Transcript CPI Global Annual Report on Low Carbon Growth Policies

Workshop on
Institutional options for the Carbon market: Can financial
markets and institutions be a model?
Is there a need for more market
oversight and regulation in the EU ETS?
Barbara Buchner, PhD
Climate Policy Initiative
Graz, 25 November 2010
The EU ETS
 Mandatory system in place since January 2005
 Legislation agreed by Member State Ministers (Council) and
European Parliament in ‘co-decision’
 Extensive stakeholder dialogue
 Covers currently 40% of EU GHG emissions
 Cap on emissions from ~11,500 energy-intensive installations
across EU
 Direct: regulated at source of pollution
 Single largest market for GHG emissions
 True multi-national scheme (25/27 MSs)
 Link to Norway, Iceland, Liechtenstein
 A “Linking Directive” governs the relationships between EU
ETS & Kyoto Protocol
 EU ETS stimulates overall carbon market
Jan 1: Start of phase I
2005
2007
Feb 15: Entry into
force of Kyoto Pr.
Jan 1: Start of phase III
Jan 1: Start of phase II
2008
Jan 1: Start of 1st CP
of KP
EU energy & climate
policy objectives
2012
2013
Dec: end of 1st
CP
2020
A phased approach
 A “broad then deep” strategy
 All inclusive, non-demanding beginning
 Increasing differentiation with greater stringency
 Participation of the less committed in decisions
 Highly decentralized implementation
 MRV and enforcement by Member States
 But: highly uniform infrastructure for registries
 And: importance of central coordination (EC)
 Towards harmonization and centralization
 From country ‘caps’ to EU-wide cap
 From national allocation plans towards EU-wide auctioning
and harmonized benchmarks
 Differentiate through auction rights
 Towards common definitions, scope and criteria for inclusion
learning the lessons from the pilot phase
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The carbon market – who, what, where?
 Who?
 Industrial companies
 Energy companies
 Banks/intermediaries
 What?
 Spot - a commodity
 Derivatives – financial instruments
 Standardized and non-standardized contracts
 Where?
 Exchanges – regulated markets, MTFs
 OTC – brokered/non-brokered, unregulated exchanges
Art. 12(1a) of Dir 2009/29/EC: “Commission shall by 31 Dec 2010,
examine whether the market for emission allowances is sufficiently
protected from insider dealing or market manipulation….”
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A single, accountable long-term cap and a longer time horizon
3,000
Pilot
2nd Phase
3rd Phase
4th+ Phases
Scope changes
2,500
30% adjustment
Adoption of adjusted linear reduction factor
(Art 9 ETS Directive)
mln t CO2e
2,000
1,500
-71% vs 2005
1,000
500
EU ETS phase 1 & 2 cap
EU ETS phase 3+ cap based on linear reduction factor 2.4%
EU ETS phase 3+ cap based on linear reduction factor 1.74%
-96% vs 2005
0
2005
2010
2015
2020
2025
2030
2035
2040
2045
2050
Source: Öko-Institut 2010
Note…
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Linear factor to be reviewed by 2025
Aviation to be included; will change figures correspondingly but cap not
reduced
Uncertainty re move to 30% GHG reduction target
Some conclusions from Phase I
 A pilot phase is useful.
 Trading infrastructure and experience
 Data issues
 Everything doesn’t have to be ready on Day 1
Learning by Doing: A phased approach- allows learning and
revision
 Carbon now has a real price.
 Phase 2 tightened overall cap (-6% wrt 2005)
 Agreed amendments add to scarcity (-1.74%/year)
 A new commodity and liquid market emerged.
 Price behavior has been rational
 Steady growth in volume and products
 Volatility not extraordinary (less than in other commodity
markets)
 Widespread participation in the trading
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A price signal
€/t
35
1
Phase II Allowances
(2008-2012)
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ECX Dec-08 Futures
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May 15,
2006:
verified
emissions
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Phase I Allowances (20052007)
OTC and BlueNext Spot
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Data and design matter !
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Reliable information - MRV
Market infrastructure
Flexibility/certainty/predictability
Some more conclusions from Phase I
 Allocation is controversial.
 Free allocation was price of acceptance
 Also, many choices impractical due to data constraints
 But subsequently very controversial
 Abatement occurred.
 A significant positive price
 Emissions are lower than historical levels (even after allowing
for plausible bias), despite robust economic growth and
adverse energy price developments
 Probably 120-300 MtCO2/year (2-5%) in 2005-2007:
modest, but in line with modest ambition
 Too early to observe investment effects
 Carbon price has had limited impact on industrial
competitiveness.
 No empirical evidence of market share loss due to carbon
pricing: only one price among many
 But: may change in the longer term
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Learning the lessons for carbon markets governance
 The principles
 Simplicity & Transparency
 The conditions
 Suitable club benefits: broader benefits than GHG
 Actors with varying marginal abatement costs
 Low transaction costs
 Good data availability
 Good decision process (a ‘center’, coordinating mechanisms)
 The choices
 A robust, binding cap
 Predictability/certainty
 Flexibility: scope, linking, international offsets (with limits to
ensure sustained effort)
 Effective monitoring, reporting, verification
Secure
long term carbon price
stability & integrity of system
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What if…more oversight through price floors/caps/collars?
 Combination solution
 Permits & “ safety valve”
 Implementation
 Along with emission targets, government sets a “trigger price”
 If price of permits > trigger, government guarantees the
“safety” price
 Theory…
 On economic grounds, they can be helpful to lower cost of
achieving ambitious targets
 Quantitative analysis: price floor much higher than price
levels experienced in EU ETS
• EUR 35/tCO2 in 2011, to EUR 120 in 2050 to reach 50% from 2005
levels by 2050
• also higher than some suggested caps in other legislations (US
price collar in Senate bill: US$ 28)
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More oversight through price floors/caps/collars?
 …and practice: what if we had adopted some?
 Implications for compliance costs: the market has worked
well, lowering cost of compliance when entities had economic
difficulties
 Practical implications: floor/cap levels determined by national
circumstances, not science
• Linking of trading systems proves challenging
(environmental ambition, GHGs, activities, etc.)
– Collars, here but not there, make linking
unwieldy/meaningless
– Coordinating floor/cap levels unlikely to facilitate matters
• The issue of the rents: a reserve price in auctioning has a value …
especially for sellers into the system (CDM, AAUs?)
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How to optimize market regulation?
 Do not address the wrong issues
 Low prices criticized for lack of sufficient signal: blame the
target, not the mechanism
 Maximize confidence in system
 Learn from mistakes, allow adjustments
 Consider that regulatory interference with the carbon price
undermines the market and investment decisions, and thus
confidence from the beginning
 Important to set proper instruments to hedge against future
risk
 What hedging instruments in presence of gov’t guaranteed
prices?
Experience tells us that markets can deal with price
uncertainty, while policy uncertainty is much more difficult
to handle
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Bottom line
 CO2-emissions are no longer free in the European Union
 Importance not so much in price per se, but in institutions &
thinking
 From rather dubious initiative to accepted fact and
cornerstone of EU policy
 Achieved despite significant obstacles and problems
 Pre-existing institutions, powerful club benefits facilitated EU ETS
 But significant obstacles: time schedule, inexperience with trading
 Importance of pilot phase
 Provided infrastructure and lessons: balance flexibility & regulation
 Illustrates incentives: carbon price has induced some abatement
 Importance of continuous learning by doing
 Market oversight – based on stocktaking exercise
 EU ETS shows that multi-national systems can be successfully
implemented
more than least-cost abatement
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Thank you!
[email protected]
www.climatepolicyinitiative.org