THE EU PRESENTS: THE FUTURE OF EMISSIONS REDUCTIONS

While the U.S. does everything it can to protect the fossil fuels industries and the emissions they generate, the European Union (EU) is aggressively confronting the “anthropogenic” part of anthropogenic climate change.

This week the rules that will govern the EU Emissions Trading Scheme (ETS) for 2013 through 2020, Phase 3 of the European Union’s heroic effort to reduce emissions through market processes, were announced. The new rules implement previously agreed-on EU targets for obtaining 20% of power from New Energy and a 20% cut in greenhouse gas emissions by 2020. Some business and political leaders heralded the new standards while some environmentalists, including IPCC head Rajendra Pachauri, wanted 30% goals.

Instituting the EU’s cap-and-trade system has been no easy matter for the European Commission (EC), the executive body for the Union. In its earliest stages, it reminded many of the Yeats line, “A terrible beauty is born.” But the EC has vigilantly adjusted the system and in the process discovered much about what makes cap-and-trade work.

The most troublesome aspect of the EU’s efforts remains that so many nations of the world remain outside the EU ETS and any other emissions-cutting cap-and-trade system.

But some EU leaders remain optimistic that the rest of the world (i.e., China, India and the U.S.) will respond to their leadership. Hilary Benn, MP/UK Environment Secretary: "This plan shows exactly what we are aiming for globally --a comprehensive and affective agreement to tackle climate change, with the carbon market at its heart. With a global deal the EU will up its commitment to cut greenhouse gas emissions to 30 percent by 2020."

EC Commission President Jose Manuel Barroso is more realistic: "We do not want to be dependent on regimes that are not our friends and want to protect ourselves from them…"

Possibly the most important new rule is the decision to consider CO2 that is captured and sequestered to be NOT counted in a power plant’s emissions. This will likely make carbon-capture-and-sequestration (CCS) a much more appealing economic prospect.

A disappointment is that the new rules exclude trading credits for preventing deforestation.

Emissions credit prices dropped in anticipation of this announcement but have already begun to recover. Traders are learning to anticipate the behavior of CER markets like they do any other. (click to enlarge)

Overall, the new rules incorporate 6% more emissions.

Perhaps the most progressive idea under consideration was the “emissions-rendition” idea that would put an import tariff on goods from nations without an emissions-reduction program so as to make them as expensive as goods manufactured in the EU, where the cost is higher as a result of EU emissions caps. The EC, which formulated the new rules on behalf of the EU, did not institute the tariff but did not rule out the possibility of coming back to it.

Many in the U.S. may not want to read it but the EU is the standard-setter on New Energy development and climate change initiatives. If the U.S. does not get in the game soon, it will miss out on a huge economic opportunity.

EU adopts major energy, climate change plan
Paul Taylor and Gerard Wynn, January 23, 2008 (Reuters)

WHO
European Commission (Jose Manuel Barroso, President) of the European Union; International Panel on Climate Change (Rajendra Pachauri, Panel Chair)

WHAT
- New rules for Phase 3 of the European Union (EU) Emissions Trading Scheme (ETS) were announced.
- Auctioning of permits for emissions has emerged as the crucial factor in making the cap-and-trade system effective. If permits are given to emitters freely, trading of the excess amounts does not end up making them expensive enough to cut emissions. If they are too expensive, it would slow economic development.

The EU is way ahead of the rest of the world on the development of New Energy. It may cost now but it will likely make the EU powerful in the future. (click to enlarge)

WHEN
- Phase 2 began in 2008 and runs through 2012.
- Phase 3 will begin in 2013 and run through 2020.
- The new Phase 3 measures were announced January 23.
- 2013 EU allocation: 1974 tonnes CO2e; 2020 EU allocation: 1720 tonnes CO2e.
- 2013 through 2020 and 2021 through 2028: Allocation falls 1.74%/year.
- The new rules must still be ratified by EU leaders and the EU Parliament.

WHERE
- There are 27 nations in the European Union.
- The ETS covers power plants, oil refineries, coke ovens, iron and steel plants, and makers of cement, glass, lime, bricks, ceramics, pulp, paper and board. Phase 3 will include aluminium and ammonia producers.

EU trading is now financing emissions-reduction projects all over the world: Red=Large scale CDM project, one location; Orange=Large scale CDM project, several locations ; Yellow=Small scale CDM project, one location ; White=Small scale CDM project, several locations. (click to enlarge)

WHY
- The EU will cut permits, lowering emissions to 21% below 2005 levels by 2020
- EU electricity prices are expected to rise 10 to 15%
- 5% of allocations set aside for new energy installations and new airlines.
- Utilities must purchase ALL emissions permits after 2013. Decisions on free/auctioned permits for other sectors will be made after 2010. On average, 60% of permits will be auctioned after 2013.
- Airlines and oil refineries will pay for 20% of permits in 2013 and that will rise to 100% for 2020.

- Each member nation will have its own auction for its own emitting businesses and industries.
- An import tariff is not on the schedule but is not ruled out.
- Permits not used in Phase 2 can be used in Phase 3.
- Nitrous oxide (N2O) and perfluorocarbons will be included in the list of greenhouse gases after 2012.

Europe's offshore wind capacity may make it an energy giant in the coming decades. (click to enlarge)

QUOTES
Here are selections from a fascinatingly broad sampling of opinion collated by Reuters:
- David Porter, CEO, Assoc of electricity producers (95% of UK power): "One way or another reducing carbon emissions from the electricity industry costs money. It will be interesting to see how the revenue that is taken from the electricity industry is used when it gets into government hands."
- Jake Ulrich, Managing Director, Centric Energy: "It is good news that in the power generation sector at least, the Commission is moving from a system of free handouts of allowances to emit CO2 to full auctioning instead. This will ensure that the polluter pays and will end huge windfalls to the highest polluting generators."
- John Hutton, MP/UK Business Secretary: "The Commission's proposals on removing regulatory barriers to Carbon Capture and Storage (CCS) are vital. Demonstration of this globally significant technology must happen as soon as possible and I hope that the UK's demonstrator plant, expected to be up and running by 2014, can fully participate in EU initiatives on CCS demonstration."
- Robt Bailey, Oxfam Intn’l: "Oxfam is already seriously concerned that the EU's biofuels strategy fails to protect the land, livelihoods and human rights of vulnerable people, creating a huge threat to sustainable development where there should have been an opportunity. It is untenable for the EC to proceed with this legislation in the knowledge that it is unlikely to deliver on its primary policy objective of reducing emissions from transport."
- Robt Casamento, Director/Utilities, Ernst & Young: "Europe has been the global leader on emissions trading for the last three years -- but the EU needs to consider the pace and the scale of implementing changes to the developing ETS(Emissions Trading Scheme). It cannot continue to go it alone without others such as the U.S. and eventually India and China-- emissions trading schemes need to be developed worldwide."
- Mark Spelman, Global Strategy Head, Accenture: "Dirty energy will become a real and tangible cost for business. Despite the large venture capital investment going into renewables, the outlook is that we will remain hugely dependent on fossil fuels for the next 25 years... Renewables is a step in the right direction but coal remains the big, unanswered question."