Embed Size (px)
Citation preview
Next steps for ETS - The 2007 review
Karsten NeuhoffUniversity of Cambridge
European Wind Energy ConferenceMilan 9th of May 2007
www.climate-strategies.org/
www.electricitypolicy.org.uk/tsec/2
Karsten Neuhoff, 2
(I) Objective: effective and efficient
(II) Objective: investment security
(III) Interaction with renewables policy
Next steps for the European Emissions Trading Scheme
Karsten Neuhoff, 3
• Increased expenditure on extending plant-life • Inefficient fuel choice• Less efficiency improvements
AuctionCapacity only X
Capacity by fuel/plant type X XOutput only X X
Output by fuel/plant type X X X
Emissions X X X X
Discourage plant c
losure
Shields output fr
om average ca
rbon cost
Reduce in
centiv
es for
Efficiency
-improvin
g inve
stment
Impacts
Updating fromPrevious periods
Benchmarking
XX
Distortio
n biased to
wards coal
Distortio
n biased to
wards coal
These distortions from repeated free allowance allocation can be ranked in a pyramid
Source: Neuhoff, K., Keats, K. and Sato, M., 2006, Allocation, incentives and distortions: the impact of EU ETS emissions allowance allocations to the electricity sector, Climate Policy, 6 (1)
Objective: Effective and efficient – process optimisation
Karsten Neuhoff, 4
… and we seem to have made little progress moving on
Source: Neuhoff, K., Rogge, K., Schleich, J., Sijm, J., Tuerk, A., Kettner, C., Walker, N., Åhman, M., Betz, R., Cludius, J., Ferrario, F., Holmgren, K., Pal, G., Grubb, M. and Matthes F., 2006, Implications of announced Phase 2 National Allocation Plans for the EU ETS, Climate Policy 6(5) pp. 411-422.
Installed capacity P P P
Projection for productionP P
Historic production P O
Installed capacity
Projections of production P
Historic Production
Projections O O P / O P / O P
Historic Emissions O O-Not defP / O P / O P / O O P / O P / O P / OAT* BE -W BE - F BE - B CY CZ** DE DK** EE ES* FI FR GR
Installed capacity
Projection for productionP P / O
Historic production
Installed capacity P
Projections of productionP P P / O P / O
Historic Production
Projections P / O O P P / O P / O O
Historic Emissions P P / O O P / O P / O P / O P P / O P / O P / O P / O P / O P / OHU* IE IT* LT LU LV MT NL PL PT SE SI SK UK
Ben
chm
arki
ng
Uni
form
Tec
h /
Fue
l spe
c.
Emission based Incr
ea
sin
g D
isto
rtio
n
NA
P I
I no
t a
nal
yse
d y
et
/ N
o
tra
nsla
tion
ava
ilabl
e
NA
P I
I no
t a
vaila
ble
NA
P I
I no
t a
vaila
ble
Uni
form
Ben
chm
arki
ng
Emission based
Tec
h /
Fue
l spe
c.
Objective: Effective and efficient - process optimisation
Karsten Neuhoff, 5
And the level of allocation is not trivial
0,0
0,2
0,4
0,6
0,8
1,0
1,2
AT*
BE - WBE -
F
BE - B CY DE
ES* FIFR
HU* IE IT*
LV MT NL PL SE SK UK EE LU SI
CZ**DK** GR LT PT
mil. EUA
Hard Coal Plant
Natural Gas Plant
No detailed provisions
Analysis to be done or
No Translation available
NAP II not
available yet
Model Coal power station, 6000h,33% efficiency
Model CCGT (gas), 6000h,45% efficiency
Source: Neuhoff, K., Rogge, K., Schleich, J., Sijm, J., Tuerk, A., Kettner, C., Walker, N., Åhman, M., Betz, R., Cludius, J., Ferrario, F., Holmgren, K., Pal, G., Grubb, M. and Matthes F., 2006, Implications of announced Phase 2 National Allocation Plans for the EU ETS, Climate Policy 6(5) pp. 411-422.
Objective: Effective and efficient - process optimisation
Karsten Neuhoff, 6
Prices drive substitution (with regulatory/institutional support)
Denmark
JapanNorway
Austria
ItalyGermany Luxembourg
Switzerland SwedenPortugalFrance Finland
Spain
United
Kingdom
Netherlands
Greece
New Zealand
Belgium
United States
Australia
Mexico
Turkey
Hungary
Korea
Canada
Slovakia
Czech RepublicPoland
0
200
400
600
800
1,000
1,200
1,400
0.0 0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8 0.9 1.0Average energy intensity (kg oil equivalent/$1995 GDP)
Avera
ge
en
erg
y p
rice
$/t
oe
Best fit constant price
elasticity of -1.0 a
Source:Newbery, D. M. (2003) Sectoral dimensions of sustainable development: energy and transport. Economic Survey of Europe 2(73-93).
