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International Emissions Schemes Update

International Emissions Schemes Update. Rachel Blackburn Head of Climate Change and Emissions Markets 28 May 2013. Overview. EU Emissions Trading Scheme Update h istoric e volution the full picture current obstacles recent developments North America Emissions Trading Schemes Update

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International Emissions Schemes Update

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  1. International Emissions Schemes Update Rachel Blackburn Head of Climate Change and Emissions Markets 28 May 2013

  2. Overview • EU Emissions Trading Scheme Update • historic evolution • the full picture • current obstacles • recent developments • North America Emissions Trading Schemes Update • regional schemes – linking progress? • Canada update • US – state schemes • US – California’s CARB as a trendsetter • US – California ETS recent developments • US – California ETS challenges

  3. EU ETS– historic evolution PHASE I 2005 – 2007 • Pilot Phase • Free allocation of all allowances • National Action Plans (NAP) - cap per member state on basis of estimates • In 2005: 321 million EUAs traded, with a value of US$7.9 billion • Allocation greatly exceeded demand and in 2007 the price of EUAs fell to a value of zero PHASE II 2008 – 2012 • Coincided with commitment under Kyoto Protocol over the same period • At least 90% of EUAs allocated for free • March 2010: sale of used CER by Hungarian government outside of EU ETS. Used CER re-entered EU ETS – led to partial suspension of trading • January 2011: theft of over 2 million EUAs led to suspension of trading in national registries • In 2011 there was a 19% increase in volume of carbon traded from 2010 • Aviation allowances introduced in 2012

  4. EU ETS – historic evolution PHASE III 2013 – 2020 • Single, Europe-wide cap with centralised registry • 2020: emissions to be down at least 21% from 2005 levels • More than 40% of EUAs issued in 2013 to be auctioned and this percentage to increase year on year • Covers 45% of total emissions from the 27 EU countries • Aviation included, but transport, domestic emissions, agriculture still outside scope • Opt-out for small emitters and hospitals in UK

  5. EU ETS – the full picture Why should effectiveness be a key driver in determining future developments of the EU ETS? • soaring energy costs to a struggling EU • climate change crisis – EU ETS as an answer • risk of loss of profits to companies • EU ETS used as a global model

  6. EU ETS – the full picture Contribution to emissions abatement: • Over the past 8 years academic studies (top down, and bottom up) show abatement attributable to the EU ETS was around 2-4% of the capped emissions – which is higher than the impact of individual energy policies. However, scarcity of data after the financial crisis in 2008 makes it very difficult to fully measure abatement to-date. • Developing new methods of data collection is essential to measuring effectiveness. Incentivising the development of low-carbon technology: • Data is scarce and long-term impact uncertain at this time. • Evidence from surveys shows impact has been more on bringing discussions around emissions into the boardrooms, and not directly influencing clean-tech investments. Impact on profits and product prices: • There is evidence to show sectors are passing through costs of carbon to end users, and that there has been a windfall effect – the ‘Carbon Fat Cats’ - in the iron, steel and cement as a result of free allocations and current methods to address carbon leakage.

  7. EU-ETS – current challenges Carbon price Recession Carbon leakage Price abuse and fraud Political challenges Data collection Linking

  8. EU ETS – recent developments • Carbon credit pricing (credit surplus) • Aviation – EU backs-down • Security – EUAs regulated as financial instruments • Linking activities

  9. EU ETS – recent developments

  10. EU ETS – recent developments • Carbon prices hit a record low just last month, following the vote by the European Parliament to reject the back-loading plan. • EU carbon permits plunged 43% to €2.63 ($3.44) a metric ton before recovering slightly to €2.93 ($3.83) by 1049 GMT, Reuters reports. The news agency says German power prices fell 3% to €39.60 ($51.77) per MWh. • For the time being the price of EUAs is still positive - mostly due to the market’s expectation that the Commission will take steps in the future to re-establish scarcity.

  11. EU ETS – recent developments Carbon Leakage – core assumptions in question… • Carbon leakage is a phenomenon that occurs when the decrease of GHG emissions in one country (due to climate change policies) results in increase in the another country that lacks such laws. The result is that certain sectors suffer a material disadvantage to their competitors located in other regions without strict climate change laws. • Studies have shown that the analysis that was done in 2009 to assess what sectors needed the allocation of free EUAs to avoid carbon leakage uses core assumptions that are now outdated. • Carbon prices are much lower than the forecast, benchmarks are less stringent then had been anticipated, and the scope of coverage widened. • Potential solutions: The Carbon Market Report (EC 2012) provided 6 options for restructuring, none of which have been well received. Back-loading was the least opposed option, but was still not able to pass through Parliament.

