Linking domestic emissions trading schemes to the EU ETS

1
Linking domestic emissions trading schemes to the
EU ETS

• Technology Transfer and Investment Risk in
  International Emissions Trading
• Work package 4
• Brussels, 30 November 2006
• Dr. Urs Springer, Ecoplan (Switzerland)
• Dirk Forrister, Natsource (UK)

2
Overview

1. Introduction
2. Switzerland
3. Norway
4. United States
5. Japan
6. Summary and conclusions

3
Objectives and approach
1 Introduction

• Objectives
• to describe the climate policy framework in
  Switzerland, Norway, Canada, Japan, and the
  United States
• to assess the potential and problems of linking
  these schemes to the EU ETS
• Assessment criteria
• System design (trading scheme, system boundaries,
  currency, use of Kyoto mechanisms)
• Target and allocation (Kyoto target, allocation,
  transparency)
• Compliance (Monitoring, sanctions)

4
Background
2 Switzerland

• Targets and emissions
• Kyoto target -8
• Current GHG emissions about 1990 level.
  Projected gap in 2010 5
• Instruments
• CO2 tax on heating and process fuels. Rate (22
  EUR / t CO2) still to be approved by Parliament ?
  Trading scheme not yet implemented.
• Companies that conclude voluntary agreements with
  the government are excluded from CO2 tax and can
  participate in emissions trading scheme. Targets
  of voluntary agreements are the basis for the
  (free) allocation of tradable allowances for the
  period 2008-12.
• Climate cent Levy on transport fuels (1 cent /
  liter). Revenues used for mitigation projects in
  Switzerland and abroad.

5
1) System design
2 Switzerland

• Swiss refineries not covered
• Use of Kyoto mechanisms Only minor differences
• Currency AAU in Switzerland, hot air not
  allowed

6
2) Target and allocation
2 Switzerland

• Total allocation In accordance with national
  target.
• Installation-level allocation
• Cement industry Allocation 45 above current
  emissions Over-allocation!
• Energy agency umbrella agreement Ambitious
  target (11.5 below 1990)
• Other sectors No signs of over-allocation.
• ? NAP criterion regarding allocation only
  partially fulfilled (taking reduction potential
  into account).
• Allocation to new entrants (gas-fired power
  plants) not clear.
• Transparency
• Swiss voluntary agreements confidential, but will
  be published.

7
3) Compliance
2 Switzerland

• Monitoring Less strict in Switzerland
• EU Annual reports for all installations,
  independent verification
• Switzerland Annual reports by companies, first
  report in 2008 for groups. No independent
  verification.
• Sanctions Different approaches
• EU ETS 40 EUR and 100 EUR plus surrendering of
  missing allowances.
• Switzerland Repayment of CO2 tax since
  introduction plus interest. Problem EUA prices
  gt CO2 tax (EUR 22)
• Ex-post adjustment
• EU ETS Ex-post adjustments incompatible with
  legal framework.
• Switzerland Ex-post adjustments based on energy
  intensity (until 2010). ? ? Major obstacle to
  linkage.

8
Background
3 Norway

• Targets and emissions
• Kyoto target 1
• Booming petroleum industry, energy intensive
  industries.
• Current GHG emissions 9.5
• Instruments
• CO2 tax for offshore oil, domestic and transport
  sectors (23-40 EUR/t). Reduced rate for pulp
  paper industry.
• Voluntary agreement with energy intensive
  industries (target -20 vs. 1990)
• Emissions trading scheme along the lines of EU ETS

9
1) System design
3 Norway

• Overlapping coverage no problem
• Petroleum and pulp paper opted out
• Use of Kyoto mechanisms Same as EU ETS

10
2) Target and allocation
3 Norway

• Allocation
• Installation level Overall allocation factor
  90.6. ? stricter than many European countries
• Uncertainty regarding new gas-fired power plants
  (CCS required or not?).
• No guarantee for reaching Kyoto target due to
  narrow scope of Norwegian ETS (transport and
  petroleum activities not covered).
• Ex post adjustment of targets
• Initial allocation can be changed for 2006/07 if
  the conditions on which the allocation was based
  are changed significantly.
• Modifications can only result in a reduction of
  allowances, not an increase.
• Likely to be disapproved by the European
  Commission.

11
3) Compliance
3 Norway

• Monitoring
• Annual reporting of emissions required.
• Verification by independent party only in special
  cases (EU ETS mandatory).
• Sanctions
• Fine (EUR 40) and obligation to surrender missing
  allowances in the subsequent year. Same as EU
  ETS.
• EU vs. EFTA law
• Norway, Liechtenstein and Iceland have to
  implement the Directive under the rules of the
  European Free Trade Association EFTA. Norway
  accepted, but Liechtenstein and Iceland have been
  reluctant to do so. ? linkage not yet established.

