SUSTAINABLE MARKET SOLUTIONS FOR GLOBAL ENVIRONMENTAL PROBLEMS
EU ETSWorld Bank February 15, 2005
Andrei Marcu President
International Emissions Trading Association
SUSTAINABLE MARKET SOLUTIONS FOR GLOBAL ENVIRONMENTAL PROBLEMS
Description of EU ETS
SUSTAINABLE MARKET SOLUTIONS FOR GLOBAL ENVIRONMENTAL PROBLEMS
European ETS - Scope
Encompassing more than 25 Countries• 15 EU members states• + 10 accession countries• + possibility to link with Kyoto parties
4’000 – 10’000 installation from 4 activities• Energy activities• Production and processing of ferroues metals• Mineral industry• Production of papar, board and pulp from timber
Creation of a large, competitive, cost effective Market
SUSTAINABLE MARKET SOLUTIONS FOR GLOBAL ENVIRONMENTAL PROBLEMS
European ETS – Permits and Allowances
Permits: Site-specific Set monitoring and
reporting obligations (EU Guideline)
Set obligation to hold allowances matching emissions each calendar year
Non-transferable
Allowances: Issued by Member
States Entitlement to emit
a ton of CO2 (e) Held in the national
registry system Tradable
SUSTAINABLE MARKET SOLUTIONS FOR GLOBAL ENVIRONMENTAL PROBLEMS
European ETS - Allocation, Compliance, Linking
Allocation • Member State sets quantity, timing, percentage • Approved by EC – to comply with provisions• 2005-7: at least 95% free• post 2007: at least 90% free
Compliance • Annual• Potential for banking & borrowing • Penalty (40 € - 100 €)
Linking Directive
SUSTAINABLE MARKET SOLUTIONS FOR GLOBAL ENVIRONMENTAL PROBLEMS2005
2006
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
Issue % ‘05 allow.
Issue % ‘06 allow.
Verify ‘05 emissions
Surrender allowancesfor ’05 compliance
European ETS – Banking and borrowing
SUSTAINABLE MARKET SOLUTIONS FOR GLOBAL ENVIRONMENTAL PROBLEMS
Linking Directive
•CDM credits accepted independent of the KP
•No nukes
•No LULUCF
•Hydro – WC on Large Dams
•Review as part of the 2006 review
•Amount of CER per installation to be determine by each MS
SUSTAINABLE MARKET SOLUTIONS FOR GLOBAL ENVIRONMENTAL PROBLEMS
How can CERs and ERUs be used in the ETS?
EU ETS and Linking directive• Under the EU ETS each installation is required to
surrender a number of allowances corresponding to their verified emission volume for each calendar year
• In the event that an installation has insufficient allowances for compliance, the shortage can be covered by:
- Purchasing additional allowance from the market - Surrendering a specified number of CERs and, from
2008, ERUs from its operator’s holding account (article 21 [2] EU Registry legislation)
• Surrendering of CERs and ERUs are subject to specified preconditions
SUSTAINABLE MARKET SOLUTIONS FOR GLOBAL ENVIRONMENTAL PROBLEMS
Preconditions for surrendering CERs
Starting 2005 CERs can be used for compliance • Up to a percentage of the allocation to each
installation - specified by its Member State (additional criteria under Annex III of the Directive)
CERs are not converted into EU allowances – but entered directly into the surrendered allowance table
UNFCCC ITL required for the transfer of CERs into an EU registry (?)
SUSTAINABLE MARKET SOLUTIONS FOR GLOBAL ENVIRONMENTAL PROBLEMS
Preconditions for surrendering ERUs
Kyoto Protocol enter into force is required for establishing the Supervisory Board responsible for the approving of JI projects;
ERUs are not converted into EU allowances – but entered directly into the surrendered allowance table;
UNFCCC ITL required for the transfer of CERs into an EU registry (?)
SUSTAINABLE MARKET SOLUTIONS FOR GLOBAL ENVIRONMENTAL PROBLEMS
Comparison of NAPs versus “business-as-usual” Basis is submitted NAPsSmall shortage in Small shortage in
old EU 15 …old EU 15 …
… … plus plenty of plus plenty of “hot air” …“hot air” …
… … equals negligible equals negligible COCO22-constraint-constraint
Will Europe be CO2-constrained?
Shortfall in CO2 allowances against “business-as-usual” – mln tonnes CO2
Small shortageSubstantial
overallocation
0
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rplu
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SUSTAINABLE MARKET SOLUTIONS FOR GLOBAL ENVIRONMENTAL PROBLEMS
86
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Meeting the EU Target (I)1st Kyoto Period
-8% Target
Just In Time Average=93%
Late Implementation Average=94%
Early Implementation Average=92%
Business As Usual
Source Shell
SUSTAINABLE MARKET SOLUTIONS FOR GLOBAL ENVIRONMENTAL PROBLEMS
86
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1990
2000
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1st Kyoto Period
-8% Target
Early Implementation Average=92%
Business As Usual
Meeting the EU Target (II)
Just In Time Average=92%
Late Implementation Average=92%
Shell slidesSource EC
SUSTAINABLE MARKET SOLUTIONS FOR GLOBAL ENVIRONMENTAL PROBLEMS
Emission reduction projects take time . . .
• Major projects can take 3-4+ years due to;
• Capital allocation and approval process
• Planning approval, stakeholder engagement etc.
