the eu ets: an operator perspective · the eu ets did cause reductions in the early years, but has...
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THE EU ETS: AN OPERATOR THE EU ETS: AN OPERATOR PERSPECTIVE
IETA/BPMR, Seoul 27 September 2013IETA/BPMR, Seoul 27 September 2013IETA/BPMR, Seoul 27 September 2013IETA/BPMR, Seoul 27 September 2013
Jelena SimjanovićEmerging Markets Manager
CREATIVE ECONOMY NEEDS A CREATIVE CREATIVE ECONOMY NEEDS A CREATIVE CARBON MARKET
IETA/BPMR, Seoul 27 September 2013IETA/BPMR, Seoul 27 September 2013IETA/BPMR, Seoul 27 September 2013IETA/BPMR, Seoul 27 September 2013
Jelena SimjanovićEmerging Markets Manager
Presentation Overview
• About Thomson Reuters Point Carbon
• South Korea’s market rules
• South Korea emissions forecast
• Market implications• Market implications
• What needs to be done to make the KETS work
• Korea Abatement Assessment Project (KAAP)
• Q&A
• Operator’s perspective in the EU (if anyone is still interested)
About Thomson Reuters Point Carbon• Leading provider of independent market research and
analysis for power, gas and carbon markets
• Carbon: Trading Analytics, Research, Offset database, News
South Korean market rules
• Covers installations >25,000 Mt/CO2-e and entities 125,000 Mt/CO2-e a year => ~ 470 participants
• Entities <25,000 Mt/CO2-e voluntary participation, but if in, compliance is mandatoryparticipation, but if in, compliance is mandatory
• Roughly 60 percent of country’s GHG emissions
• 10 percent of credits(offsets)
• ₩100 000/ton CO2-e(~$90/ton CO2-e)PhasePhasePhasePhase IIII(2015(2015(2015(2015----2017)2017)2017)2017)
IIIIIIII(2018(2018(2018(2018----2020)2020)2020)2020)
IIIIIIIIIIII(2021(2021(2021(2021----2025)2025)2025)2025)
Percent ofPercent ofPercent ofPercent of free free free free allowancesallowancesallowancesallowances
100100100100 97979797 Not more than 90Not more than 90Not more than 90Not more than 90
Emission fundamentals
• Emissions are correlated with the economic growth
• Weather has a large impact on power demand
•As an energy-import •As an energy-import dependant economy, Korean emissions are heavily correlated with the price of fuel
•Policy determines market parameters
•Export-oriented economy is subject to currency fluctuations
Why has the BAU changed?
• Green Growth Strategy (2009): 813 Mt• UNFCCC (2012): 776 Mt• Creative Economy: ? Mt
1. Weather patterns are changing => power demand increaseincrease
2. Economic growth is changing => overall emissions decrease
3. Currency exchange is fluctuating => it could increase or decrease demand for the Korean products on international market
4. Fuel prices are fluctuating => but Korea still needs to buy fuel
5. Revising BAU and having rules little over a year => policy uncertainty
South Korea Emissions Forecast
• Power sector
• Industry sector
• Economy-wide emissions forecast
Emission forecast for covered entities
• Thomson Reuters Point Carbon has developed its own emissions forecast for South Korea
• Separate models for the power and industry sector
• Power: • Power: Historic data: Historic data: Historic data: Historic data: the Korean Electric Power
Information Center and the GHG Research Institute of Korea
Forecast: Forecast: Forecast: Forecast: 6th Supply and Demand Plan
• Industry: Historic data: Historic data: Historic data: Historic data: Target Management
System, relevant associationsForecast: Forecast: Forecast: Forecast: Modified Australian MACC
Power sector generation by fuel
BAU Power generation, percent share by fuel
Power sector BAU annual emissions
• Insufficient capacity through 2020 (especially 2016-2018)
Sector Sector Sector Sector 2015201520152015 2016201620162016 2017201720172017 2018201820182018 2019201920192019 2020202020202020Power Power Power Power (Mt)(Mt)(Mt)(Mt) 262262262262 269269269269 279279279279 284284284284 310310310310 315315315315
2016-2018)
• Fuel-switching opportunities at different carbon prices is 307 Mt
• However, power plants will be running at full load, thus no abatement options in the power sector
Abatement potential for power sector
Source: Thomson Reuters Point Carbon, 2013
Industry BAU Emissions 2015-2020
BAU Industry Emissions, percent share by industry
Industry sector BAU forecast
Sector (Mt)Sector (Mt)Sector (Mt)Sector (Mt) 2015201520152015 2016201620162016 2017201720172017 2018201820182018 2019201920192019 2020202020202020
SteelSteelSteelSteel 96969696 95959595 95959595 95959595 95959595 94949494
CementCementCementCement 39393939 39393939 38383838 38383838 38383838 37373737
PetrochemistryPetrochemistryPetrochemistryPetrochemistry 47474747 48484848 50505050 52525252 54545454 56565656
Oil RefiningOil RefiningOil RefiningOil Refining 29292929 30303030 31313131 32323232 33333333 34343434
Other Other Other Other 69696969 72727272 74747474 77777777 79797979 82828282
TotalTotalTotalTotal 280280280280 284284284284 288288288288 294294294294 299299299299 303303303303
Source: Thomson Reuters Point Carbon, 2013
Industry sector BAU emissions
Source: Thomson Reuters Point Carbon, 2013
The KETS market cap
Given our forecast of 618 Mt for the covered sectors, we assume an economy-wide BAU of 1030 Mt and a market cap of 433 Mt.
