UK ETS integration into EU ETS - Ricardo-AEA

EU-China cooperation on climate policy and strategy
8th May 2013
Ricardo-AEA in confidence
Emelia Holdaway,
1. Introduction to Ricardo-AEA
2. Spotlight: White Certificate Trading Systems
3. Spotlight: Support to Feasibility Study of Linking Guangdong and
Hubei Provincial ETSs Pilots UK ETS integration into EU ETS
4. Other examples of project experience
1. Introduction to Ricardo-AEA
Ricardo - AEA is one of the world’s leading
energy and climate change consultancies,
with over 220 climate change and
sustainability experts, providing analysis and
solutions for major environmental challenges
We have worked at the heart of ground
breaking technical and policy developments
across the environmental spectrum for the
last 40 years, and continue to play a lead role
as advisor to governments, international
institutions and major corporations.
• Heritage
• Air quality and clean air policy -1950’s
• Energy efficiency and consequences of oil crisis 1970’s
• Climate change and sustainability -1980’s
• Resource efficiency and resource productivity- present
• Domain expertise
Climate change, energy, water
management, resource productivity and
security, air quality, waste and recycling,
chemical risk and sustainable transport
• Services
Strategic consultancy, economic
modelling, project leadership and data
Ricardo-AEA Worldwide
Deploying Electric
Vehicles (DoT)
CLIMA East Mitigation &
Adaptation (EuropeAid)
EMEA Climate Council
Japan City Transport
Model (FCO)
Riyadh Air Quality
China White
Certificate Schemes
(World Bank)
Ethiopia Climate
Smart Initiative (WB)
Kenya National
MRV+ Framework
Brazil Energy
Planning Models
Chile Carbon
Market Design (WB)
Lessons from
Urban Transport
Modelling (GEF)
South Africa (GIZ)
GHG Projections
Climate M&E
Thailand & Indonesia
GHG Reporting (GIZ)
Waste to Energy
Review (Zero Waste
South Australia)
Global Projects
• Climate & Environment “Evidence on Demand” framework (UK DFID)
• Climate Negotiator Training for LDCs (UK CDKN)
• Nanotechnology in Tyres (OECD)
2. Spotlight: White Certificate Trading Systems
(World Bank)
Project overview (1/2)
• This project aims to bring lessons from international
experience on how to design energy savings certificates (white
certificates) schemes - especially when they co-exist with other
market – based measures (e.g. renewable energy certificates,
carbon cap-and-trade mechanisms)
• Context:
− Target of 16% reduction in energy intensity during 12th FYP
– with a mix of policy instruments to achieve this goal
− Plans for pilot Energy Savings Certificate Trading; in parallel,
pilot carbon trading established to help achieve 17%
carbon intensity reduction in 12th FYP – scope for overlap
since significant portion of carbon savings come from
energy efficiency projects.
Project overview (2/2)
• The project seeks to address the following key policy
• What is the rationale for having multiple instruments
and targets?
• What design considerations were applied to develop
co-existing systems?
• How effective have co-existing systems been – MWh
and tCO2 saved?
Project lead
Danish Energy policy specialist
Chinese Energy policy specialist
• Literature
• Interviews
• Report
March –
May 2013
• International
• Chinese context
May- June
• Engage with Chinese
Early June
June 2013
Scope of international systems
Country/ Region
• Titoli di Eficienza Energetica (White
• EU Emissions Trading System
• Certificati Verdi (Renewable quota system)
• Perform, Achieve, Trade
• Renewable Energy Certificate system
• Energy Efficiency Obligation programmes
• Carbon cap and trade
• Renewable Portfolio standard
• Carbon Emissions Reduction Target (CERT –
white certificates)
• EU Emissions Trading System
• Renewables Obligation
Detailed assessment of international schemes
Examine design choices for the following elements
(across all systems examined)
Scope and coverage (energy, sectors)
Baselines and targets (level of target, type of
target, how targets determined)
Allocation mechanisms
Monitoring, Reporting and Verification
Eligible technologies
Institutional arrangements
2. Support to Feasibility Study of Linking
Guangdong and Hubei Provincial ETSs Pilots
(British Foreign and Commonwealth Office,
Tsinghua University)
Project overview
• Supporting Tsinghua University’s project to assess
technical barriers and feasibility of linking the Guangdong
and Hubei Provincial ETS pilots.