• Construction lead times
• Alignment with facility shutdown schedule*
• Even minor projects can take up to 4 years due to;
• Alignment with the facility shutdown schedule*
* A refinery will have a major shutdown every 3-4 years. On average, expect a lead-time of 2+ years for a minor project
SUSTAINABLE MARKET SOLUTIONS FOR GLOBAL ENVIRONMENTAL PROBLEMS
European Union
Unsolved Implementation Issues• Registries
- Transfers of project allowances in to ETS- Transferring of EUAs out (non-surrendered)
• Company Trading Authorisation- FSA (Financial Regulation)
• VAT (actually solved!)• Accounting• Contracts• Liquidity
SUSTAINABLE MARKET SOLUTIONS FOR GLOBAL ENVIRONMENTAL PROBLEMS
EU ETS – Current Issues
European Commission: • Currently making decisions on approving final set of
NAPs• Kyoto targets now very likely for 2nd Phase
Administrative• Company Trading Authorisation• Contracts – IETA, ISDA, EFET• VAT treatment of allowances –guidance emerging• Trading Authorisation – covers “Investment
activities”. In UK FSA “guidance” suggests some trade types (derivatives) may need authorisation, may be different in other MS depending on classification of allowance
• Accounting for allowances on the balance sheet (IFRIC)
SUSTAINABLE MARKET SOLUTIONS FOR GLOBAL ENVIRONMENTAL PROBLEMS
Brokers and Exchanges
• Currently over-brokered, fractured market (10 brokers!)• Point Carbon’s non-cleared exchange• Many exchanges planned: EEX, ECX, AAX, PowerNext,
Nordpool etc.• Credit enhancement of limited value to main players• In the beginning exchanges will cause a fractured
market to become more so• Allowance trading will end up split between brokers and
exchanges (as other commodity markets are)• In the end liquidity will concentrate in 4 brokers and 1
or 2 exchangesSource: Barclays Capital, IETA Annual Forum, Nov 4 2004
SUSTAINABLE MARKET SOLUTIONS FOR GLOBAL ENVIRONMENTAL PROBLEMS
EU ETS – The Market
Market characterised by forward trades of 10,000 – 25,000 allowances (larger trades reported)
• Traded contracts for 1 Dec 05, 1 Dec 06 and 1 Dec 07 Delivery• Credit and contract major issues with forward trades• Current EUA prices ONLY for large companies with contracts
agreed and credit approved – difficulties for small Reasonable activity in trades of EU allowances.
• Over 9 million allowances have traded for all delivery years• Over 70% for 2005 Delivery• Recent Price range €7.70-8.00 per allowance.
Market liquidity growing • Early market susceptible to sudden price changes• Market stabilised over the last month as depth has
increased• Development of spot market (end Feb 05 when
allowances allocated) will ease credit and contract issues
SUSTAINABLE MARKET SOLUTIONS FOR GLOBAL ENVIRONMENTAL PROBLEMS
Reported EU Allowance Price – UPDATE THIS
SUSTAINABLE MARKET SOLUTIONS FOR GLOBAL ENVIRONMENTAL PROBLEMS
Why have prices fallen in 2005?
Many reasons suggested• Mild winter in Europe• Scandanavian rain filling hydro reservoirs• Increase of 19.8 MtCO2 in UK allocation• Move from trading on politics to
fundamentals• Market Makers playing an increasing role
But note• Market still thin and concentrated in UK,
Germany, Netherlands
SUSTAINABLE MARKET SOLUTIONS FOR GLOBAL ENVIRONMENTAL PROBLEMS
Current Prices (Correct at 7 Jan 05) UPDATE??
Commodity Type Vintage YearPrice range (Offer) per
tonne CO2e
Kyoto Compliance Tools
CDM - CERs 2000 - 2012 EUR 4.50 - 6.50
JI - ERUs 2008 - 2012 EUR 4.00 - 6.00
Commodity Type Vintage Year Bid / Offer per allowance
National Compliance Tools
UK allowances - Bid / Offer 2004 GBP 3.50 / 3.80
EU allowances - Bid / Offer 2005 Delivery EUR 7.60 / 7.80
EU allowances - Bid / Offer 2006 Delivery EUR 7.60 / 8.10
EU allowances - Bid / Offer 2007 Delivery EUR 7.70 / 8.20
SUSTAINABLE MARKET SOLUTIONS FOR GLOBAL ENVIRONMENTAL PROBLEMS
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Highest
Lowest
Average
Median
Highest 15 15 20
Lowest 3 4 5
Average 7 9 12
Median 7 8 12
2005 2007 2010
What will be the price of a AAU/EU Allowance (€)
SUSTAINABLE MARKET SOLUTIONS FOR GLOBAL ENVIRONMENTAL PROBLEMS
0
50
100
150
200
Highest
Lowest
Average
Median
Highest 100 100 180 20 100
Lowest 1 1 1 5 2
Average 14 15 19 12 17
Median 11 13 10 12 14
2001 2002 20032004 (May)
2004 (Nov)
What will be the price of a AAU/EU Allowance in in 2010 (€) – views since 2001
SUSTAINABLE MARKET SOLUTIONS FOR GLOBAL ENVIRONMENTAL PROBLEMS
International Emissions Trading Association
www.ieta.org
Andrei Marcu – President
For more information