Climate change Oil economy

1. THE KYOTO PROTOCOL, FLEXIBLE MECHANISMS AND ECONOMIC ASPECTSIñaki Gili JaureguiBarcelona, 24 May 2005

2. Climate change Oil economy Why the Kyoto protocol?

3. Why the Kyoto protocol? • Climate change is the greenhouse effect • Climate change is not the weather • Climate change has consequences • CO2 is not pollutant • CO2 is used as an equivalent measure (to add up different units) … oil, gas, coal

4. The Kyoto protocol, what will happen? • New types of environmental markets? • The environmentalisation of the economy?

5. The Climate change, Kyoto and the coming world From the Kyoto Protocol and the fight against climate change ....... .... to the Kyoto Protocol promoting a change of climate

6. Experience in the US since 1990 Reduction targets of 10M tons of SO2 to below the 1980 levels Great success: the environmental goals have been met Costs have been reduced by more than 50% Background

7. ... and the economy grew

8. The Kyoto Protocol • The countries agree to reduce their GEG emissions by 5.2% globally with regard to 1990 • Allows the parties to transfer and buy emission rights and carbon credits • Russia ratifies the Protocol in 2004 • A strong bid to change the world energy model

9. How to achieve the Kyoto Protocol commitments? (COP3 1997) • Policies • Flexible mechanisms: • Clean Development Mechanism • Joint Implementation • - Emission trading • Carbon sinks

10. How to achieve the Kyoto Protocol commitments? POLICIES • Energy efficiency of industries • Protection and improvement of sinks • Sustainable forestry management practices • Increased use of renewable energies and carbon sequestration technologies • Measures to limit and/or reduce GEG emissions in transport, waste and energy distribution sectors • Progressive reduction of market deficiencies, such as tax incentives, deductions of fees and subsidies contrary to the objectives of the Convention

11. How to achieve the Kyoto Protocol commitments? MECHANISMS • ENCOURAGE compliance from developed countries with emission reduction commitments at the LOWEST POSSIBLE COST • SUPPORT the sustainable development of developing countries, in transition towards market economies

12. How to achieve the Kyoto Protocol commitments? SINKS • GEGs can be removed at a relatively low cost by forest arrangement actions • Fulfilling commitments entitles to accountable RMU (removal units) • Assessment of absorptions and emissions is difficult • Requires developing new inventory methods • One of the most controversial aspects, with an uncertain development

13. Flexible Mechanisms Joint Implementation • Obtaining of Emission Reduction Units or (ERUs) by investing in Projects in countries included in Annex I (item 6). Clean Development Mechanism • Obtaining of Certified Emission Reductions (CERs)by investing in Projects in developping countries (not in Annex I) (item 12). International Trade of Emissions • Compliance of emission limitation commitments by trading of Assigned Amounts or AAUs (item 17).

14. Flexible Mechanisms Joint Implementation Direct: A country or company invests directly in a JI/CDM project. Indirect: A country or company invests in a financial fund that selects adequate projects in which to invest. Clean Development Mechanism International Trade of Emissions Internal reductions and AAU trading

15. Carbon equivalent units N2O CH4 CO2 PFCs SF6 HFCs

16. Joint Implemenation • Project for Annex I countries reducing or absorbing GEG emissions • Reductions or absorptions must be in addition to the initial situation • Agreement of all the parties concerned is required • Generates ERUs (Emmission Reduction Units) accountable for achieving the goal of the investing party in the project • Expected in countries with transitional economies, as the emission reduction margin has a lower cost

17. Clean Development Mechanism Mecanisme de Desenvolupament Net • Public or private organisations invest in developing countries (not in Annex I) to reduce GEG emissions • Reductions are additionally to the initial situation • They generate CERs (Certified Emissions Reductions) • Promotes invesments and reasonable technology transfer to developing countries • Requires approval from all the parties concerned, in a long and still uncertain procedure

18. International Trade of Emissions

19. Market operation Price per tonne foreseen:?? € Emission level Deficit Surplus Present limit Future limit Emitter 1 Emitter 2

20. The total limit is established It is divided and assigned Monitoring is carried out and ownerships are recorded Non-compliances are sanctioned How a market is designed

21. Financial efficiency Protection of environmental value Clear definition of emission rights – the role of verification Allowing intertemporal banking or trading In order for the market to function

22. Implications and queries • Negotiable financial asset? With an expiry date? • Taxes? • Accountancy? • Offered freely by the State? • Can it be pledged? • Etc.

23. Register of rights • Creating emission rights • Obligation to submit emission rights equivalent to the total emissions of the installation, for each calender year • Inscribed in the register by recording in account • Purpose of registration: transfer, cancellation, conversion

24. National Assignment Plan (NAP) • Criteria stipulated in the Directive • Developed by the Commission • 95% Free assignment - 2005-2008 • 90% Free assignment - 2008-2012

25. Penalties • 40 Euros /t 2005- 2008 • 100 Euros / t 2008-2012 • Does not release from the obligation of acquiring sufficient rights to comply with the limit assigned

26. GEG Gross Emissions in Europe 120 110 Index (base year = 100) 101,6 100 97,7 90 92,0 80 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 Greenhouse gas emissions Target path 2010 GHG target 2010 CO2 emissions Source: European Environmental Agency 2003

27. In the European Union, Directive 2003/87 • Largest emission rights market worldwide • 10,000 - 17,000 installations • Includes industries representing 40% of emissions • Energy activities: Power Plants / Refineries • Production and process of ferrous metals • Mineral industries: Cement / Glass / Ceramics • Paper and paper pulp • At present, in the initial stage, CO2 only

28. Evolution of oil prices (Brent barrel /$) Mecanisme de Desenvolupament Net • 15 January 2001 => 25.66 $ • 4 August 2004 => 40.99 $ • 6 April 2005 => 56.30 $

29. Reflections, on a Spanish note • Importing of 400M barrels per year • An increase of 1 € => 400M € increase in expenditure transferred abroad • Energy consumption increases twice as fast as the GNP (“Asian tiger” model) • 15% emission increase capacity, having reached 40% increase by November 2004 • According to this trend, in three years time the EU emissions per capita will be equalled, athough the latter has a larger economic development • A new house in Spain consumes 40% more energy than in France • 50% are diffuse emissions, currently the fastest growing and the most difficult to control, this is still THE BIG ISSUE TO BE RESOLVED

30. THE KYOTO PROTOCOL, FLEXIBLE MECHANISMS AND ECONOMIC ASPECTSIñaki Gili JaureguiBarcelona, 24 May 2005