EU Emissions Trading Scheme

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					 Emissions Trading – UK
Experience and Perspective

Jill Duggan
February 2008
World’s Top Five CO2 Emitters

                         2005             2015               2030
                   Gt       rank     Gt      rank       Gt      rank
   US              5.8          1   6.4          2     6.9          2
   China           5.1          2   8.6          1     11.4         1
   Russia          1.5          3   1.8          4     2.0          4
   Japan           1.2          4   1.3          5     1.2          5
   India           1.1          5   1.8          3     3.3          3

     China will become the largest emitter in 2007, and India will be
 the third largest by 2015 – strengthening their positions through 2030
UK views

• Political consensus – all major political parties agree that
  tackling climate change is an urgent priority
• Emissions trading has a key role in reducing emissions
   • environmental certainty,
   • lowest cost emissions reductions
• Other complementary mitigation measures also required
UK Emissions Trading Experience
UK Emissions Trading Scheme 2002-2006

• Voluntary
• Participants received financial incentives for
  taking on binding targets
• Bid in descending clock auction for emissions at
  incentive prices
• 31 direct participants bid to reduce by 18 million
  tonnes of CO2e over 5 years.
What we learned from the voluntary
• Early action helped put the City and ancillary
  services in a good position for emissions trading –
  verifiers, lawyers, consultants
• Difficult to establish BAU and therefore real
  additional emissions reductions
• Need tough targets and scarcity to achieve a
EU Emissions Trading
European Union
25 Member States
Countries joined EU in
EU Experience

•   Started trading across Europe in 2005
•   11,000 installations in Europe – 1100 in UK
•   50% of Europe’s CO2
•   Overallocation in first phase
•   But good carbon price for 2nd Phase
What have we learned

• Emissions Trading works – Point Carbon Survey of participants in
  2006 found 15% took future cost of carbon into account for
   • By 2007 this had risen to 65%
• 6 million allowances traded each day
• Market worth $60 billion in 2007 (source Point Carbon)
• 27 Member States have put in place the institutional framework
• EU business has gained experience that will help them in the low
  carbon economy
Commission Proposal for 2013 and
• Central cap – linear decrease from 2008-12 average
  annual emissions
• Full auctioning for electricity generators and CCS (except
  heat for CHP – full auctioning by 2020)
• Community wide rules for free allocation. Sectors share
  of allocation will be in line with 2005-7 verified emissions
• Full auctioning for sectors by 2020 (unless carbon
• Tighter limits on use of project credits in EU until
  international agreement reached
Developments over the last year

• Moved from 6 US states to 23 US states committed to cap
  and trade + 2 Canadian Provinces
• New Zealand set up cap and trade
• Australia ratified Kyoto and will set up mandatory cap and
• 40 US states have joined the Climate Action Registry to
  report emissions
• Norway, Lichtenstein and Iceland have joined the EU ETS
• International Carbon Partnership set up – with 23
  members committed to developing scalable and linkable
  mandatory cap and trade systems.
Contact on Emissions Trading Policy

Stern has demonstrated that we need to tackle a range
of market failures to mitigate at low cost

             Complemented by action to change attitudes to climate and realistic
Credibility can reduce abatement costs if policy is durable, enforceablechange.

              Complemented by action to change attitudes to climate change.
Flexibility over ‘what’, ‘where’ and ‘when’ abatement takes place will minimise costs

      Carbon pricing               Technology policy            Removing other barriers

The first of Stern’s market   The second of Stern’s market      The third of Stern’s market
failures: the damage costs      failures: uncertainty and      failures: imperfections such
 imposed on the world by       knowledge spill-overs mean       as information asymmetry
greenhouse gas emissions      that carbon pricing alone will   and capital constraints mean
  are an ‘externality’ that   not be enough to induce low      that abatement will be more
  needs to be reflected in      carbon technology at the        costly if you rely on carbon
     the prices of goods         pace and scale needed                  pricing alone

International by action to change attitudes to climate change.
Complemented cooperation overcomes risks of free-riding, as the climate is a ‘public good’

    Carbon pricing is a necessary but not sufficient tool for a low-cost transition

Stern Review (2006).                                                                    14