Emissions reductions needed vs. our emissions forecast
Reductions needed between 2015 and 2020 = 627 Mt627 Mt627 Mt627 Mt
How short is the Korean market?
• Offsets add a supply between 100 Mt – 210 Mt
• Design as it is would yield a market that would be 360 Mt short.
• With $90/ton incompliance penalty we are looking at the
aggregated cost of $32.4 billion $32.4 billion $32.4 billion $32.4 billion
But these are just theoretical assumptions
In practice this is not likely to happen, because: In practice this is not likely to happen, because: In practice this is not likely to happen, because: In practice this is not likely to happen, because:
1. Export-oriented industries would be hit particularly hard, thus could have a negative impact on the overall economy
2. The price of electricity would need skyrocket
3. This would result in an illiquid market. In fact, without sellers, it would hardly be a market
KETS KETS KETS KETS –––– what are the cost containment options?what are the cost containment options?what are the cost containment options?what are the cost containment options?
• What to do to reduce the price of carbon allowance in South Korea
Where is KETS going?
1. In the power sector, coal-build out power plan resolves energy shortage short-term, long term it significantly contributes to much higher emission levels
2. Real industry abatement potential could be 2. Real industry abatement potential could be higher or lower than the number we showed – the lack of transparency re: MACC curves is counter-productive
3. Market with no seller is illiquid. Is it really a market?
LongLongLongLong ShortShortShortShort
Metals
Cement, lime and glass
Other
How shortage works in the EU ETS
Hedging
requirementsMonetising
surplus
-500 -300 -100 100 300 500 700 900 1100
Mt 2008-2012
Source: Point Carbon CMT
Pulp and Paper
Oil and gas
Total
Power and heat
Note: excluding auctioning, NER and credit limits
surplus
Cost containment scenarios
1. “Optimistic” BAU
2. Link with another system
3. Increase offset usage or allow international offsets
4. Create a long-term emissions forecast and increase borrowing provision
5. Mix and match any of the above
Cost containment options will move the market, but will they reduce emissions?
• Without liberalizing the power market, its hard to see internal reductions happening or market moving
• Revenue recycling and investments in CCS and other technologies could help further reduce other technologies could help further reduce emissions in the industry sector
• Decarbonization of the economy costs – those costs are known. The BAU costs as well, but the costs are unknown
• Co-benefits of not depending on fuel imports are energy and economic security
Korean Abatement Assessment Project (KAAP)
Real, verifiable industrial emissions are essential for a healthy and functioning market
Without precise and true cost market compliance could end up being more expensive
Identify the most-cost effective ways to utilize Identify the most-cost effective ways to utilize innovative technologies and reduce emissions at the least cost
Why joint TR Point Carbon KAAP?
• The most experienced analytics and market The most experienced analytics and market The most experienced analytics and market The most experienced analytics and market research company in carbon and energy field. research company in carbon and energy field. research company in carbon and energy field. research company in carbon and energy field. We have been working with industries and governments all over the globe on various market design issues since 2003.
• Leading forecast experts. Leading forecast experts. Leading forecast experts. Leading forecast experts. 5 years in a row winners of the EU ETS verified emissions data estimate (this year forecasted emissions precisely to a ton)
• The most comprehensive and accurate trading The most comprehensive and accurate trading The most comprehensive and accurate trading The most comprehensive and accurate trading analytics and offset databases.analytics and offset databases.analytics and offset databases.analytics and offset databases.
THANK YOU FOR YOUR ATTENTION THANK YOU FOR YOUR ATTENTION THANK YOU FOR YOUR ATTENTION THANK YOU FOR YOUR ATTENTION
Jelena Jelena Jelena Jelena SimjanovićSimjanovićSimjanovićSimjanović
[email protected]+ 1 510 909 8107+ 1 510 909 8107+ 1 510 909 8107+ 1 510 909 8107
Modus operandi of EU ETS companies
• Different participants
• Different starting positions (long/short)
• Different trading strategies
• Public power and heat
– Combustion installations > 20MW
– Autoproducers in industry sectors
How are emissions distributed in the EU ETS?
• Industrial sectors
– Oil and gas
– Metals
– Cement, lime, glass
– Pulp and paper
– Other
– Aviation
Power and heat
– Decides on a daily basis which plants to run based on an assumption of least cost dispatching
– Forward hedging of power production to diversify risk
– On average, the sector is short allowances
Two different participant groups
– No/limited free allocation from 2013
Industry sector
– Reduction options are based on investment decisions and take time to implement
– Different approaches regarding their carbon exposure
– Overall long allowances and free allocation in phase 3
Long Short
Metals
Cement, lime and glass
Other
How is the shortage distributed?
