Transcript EU ETS after one year and prospects for the future

EU ETS after one year
and prospects for the future
Workshop 4 April
NCM, Climate Change Policy Group
Outline of presentation
Experiences so far
The second trading period
 Links
between the periods
Post-Kyoto
2
Carbon price development 2005
35
High gas price UK
30
25
€/tCO2
Court ruling on
UK NAP
Last NAP approved
?
20
15 Cold spells
Imports of CDM
credits
Cuts in Italian
NAP 69 Mt (9%)
10
5
Mild weather
Cuts in Polish NAP
141,3 Mt (16,5%)
Expectations
are
important!
0
01jan
29jan
26feb
26mar
23apr
21maj
18jun
16jul
13aug
10sep
08okt
05nov
Source: Point Carbon
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Observations and explanations
Allowance prices much higher than most
expected before the system was launched
Potential explanations:
Changes in net demand due to:
 Changes
 ”Errors”
in allocation (supply)
in estimation of BAU emissions
 Changes
in underlying economic conditions
Changes in abatement costs
 Changes
 ”Errors”
in fuel prices
in estimation of MAC curves
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Changes in allocations
During review process cuts of almost 300 Mt were made

Poland: 141 Mt

Italy: 69 Mt

Czech rep: 31 Mt

France increased the allocations with ca. 100 Mt due to
inclusion of more facilities
Late submissions and decisions
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Changes in allocations
Net demand
8 000
400
Emission projections
Cuts compared to notified plans
7 000
Reserves
350
Final allocation
6 000
300
MtMt
CO2
CO2(2005-07)
(2005-07)
5 000
250
4 000
200
3 000
150
2 000
100
150000
0 0
Final allocation
Cuts compared to notified
Emission projections
Net demand final allocation without
plans
Net demand final allocation
cuts
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Other changes to net demand
Some differences in BAU estimates between
submissions of national communications to
UNFCCC and national allocation plans:

Higher estimates in NAPs
Economic conditions reduced emissions

Reduced steel production (8-10 Mt)

Labour market conflict in Finland (10 Mt)
Weather

Dry year in Spain
– Hydro inflow reduced by 14 TWh, nuclear with 7 TWh

Wet in Nordic area
– Hydro inflow 35 TWh above normal
7
Abatement costs
Substantial changes in fuel prices
 Affect
cost of fuel switching
Large uncertainties about the actual
abatements costs in different sectors
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Fuel switching depends on fuel prices
Price
Full price
effect
Realized
price effect
Gas
Coal
Coal
Marginal
carbon
cost
Gas
Volume
9
Fuel price developments during 2005
$/tonne (coal), p/th (gas), €/tonne (CO2)
100
80
60
40
20
0
Oct- Nov- Dec- Jan- Feb- Mar- Apr- May- Jun- Jul- Aug- Sep- Oct- Nov- Dec- Jan- Feb- Mar- Apr- May04
04
04
05
05
05
05
05
05
05
05
05
05
05
05
06
06
06
06
06
Coal
Gas
CO2
CO2 break even
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Development of the market
Delays in national registries
Growing trade
 Jan/Feb
-05: 0.6 to 3 Mt/week
 Nov/Dec
trade during 2005: 250 Mt
40
35
30
25
20
15
10
5
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Ju
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Ju
M
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Ap
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ch
M
ar
b
Fe
n
0
Ja
Mt
 Total
– 05: 10 Mt/week
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Carbon supply curve 2005-2007
P
Expectation:
Lower price in next period
MAC = Marginal abatement costs
Max short-term abatement
Supply curve
40 €
MAC
Pexp next period
CER
Allowances/gap
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Changes within EU ETS for Phase II
No opt out
Little impact
10% auctioning
Little/no impact
100€ penalty
Little/no impact
New gases/sectors
Ambiguous price effect
JI credits
May reduce price
Price of
allowances
BUT mandatory inclusion of new sector/gases may affect the price

