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200701_3rdEnergyForum

200701_3rdEnergyForum

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Published by: Civic Exchange on Apr 28, 2009
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05/11/2014

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Market-based Pollution Control

:
Hong Kong & the International Marketplace
Roger Raufer Director, Engineering Services International Environmental Trading Group roger.raufer@ietg.com Civic Exchange 25 January 2007

Rapidly growing market

Carbon market size 2004: 2005: 2006: 2010: <$1 bn $9-11 bn $25-30 bn $40+ bn?

Kyoto Protocol "shortfall" 2008-2012: 4.5 - 5 bn tonnes Growing emissions problem
Source: WB & IETA, 2006; IPCC, 2001

R. Raufer, IETG

Strong project growth

CDM “pipeline”
Sources: OECD & IEA, 2006; UNFCCC, 2007

• 489 registered CDM projects • 1300 in "CDM pipeline" • CERs issued: 28.2 m • 1.5 b tonnes CO2eq. through 2012 • 17 approved DOEs • 112 countries have established DNAs

R. Raufer, IETG

Strong Asian focus

Regional Distribution of CERs to 2012 from Confirmed + Probable Projects
Source: UNDP, 2006

R. Raufer, IETG

Active markets worldwide

INVESTMENT BANKS SCRAMBLE TO JOIN CLEAN ENERGY MARKET
By REBECCA BREAM 3 January 2007

....banks are also investing heavily in carbon trading desks and establishing a position in this new market. Last year, Goldman said it was investing Dollars 23m in a 10 per cent stake in the London-listed Climate Exchange, which trades carbon future permits in Europe and the US. Morgan Stanley plans to invest Dollars 3bn (Pounds 1.52bn) in the carbon trading market over the next five years, buying carbon credits around the world and also setting up its own low-emission energy projects.....

R. Raufer, IETG

Overview

• • •

Engineers vs. Economists International Environmental Marketplace Hong Kong Challenges & Opportunities

R. Raufer, IETG

I. Engineers vs. Economists

vs.

R. Raufer, IETG

Engineering “Command/Control” Regulation

Goals
physical modeling

Environmental Quality Standards

Regulatory Means

A. Prohibitions

B. Technology-Based Standards
X

Emission Standards Performance Standards
X

Input/Fuel Standards Design Standards

X

X

R. Raufer, IETG

Economic Regulatory Approach

Goals

Marginal Costs (MC) = Marginal Benefits (MB)
$/ton

MB

MC


% reduction

Regulatory Means

Pollution Taxes (Price-based) Pigouvian taxation

Pollution Markets (Quantity-based) Emissions Trading

P Q

R. Raufer, IETG

Engineering vs. Economic Worldviews Engineering Goals
EQ Standards

Economics
MC = MB

Regulatory Means
Technology-Based Standards
Emission Stds. Performance Stds.
X X X

Economic Mechanisms
Pollution Markets (Quantity-based) Pigouvian Taxation Emissions Trading Pollution Taxes (Price-based)

Input/Fuel Stds. Design Stds.

P
X

Q

R. Raufer, IETG

Regulatory Means Transition #1: Engineering to Economics Engineering Goals
EQ Standards

Economics
MC = MB

Regulatory Means
Technology-Based Standards
Emission Stds. Performance Stds.
X X X

Economic Mechanisms
Pollution Markets (Quantity-based) Pigouvian Taxation Emissions Trading Pollution Taxes (Price-based)

Input/Fuel Stds. Design Stds.

P
X

Q

R. Raufer, IETG

Regulatory Means Transition #2: Price to Quantity Engineering Goals
EQ Standards

Economics
MC = MB

Regulatory Means
Technology-Based Standards
Emission Stds. Performance Stds.
X X X

Economic Mechanisms
Pollution Taxes (Price-based) Pigouvian Taxation Pollution Markets (Quantity-based) Emissions Trading

Input/Fuel Stds. Design Stds.

P
X

Q

R. Raufer, IETG

The U.S. Q-based Economic Transition

− 1976 − 1990 − 1999 − 2005

Urban air pollution Acid rain Ozone SOx/NOx expansion Mercury Greenhouse gases
RGGI, etc. California, etc. Federal??

– Forthcoming

R. Raufer, IETG

U.S. Emissions Trading Program – mid 1970s

Goals Regulatory Means

Environmental Quality Standards

1. Prohibitions

2. Technology-Based Standards
X Emissions Trading Program

Emission Standards Performance Standards
X

Input/Fuel Standards Design Standards

X

X

Brokerage Opportunities
R. Raufer, IETG

Emission Reduction Credits (ERCs)

ETP Components

Bubbles • Offsets • Bubbles • Netting • Banking

R. Raufer, IETG

Engineers' Approach: Credit trading from baseline

R. Raufer, IETG

Economists' Approach: Trade in allowable budget

R. Raufer, IETG

The Acid Rain Problem

R. Raufer, IETG

U.S. Acid Rain Control Program – 1990

Goals

Localized SO2 Levels

+

Total SO2 Loading

Regulatory Means

1. Prohibitions 2. Technology-based Standards

Pollution Markets (Q-based)

Q Nation-wide Market (Allowance Tracking System)
Emissions Trading Program

Emission Stds. Performance Stds. Input/Fuel Stds. Design Stds.

