Norwegian emissions trading proposal 2005-2007 and onwards

1. Norwegian emissions trading proposal 2005-2007 and onwards Peer Stiansen Norwegian Ministry of Environment

3. Emissions distributed by sectors in 1999

4. Norway’s challenge: emissions/industry/energy profile • No emissions from electricity (EU: >30 %) • 20 % of emissions from offshore (EU countries : =< 2 %) • 30 % of emissions from heavy industries (EUcountries:<5) • High proportion small/medium sized enterprises/entities • Conclusion: a trading scheme based on EU averages does not necessarily fit Norway well • EU relevance of trading directive ? • if so, adjustments for Norway ?

5. Level of ambition and allocation • - 20 % compared to same sources in 1990 • adjustment for closure and increased production capacity/new entries • Grandfathering: • Established entities: based on historical data • New entities: based on norms • Restrictions on sale of a portion of the quotas • Industry invited to a dialogue on details of the system, given level of ambition and EEA regulations

6. Considerations • White paper focus: Reduce emissions domestically prior to 2008 • realize presumed cheapest measures • need stronger incentives in some sectors • wider coverage could have reduced incentives since prices are likely to be below present tax • revenue • ”Clean” allocation system (grandfathering or auction) could be easiest vis a vis EEA (EU) state aid regulations

7. Compliance system • Penalty (fine - level to be decided): • level will depend on with how many and which countries Norway cooperates • Response regarding violation of requirements to • report emissions • use appropriate methodology • Facilitative functions

8. Effects 2005-2007 • SFT: Potential for 1,6 Mt cheap reductions (3 % of Norwegian emissions) • If price = 100 NOK and emissions stable: Industry’s cost is about 160 mill NOK/year • Macroeconomic effects: Marginal • Employment: Don’t expect significant effects • New entries and closures: Nothing particular • Early experience with trading and Kyoto mechanisms - establish trading institutions

9. Safety valves • Opening for Kyoto’s AAUs and CERs • Possible cooperation with other countries and EU (require negotiations and political will to adjust the system if needed) • Limited joint implementation domestically • Penalty (balance cost and environmental ambition) • Taylor made allocation

10. System linked to the Kyoto Protocol from 2008 • Compatible with the Protocol, target and registry • Broad coverage – >80 % of sources • Full use of Kyoto mechanisms • Allocation not finally decided – could be auction for some and grandfathering for others • Strong penalty

11. Coverage 2005-2007 • Activities not subject to the CO2 tax: • metal production (light metals and ferro alloys) • fertilizers • petrochemical industry, methanol • refineries • production of carbides • cement, leca and limestone • [gas-fired power plants – the Storting: as in EEA ] Fisheries and other activities exempted or getting the CO2 tax refunded will be consided in the legal proposal

12. Some implications for the affected industries • Report emissions for the previous year • Surrender quotas for the previous year • Open account in the domestic registry • Subject to grandfathering • Need to purchase quotas if allocated ”too few” - can sell if allocated more than needed • Subject to penalty (a fine) in case of not surrendering a sufficient amount of quotas, other responses for other violations of the system (reporting, use of methodologies)

13. Further process • Consideration by the Storting (Parliament) – discussion scheduled 18 June • Legal framework, including detailed regulations, needs to be in place well before 2005. • Legal proposal to the Storting - timing to be decided. Relevant aspects: • Comments/requirements from the Storting • Progress with the EU directive

14. Registry • Legal entities mandated to participate need account • Others may open account and trade • Compatability with the Kyoto Protocol for ”Kyoto quotas” • Compatible with registries in cooperating countries

15. Registry, continued • Responsible: SFT, Nat’l Securities Depositary or other ? Legal foundation ? • Develop or buy from other country ? • Funding: Fees for opening accounts and transfers? • Safety issues ? Observation: The trading simulations carried out so far required simple registries. UK, DK and US have registries for emissions trading. Marketable ?

16. Commitment Period Reserve Problem: If all AAUs are allocated to industry, it could choose to transfer them temporarily abroad for tax or other reasons. Possibilities: • Restrict transfers until enough quotas are surrendered to the government. (Annual surrender delivers the whole CPR by 2010-2011 due to underlying growth.): • A-quotas: transferable between companies and across borders • B-quotas: transferable domestically • Restrictions on sales of some grandfathered quotas keep these in nat’l registry (half of process industry emissions = 15% of domestic). • Slow allocation – AAUs stay in state account until they are allocated • AAUs to cover non-trading sectors (agriculture etc.) 20 % stay in state account