Environmental dimension of the EEP V Filip Černoch černoch @,mail.muni. cz center for energy studies Climate and environmental policies of the EU Multiple overlapping activities relevant to the EU energy policy: • International regime of climate change mitigation (EU plays a significant role). • Environmental dimension of the European energy policy: • Climate aims and tools to reduce GHG emissions — EU ETS, GHGs outside of the EU ETS, CCS. • Energy related environmental aims - RES, energy efficiency. • Environmental policy of the EU — local environmental protection. • Air, land and water pollution, noice, light pollution. • Industrial (energy) waste. • Protection of biodiversity. • Extraction of non-conventional sources of energy. &j center for energy studies Climate (GHG related) obligations of the EU relevant to energy • Kyoto Protocol - EU15 to reduce its GHG emissions by 8% compared to base year (1990) during the first commitment period 2008 - 2012. Estimates of 16,3% without LULUCE • EU supports the Doha Amendment extending the KP from 2013 to 2020. • Energy and climate package 2009 - A 20% reduction in EU greenhouse gas emissions from 1990 levels by 2020. • Roadmap for competitive low carbon economy 2011 — up to 80% reduction to 2050 compared to 1990. • 2030 Climate and energy framework — 40% by 2030 compared to 1990. center for energy studies International climate regime • Intergovernmental Panel on Climate Change — 1988. •Rio Summit on Earth — 1992 (UN Conference on Environment and Development) —> UNFCCC. • Kyoto protocol. • 1997, in force 2005. = Existence of a generally accepted consensus on the climate change as well as the contribution of human activities to this process. center for energy studies Kyoto protocol • 4 GHG (carbon dioxide, methane, nitrous oxide, sulphur haxafluoride) + hydrofluorocarbons and pefluorocarbons. •Annex I. parties (37 industrialized countries + EU15), Non-annex I. parties. • Reducing of GHG emissions by 5,2 % for the period of 2008-2012. (4,2 % after USA left). Base year 1990. • Flexible mechanisms — Emission trading, CDM, JI. • Art. 4 — burden sharing agreement of European Community. Common but differenciated responsibility. center for energy studies ANNEX JJ Tabic of quantified emuiSLun limitation ur reduction tummitmenIi for the purpose of determining [he respective emission levels alluoated lit [he European Community and its Member Slates in accordance with article 4 of [he Kyoto Protocol QuafltiNtd Mnbslüfl redüLtiün cojuunmmtnt as ladd äawa in Annex B of the tynto Prcnotol ([Mintage of base pear or period} European Community 92 96 Quannäed ejmssloji Imiltanon or redutuon coinniimttüt as agreed in iccorduicL with ankk 4(1) Ol the tvoto Protocol (perceüiage at base year or period) Belgium 92r5 96 Denmark 79 96 Germany Spain France 100% Ireland [[•■■% Italy 9VS96 Luxembourg 72 96 Netherlands '.'4 % Austria £7 96 Portugal 127 96 Finland 100* Sweden 104% United Kingdom 87rS96 center for rgy studies EU and climate change: carbon tax Federal Government imposes a carbon tax on polluting Industrie* Industry adds the extra cost onto the price or their products so high pollution good* become more expensive to buy 3 A portion of the tax money collected is used to comensate low Income household* for the price rises Consumers prefer to buy low pollution products now because they are cheaper and household em missions decrease. M *• Low pollution products become cheaper because their prices do not include the pollution tax increase 6 industry has a financial incentive to reduce carbon emmlsaons now A portion of the funds from the carbon tax are used for research to create green industries with new |ob*. A 8 Carbon emmlsaons fall both in homes and industry without fobs losses http://www.4lii Adapted from ABC News • Carbon pricing explained event vclimateKhande/cartHKfr-pfkirig-eMpfained.Mm Emission trading • EU firstly sceptical about international emission trading. • See it morally wrong — trading authorizes pollution, turning it into commodity to be bought and sold. • Questionable with regard to equity — that the richer industrialized countries can buy their way out of their obligations instead of