Signing up to the UK Emissions Trading Scheme

1
Signing up to the UK Emissions Trading Scheme

• Why, What and How?

2
The UK Emissions Trading Scheme

• The UK Emissions Trading Scheme (ETS) is designed
  to
• Demonstrate that trading is a cost effective way
  of meeting emissions targets without damaging
  competitiveness
• Deliver real environmental benefit
• Gain international experience and credibility
• Provide a voluntary and open route into trading
• Work alongside other government policies and
  measures

3
The UK Emissions Trading Scheme

• Is a pilot, voluntary, scheme for 5 years
• Covers all the greenhouse gases
• Is open to all, except transport and the power
  sector
• Sets emissions targets in tonnes of carbon
  dioxide equivalent
• Participants receive allowances for their target
  amounts
• Allows buying and selling of allowances
• Provides a financial incentive to join the scheme

4
The ETS and CCL

• CCL payments are not affected by the ETS
• Firms within CCL Agreements can use trading to
  provide flexibility in meeting their targets
• They can acquire allowances when they beat their
  targets and can buy at any time
• Rules for trading are adjusted for energy
  efficiency targets
• CCL Agreement members can apply for the incentive
  on emissions not covered by agreements

5
Why Volunteer?

• If
• Benefits exceed Costs
• Then you have a business case

6
Benefits

• Potential to sell allowances
• The 215m ETS incentive
• Support environmental reputation
• Demonstrate pro-active approach
• Driver to increase efficiency and reduce energy
  costs (including CCL)
• Learn from early participation
• Credit for early action
• Ability to take part in international markets

7
The Costs

• Cost of reducing emissions
• Administrative and verification costs
• If miss targets
• Buy allowances or
• Repay incentive money
• Loss of reputation

8
What is the Scheme?How does it work?

• It is a cap and trade scheme

9
What is a cap?

• Caps are emissions targets
• Targets based on 3 year average to 2000
• Groups will be expected to take caps on whole
  sector basis not just selectively
• Absolute cap can be changed only if companys
  structure changes significantly

10
Trading Allowances Cap and Trade
Emissions limit after trading (60tCO2)
10
Units bought
Emissions limit before trading (50tCO2)
-10
Units sold
Carbon dioxide/ GHG emissions
Emissions limit after trading (40tCO2)
50
50
Company 1
Company 2
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And how the scheme works
Market
Allowances
Core Participants Absolute Emissions
Cap Negotiated Agreements Grandfathering
Verification
Reporting
Emissions Trading Authority
12
The Incentive

• Is worth 215m gross over 5 years
• Reverse auction of emissions reductions, the
  price starting no higher than 100/tCO2e
• First target period 2002 (starting April)
• First payment after reconciliation April 2003
• Maximum take of 10 of fund

13
Descending Clock Auction
14
Incentive Design
ETS Start
Emissions
Baseline
Incentive Payment
Target
2006
2002
15
Incentive Design
ETS Start
Emissions
Baseline
Incentive Payment
Target
2006
2002
16
Incentive Design
ETS Start
Emissions
Baseline
Incentive Payment
Target
2006
2002
17
Incentive Design
ETS Start
Emissions
Baseline
Incentive Payment
Target
2006
2002
18
Incentive Design
ETS Start
Emissions
Baseline
Incentive Payment
Target
2006
2002
19
Incentive Design
ETS Start
Emissions
Baseline
Target
Actual Emissions
Allowances to sell
2002
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Incentive Design
ETS Start
Emissions
Baseline
Actual Emissions
Target
Allowances to buy
2002
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A Simple Bidding Strategy

• Work out the level of incentive you will wish to
  obtain for a given level of emissions reduction
• Stay in the auction whilst incentive to be
  received is greater than this level
• View the market only as an insurance mechanism
• Trade if costs are different from the market price

22
Compliance

• Incentive only paid once reconciliation of given
  year complete
• Withdrawal from scheme triggers repayment with
  interest
• Non-compliance toughens the target next year
• Eventually to be statutory

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Other Benefits

• Incentive to discover new methods and practices
• Enhances company reputation across the board
• Supports a flexible approach in a
  carbon-constrained world
• Preparation for a possible mandatory emissions
  trading scheme

24
Other Participants

• CCL Agreement Companies with energy efficiency
  unit targets
• Others with projects, including electricity
  companies
• Traders and Brokers
• NGOs and carbon trusts

25
Participants issued with Allowances

• CCL Agreement members with energy efficiency
  targets can trade subject to some restrictions
• Their sales into the full market can only take
  place if balancing trades have taken place the
  gateway
• Carbon saving projects can apply for allowances
  for credible emissions reductions
• Electricity companies may also apply for projects

26
Participants not issued with Allowances

• Anyone can buy and sell
• Traders and brokers are already making markets
• Green organisations may want to buy

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Outline of Proposed Scheme
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Prospects for success

• Certainties
• 8000 sites with Negotiated Agreement targets
• Many companies believe that this is the way
  forward
• The UK scheme will influence international
  developments
• Risks
• Insufficient volunteers for core cap and trade
  market
• Low liquidity

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Conclusions

• Signing up to the ETS is an important decision
• Signing up can be financially beneficial
• Signing up can have significant non-financial
  benefits
• Making the ETS a success helps reduce future risk
  of stringent regulation
• You need to make an immediate decision to receive
  a share of the government money

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Next Steps

• Go to the How To section
• A range of material to help you prepare a bid is
  included
• Contact the ETG 020 7245 8035
• ETGSecretariat_at_bciplc.com
• Contact DEFRA 020 7944 5933
• ets_at_defra.gsi.gov.uk