Aviation may be included in Phase II
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Import of credits – uncertainties about
supply
Nov. 15, 2005: 35 CDM projects
registered (7.8 million CERs)
400 projects at validation stage
20 avaiting regitration
57000 CERs issued into CDM registry
To 2012: 500 Mt CO2e not unlikely
 But
to whom? And when?
And JI from 2008
14
The Kyoto period gap
Commission:
A number of countries not sufficiently on track
 Unlikely that it can be closed without the ETS
 Some MS will have to reduce – other keep unchanges
 Allocation 6% below phase I (~130 Mt lower)

ETS sector share
2005-07 gap
Annual gap
"Com guidelines"
EU-27
EU-25
EU-15
0
50
100
Imports of credits: Share to EU?
150
200
250
300
350
Mt CO2
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Summary of price shapers
Main price drivers:
2005 –
2007
First trading period
Relative fuel prices
Supply of CDM credits
2008 –
2012
Expected
price
Kyoto period
2012 –
…
Expected
price
Beyond Kyoto
Restrictions on imports
Supply strategy AAUs
Binding target?
Back-stop technology
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Preview of model results
Allowance price
40
35
Euro/ton
30
25
20
15
Gap = 314 Mt
10
5
0
0
50
100
150
200
250
300
350
400
450
Emission reductions from BAU (Mt)
Base case
Low gas price
Events in 2005
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Model simulations
Workshop 4 April
NCM, Climate Change Policy Group
Model simulations for 2005-07
Three cases
 Base
case with normal weather and actual
fuel prices
 Sensitivity
with low gas prices in 2006 and
 Sensitivity
with actual events in 2005
2007
ECON’s carbon market model
 Built
on ECON’s European power market
model
 Added
 Covers
heat and industrial sectors in ETS
the three year period 2005-07
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ECON Carbon market model
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Assumptions
Allocation of allowances


According to NAPs
Norwegian allowances added
Import of CERs


The level of import uncertain
Not analysed separately – but can be done through
varying the gap
Economic growth

Assumptions based on ECON in-house analysis and
forecasts from Deutsche Bank
Weather

Not modelled demadn varations due to weather, but
analysed through sensitivity analysis
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Assumptions, cont.
Abatement costs and fuel prices

Power sector most important sector (in the short run)

Fuel prices based on observed spot prices for 2005 and
forward prices for 2006 and 2007

Seasonal variation in gas prices
40
35
30
€/MWh
25
20
15
10
5
0
1
9
17 25 33 41 49
5
13 21 29 37 45
1
9
17 25 33 41 49
Week No. (2005-2007)
Continent - base case (TTF)
UK - base case (NBP)
Continent - low gas price
UK - low gas price
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Assumptions, cont.
Generation and transmission capacities
are actual capacities in 2005 and adjusted
for known investments and closures in
2006 and 2007.
No endogenoues investments (short run)
Lower price elasticity of power demand in
the short run (-0.2 to -0.4)
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Results – allowance price
Base case
Allowance price
40
35
Euro/ton
30
25
20
15
10
Gap = 314 Mt
5
0
0
100
200
300
400
Emission reductions from BAU (Mt)
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Results – allowance price
Sensitivity: Low gas price
Allowance price
40
35
Euro/ton
30
25
20
15
Gap = 314 Mt
10
5
0
0
50
100
150
200
250
300
350
400
450
Emission reductions from BAU (Mt)
Base case
Low gas price
25
Results – allowance price
Sensitivity: Events in 2005
Allowance price
40
35
Euro/ton
30
25
20
15
Gap = 314 Mt
10
5
0
0
50
100
150
200
250
300
350
400
450
Emission reductions from BAU (Mt)
Base case
Low gas price
Events in 2005
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The Kyoto period
No model simulations made
Simulations for 2005-07 indicate that a
change in the gap (over three year) of 1
Mt change the allowance price with €0.1
Price range: €15-70
 Without
imports
MAC likely to be lower with more
abatement possibilities
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Short term power price effect
Produce if: Power price > Marginal cost of fuel plus carbon
Carbon allowances have an alternative market value
Total
capacity
P>F+C: Sell power
F<P<C: Sell credits
Cost of CO2
emissions
100% free allocation:
100% windfall profit
Fuel costs
P<F: Sell credits
Different plants in different hours
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Effect on average price level
Price
Effect on average prices depends on
capacity mix and load pattern
Small
effect
No effect
Small
effect
Large
effect
Volume
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Electricity price – base case
60
Electdricity price, öre/kWh
50
40
30
Jutland 2005
Jutland 2006
Jutland 2007
Sweden 2005-2007
20
10
0
0
3
13
21
29
32
40
Allowance price, €/ton
30
Electricity price in Sweden 2005:
55
Power price (öre/kWh)
50
45
40
35
30
25
20
15
0
5
10
15
20
25
30
35
40
Allowance price (euro/ton)
High gas price
Low gas price
Events in 2005
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Distortions of short-term price effects
Market power