lowering their disproportionate consumption of scarce sources. • But — change in the possition of the U.S. placed the EU in the forefront of the climate change movement. center for energy studies EU and climate change: emission trading ET: Central authority ... sets a limit ...on the amount of pollutant to be emitted ... the cap is sold/allocated ____ as permits ____companies are required to hold those permits .. .if they need to increase this volume.. .have to buy those premits or pay the fee. = the buyer is paying a charge for polution = he is motivated to invest in less-poluting technologies. center for energy studies How the system works? It creates a dynamic monetary incentive so companies can sell their allowances to other producers and make profit. This incentives are based on real needs (scarcity) of allowances and on adequate monitoring and enforcement. This system (at least in theory) offer certainity of emission reduction corresponding to the stringency of the cap. Unlike domestic schemes effective international systems are more difficult to establish. Even a well-designed system is not to work if it is not implemented correcdy by the participants in the system (MS). center for energy studies Run-up to the EU ETS 1 1988 EC's communication „The Greenhouse Effect and the Community". * 1998 EC's communication „ Climate Change - Towards an EU post-Kyoto strategy". 1 1999 EC's communication ^Preparing for Implementation of the Kyoto Protocol". * 2001 - EU ETS legal preparation launched, approved in 2003. 1 Designated the first period from 1.1.2005 to 31.12.2007, covering about 11,500 facilities in 25 MS = 45% C02 emitted in the EU. center for energy studies EU ETS: The first phase 2005 - 2007 Country Mil. EUAs Share of the overal amount of EUA (%) Number of incl. facilities The aim of Kyoto Belgium 188,8 2,9 363 -7,5 Czech Republic 292,8 4,4 435 -8 Denmark 100,5 1,5 378 -21 Estonia 56,85 0,9 43 -8 Finland 136,5 2,1 535 0 France 469,5 7,1 1 172 0 Ireland 67 1 143 +13 Italy 697,5 10,6 1 240 -6,5 Cyprus 16,98 0,3 13 - Luxembourg 10,07 0,2 19 -28 Lithuania 36,8 0,6 93 -8 Latvia 13,7 0,2 95 -8 Sourcej: Massai, 2012, s. 174 energy studies ! EU ETS: The first phase 2005 - 2007 Covers power stations and combustion installation of 20MW+, and some industries (oil refineries, coke ovens, iron and steel plants, production of cements, glass, lime, bricks, ceramics, pulp, paper, board). Problems with the decentralised system of distribution — the EU cap results from the aggregation of National Allocation Plans of each MS (also in the second phase). Nearly 100% free allocation. Overestimation of emissions — with the exemption of Germany and Slovenia (4% surplus). Drop in the prices of allowances. Very limited impact on emissions of GHG. NAP — only Austria, Denmark, Finland, Germany, Ireland and Slovenia in time. center for energy studies Igure 2: EU ETS emissions allowance prices: April 2005 - December 2009 35 30 25 S 20 ft E S 15 JAN 2006 JAN 2007 J AN 2008 JAN 2009 MP 10 Phase I (2005-2007) —Phase II (2008-2012) center for energy studies EU ETS: The first phase 2005 - 2007 Difficult calculations due to: • Proneness to cheating. • Changing level of industrial production. • Changes in energy prices. • Increasing deployment of RES (canibalism of targets). • Permit stockpiling. • Weather. • And others. Not only GHGs decrease is desirable, but also the stability of price of EUAs. center for energy studies EU ETS: The second phase 2008 - 2012 • Aviation added. • More stringent approach of EC — cuts of NAP (litigation at ECJ), but still decentralized cap-setting. Overall number of EUAs reduced by 6,5% for this period. • Only about 3% of allowances auctioned. • Relatively stable (but low) price of allowances. • Iceland, Liechtenstein and Norway part of ETS. • Pressure to change the whole system. „Nearly all 25 EU MS did not meet the 30 June 2006 deadline for the submission of the second phase NAPs (only Estonia was on time). Preinfringement letters were sent by the EC to 14 MS, namely .Austria, Belgium, Cyprus, the C^ech Republic, Denmark, Finland, Hungary, Eatvia, Malta, the Netherlands, Portugal, Slovenia, Slovakia and Sweden. " center for ■ energy