12
Proposed Trading Programs Overview
4 United States

• Climate Stewardship Act (McCain/Lieberman)
• (Pending in Senate Environment Committee)
• Absolute targets cap at 2000 level by 2010-15
• Coverage 85 of national GHGs
• downstream large emitters
• upstream suppliers of transport fuels
• Tradable units
• Allowances from another nations market
• Eligible domestic offsets including sequestration
• Credit against future reductions
• Financial penalty (3x market value), but no
  payback of tons

• Climate Economy Insurance Act (Bingaman)
• (Pending in Senate Energy Committee)
• Relative targets less stringent than CSA
• Devolves absolute targets to sectors/companies
• Program-wide 2010 target 2.4 below 2009 (est)
  emissions intensity forecasted 2010 GDP
• 2011-19 2.4 below previous years intensity
  target forecasted GDP
• Coverage downstream process emissions all
  upstream sources
• Auctioning 9 in 2010, 13 in 2020
• Tradable units Allowances foreign offsets
• geologic sequestration, use of covered fuels as
  feedstocks, exports of covered fuels,
  exports/destruction of HFCs, PFCs, SF6, N20,
  eligible early reductions
• Price cap US7/ton in 2010, increasing 5/year
• Financial penalty (3x safety valve), no payback
  tons

13
Proposed Trading Programs Overview (contd)
4 United States

• North-eastern States Regional Greenhouse Gas
  Initiative (RGGI) (8/06)
• 7 North-eastern / Mid-Atlantic States, plus
  Maryland in June 2007
• Cap and trade for electricity sector
• 3-year compliance periods, extendable to 4-year
  if 10 trigger price reached (average during 1
  year)
• Certified offsets anywhere in U.S. (limit of 3.3
  of entitys emissions) LFG, afforestation,
  end-use efficiency for home heating, natural gas,
  agricultural methane capture, oil and gas
  fugitive methane reductions, reduction in SF6
  emissions
• Offset trigger if average prices equal or
  exceed
• 7 over period of 1 year, offset limit increases
  to 5
• 10 over period of 1 year, offset limit increases
  to 10, and CERs and ERUs become eligible

14
Proposed Trading Programs Obstacles to Linking
with EU ETS
4 United States

• Formal linking requires amendment of Emissions
  Trading Directive
• Possible to informally link, but EU purchases of
  US allowances endanger EU Kyoto compliance
• Gateway could be implemented, but reduces
  efficiency gains
• Price cap (Bingaman)
• Creates arbitrage opportunities, which can be
  reduced by limiting cap use to difference between
  US firms emissions and allocations
• Cap reduces economic efficiency benefits by
  segmenting market, preventing efficient trades by
  US firms, potentially distorting pricing by US
  sellers
• All 3 U.S. programs allow for types of reductions
  not eligible under EU ETS
• Allows for circumvention of EU restrictions
• Allows for greater purchases of EU-restricted
  instruments in the U.S. than under no-linking
  scenario

15
Proposed Trading Programs Obstacles to Linking
with EU ETS (contd)
4 United States

• Comparability of effort
• McCain-Lieberman, RGGI targets somewhat less
  stringent, Bingaman targets much less stringent
  than EU ETS
• Implication U.S. would become major seller to
  EU
• Leakage under RGGI
• RGGI cap could be undermined by electricity
  imports into region
• Total U.S. emissions could increase while program
  goals met

16
Background
5 Japan

• Ambitious Kyoto target (-6), given Japans low
  emissions intensity
• Significant Government purchases if no tax or
  mandatory cap and trade imposed after policy
  review in 2007
• Keidanren voluntary emission reduction targets
  are centerpiece of KP compliance plan
• Reduce industry, energy emissions below 1990
  levels by 2010
• Targets may be based on energy intensity, energy
  consumption, CO2 emissions intensity, or absolute
  CO2 emissions
• 35 industries covered
• May purchase CERs, ERUs to meet targets
• Mandatory cap and trade could be considered, but
  strongly opposed by industry, METI

17
Climate Policies
5 Japan

• Japan Voluntary Emissions Trading Scheme (JVETS)
• Small program
• 34 companies taking on voluntary targets with
  subsidies for energy conservation, switching from
  oil
• Reductions below 2003 baseline of 1.3 Mt
• Subsidies awarded based on cost-effectiveness,
  must be returned if target not met
• Can use traded allowances or CERs for compliance

18
Compatibility with EU ETS
5 Japan

• Environmental integrity
• No sanctions for non-compliance with Keidanren
  targets
• JVETS has no penalty, only withdrawal of
  subsidies
• Both programs may allow CERs from large hydro and
  sinks projects
• Could circumvent EU prohibitions
• Many Keidanren targets are not absolute, unlike
  EU ETS
• Subsidies provide advantage to JVETS firms, also
  obscure marginal costs, reduce efficiency
• JVETS is small

19
Prospects and potential of linking
6 Summary and conclusions

• Linkage between EU ETS and domestic schemes
• Norway Linkage likely and feasible. Legal issues
  to be resolved.
• Switzerland Linkage feasible, only if CO2 tax
  implemented.
• North America Great challenges of legal,
  economic and technical nature.
• Japan Linkage unlikely given voluntary targets
  and subsidies.
• Economic potential
• Significant benefits for Norway and Switzerland,
  but negligible efficiency gains for the EU.
• Japan and North America Linkage would greatly
  expand the market and provide substantial
  benefits for all parties.

20
Conclusions
6 Summary and conclusions

• Main obstacles
• Price caps Segment the market, reduce
  efficiency.
• Eligibility of tradable units Probably
  impossible to maintain in practice.
• Ex-post adjustments
• Voluntary nature of trading schemes Sanctions
  for non-compliance?
• Lessons for policy development
• ETS should not be developed independently of each
  other
• Path dependence Once an instrument (e.g. carbon
  tax) is implemented, it is likely to remain in
  place even when new instruments are introduced
• Outlook
• No global uniform carbon market in the near term
• In the long term, better prospects for linkage of
  major markets

21
www.ecoplan.ch