  12. EU ETS – recent developments Carbon surplus crisis – different perspectives On the dark side… • The Mid-Term Review falls during an election year and a new Commission won’t be in place, which will result in very little action taken until 2015 • Without back-loading, the market could collapse and will fluctuate on political speculation alone • There is substantial political support for doing nothing and waiting for the ‘market correct itself’, which avoids dealing with structural inaccuracies in the long-term On the bright side… • The Mid-Term Review in 2014 offers a chance to correct the carbon leakage analysis to better reflect the current market, which would help remedy the surplus • Back-loading was a temporary fix and only bought time for further delays in long-term reform • The EU is committed to finding a permanent structural reform and less concerned with temporary fixes

  13. EU ETS – recent developments Aviation: EU backs-down • ‘Stop the Clock’ – EU has allowed a one year suspension from inclusion in the EU ETS for non- EU aircraft operators using EU airports. No changes were made to the regulation of internal EU flights. • Low-fare airlines in EU threatening to sue the Commission over unfair impact resulting from the suspension of the regulations for non-EU operators only. • The MBMs were narrowed down to four options including an emissions trading (cap and trade) scheme. • Aviation emissions reduction is scheduled to be given top priority at ICAO’s next General Assembly in October 2013. • US airline lobby, Airlines for America, may stall any efforts by ICAO to reach agreement on a global emissions trading scheme, should it succeed in encouraging the US Government to bring a challenge against the EU ETS under ICAO’s Article 84.

  14. EU ETS – recent developments Linking activities • California puts its focus on Quebec as first-resort linking partner – switching directions from the 2011 talks with the EU • EU pushing to have new market mechanisms implemented in developing countries – these mechanisms would cover whole economic sectors, not only projects (as the CDM does) • the Commission and Australia announced agreement in August 2012 on a pathway for linking the EU ETS and the Australian ETS. A full two-way link between the two cap-and-trade systems will start no later than 1 July 2018 • Switzerland is expected to link to the EU ETS in 2014

  15. EU ETS – recent developments Security – EUAs regulated as financial instruments • Key proposal: EUAs to become financial instruments under Markets in Financial Instruments Directive (MiFID) – MiFID regulates trade in financial instruments such as transferable securities and derivatives. • Bulk of carbon trading already falls under MiFID (bidding at auction as well as trade in EUA derivatives). Key impact will be on spot trades. • Proposals yet to be finalised: • Parliament to consider proposals in plenary session - October 2013 • No timetable for agreement on Council’s version of proposals – still key issues to be resolved • Once the Council and Parliament have agreed respective proposals, discussions with the Commission can commence

  16. EU ETS – recent developments Security – EUAs regulated as financial instruments Impact: • Trading venues specialising in EUA spot trades will need appropriate MiFID authorisation (as regulated market, multilateral trading facility or organised trading facility) • Intermediaries providing spot trading services would need to hold a MiFID licence • Installations that use EUAs do not need to be authorised – subject to any trading activity remaining ancillary to their main business – but will need to abide by market abuse rules under Market Abuse Directive (MAD) • Proposals for review of MAD include several carbon-specific elements, including complete coverage of the auctioning market • Parliament to consider in plenary sessions in July and October 2013 • MiFID compliance in the UK is under the FCA

  17. North America Update • North America Emissions Trading Schemes Update • regional schemes • Canada update • US – state schemes • US – California’s CARB as a trendsetter • California ETS recent developments • California ETS challenges

  18. North America – regional schemes • The Western Climate Initiative (WCI), a cooperative initiative to design a regional emissions trading scheme, began in 2007 among US states and Canadian provinces. • Linking - The Canadian provinces of British Columbia and Ontario alongside California and Quebec, have established a non-profit organization, WCI Inc., that will help administer the regionally linked programme. • The initial Board of Directors of WCI, Inc. includes officials from California and the provinces of Quebec and British Columbia, the three jurisdictions planning to require compliance with cap-and-trade regulations by 2013. • The 2050 Initiative is made of 20 states/provinces from Canada and the US, the group has a number of very active working groups that help the governments in aspects of the energy, climate, and economic challenges that they face. • 22 March 2013 - the California Air Resources Board (CARB) released an amended regulation to the cap-and-trade regulation that will authorise ‘linking’ with other jurisdictions – starting with Quebec in 2014. The release signals that the Governor should shortly issue the authorising ARB to officially link with Quebec. Regulations in Quebec are already in place.

  19. Canada Update • The Canadian province of Quebec is the first jurisdiction to implement emissions trading, which commenced on 1 January 2013. • The Canadian provinces of British Columbia and Ontario have passed legislation to establish emissions trading in line with the WCI, but are lagging behind other jurisdictions in implementing any further steps to do so. • The governments of Canada and Quebec are having conversations with other cap-and-trade jurisdictions around the world as they are developing similar climate regulations. Among these: the EU, China, Australia and Japan.