Monopolists and oligopolists do not pass through the
full marginal cost effect in bids
Withdrawal of allowances (within trading period)

Reduced emissions t1  reduced allocation t2:

Reduced value of selling credits/additional value of
generating
”Grandfathering” (between trading periods)

Emission level period 1 determines allocations period 2
(or 3)  Additional value of generating
Rules are not harmonized

Different rules in different countries affect trade
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Long term power price effect
Invest if: Expected average price > Long-term marginal costs
Long-term
(expected)
average
price level
(Expected)
cost per
kWh
Purchase
of Credits
Fuel costs
O&M costs
Capital
costs
”Need” for allowances
What is BAU?
-Benchmarking?
-BAT?
-Same allocation for all kWh
Long-term price effect:
-Share of free allocations
important
High share of free allocations
-Smaller average price effect
-Abatements on the supply
side (more gas power)
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Allocation rules distort investment decisions
Outcome of free allocations: Investments are
realized “too early”

Do not take into account the full cost
Distortion towards consumption

Reduced price effect reduces incentives for abatements
and measures on the demand side
Distortion towards carbon-free capacity


Premium for fossil fuel plants (free allowances)
No premium for renewables and CO2 capture and
storage
Distortion in choice between gas and coal?


DK: Same amount of free allowances NO
DE: Higher amount to coal YES
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Power price effects in the model
Full pass-through of marginal costs in short term
(hourly) prices



Demand effects taken into account!
Different plants marginal in different hours  different
cost increases in different hours
General pass-through: Average of all hours
Long-term pass-through determined by average
cost effect on new plants


High share of free allowances: Small price effect 
increased gas power investments and generation
Low share of free allowances: Large price effect 
reduced consumption (and some new gas)
New investments and the gap

Assume free allowances are taken from NER and leftovers are cancelled
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Contacts
Niclas Damsgaard
Partner, ECON Analysis
[email protected]
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ECON – Contact information
Stavanger
Stockholm
P.O.Box 5,
N-0051 OSLO
Biskop Gunnerus’ gate 14A
Phone: +47 45 40 50 00
Fax: +47 22 42 00 40 (Analyse)
Fax: +47 22 41 41 44 (Management)
e-mail: [email protected]
Kirkegaten 3
4006 STAVANGER
Telefon: +47 45 40 50 00
e-post: [email protected]
Artillerigatan 42, 5 tr
SE-114 45 STOCKHOLM
Sweden
Phone: +46 8 528 01 200
Fax: +46 8 528 01 220
e-mail : [email protected]
Copenhagen
Paris
Nansensgade 19, 6. sal
DK-1366 København K
Denmark
Phone: +45 33 91 40 45
Fax: +45 33 91 40 46
e-mail : [email protected]
18, rue de la Perle
F-75 003 PARIS
Frankrike
Telefon: +33 1 45 78 70 03
Telefaks: +33 1 48 87 44 39
e-post: [email protected]
Oslo
ECON Analysis Headquarter/
ECON Management
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