Objective: Effective and efficient – substituting (intermediary) products
Karsten Neuhoff, 7
Phase I2005-07
Phase II2008-12
Develop options for different international outcomes
Global or sectoral agreements
Effi
cie
nt p
rodu
ctio
n
En
viro
nmen
tal c
osts
re
flect
ed
in p
rice
Inn
ova
tive
ma
rke
t re
spo
nse
Border tax adjustment*
Allocation pro-portional to output
We will find the best solution in an international dialogue.*Ismer/Neuhoff, 2004, Border tax adjustments: A feasible way to address non-participation in emission trading, CMI/DAE WP 36.
How do address competitiveness effects?
Karsten Neuhoff, 8
(I) Objective: effective and efficient– Emissions reductions from process optimisation– Emissions reductions from substitution effects– > Auctioning
(II) Objective: investment security
(III) Interaction with renewables policy
Next steps for the European Emission Trading Scheme
Karsten Neuhoff, 9
Stern 2006
In the next 10 to 20 years … transition ... to [a world] where carbon pricing is universal and is automatically factored into decision making. … avoids the risks of locking into a high-carbon infrastructure … additional measures may be justified to reduce the risks."
Objective: Investment security
Karsten Neuhoff, 10
Projection uncertainty implies price uncertainty
Source: Emissions Projections 2008-2012 versus NAP2 (2006) by Karsten Neuhoff, Federico Ferrario and Michael Grubb. Published in Climate Policy 6(5), pp 395-410.
Create mid-term confidence in CO2 price to facilitate low Carbon investment
0
500
1000
1500
2000
2500
2005 2008 2009 2010 2011 2012
MtCO2/year
Verified Emissions
NAP II + (JI/CDM range)
Avg. 2008-12
Final NAP II***
Max projection
Min Projection
20% projections60%projections
Adjustments for opt-in in Phase II
88125
Other Adjustments*
Proposed NAP II**
Karsten Neuhoff, 11
0
500
1000
1500
2000
2500
2005 2008 2009 2010 2011 2012
MtCO2/year
Verified Emissions
NAP II + (JI/CDM range)
Avg. 2008-12
Final NAP II***
Max projection
Min Projection
20% projections60%projections
Adjustments for opt-in in Phase II
88125
Other Adjustments*
Proposed NAP II**
10% auctions with price floor could facilitate investment
Fre
e al
loca
tion
Coordinated auction with price floor can reduce risk of low prices
Price setby price floor
Fre
e al
loca
tion
Source: Emissions Projections 2008-2012 versus NAP2 (2006) by Karsten Neuhoff, Federico Ferrario and Michael Grubb. Published in Climate Policy 6(5), pp 395-410.
Create mid-term confidence in CO2 price to facilitate low Carbon investment
Karsten Neuhoff, 12
Proposed approaches to create long-term stability
• Increased use of banking*• Open market intervention• Splitting allowances as under US clean air program• Longer commitment periods
* Newell, R., W. Pizer and J. Zhang (2005) Managing Permit Markets to Stabilize Prices. Environmental and Resource Economics 31(2): P.133 - 157.
