climate change - emissions trading and policy frameworks

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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)



~ 2GW capacity

25 million people



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)



~ 2GW capacity

28 million people



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)



294 million people



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)




335 million people




* 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)




400 million people




* 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

climate change - emissions trading and policy frameworks

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