Regional Training on ETS Cap-Setting Part II Practice Alyssa Gilbert Developed by Alyssa Gilbert, Maarten Neelis Dian Phylipsen, Monique Voogt Supporting the Design and Implementation of Emissions Trading Systems in China 中欧碳交易 能 力建设项目 Beijing, September 17 th 2014 This project/programme is funded by the European Union Project implemented by ICF International together with Sinocarbon, SQ Consult and EcofysCurrent status Well-functioning China National ETS Road maps Cap setting Allocation MRVA Registry Market oversight Capacities built over time Supporting the Design and Implementation of Emissions Trading Systems in China - 中欧碳交易能力建设项目 ECOFYS | | Cap-setting in Europe  Cap-setting in Phase 1 2005-7 Bottom-up  Changes in Phase 2  Significant changes for cap setting in phase 3  Impact of projections in cap setting  The cap and other determinants of price  Burden-sharing between countries in Europe Cap-setting in Europe PRACTICE 17/09/2014 Alyssa Gilbert 3 Cap setting Part II Practice ECOFYS | | Phase I learning by doing Each EU Member State MS established the ‘national cap’ on the basis of criteria set by the European Commission – Criteria included e.g. ‘consistency with Kyoto targets’, consistency with emission developments’, ‘consistent with potential to reduce emissions’, ‘consistency with other policies’, ‘not higher than needed’ and ‘no distortion of competitiveness’ – Still left room for very different approaches. The European Commission reviewed the proposed amounts and required limited changes including views from other MS The total EU cap was determined by adding up all those amounts of allowances across MS 17/09/2014 Alyssa Gilbert 4 Cap-setting EU-ETS phase I national/bottom-up approach Implications Difficult to prove criteria were not met, and that total allocation therefore needed to be reduced, due to large amounts of country-specific ination and too generic criteria This led to problems in terms of a too lenient cap, resulting in low carbon prices, and distortion of competitiveness between countries – Expectations upfront 18-36 E/t including/excluding the use of project credits, respectively – Trading around 20-30 E/t in 1st year, down to near zero at the end of Phase I no ‘banking’ ECOFYS | | Phase II limited time for changes 17/09/2014 Alyssa Gilbert 5 the same rules applied as in Phase I A ‘mid-term review’ was foreseen 2006, with potential changes in the rules effective as of Phase III NAPII due June-2006, no time for a al adoption of new legal text replacing the 2003 EU ETS Directive to have new rules in place for Phase II Maximum achievable were small changes that all MS could agree to inally Cap-setting EU-ETS phase II little changes from Phase I Implications Little time was a available for change Focused on improving the process as much as possible Focused on more significant change in phase III ECOFYS | | 0 500 1000 1500 2000 2500 Av. Cap Phase I Ver 2005 emissions Prop cap Phase II Official BaU Ecofys BaU Final cap Phase II max JI/CDM use Phase I Phase II -370 -160 -335 240 2080 shortage 130Mt- 80Mt NB Phase I scope was narrower than Phase II 17/09/2014 Alyssa Gilbert 6 Source Ecofys The impact of using projections on cap-setting Projections vary significantly, and the projections used can impact the system significantly ECOFYS | | Phase III substantial changes based on lessons learned from Phase I-II While not in time for Phase II, lessons from Phase I fed discussions on changes in the system as of 2006, with draft legislation published at end 2008, and adopted at end 2009. Changes to affect Phase III, as of 2013 Part of the Climate and Energy, or 20-20-20, Package, adopting a set of 3 targets for 2020 20 reduction of EU GHG emissions, 20 energy efficiency improvement, 20 renewable energy 17/09/2014 Alyssa Gilbert 7 Cap-setting EU-ETS phase III substantial changes Implications For ETS, this GHG target was translated to a -21 reduction in 2020 compared to 2005, assuming a distribution over ETS/non-ETS sectors Cap set top-down instead of bottom-up One EU-wide cap instead of summing up ‘national caps’ Much more stringent cap No impact of differing national targets on ETS participants Meeting all three targets is more expensive than only the 20 GHG target Non-ETS emissions still managed at the MS level ECOFYS | | Sidebar 1997 EU Burden sharing distributing joint efforts EU could not agree on its shared Kyoto target due to many differences between MS A burden sharing approach was developed to estimate the reasonable contribution of each MS to joint target, given these differences – Triptych approach applied uni criteria to different starting point in each MS – Adding resulting reductions yielded MS contribution to EU target – Resulted in differentiated targets for different MS Alternative considered in negotiations – to take emissions of internationally oriented sectors energy, industry ‘out of the national emissions’, as if a separate ‘country’ with separate target – Similar to approach for EU 2020 targets, where ETS sectors are no longer covered by MS targets, but are separated into astand-alone system the EU-wide ETS with one target for all emitters across the EU Approach also applied to distribute energy conservation targets in 12th FYP over provinces Could be a tool in distributing China’s national GHG ambitions over sectors ETS/non-ETS and/or over provinces 17/09/2014 Maarten Neelis 8 ECOFYS | | Cap-setting in Europe  Details of cap-setting in Shenzhen, Beijing, Shanghai, Guangdong, Tianjin, Hubei, Chongqing Cap-setting approaches in the current pilots PRACTICE 17/09/2014 Alyssa Gilbert 9 ECOFYS | | Cap-setting of Chinese ETS pilots 1 Each pilot has a cap in absolute term tCO 2 e Factors to considered when setting the carbon emissions cap – Scope ● CO 2 or other gases; ● sectors choose sectors that cover the most emissions e.g. power, cement, iron and steel etc. – Carbon intensity targets allocated to the provinces or municipalities – Economic growth targets – Emissions controls in place when considering the development plan by sector The caps are growing in the pilot phase unlike other ETS schemes 17/09/2014 Alyssa Gilbert 10 Characteristics of Chinese ETS pilot caps ECOFYS | | Cap-setting of Chinese ETS pilots 2 17/09/2014 Alyssa Gilbert 11 Shenzhen 33 Mt Shanghai 160 Mt Beijing 50 Mt Guangdong 388 Mt Tianjin 160 Mt 18.06.2013 19.05.2014 Hubei 324Mt Chongqin g 125 Mt New caps of Chinese pilot schemes in chronological order Source Ecofys, World Bank ECOFYS | | Cap-setting in Europe  Examples of California, Australia, South Korea, Qubec Cap-setting in some other jurisdictions PRACTICE 17/09/2014 Alyssa Gilbert 12 ECOFYS | | Cap setting in other ETS 17/09/2014 Alyssa Gilbert 13 California Cap- and-Trade Program Qubec Cap and Trade System Australia’s Carbon Pricing Mechanism * South Koreas Emission Trade Scheme Type of cap Absolute Absolute Absolute Absolute Emission Reduction Target By 2020 15 below 1990 level under a BAU scenario By 2020 25 below 1990 levels under a BAU scenario By 2020 5 below 2000 levels under a BAU scenario By 2020 30 below 1990 level under a BAU scenario Cap-setting estimation Estimation based on historical emissions Estimation based on historical emissions Estimation based on historical emissions no cap during the fixed price period Estimation based on historical emissions Price Containment Mechanism Allowance Price Containment Reserve Allowance Price Containment Reserve Fixed price period, afterwards n.a. Early Reserve Auction Flexibility Offset credits Offset credits Early action credits Offset credits Offset credits Early Action credits * Australia’s Carbon Pricing Mechanism was repealed from 1 July 2014 ECOFYS | | Cap-setting in Europe  The problem – lack of supply response  Solutions supply demand mechanisms to cope with inherent uncertainties IN-DEPTH STUDY 17/09/2014 Alyssa Gilbert 14 ECOFYS | | In-depth the surplus debate in the EU ETS – record high surplus and record low prices 17/09/2014 Alyssa Gilbert 15 2008 2009 2010 2011 2012 2013 0 500 1000 1500 2000 2500 0 5 10 15 20 25 30 35 Jan 2008 Jan 2009 Jan 2010 Jan 2011 Jan 2012 Jan 2013 Jan 2014 Million EUAs EUA prices €/tCO 2 Surplus end of the compliance year EUA December contract price “Potentially there will be a structural surplus in most of phase 3 of around 2 billion allowances. This risks undermining the orderly function of the carbon market.” European Commission The development of carbon prices and allowance surplus in 2008-2014 ECOFYS | | In-depth the surplus debate in the EU ETS – Is there actually a problem in the EU ETS 17/09/2014 Alyssa Gilbert 16 The EU ETS is established “in order to promote reductions of greenhouse gas emissions in a cost-effective and economically efficient manner” 0 500 1,000 1,500 2,000 2,500 2010 2015 2020 2025 2030 2035 2040 2045 2050 MtCO 2Reference scenario emissions under current EU ETS cap trajectory Emissions remain below the cap and the market is setting the carbon price, so the EU ETS market is working Carbon price is not stimulating low-carbon investments, jeopardising achieving future GHG reduction targets VS There is no problem There is a large problem EU ETS cap Significant GHG emission reductions will be necessary to meet the 2050 target , requiring action now Is the market appropriate to incentivise longer term action Different interpretations on the functioning of the EU-ETS are voiced ECOFYS | | In-depth different supply mechanisms to cope with uncertainties and unexpected shocks Dynamic intensity-based cap-setting Cap trajectory gateway Rolling cap Periodic review of the cap Price floor and/or ceiling price corridor Auction reserve price Allowance reserve mechanism 17/09/2014 Alyssa Gilbert 17 Options to implement a of supply flexibility in an ETS ECOFYS | | In-depth using a reserve mechanism to cope with uncertainties and unexpected shocks 17/09/2014 Alyssa Gilbert 18 Actual GDP Projected GDP Allowance Reserve Actual allowance supply Absolute cap on emissions GUARANTEED some supply flexibility Different triggers can be used to determine the operation of the reserve mechanism, e.g. GDP, allowance price or surplus The functioning of a reserve mechanisms ECOFYS | | In conclusion, there are different aspects to take into consideration when setting the cap Cap determines the total supply, and supply and demand determine the carbon price Demand is uncertain and depends on many factors Actual quantity of allowances for sale may differ again, depending on a range of factors Trade-offs of absolute cap-setting vs dynamic intensity-based cap-setting Consider how money flows between sectors Different ways to regulate supply and demand to cope with uncertainty and unexpected shocks to the ETS market 17/09/2014 Alyssa Gilbert 19 Allowance Reserve Main takeaways for cap-setting ECOFYS | | Key sources with considerations for cap-setting Ecofys and OEA 2014. “Cap-setting, Price Uncertainty and Investment Decisions in Emissions Trading Systems”, UK Department of Energy and Climate Change, January 2014. Fankhauser, S. and Hepburn, C. 2010. “The Design of Carbon Markets Part I Carbon Markets in Time”, in Energy Policy, 388, pp. 4363-4370. Murray et al. 2009. “Balancing Cost and Emissions Certainty An Allowance Reserve for Cap-and-Trade”, Review of Environmental and Policy, January 2009. DIW Berlin 2013, “EU Emissions Trading The Need for Cap Adjustment in Response to External Shocks and Unexpected Developments”, German Federal Environment Agency, February 2013. 17/09/2014 Alyssa Gilbert 20