Environmental (climate) dimension of the EEP V Filip Černoch černoch @,mail.muni. cz CENTER FOR ENERGY STUDIES Environmental dimension of EEP • Energy sector (extraction, transport, processing and combustion) harms the environment significantly. • Climate change (regional/global level) — measures to reduce GHG emissions. • EU ETS, GHGs outside of the EU ETS. • RES. • Energy Efficiency. • Research and development, new technologies (CCS). • Local environment protection — covered mainly by EU environmental policy. • Air, land and water pollution, noice, light pollution. • Industrial (energy) waste. • Protection of biodiversity. • Extraction of non-conventional sources of energy. CENTER FOR ENERGY STUDIES Period between 1985 - 2000 New incentives for energy on the EC level. • Weak competitiveness of European industry — first proposals to create the internal energy market. Competition and transparency instead of national monopolies and closed markets. • Climate change — tools to prevent impact of usage of energy on local and global level, (to reduce the amount of emissions produced in the EU). • Disintegration of Soviet block — proposals to manage relations between producents and consumers (EU MS) of energy. CENTER FOR ENERGY STUDIES Environmental dimension of EEP Two interlinked (but not identical) processes: • International regime of climate change mitigation (EU plays a significant role). • Interlinked but independent climate policy of the EU (part of the EU energy policy). 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. = Political consensus on the climate change as well as the contribution of human activities to this process. • Kyoto protocol. •1997, in force 2005. 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. ^ mm r J CENTER FOR ENERGY STUDIES ANNEX JJ Tabic of quantified emuiSLun limitation ur reduction tummitmenIi for the purpose of determining [he respective emission levels allucated lit [he European Community and its Memher Stales in accordance with article 4 of [he Kyoto Protocol Quantified emission reduenüü coiiuninntnc as laid dnwu ia Annex B of [lie tLyata Proiotol (perceü[age of base pear or period} European Community 92 96 Quantified ejmssloji liuiltaiiou or redutuon conuvdmttiH is agreed in iccorduict widi arrkk 4(1) ai [he tvom Pro[ocoJ (perceu[age at base pear or period) Belgium 92r5 96 Denmark 79 96 Germany 79 96 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 • Environmental awareness. • Preemptive environmental measures. • Common market. • Cross-border cooperation. • Raison d'etre. 13 Or (TEUj „...Community policy on the environment...shall be based on the precautionary principle and on the principles that preventive action should be taken, that environmental damage should as a priority be rectified as source and that the polluter should pay " CENTER FOR ENERGY STUDIES EU and climate change: carbon tax ^ Federal Government imposes a carbon tax on polluting industries in Industry adds the extra cost onto the price of their products so high pollution goods become more expensive to buy 3 A portion of the tax money collected is used to comensate low income households for the price rises Consumers prefer to buy low pollution products now because they are cheaper and household em missions decrease. 4 tow pollution products become cheaper because their prices do not include the pollution tax increase 6 industry has a rinancial 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 jobs. 8 Carbon emmlsaons fall both in homes and industry without fobs losses Adapted from ABC News • Carbon pricing explained imp: //www. abc.net. au/ne w we vent vclim at e-chai lOefearbon-pr I dng-ex#4afned.ht m 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. = in areas where emission could be easily measured, reported, and verifyied. 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 correctly by the participants in the system (MS). CENTER FOR ENERGY STUDIES Run-up to the EU ETS 11988 EC's communication „The Greenhouse Effect and the Community". 11998 EC's communication „ Climate Change -Towards an EU post-Kyoto strategy". 1 1999 EC's communication ^Preparing for Implementation of the Kyoto Protocol". 1 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 Zdroj: Massai, 2012, s. 174 CENTER FOR j ENERGY STUDIES i EU ETS: The first („Pilot") phase 2005 - 2007 1 Only C02 from power generators and energy intensive industries. * Almost all allowances for free, penalty at EUR40/tC02. * MSs responsible for cap setting. (NAPs submitted to EC for approval) - Absent historic verified emissions data, most MSs distributed allowances on the basis of estimated emissions. 1 Overestimations of emissions — with the exemption of Germany and Slovenia (4 % surplus). 1 Drop in the prices of allowances + very limited impact on emissions of GHG. 1 NAP — only Austria, Denmark, Finland, Germany, Ireland and Slovenia in time. 1 Banking not allowed, oversupply of 150 million of EUAs. 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 the price of EUAs. CENTER FOR ENERGY STUDIES EU ETS: The second phase 2008 - 2012 1 Cap lowered by 6,5% in comparison with 2005 production. 1 Iceland, Liechtenstein, and Norway joined the EU ETS. 1 Aviation added, but only for EU flights. 1 Nitrous oxide emissions from the production of nitric acid were included by several MSs. 1 The proportion of free allocation fell to around 90%, with several countries auctioning the remaining 10%. 'The penalty for non-compliance was increased to €100/tCO2. 1 Banking allowances from phase II to phase III was allowed. CENTER FOR ENERGY STUDIES EU ETS: The second phase 2008 - 2012 • 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. • Relatively stable (but low) price of allowances. • 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 Volume of C02 Allowance Trades (chtih average) 100.000 10,000 g, 1,000 100 10 EU 2005 CDM 1 i r + RGGI Voluntary markets New Zealand 2006 2007 2008 2009 2010 2011 2012 CENTER FOR ENERGY STUDIES Sources • Linklaters (2014): Capacity mechanisms. Reigniting Europe's energy markets. CENTER FOR ENERGY STUDIES