Create long-term confidence in CO2 price to facilitate low Carbon investment
Karsten Neuhoff, 13
Expected (Ex Ante) and Actual (Ex Post) Total Costs of some UK Policies during 1990-2001
* Upper estimate >£8000 mio.Source: AEA Technology Environment, 2005, An Evaluation of the Air Quality Strategy,Report to DEFRA, available at: http://www.defra.gov.uk/
0
1000
2000
3000
4000
5000
6000
Lead Free
Petrol
Euro I petrol
Cars*
2000 fuel
standards
2005 fuel in
2000/1
Flue Gas De-
Sulphurisation
(FGD)
Low NOX
burners
Co
sts
(£M
)
ex anteex post
Create long-term confidence in CO2 price to facilitate low Carbon investment
Karsten Neuhoff, 14
Option contracts could create long-term price floor
• Governments sell option contracts to private parties• Creates property right, strong enforceability• Investors can call an option:
– Hands in option + CO2 allowance
– receives strike price, e.g. 15 Euro/t CO2
• Direct hedge for investment
• Investors will call options if pCO2<15 Euro/tCO2
– Reduces supply, pushes up price, implements price floor
• Governments avoid buying back allowances– Restricts issuing allowances to retain scarcity price
Ismer, R. and Neuhoff, K. (2006) 'Commitments through financial options: a way to facilitate compliance with climate change obligations‘, EPRG WP 06/25
Create long-term confidence in CO2 price to facilitate low Carbon investment
Karsten Neuhoff, 15
(I) Objective effective and efficient– Emissions reductions from process optimisation– Emissions reductions from substitution effects– > Auctioning
(II) Objective investment security– Why is it an issue?– >Price floor in auctions– >Long term option contracts
(III) Interaction with renewables policy
Next steps for the European Emission Trading Scheme
Karsten Neuhoff, 16
pric
e
time , cumulative sales
market size
existingtechnology
CO2 price internalisation and technology policy
saved costs
learning costs
reduced by CO2 policy
additional benefits with CO2 price
ETS is no substitute for technology policies (e.g. renewable support)
Interactions between CO2 and renewables policy
Karsten Neuhoff, 17
Interactions between CO2 and renewables policy
What are the implications for renewables investment
Price uncertainty from ETS
+ Price/revenue uncertainty transmission constraints
+ Intra-annual volatility and balancing costs
----------------------------------------------------------
Significant market and regulatory uncertainty
Karsten Neuhoff, 18
SCOTLAND
Location ofWindSitesin the InvestmentPlanningModel
Regional boundariesfor transmission andinvestment
Our model outputs:
Wind output Wind investmentCCGT investmentSCOTLAND
0
2500
5000
7500
10000
2005 2010 2015 2020
0
2500
5000
7500
10000
2005 2010 2015 2020
0
2500
5000
7500
10000
2005 2010 2015 2020
0
2500
5000
7500
10000
2005 2010 2015 2020
0
2500
5000
7500
10000
2005 2010 2015 2020
0
2500
5000
7500
10000
2005 2010 2015 2020
0
2500
5000
7500
10000
2005 2010 2015 2020
WindCombined C
*
*
*
*** *
* Regional build constraint binding
– build constraints create scarcity rent
Future environment for renewables - congestion and balancing
Source: Neuhoff,K Cust, J and Keats,K, 2007, Modeling wind in the electricity sector, EPRG working paper 0702
Karsten Neuhoff, 19
Results in more volatile and peaky prices
0
10
20
30
40
50
60
70
80
90
100Euro/MWh
20052010
2015 2020
0 1 year
Illustrative
Future environment for renewables - congestion and balancing
Karsten Neuhoff, 20
In the real world, it is all about who carries the risk
RO
de
sig
n
En
erg
y p
rice
Ba
lan
cin
g c
ost
s
Imp
act
tra
nsm
issi
on
co
nst
rain
ts
Pro
ject
ris
k a
nd
d
eve
lop
ers
ma
rgin
RO
C m
ark
et
Co
sts
Project revenue requirement
Performance/operation
Regulatory uncertainty
Future market evolution
Risk from:
Pro
fit f
or
infr
am
arg
ina
lte
chn
olo
gie
s/lo
catio
ns
RO
de
sig
n
En
erg
y p
rice
Ba
lan
cin
g c
ost
s
Imp
act
tra
nsm
issi
on
co
nst
rain
ts
Pro
ject
ris
k a
nd
d
eve
lop
ers
ma
rgin
RO
C m
ark
et
Co
sts
Project revenue requirement
Performance/operation
Regulatory uncertainty
Future market evolution
Risk from:
Pro
fit f
or
infr
am
arg
ina
l
Reduce (a) infra-marginal rent (b) regulatory risk (c) re-allocate risk from future technology mix/fuel prices
Addressing regulatory risks reduces financing costsS
ou
rce
: Jo
hn
sto
n,
Ka
vali
an
d N
eu
ho
ff,
20
07
Ta
ke-o
r-p
ay
con
tra
cts
for
Re
ne
wa
ble
s D
ep
loym
en
t,
EP
RG
Wo
rkin
g P
ap
er
07
07
.
Banded ROC
Fixed & banded ROC
Take or pay contract
ROC
Karsten Neuhoff, 21
(I) Commit to auctions of most allowances– Avoids delays in emission reductions (early action
problem)– Positive for distributional impacts, innovation, credibility
(II) Consider instruments to avoid low prices– Price uncertainty delays (low Carbon) investment– E.g. use price floor in auction, long-term option contracts
(III) Renewables policy
– For many technologies CO2 price alone too low
– In addition significant uncertainty about market design (congestion, balancing, CO2)
– Provide long-term stability (e.g. take or pay contracts)
Next steps for the European Emission Trading Scheme
