EU ETS Changing Trading Market Conditions

1
EU ETS Changing Trading Market Conditions

• Nordic Energy Perspectives
• Helsinki 24th of January 2006

2
Agenda

• Lessons learnt from the First Emission Trading
  Period
• EU Commission Guidelines Phase Two
• Allocation
• Small installations
• Defintion combustion intallation
• CDM/JI as compliance instruments
• New entrants and closure
• Second Emission Trading Period Price Drivers
• The Kyoto gap
• Allocation
• CDM/JI Credits
• Conclusion

3
Lessons learnt from the first trading period
EXPERIENCES
NEW DIRECTION
Stricter national CAPs second period
Low contribution of ETS sector to reach Kyoto
target
Harmonisation regarading
allocation methods, NER, closure, small
installations and def. of comb. installation
Unharmonised procedures in EU ETS member states

• Project based mechanisms
• High governmental activiy level
• Moderate use in EU ETS to comply

Governmental contribution by purchase
programmes
Limit of CDM/JI credit use in ETS to
comply
4
EU Guidelines Phase 2 Allocation

• Discussions on
• Harmonised allocation methodologies
• Regulations on auctioning and EU wide benchmarks

• Guidelines
• EU-wide benchmarking is not sufficiently matured
  as allocation method
• 10 auctioning is stressed by EU
• Caps have to be lower than caps of phase 1
• Total allocation have to be reduced by 6
• 45 is now coverd by EU ETS
• Total Gap (2003) is 296,5 Mio t
• Total allocation cut of 128 Mio t
• Total cap second trading period

2063 Mio t (2190.8)
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EU Guidelines Phase 2 Small installations

• Discussions on
• Decision to leave out small installations lt25 000
  t/a
• Simplified and cost efficient rules for small
  installations
• Guidelines
• Small Installations
• Will be further considered in the EU ETS review
• Cost saving potentials by simplifying rules
• Less transaction costs in the 2nd phase
• EU Comission consideration of combustion
  activities below f.ex 3 MW should not be counted
  for

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EU Guidelines Phase 2 Definition of combustion
installation

• Discussions on
• Definition of combustion installation
• Guidelines
• Broad definition including all combustion
  processesany installation, which includes one
  or more piece of stationary technical apparatus
  in which a combustion process takes place and
  that together on the same site and under the
  responsibility of the same operator has a rated
  thermal input exceeding 20MWth

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EU Guidelines Phase 2 CDM/JI as ETS compliance
instrument

• Discussions on
• Limits for the use of project based mechanisms
  for compliance
• Guidelines
• There is no limit in the usage of Kyoto units by
  operators set by EU Commission(as long as the
  figure is consistent with the obligations under
  the Kyoto Protocol)
• NAP II has to specify the max. amount of
  CERs/ERUs which may be used by operators to
  comply
• As a percentage of allocation of allowances
• Limit can be individually or collectively

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Closing the Gap Price Drivers in the EU ETS
2005-2007 2008-2012
General Price Driving Factors
Economic Growth
Economic Growth
Weather conditions
Weather conditions
Price Drivers within Europe
NAP 1 Allocations
NAP 2 Allocations
Relative coal/gas prices
Relative coal/gas prices
New ETS Entrants
Governmental Purchase of AAUs
Price Drivers outside Europe
CERs from CDM
CERs from CDM
ERUs from JI
Governmental Purchase of AAUs
Supply of AAUs Strategic Behaviour
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Kyoto GAP

• Kyoto Gap according to BAU emission projections
  for 2010
• Intended use of CDM and JI

Source EEA 2005
10
Allocation Phase 2
Allocation according EU Commission Guidelines
calculation
Kyoto Gap (2003)

ETS share 2003

Reduction of Cap Phase one
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CDM/JI Governmental purchase volumes
In Mio t CO2eq/a
Sweden
Austria 7
Spain 20
Belgium
1
Denmark
Finland
8,4
2
4,5
Ireland
3,7
Netherlands
20
39,6
Italy
3
Luxembourg
Total Period 545 Mio t CO2eq 2008-2012
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CDM credit availibility

• CDM Volumes until 2012 by project status in kt
  CO2 (acc. UNEP CDM Pipeline)

Total volume 2008-2012 548 Mio t
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JI credit availability
Total volume of already implemented JI projects
2008-2012 by host country in kt CO2eq
Total JI Volume 2008-2012 54,7 Mio t CO2e
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CDM/JI credits Intended Purchases 2008-2012
IET Market
DEMAND
Other trading markets
New ETS countries
Governm.purchase 550 Mio t