studies! ■ Historic evolution of volumes and spot prices for emission allowances under EU ETS un-OS Dec-OS Jun-Q9 Dec-09 Jun-IQ Dec-10 Jun-ll Dec-ll Jun-12 Dec-12 Jun-13 Dec-13 Jjn-14 Historic/ECX exchange volume ^^EUA Dec 2014 ^^Spot (OTC history) CENTER FOR j ENERGY STUDIES i EU ETS: The second phase 2008 - 2012 • Beween 2008 - 2012 the C02 price declined from around €20 MtC02 to around €8 MtC02. • The reduction of energy demand due to the financial and economic crisis starting in 2008. • Inflow of international credits (Certified Emission Reduction CER of CDM and others). • Impact of other EU policies such as RES and energy efficiency policy • Rising prices of fuels. • The design of the EU ETS doesn't allow the adjustment of supply of EUA in reaction to the changes in demand. • Since the banking is allowed between the second and third trading period = surplus of 2-2,5 bn EUA. CENTER FOR ENERGY STUDIES EU ETS: The third phase 2013 - 2020 • Changes introduced by Energy and climate package 2009. • CCS installations, production of petrochemicals, ammonia, non-ferrous and ferrous metals, gypsum, aluminium, nitric etc. added. • International aviation — requirements for extra-EU flights operating from or to non-EU countries suspended temporarily CENTER FOR ENERGY STUDIES EU ETS: The third phase 2013 - 2020 EU-wide emission cap to replace NAPs. 2084 MtC02e in 2013, a linear reduction factor of -1,74 %/y (38,3 mil.tons) applied. Auctioning of permits as a default method. More than 40 % of EUA to be auctioned in the first year of 3rd period with progressively rising shares each year. • End of free permits to the power sector. In other sector the progresive transition to the auctioning. Common auctioning platform for the sale of permits (except Germany, UK, Poland). 300 million EUA in the New Entrants Reserve to fund innovative RES technologies and CCS. An expanded list of restrictions on the use of credits from the CDM. CENTER FOR ENERGY STUDIES EU ETS: The third phase 2013 - 2020 • Distribution of auction revenues (88% to MS, 10 to MS with low per capita income and 2% to MS that had achieved a 20% emission reduction in their Kyoto protocol base by 2005). • At least half of revenues to combat climate change. CENTER FOR ENERGY STUDIES Exceptions and derogations • Countries, producing more than 60% of their electricity from coal or poorly interconnected to European grids could provide up to half of the allowances in energy sector freely • Bulgaria, Cyprus, the Czech Republic, Estonia, Hungary, Lithuania, Poland and Romania • A risk of carbon leakage. • Process industries may get part or, if subject to carbon leakage, all of their EUA for free at the level of harmonized industry best practice practice. • Carbon leakage list to be published every 5 years (2009, 2014). CENTER FOR ENERGY STUDIES Surplus of allowances • At the end of 2nd period 900 mil. EUA. + the selling of left-over allowances in national phase 2 new entrant reserves. + early auctioning to meet sector hedging demand. + the forward selling of phase 3 allowances to generate funds for the NER300 program. • About 2 - 2,2bn of EUAs surplus. • Backloading: delaying the auctioning of emission allowances intended to be allocated in 2014-2016 until 2019-2020 (now directly to MSR). • Market Stability Reserve (from 2019) — to address the surplus of EUAs (more than 822 million of EUA in circulation) by automatically adjusting the supply of EUAs to be auctioned. CENTER FOR ■ ENERGY STUDIES! Revision for the phase 4 (2021-2030) • In 2015-2016 preparation of the revision of the EU ETS for its fourth phase (2021-2030), aiming at aligning the cap with the EU's 2030 target of at least 40% reduction. • The overal number of EUAs to decline at an annual rate of 2,2% from 2021. • Better targeted allocation of free allowances: • Update of benchmarks to reflect the technological progress • More targeted carbon leakage classification • Free allocation better aligned with production levels. • Innovation fund — support for innovative technologies • Modernisation fund — to boost energy efficiency of power sector in 10 lower income MS (free allowances still available in these countries). CENTER FOR ENERGY STUDIES EU ETS-Assesment + it works at a technical level. It is the first and the largest international scheme for trading allowances. 