Sectoral Crediting Mechanisms SCMs: An initial assessment of electricity and aluminium

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Sectoral Crediting Mechanisms (SCMs) An initial
assessment of electricity and aluminium

• Jane Ellis and Richard Baron
• www.oecd.org/env/cc

COP/MOP1 - CPEQ WBCSD Side event Montréal, 7.12.05
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Presentation outline

• Why sectoral crediting mechanisms (SCMs)?
• Background
• Common SCM requirements
• Aluminium sector insights
• Electricity sector insights
• Conclusions

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Background (1)

• Why electricity and aluminium?
• Have examined how SCMs that are rate-based,
  policy-based or fixed limits could work in each
  sector

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Background (2) three structures for SCMs

• Policy-based
• Evaluate and credit reductions pertaining to
  well-identified policies
• Fixed limits
• Fixed caps on sectors (and installations)
  emissions
• Rate-based
• Baseline set in terms of t CO2-eq per unit of
  output
• Critical issue national or international-level
  baseline?

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Common themes
Electricity
Aluminium
Baselines Eligibility Projections

• Environmental effectiveness determined by SCM
  design (e.g. baseline level), rather than its
  structure (e.g. rate-based, policy-based)

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Initial insights aluminium

• International-level, rate-based mechanism most
  appropriate
• This study Focus on primary production
• Issues to be resolved
• how to encourage participation? (voluntary
  agreements exist)
• boundary definition (include electricity
  emissions?)
• data availability for sector projections?
• role of governments and linkages to national
  systems
• fairness / perverse incentives/ leakage to other
  sectors

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Initial insights electricity

• National-level SCM seems most appropriate
• Fuel resources and power generation mix vary
  significantly (e.g. Brazil and China)
• Issues to be considered vary. For instance
• Policy-based ex-post estimates required to
  quantify CO2 reductions, as baseline could vary
  with sectors development. Outcome hence
  uncertain for investors.
• Rate-based various options exist for baselines
  (national average tCO2/MWh) Fuel by fuel
  discourages fuel switching, but takes local
  conditions into account. Does not encourage
  demand side energy efficiency.
• Fixed limit less flexibility could lead to an
  agreement on a relatively high baseline (and the
  possibility of overly-generous allocation of
  credits)

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Options for baselines (rate-based)

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SCM Policy Challenges

• Governance issues
• Who negotiates on behalf of sectors (especially
  if international agreements are envisioned)?
• How to turn SCM into effective incentives at
  domestic level?
• Interaction with existing mechanisms
• CDM, Article 17 trading, EU ETS, other trading
  systems
• Approval process what can we learn from CDM?