today in a meeting with reporters in London.

• If left to Market forces what would the price have to be to properly encourage investment in low carbon technologies?

• The European Commission may propose as early as this week a law requiring that at least 20 percent of the continent's power come from renewable energy by 2020, Eluned Morgan, a member of European

Parliament said today. • Subsequently EU target became 15% of all energy demand and in recent

Renewable Energy Strategy, UK is aiming to achieve over 30% renewable electricity generation by 2020.

• Is this achieveable?????

42Annual Solar Gain 910 kWh

Solar Collectors installed 27th January 2004

What prices does EU-ETS need to be to stimulate low carbon technologies?

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What prices does EU-ETS need to be to stimulate low carbon technologies?

• Example: solar thermal• Produces ~ 900 kWh per year• Over life time of say 25 years ~ 22 500 kWh• Allowing for an efficiency of older boilers of 70% (compared

to 90% for modern ones)• Delivered energy requirement is 22500/0.7 = 32143 kWh gas• Emission factor for gas = 0.186 kg/kWh• So saving over lifetime = 32143 * 0.186 kg• = 5.978 tonnes• Capital cost is ~ £4000• Cost per tonne saved = £670 which would have to be trading

price to achieve desired reduction.• Many other technologies are much more expensive – most

offset or trading prices are around £10!

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The Future• Discussions are ongoing about EU-ETS Phase 3. 2013 – 2020• All Electricity Generators may have to purchase all their

permits via auction – will lead to higher generation costs for coal in particular

• Discussions relating to reducing threshold of 20 MW Th – would include many more businesses

• Inclusion of Transport (air transport in particular?????).

Has EU-ETS trading really worked

Generally NO.

• Grossly over generous allocations in Phase 1 by some countries

• Penalty on early movers reduces incentives for further investment by leading companies in future.

• Prices are too low to assist deployment of low carbon technologies, but some (renewable electricity generation) are covered by other incentives

cred carbon reduction 1 carbon trading a way towards carbon reduction? keith tovey ( Н.К.Тови...

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