EU ETS
1/3
2/3
EU market (60 of total supply potential)
JI Project pipeline54.8 Mton CO2e
CDM Projectpipeline 548 Mton CO2e
New projects
SUPPLY
Source UNEP, IETA
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Changing Trading Market Conditions

• First Emission Trading Period
• No harmonised allocation methods
• No transparancy
• EU Commission Guidelines Phase Two
• Stricter demand on
• Allocation methods
• Transparancy
• MS and trading participants to show policies and
  measures to reach compliance
• If not documented satisfactory, the Commission
  will propose a proportional reduction of the MS
• Second Emission Trading Period Price Drivers
• New price drivers make credit prices uncertain

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ECON - Kontaktinformasjon
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København K DanmarkTelefon 45 33 91 40 45
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PARIS Frankrike Telefon [phone]
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paris_at_econ.no
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EU Commissions Timeline
EU Commission GuidelinesPhase II EU ETS

• Review report of EU Commission on Directive

Deadline for amendments to NAP II
Start of second ETS trading period Entry
into force of revised monitoring and
reporting guidelines

• Draft NAP II by member statesto be handed in

2006
2008
2007
31. Dec 06
1st Jan 08
June 06
July 06
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Kyoto Gap including CDM/JI purchase
Kyoto Gap (BAU emission projections for 2010)
with consideration of governmental purchase of
CDM/JI credits
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Price Influences in the 2008-2012 Period

• Demand Side
• Kyoto Gap
• Allocation 6 percent reduction what does it
  mean for countries short of allowances?
• IET market activities
• CDM/JI credit use
• Governmental level
• ETS installation level
• Supply side
• New ETS Entrants Bulgaria Romania
• Russia and Ukraine
• Influence of other markets (Canada, NZ, Japan)

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General availability of credits (1)

• IET Market and other non EU countries
• Canada
• New Zealand
• Japan

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CDM/ JI credit import into ETS

• Due to relative strict allocation provisions of
  EU Commission
• Member states provide flexibility in use of
  project based mechanisms for compliance
• Most likely soft limits will be set in NAP 2
• Import volume does not change significantly if
  single states do not allow import

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Experience from the 2005-2007 period and Further
Guidance for the 2008-2012 period
Second Trading Period 1. More use of emissions
trading 2. Allocation has been more restrictive
for power generators 3. MS with excess emissions
intend to buy Kyoto units 4. Non-acceptance for
ex-post adjustment 5. Some NAPs are more complex
than needed
First Trading Period NAPs was assessed in a
pragmatic manner General lessons for the 2nd NAP
resulted in a convergence of choices across MS
Further Guidance on

11 Countries are not on track
1. Progress to Kyoto Target

• Cap potential is based on GDP growth and carbon
  intensity red. rates
• Total gap 296.5 MtonCO2e.
• Proportional share of ETS Sector 6 below
  1st phase
• Annual average allocation of 2.063 billion
  allowances

2. Setting NAPs 2 caps

• MS face a considerable
• challenge to realise volumes
• If not documented satisfactory
• Commission will propose a
• prop. reduction of MS cap

3. Intended Gvnmt purchase
If not documented satisfactory Commission will
propose a prop. reduction of MS cap
Definition of Combustion Installation Broad
Definition 20 MW in the same network with the
same operator
Small Installations lt 3 MW aggregation rule not
valid
4. PM
5. Limit on JI/CDM compliance by operator
To be specified for each inst. by the MS
To early to determine best practice
6. New Entrants and Closures
Beyond 2012 Further harmonisation desirable
Commission stresses auctioning
7. Allocation Methods
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Other Credits EUAs and AAUs

• EUAs Bulgaria and Romania will enter EU ETS in
  2008
• Their position 2008-2010 will be long
• Bulgaria 51 Mio t/a
• Romania 64 Mio t/a
• AAUs Russia and Ukraine have excess allowances
  which could enter the EU market
• App. release of 540 Mio t (40 of total surplus
  units IETA, 04)
• Difficult to foresee supplyand thereby hard to
  determine price influence of the EUAs

Need to be checked by other sources
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CDM/JI Governmental purchase volumes
In Mio t CO2eq/a
Sweden
Austria 7
Spain 20
Belgium
1
Denmark
Finland
8,4
2
4,5
Ireland
3,7
Netherlands
20
39,6
Italy
3
Luxembourg
Total Period 545 Mio t CO2eq 2008-2012