EU and UK experience: Lessons learned

1
EU and UK experience Lessons learned

• Martin Nesbit
• Deputy Director,
• Climate and Energy Business and Transport
• UK Department for Environment, Food and Rural
  Affairs
• martin.nesbit_at_defra.gsi.gov.uk
• http//www.defra.gov.uk/

2
Stern Review The economics of climate change

• July 2005 UK Finance Minister commissions Nick
  Stern (former World Bank chief economist) to
  study economics of climate change
• October 2006 report published
• Key messages
• Urgency - benefits of strong early action
  outweigh the costs
• Mitigation investment
• Poorest countries and people will suffer earliest
  and most
• Growth v. tackling climate change is a false
  choice
• Prices need to reflect climate change impacts
  either through taxes, regulation, or trading.
  Trading likely to be the best way of securing an
  international carbon price.

3
Cap and Trade the UK Experience

• Voluntary cap and trade scheme 2002-2007 covering
  all Kyoto gases (indirect emissions)
• Climate Change Agreements energy-intensive firms
  commit to significant carbon reductions to secure
  a rebate from the UKs carbon tax (climate change
  levy CCL)
• Lessons learned
• Valuable experience in mechanics of trading
  (registries, etc.)
• Limited value in voluntary schemes
• Importance of ensuring scarcity
• Behavioural effects can be more powerful than
  expected

4
European Union 25 countries in ETS
2 joined EU in 2007
5
European Union action Emissions Trading Scheme
(ETS)

• 1998 EU Member States agree share-out of EU 8
  Kyoto reduction target. Shares range from -20
  (Germany, Denmark), -12.5 (UK), to some states
  which are allowed to increase emissions.
• 2001 European Commission proposes legislation
  for ETS Member States (Council) European
  Parliament reach agreement in 2003.
• Why? Because emissions trading -
• - means emissions reductions take place where
  cost is lowest, thereby maximising action
  possible for a given level of economic cost
• - provides certainty of the level of emissions
  reductions (through setting a cap on emissions
  levels).
• New approach to environmental legislation for
  Europe, to meet new global challenge of climate
  change. Most other policies (e.g. air quality,
  acid rain, water quality) use a combination of
  tough limit values, and environmental standards.

6
Key features of EU ETS

• Cap and trade scheme covering CO2 emissions
  from combustion processes (approx 46 of EU CO2
  emissions)
• Phase 1 EU ETS - 2005-2007 - learning phase
• Phase 2 EU ETS - 2008-2012 - Kyoto Commitment
  Period
• 1 European Union Allowance (EUA) 1 metric tonne
  of CO2
• Allowances freely tradable throughout 25 EU
  Member States
• Majority of allowances allocated for free - range
  of methods, including historical emissions,
  projected emissions, sector benchmarks etc
• Businesses can make limited use of Kyoto project
  credits

7
EU allowance prices phase 1 (2005-07) and phase
2 (2008-2012)
8
Learning how to manage a trading system

• Need real scarcity over-allocation in phase 1
• Price fluctuations are to be expected in a young
  system but can create political uncertainty
• In a multi-state system, potential for
  competitive distortion
• Need good data as a basis for allocation
  decisions
• But also
• A functioning market system was created to an
  ambitious timetable, with a high level of
  compliance in year 1 (99)
• Early evidence of behavioural impacts, including
  much higher level of boardroom attention
• Decisions on phase II allocation much stricter,
  because (a) better data now available (b) Kyoto
  targets

9
EU emissions trading Daily Volume Jan 05 Feb
07
10
Future of EU ETS

• EU ETS Phase I (2005-2007)
• Data for 2nd year of operation (2006) due around
  May
• EU ETS Phase II (2008-2012)
• Allocation plans now being finalised, following
  Commission announcement in November 2006, which
  included criteria for checking member state
  allocation plans.
• EU ETS Review (Post 2012)
• European Commission conducting Review of EU ETS,
  with changes being considered for post-2012. EU
  ETS now has widespread political endorsement, and
  will be used as a key long-term mechanism for
  reducing greenhouse gas emissions in Europe
• Important issues for review sectoral coverage,
  auctioning, cap-setting, long-term predictability
  for businesses

11
Future levels of ambition, and linking with other
schemes

• EU Member States agreed last week a unilateral
  commitment to reduce to 20 below 1990 levels by
  2020 and are ready to reduce to 30 as part of a
  global and comprehensive agreement.
• EU wants to strengthen the EU ETS and to
  extend the global carbon market.
• Current EU legislation restricts linking EU ETS
  only to schemes in developed countries that have
  ratified Kyoto Protocol (e.g. Canada, Japan,
  Switzerland).
• Unilateral recognition by other schemes still a
  possibility (e.g. US state and regional-level
  schemes).
• EU ETS Review will consider potential for future
  links to other greenhouse emissions trading
  schemes. Impact on incentives for countries not
  currently signed up to international action a key
  factor.

12
EU and UK experience Lessons learned

• Martin Nesbit
• Deputy Director,
• Climate and Energy Business and Transport
• UK Department for Environment, Food and Rural
  Affairs
• martin.nesbit_at_defra.gsi.gov.uk
• http//www.defra.gov.uk/