  20. US – regional state scheme Aim: These states have capped emissions from their electricity sectors and aim to reduce emissions from fossil fuel energy generation by 10 per cent of 2009 levels by 2018. Developments: RGGI has suffered with the same issues with over allocation as the EU ETS, and has seen prices steadily below $2 a ton for most of the past 3 years. Recently, it took steps to lower the annual cap and hold back excess allowances from the past years, which has nudged prices above $3.35, and may have fixed the problem through 2020. The Regional Greenhouse Gas Initiative has been in place since 2009 and covers the electricity generation sectors in 9 US states: • Connecticut • Delaware • Maine • Maryland • Massachusetts • New Hampshire • New York • Rhode Island • Vermont

  21. US – California’s CARB as a trendsetter? • In the mid-1990s, California became the first state to ban smoking tobacco in bars, clubs and restaurants - within a short period most other states followed. • California is known as a trendsetter for the other states and willing tackle issues the federal government will not touch – from stem cell research to minimum wage. • It has the 9th biggest economy in the world, and by linking with Quebec it will have the world’s largest ETS, surpassing the EU. • In reference to the recent GHG legislation Gov. Arnold Schwarzenegger said: "This will lead to us leading the way for other states and for other nations"

  22. US – California Overview • In 2006, California passed a law to introduce an ETS as part of a broad package of reforms designed to reduce the state’s emissions to 1990 levels by the year 2020 with a further reduction of 50 per cent by 2050. • Rules to establish California’s emissions trading scheme were finalised in 2011 and the scheme has applied since 1 January 2013. • The scheme involves setting a limit (a ‘cap’) on the total amount of emissions that can be generated. Sectors covered by the scheme can then buy and sell (or ‘trade’) emission allowances to meet the set cap.

  23. US – CARB recent developments Developments • California carbon permits sell for record high price of $14/t for the right to release carbon this year, a record-high price that narrowly beat market expectations, the state said on the 21st of May. • In 2011 Climate Action, Connie Hedegaard, met with California’s governor Jerry Brown and confirmed plans to link the EU emission trading system (EU ETS) with California’s emerging carbon market. However, the focus of California is on Quebec and in the short-term not much action has been taken to further linking activities. • Lawsuits remain a source of uncertainty – the lawsuits directed at the cap-and-trade program itself are not so much the worry as the lawsuit against the Low Carbon Fuel Standard (LCFS). A successful challenge to the LCFS would send a major bullish signal to the market as it would mean higher emissions from the transportation sector through 2020.

  24. US – California ETS recent developments Developments (con’t) • The regulatory amendment package could in practice be an implementation mechanism for the $50 price ceiling could impact long term supply, while the increase in free allocation to industrial players could limit the incentive to abate emissions within those industries, potentially putting upward pressure on prices • Prices of carbon went up slightly following the confirmation of the linkage with Quebec, but the linking will unlikely have a noticeable impact on prices until the markets are actually linked, in January 2014

  25. California ETS – Challenges Challenges • Carbon Leakage - The Supreme Court’s landmark decision in Massachusetts v. Environmental Protection Agency, 549 U.S. 497, 519 (2007) limits the options for states to enforce against other states GHG reductions measures, and states cannot enter treaties with other countries. Any efforts to expand the regional schemes will probably be met with judicial scrutiny. • Continued lobbying from a number of oil companies to change the cap-and-trade provisions for 2015 and after - this could bring sudden shifts in supply and demand outlook if the Government reacts to the concerns of the oil industry and agrees to change the way oil companies are covered in future compliance periods. • Protocols currently in the rules won’t be enough to provide sufficient supply to the market according to the American Carbon Registry, which is an issue that will only be partially dealt with in the current rule making that adds two new protocols to the program. • The Energy Institute at Haas (UC Berkley) has raised concerns over the price of carbon becoming too high and scarcity of credits.

  26. Conclusion Headlines – front page news…wasted capital: The Guardian, Friday 19 April 2013 Carbon bubble will plunge the world into another financial crisis – report Trillions of dollars at risk as stock markets inflate value of fossil fuels that may have to remain buried forever, experts warn

  27. Conclusion • This Guardian article was based on new research from Carbon Tracker and the Grantham Research Institute on Climate Change and the Environment at LSE. • It calls for regulators, governments and investors to re-evaluate energy business models against carbon budgets, to prevent $6trillion carbon bubble in the next decade. • It finds that ‘Wasted capital and stranded assets has revealed that fossil fuel reserves already far exceed the carbon budget to avoid global warming of 2°C, but in spite of this, spent $674billion last year to find and develop new potentially stranded assets’ • Conclusion – Emissions Trading Schemes are not a trend but are setting trends on a global level, which should no longer be ignored.

  28. Contact Rachel Blackburn Head of Climate Change and Emissions Markets Direct dial: +44 (0) 117 939 2225 Email: rachel.blackburn@burges-salmon.com

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