31 countries (EU28+Iceland, Liechtenstein, Norway). Central pillar of the EU's climate change policy. More than 11 000 installations, 45% of the EU's GHG emissions. +It has a modest (but limited) effect on carbon emissions. Emission stayed within the cap. +It generates some revenue to promote climate change objectives. CENTER FOR ENERGY STUDIES EU ETS-Assesment - Low prices of EUA - Tensions with other instruments. - Perception of competitiveness problems. - Lack of credibility. = high price is necessary for profitability of low carbon technologies (CCS, nuclear, renewables) CENTER FOR ENERGY STUDIES -> time 2020 2030 CENTER FOR ENERGY STUDIES CAPEX, USA, USD 2014 Source: Global CCS Institute analysis CENTER FOR ENERGY STUDIES LCOE, USA, USD 2014 CENTER FOR ENERGY STUDIES CCS instalations 2014 CCS (MSTlTUT f a 0 1 £ 16 14 12 10 8 6 A 2 0 Identify Evaluate Define Execute Operate Total United States 0 4 5 3 7 19 1M China 6 2 4 0 0 12 ■1 Europe 0 2 4 0 2 8 IH Canada 0 1 1 3 2 7 IH Australia 0 2 0 1 0 3 Middle East 0 0 0 2 0 2 Other Asia 0 2 0 0 0 2 South America 0 0 0 0 1 1 I^H Afhca 0 0 1 1 Total 6 13 14 9 13 55 CENTER FOR ENERGY STUDIES Existing and Emerging Emissions Trading Systems WASHINGTON CALIFORNIA Offsetting —♦ COM and Jl credits —♦ Bilateral offsets r\ Domestic offsets Linking ♦ • Planned bnk Link EUROPEAN UNION KAZAKHSTAN n REPUBLIC OF KOREA n SWITZER LAND Status of implementation ) Implemented (in force with established rules) ) Implementation scheduled (mandate agreed, start date communicated, rules m preparation) ) Under consideration"" (government gave pubic Signal towards the development of an ETS) ) National ^ Sub-national or regional NEW ZEALAND CENTER FOR ENERGY STUDIES Climate and environmental policies of the EU Multiple overlapping activities relevant to the EU energy policy: • International regime of climate change mitigation (EU plays a significant role). • Environmental dimension of the European energy policy: • Climate aims and tools to reduce GHG emissions — EU ETS, GHGs outside of the EU ETS, CCS. • Energy related environmental aims - RES, energy efficiency. • Environmental policy of the EU — local environmental protection. • Air, land and water pollution, noice, light pollution. • Industrial (energy) waste. • Protection of biodiversity. • Extraction of non-conventional sources of energy. &J CENTER FOR ENERGY STUDIES A shared effort between sectors and MS GHG Target: -20% comparedto 1990 n=i | -14% comparedto 2005 EU ETS ■21% compared to 2005 ESD sectors -10% comparedto 2005 28 Member State targets, ranging from -2Q:o to +20:o | l_ _1 CENTER FOR ENERGY STUDIES Non-EU ETS emissions •20% target is divided between a) a 21% target compared to 2005 for EU ETS emissions and b) a 10% target compared to 2005 for the non-ETS emissions. • The later goal is split into national sub-targets. • Traffic management, low-GHG transport, biofuels, urban planning, improved energy performance standards for public building, labeling system, eco design... • To support it some measures at the EU level — emission standards for vehicles, fuel quality directive... CENTER FOR ENERGY STUDIES Latest development in emission targets • In Oct 2014, a binding target of 40% by 2030 compared to 1990. (Part of the 2030 Climate and energy framework - plus 27% for RES; plus 27% improvement in energy efficiency). • EU ETS to cut emissions by 43% (compared to 2005) • Non EU ETS sector to cut emissions by 30 (compared to 2005). National targets range from 0% - 40%. CENTER FOR ENERGY STUDIES Sources Linklaters (2014): Capacity mechanisms. Reigniting Europe's energy markets. ICAP (2017): EU Emission Trading SystemlEA (2014): Energy Policies of IEA Countries — The European Union. Talberg, A.-Swoboda, K.: Emissions trading schemes around the world, 2013. Buchan, D.(2009): Energy and Climate Change: Europe at the Cross Roads. Buchan, D.-Keay, M.(2015): Europe's Long Energy Journey: Towards an Energy Union? EC (2015): The EU Emission Trading System (EU ETS) World Bank: Networked Carbon Markets CENTER FOR ENERGY STUDIES