• Reviewing international experience and developing
recommendations for China based specifically on:
− the EU-Australia carbon market linkage
− UK ETS integration into ETU ETS
− The distribution of allowances among EU Member
States and transactions between them
− Models used to estimate abatement potential & costs
− How to address carbon leakage & its impact on linking.
Overview: current international links
Current links:
California and Quebec (last month).
EU ETS and Australia.
Norway, Iceland and Liechtenstein joined the EU ETS in 2007; link
with Switzerland is currently being negotiated.
Linkages that are under discussion:
Australian and New Zealand – official announcement has yet to be
Australia and California– official talks have started on possible
linking mechanisms.
UK ETS integration into EU ETS
Overlap rather than linking
~ exemption required equivalence
Two year overlap
2002 – 2006
For companies
Phase 1 EU ETS (pilot phase)
2005 – 2007
For installations
63 common installations
• UK lobbied the European Commission for temporary exclusion
of common installations, if schemes were equivalent.
 Useful insights for linking because UK ETS had to demonstrate
equivalence with EU ETS in three areas: ambition, penalties
and MRV
Ambition (1/2) – comparison of approaches
Administrator Defra
Phase 1 EU ETS
European Commission
MS had flexibility regarding
how EUAs were allocated
between installations via the
NAPs (NAPs in line with MS’
Kyoto commitments)
Different levels of
ambition in different
company proposals
(although scheme
aims to meet Kyoto
Company GHG
emission reduction
target over 5 years
2000 baseline
(‘98,’99,’00 average)
Installation-level CO2 free
allocation over 3 years ~
reduction target
2000 baseline
Ambition (2/2) – making UK ETS equivalent
• UK targets were ‘converted’ into EU targets, and then UK
company-level targets tightened to show equivalence at
an installation-level (target was raised if lower than NAP
allocation and kept if higher to comply with UK ETS).
To adequately compare equivalence of ambition, data must
be available for equivalent baseline periods and ambition
must be robustly understood (transparency).
Penalties (1/2)– comparison of approaches
If installation not
meet its target subtraction from
subsequent year’s
allocation, with
potential of using a
penalty factor as a
No penalty incentive only paid if
installation has
sufficient allowances.
Phase 1 EU ETS
If installation not report
sufficient allowances requirement to buy extra
tonne in subsequent year
Fixed penalty of €40 for each
tCO2 that installation not
hold an EUA for
Penalties (2/2) – making UK ETS equivalent
• The UK Government had to demonstrate that the
penalties were equivalent:
− Introduced a penalty of £30 (≈€45) for each tCO2 that
the installation not hold an emissions unit for (different
currency, UK ETS penalties more severe)
 Penalties should be comparable, but may need not be
exactly the same – important to ensure that companies
are equally dis/advantaged between the schemes.
MRV (1/2)– comparison of approaches
Phase 1 EU ETS
Equivalent regarding how to
report on sources of
emissions - additional rules to
establish company
Equivalent regarding how to report on
sources of emissions - no additional
rules for companies because
installation based
Imported elect, heat or steam
used on site – included;
Generation of elect, heat or
steam exported offsite excluded
Imported elect, heat or steam used on
site – excluded; Generation of elect,
heat or steam exported offsite included
Monitoring equipment to be
used when not possible to
calculate emissions
Continuous emission measurement
systems may be used if verified by the
relevant authority
tCO2 = activity data x
emission factor
tCO2 = activity data x emission factor x
oxidation factor
kgCO2/kWh and kWh/unit
(e.g. tonne, m3 of gas)
MRV (2/2) – making UK ETS equivalent
• While the differences were not substantial, the UK agreed
that any UK ETS companies wanting to opt-out of the EU
ETS would have to adopt the EU ETS MRV rules.
Out of all the linking issues, it was only MRV for which
complete harmonisation was required despite the
schemes being very similar– which suggests that
standardised MRV methodologies may be a requirement
for linked systems; and that linking negotiations are about
politics as much as technical concerns.
Australian and EU carbon market linkage
Brief comparison of the two schemes
Australian CPM
Phase 3 EU ETS
Power stations, heavy industry,
wastewater, mines, landfills.