Hedging
requirementsMonetising
surplus
-500 -300 -100 100 300 500 700 900 1100
Mt 2008-2012
Source: Point Carbon CMT
Pulp and Paper
Oil and gas
Total
Power and heat
Note: excluding auctioning, NER and credit limits
surplus
• A significant increase in auctioning levels
• The power sector will be subject to full auctioning from 2013 onwards (derogation for certain member states)
• Sectors at significant risk of carbon leakage will receive 100% of their benchmark for free
Allocation changes from 2013
Sector 2013 2020 2027
Power generation 100% 100% 100%
Derogation power generation 30% 100% 100%
Industry with low risk of carbon leakage 20% 70% 100%
Industry sectors at risk of carbon leakage
100% free allocation (up to benchmark)
?
Auctions as default allocation
Industry sectors in the EU ETS - MACC
400
500
600
700
Ad
dit
ion
al a
ba
tem
en
t 2
01
3-2
02
0 p
er
sect
or
New industry
Other sectors
Pulp&paper
Oil&Gas
Price forecast for phase 3:
average of €7.7/t
Note: this does not account for already realised abatement potential
0
100
200
300
0 5
10
15
20
25
30
35
40
45
50
55
60
65
70
75
80
85
90
95
10
0
Ad
dit
ion
al a
ba
tem
en
t 2
01
3
sect
or
EUA price in €/t)
Oil&Gas
Metals
Cement, Lime
&Glass
Source: Point Carbon modelling
Survey results: ETS impact on operators
• Who has surplus to sell?
• Has the EU ETS caused reductions?
• Importance for investment decisions
• Causing carbon leakage?
Surplus to sell?
Power
Industry
44 %
22 %25 %
30 %
35 %
40 %
45 %
50 %
Surplus to sell in phase 3?
12 %
8 %
12 %
2 %
0 %
5 %
10 %
15 %
20 %
Suplus EUAs to sell
Allocation equals
compliance needs.
Need allocation + some of the
credit limit
Allocation + full credit limit needed for
compliance.
Need allocation, full
credit limit, and to buy EUAs
Don't know/cannot
answer
EU ETS and internal abatement“To what extent has the EU ETS caused your company to reduce its emission?” Question asked to compliance entities, N=178
48% 46% 47%54%
59%50%
20%
17%16% 15%
10%9%
11% 6%
14%30% 29% 25%
24%31%
25%
20%
8% 9% 12% 9% 9%17%
30%
40%
50%
60%
70%
80%
90%
100%
48% 46% 47%54% 50%
33%
0%
10%
20%
2007 2008 2009 2010 2011 2012 2013
Don't know/cannot answer
EU ETS has not caused any emission reductions in our company
EU ETS has caused reductions to be planned but not yet started
The EU ETS did cause reductions in the early years, but has little impact today (asked in 2013)
The EU ETS has caused and continues to cause emission reductions in my company (asked in 2013)
EU ETS has already caused emission reductions in my company
Impact on investment decisions
53 % 56 % 48 %47 % 52 %
55 %49 %
8 % 6 %10 % 7 % 4 %
7 % 6 %
50 %
60 %
70 %
80 %
90 %
100 %
39 % 38 %42 %
47 % 44 %38 %
45 %
0 %
10 %
20 %
30 %
40 %
50 %
2007 2008 2009 2010 2011 2012 2013
Decisive factor Influencing calculation, but not decisive No importance
Investment decisions: Sector level
40 %
50 %
60 %
70 %
80 %
90 %
0 %
10 %
20 %
30 %
Power and
heat
Metals Oil and
Gas
Pulp and
Paper
Cement,
Lime,
Glass
Chemicals Aviation
No importance Influencing calculation, but not decisive Decisive factor
Danger of carbon leakage is limited
Will the EUETS exist post-2020?
12 %
10 %
18 %
14 %
Don’t know
2013
2012
77 %
11 %
77 %
12 %
69 %
18 %
0 % 10 % 20 % 30 % 40 % 50 % 60 % 70 % 80 % 90 %
Yes
No2012
2011
High expectations for ETS in Korea
15%
10%
15%
Will KETS start in 2015 as planned? Will KETS reduce emissions?
66%
19%
74%
10%
Yes No Don't know/cannot answer
EU – Korea link by 2030?
63 %
40 %38 %
33 %
37 %
30 %
40 %
50 %
60 %
70 %
21 %
14 %
8 %
17 %
9 %
20 %
24 %
11 %
19 %
24 %22 %
0 %
10 %
20 %
30 %
Australia California-Québec (WCI)
South Korea China (national and/or provincial)
By 2020 Between 2020 and 2030 After 2030/never Don't know/cannot answer
Conclusions
• The EU ETS has had an influence on operators in all covered sectors as the carbon price became a new component in their decision-making process
– Impact on daily operations and investment decisions
• But the low price over the recent years does not trigger • But the low price over the recent years does not trigger additional abatement
• The mechanism is widely accepted and offers flexibility for operators (e.g. compared to a carbon tax)
– Low prices during an economic recession is in line with the “inherent logic” of an ETS
Thank you for your attention!
Jelena Simjanovic
Lead analyst on emerging markets, Point Carbon
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