REDUCTION OF

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REDUCTION OF CO2 EMISSIONS IN THE EU
By Dr. Jean-Chandelle CEMBUREAU Chief Executive
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• European Emissions Trading Scheme (EU-ETS)
• Linking Directive
• Impact on Electricity Prices

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European Emissions Trading Scheme (EU-ETS)
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NAPs TABLE
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STATE OF PLAY NAPs - GENERAL TRENDS

• 15 NAPs out of 25 OUT
• Allocation method
• General trend grandfathering
• PS Historical average
• Reference year 1998 2002
• Growth updated grandfathering
• Process CO2 yes in /- half of MS
• Waste CO2 no in general
• Early action no in general
  

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STATE OF PLAY NAPs - GENERAL TRENDS

• New entrants reserve in almost all MS
• Plant closures allowances cancelled after year
  of closure
• Consultation period
• Number of installations covered gt 12 000
• Gap between 2001 Burden Sharing
• Reduction imposed in NAP
• Industry level versus cement

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SOME SPECIFICS EX POST ALLOCATION
Ex-post allocation in relation to biomass in the
NAP of Luxembourg "Auberdem erhalten im
Einzelfall - nach Prüfung - emissionsarme
Technologien (z.B. Zufeuerung von Biomasse)
ex-post eine Sonderausstattung aus der Reserve,
wenn sie vorübergehend aus bestimmten Gründen
ihren Biomasseeinsatz zurückfahren bsw.
einstellen müssen"
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SOME SPECIFICS BENCHMARKING
In Denmark, allowances are allocated to new
entrants on the basis of the following

• 5843 tonne CO2/year ltgt capacity 1 tonne grey
  cement/hour
• 8291 tonne CO2/year/ton ltgt capacity 1 tonne
  white cement/hour

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Linking Directive
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LINKING DIRECTIVE

• Purpose to convert credits from projects (CERs
  and later ERUs) into allowances (EUAs)

• Status political agreement between EUR
  Parliament (EP) and Council vote in EP on 21
  April

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LINKING DIRECTIVE
MAIN FEATURES

• Baseline and Credit (Ex post) v. CAP and TRADE
  in E-ETS (Exante)
• Conversion allowed regardless of Kyoto coming
  into force or not
• One to one conversion
• Cap on installations optional to M-S (to be
  defined)
• Possibility for Domestic Projects after 2006
  review
• Sinks excluded but possibility for credits from
  biofuels projects and some sinks may be included
  in 2nd phase.

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Impact on Electricity Prices
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THE IMPACT OF CO2 TRADING ON POWER PRICES
Supported by Ford Europe, IFIEC and Solvay
Yes to Emissions Trading No to Windfall Profits!
The Power Intensive Industries Alliance
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BACKGROUND

• Several studies have looked at the indirect
  impact of the EU Emissions Trading Scheme on
  power prices
• Estimated price increases from 15 to 50!
• Not based on real costs from the CO2 trading and
  leading to windfall profits for utilities
• Possible because of the existing pricing
  mechanism (based on marginal costs) and the lack
  of competition between utilities

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Price of electricity 25/ MWh 0.7 tonne CO2
/MWh for marginal production With Emission
costs of 10/ tonne 7/ MWh cost increase for
coal condense production but 90 of allowances
are free of charge and 20 of the electricity is
fossil fuel based ? 0.14
POWER MARKET NORDIC AREA (simplified)
production cost
/ MWh
Current Market Price
TWh
Oil / coal
Hydro power
CHP Industry
Nuclear power
CHP District
Gas
Wind power
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Price of electricity 30/ MWh 0.7 tonne CO2
/MWh for marginal production With Emission
costs of 10/ tonne 7/ MWh cost increase for
coal condense production but 90 of allowances
are free of charge and 60 of the electricity is
fossil fuel based ? 0.42
POWER MARKET GERMANY (simplified)
production cost
/ MWh
Current Market Price
TWh
Hydro
Nuclear power
Different coal
Gas
oil
others
Wind power
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ACCEPT TRUE CO2 COSTS BUT NOT WINDFALL PROFITS
6.75 /MWh
With CO2 allowances 10 / tonne of CO2
An average European calculation (Nordic area
0.14 Germany 0.42)
0.25 /MWh
True CO2 Costs
Cost of Windfall Profit
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IMPACT PER TONNE OF CEMENT
Our own emissions and electricity prices
0.7 t CO2 / tonne cement 105 kWh / tonne cement
Accepted true electricity costs of 0.25 /
MWh (Average Nordic Area 0.14 - Germany
0.42) 90 allowance free of charge CO2 priced
at 10 / tonne.
Windfall profits
Real costs
/ tonne of cement
Cement production own emission costs after 90
free allocation
Accepted true costs for electricity from actual
mix of market power
Total costs per tonne of cement
Real costs cost of windfall profits with full
marginal costs charged
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CONCLUSIONS

• Windfall profit estimated at 2.70 bio in
  Nordic area, 3.20 bio in Germany!
• Cost for the alliance 2,4 billion per year
• Accept 0.25/MWh - Cannot accept 7.00/MWh
• Recommendation
• Unbundling of the environmental market from the
  power market ensuring transparency, producers
  cost coverage and cost-based environmental
  increases

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SOLUTION UNBUNDLING
To separate the emissions trading market and the
electricity market so that unfair electricity
price increases can be avoided with a solution
which

• is fair both to electricity producers and
  consumers
• increases transparency
• separates emissions market and electricity market
• enables monitoring the impact of the ETS on
  electricity prices
• contributes to EU Climate Change objective

AND
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SOLUTION UNBUNDLING

• can be accommodated under existing EU laws

• the Electricity Market Directive (2003/54/EC)
• the Emission Trading Directive (2003/87/EC)

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UNBUNDLED AND TRANSPARENT PRICING OF POWER
National Schemes
National or regional power exchanges EEX,
NordPool, etc.
EU Emissions Trading
Taxes
Natural regulatedmonopoly
Renewable energy fee
The power price is a result of two separate
products, one monopoly service and taxes.
CO2 Emissions Trading
Environmental markets
Power Free market
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CONSUMER PRICE DEVELOPMENT WITH SEPARATION
Total costs 36 /MWh
Windfall 7 ET Real Cost 0.1 Production
25 Transmission 4
Power producer
TSO
No Separation
Separation
Production Cost
ET Real Cost
Transmission Cost
Windfall Profit
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ENVIRONMENTAL INCENTIVE
End users secure Needed allowances
Allowances needed for production
Bought in Market
Received from NAPs
Sold in market
Needed
Needed
Power Producers Keep benefit of surplus
allowances
CO
CO
2
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Allowances
Allowances
Needed CO2 Allowances
Needed CO2 Allowances
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12.03.04
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NT
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FUTURE ACTIONS
2 pathways to be followed to reach a solution
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www.cembureau.be