Power stations, heavy industry,
commercial aviation, large combustion
Carbon dioxide, methane, nitrous Carbon dioxide, nitrous oxide (from
oxide, perfluorocarbons from
specific sources) and perfluorocarbons
aluminium production
from aluminium production
CERs, ERUs, RMUs – up to 50% of
a company’s obligation
Only CERs from Least Developed
Countries are allowed
Domestic offsets allowed (Carbon Domestic offsets (and land-based
Farming Initiative units)
credits) not allowed
Based on Australian National
Greenhouse and Energy
Reporting Scheme regime
EU ETS MRV Guidelines
Partial linkage (from 1st July 2015)
• One-way linkage - Australian liable entities will be able to
purchase EUAs and use them to meet up to 50% of their
obligations under the CPM until 2020.
• Amendments to the CPM to align with EU ETS settings:
− The proposed carbon price floor of A$15 per eligible
emissions unit will not be implemented.
− The use of Kyoto units restricted to only 12.5% (within
an overall limit of 50% for eligible international units).
− The proposed price ceiling will instead be set against
the expected price of EUAs.
Full linkage (by July 2018) (1/2)
Negotiation of a full bilateral treaty is underway to enable
European liable entities to use ACUs for compliance
purposes under the EUETS and vice versa:
• MRV requirements - The EU will want to be satisfied that
the CPM has adequate and comparable systems to
ensure equivalence and environmental integrity of units
• Comparable market oversight arrangements –
Prevention of similar (past) EU ETS fraud scandals and
legal status of units traded (and those allowed to trade
units) under the schemes.
• The types and quantities of third party units that can
be accepted into either system – both Kyoto units and
any additional ETSs that either scheme may link with.
Full linkage (by July 2018) (2/2)
• The role of land-based domestic offsets from
Australia’s CFI in the linked system – EU may need to
revise its land-based offsets policy and/or be satisfied that
the CFI methodology and accounting rules address
concerns regarding environmental integrity and
permanence, and/or impose a gateway.
• Implications for supporting the competitiveness of
European and Australian industries - ensure
overlapping trade-exposed sectors face a comparable
carbon price and leakage risks between Australia/EU are
not increased (e.g. if long term EUA price is high).
 Additional issues: policy issues (cap, inclusion of
aviation/maritime, alignment of compliance periods) +
registry connectivity (fungibility, security, accounting).
Lessons learned
• Very little detail is available regarding full linkage
• The political and economic drivers for linking will
influence both the shape and timetable of the agreement.
− EU ETS/CPM linkage is as sensitive to domestic
politics and policy uncertainty, as it is to the technical
challenges of linking.
 Different nuances for these factors in a Chinese context,
given differences in China’s political, policy and lawmaking systems?
4. Other examples of project experience
UK-China Near Zero Emissions
Coal for China initiative (NZEC)
• Managed pre-feasibility study and led three of the five
technical work packages – leading a consortium of 28 UK
and Chinese academic and industrial partners including
world experts in carbon capture and storage (CCS).
• Working closely with DECC, the Chinese Ministry of
Science and Technology (MOST) and the Administrative
Centre for China’s Agenda 21 (ACCA21).
• Led capacity building and knowledge transfer activities
between Chinese and UK parties (academic, industrial
and high level policy makers), modelling the future energy
requirements of China, review of international CCS
policies and regulations for their applicability to China.
NZEC: a three-phase programme with the ultimate aim of building a
prototype coal power plant with CCS in China.
UK Climate Change Agreements
• Ricardo-AEA has supported the UK government with the
technical implementation of the UK CCAs for 14 years
(since 1999):
− advising on the monitoring, reporting and verification
requirements and interactions with the EU ETS
− supporting target negotiations with industry sectors
 In-depth knowledge of energy and carbon profile for
energy intensive sectors and sub-sectors
Carbon Change Levy introduced in 2001- carbon tax on company coal,
gas and electricity use. 65% exemption for companies who agree to %
reduction in energy or carbon via a Climate Change Agreement (CCA)
World Bank PMR: Chile ETS Roadmap
• Developed a framework for assessing key design elements
for market mechanisms; applied these to a Chilean context
• Drew on international experience to develop an approach
to selecting optimum sectors: MRV practicability,
abatement potential, interactions with other polices,
competitiveness impacts.
• Examined options for obligating at the point of emissions or
upstream; framework applied to electricity, industry,
transport, waste & LULUCF sectors.
• Key foundation for Chilean Government to develop its
Market Readiness Proposal.
World Bank Partnership for Market Readiness supports capacity building in
the field of carbon market measures for developing countries
Contact details
Emelia Holdaway
Principal Consultant, Energy and Climate Change
• Tel: +44 (0) 870 190 2836
• Mobile: +44 (0) 7425 623525
• E-mail: [email protected]

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