Brokerage Opportunities
R. Raufer, IETG

ERCs

Emission Allowances

U.S. Ozone Control Program – late 1990s
Goals Regulatory Means Environmental Quality Standards
Pollution Markets (Q-based)

1. Prohibitions

Q 2. Technology-based Standards
City/Regional Markets Examples:

Emission Stds. Performance Stds. Input/Fuel Stds. Design Stds.

Northeast U.S. “NOx Budget”

Emissions Trading Program

Los Angeles “RECLAIM” Program Illinois “Clean Air Market”

Brokerage Opportunities
R. Raufer, IETG

ERCs & Discrete Emissions Reductions (DERs)

NOx/VOC Emission Allowances

Price Signals for Emissions

SO2

NOx

Source: Evolution Markets

R. Raufer, IETG

New Markets: Transferable Renewable Energy Credits

Emissions Trading

Renewable Energy Credit (REC) Trading

Pollution levels

RES levels

Zero base

R. Raufer, IETG

Similar European P

Q Shift for RES

P-based
EFFECTIVENESS

Q-based
Feed-In
Spain France Austria Luxembourg Greece Portugal

Obligation + TGCs
Netherlands Denmark UK Italy Norway Belgium Sweden

Green Pricing
Finland

Tender
Ireland

ECONOMIC EFFICIENCY

Source: RECerT, 2001

R. Raufer, IETG

II. International Environmental Marketplace

CO2 at Mauna Loa

1000 years of temperatures

IPCC scenarios
R. Raufer, IETG

Emissions Trading in the Kyoto Protocol
Project-based

• Article 6: Joint Implementation
– Transfer of “emission reduction units” – Project-based, effective 2008-2012

• Article 12: Clean Development Mechanism
– Transfer of “certified emission reductions” – Banked after 2000, used during 2008-2012
Budget-based

• Article 17: International emissions trading
– Transfer of “assigned amount” units – Annex I countries, 2008-2012 – + Post-Marrakesh “removal units”
R. Raufer, IETG

KP Q-Based Program
Goals Regulatory Means

Reduction of GHG Emissions
Project-based
1. Prohibitions

Budget-based
Pollution Markets (Q-based) International Emissions Trading JI , CDM & LULUCF GHG Improvements Annex I Countries “Hot Air”

2. Technologybased Stds.

Q

Emission Stds. Performance Stds. Input/Fuel Stds. Design Stds.

Baseline Conditions

Brokerage Opportunities
R. Raufer, IETG

ERUs, CERs, & RMUs

AAUs

Clean Development Mechanism Project Cycle

Source: UNFCCC

R. Raufer, IETG

CERs from registered projects

Source: http://cdm.unfccc.int; 30/11/06

Expected annual average; 104,445,772 tonnes CO2e/yr

R. Raufer, IETG

EU Q-Based Emissions Trading System
Goals Regulatory Means
Energy Projects Pilot phase now (2005-2007) No LULUCF No nuclear
JI & CDM

EU Kyoto Protocol Compliance (i.e., GHG reduction)

Q

National Allocation Plans (NAPs)
10000 sources: ~44% of EU25 CO2 emissions

Baseline Conditions

“Linking Directive”

Brokerage Opportunities
R. Raufer, IETG

ERUs & CERs

EUAs

EUA Market


Spot market last 30 days

2005 EUA Exchanges
Source: Point Carbon, 2006; 2007

(Volume %)

R. Raufer, IETG

III. Hong Kong Challenges & Opportunities

Thickening haze blotting life from 'Asia's World City'
Monday, August 07, 2006 Runners' collapse brings calls for Hong Kong to clean up smog act Time is GMT + 8 hours Posted: 21-Aug-2006 14:00 hrs A pall of pollution hangs over Hong Kong harbour. Environmentalists have called for a rethink on how Hong Kong monitors air pollution after five more athletes collapsed while racing in thick smog and scorching temperatures Source: Singapore’s TODAY On-line Hong Kong was cloaked in dangerously high levels of thick smog on July 25 when Chief Executive Donald Tsang launched the Action Blue Sky campaign to reduce pollution.

R. Raufer, IETG

Hong Kong's Side Actions taken....

.....but expensive next steps Power Sector 20.5-27 bn HK$ Transport 7.4-23.6 bn Industry 0.2-0.4 bn
Source: HK Council Sust. Dev., 2006

R. Raufer, IETG

Guangdong's side & increased SO2 emissions
1200K

Rapid growth.....
TWh
200

800K Nuclear Hydro Gas Oil 400K

100 Coal

0 2001 2005

0

....with an inefficient energy infrastructure
(Per unit GDP, China energy consumption: 2.4 x world avg.; 8.7 x Japan avg.)

Source: Zhang et al, 2005; Guangzhou Daily, 2006

R. Raufer, IETG

Key Components to make ET Work

World Bank

• • • • • •

Realism Gradualism Legal Flexibility Leadership Participation Market Reliance

& Civic Exchange added a few more.... • • • • • Simplicity Commitment Verification Compatibility Cultural specificity

R. Raufer, IETG

Final thoughts

• Strongly growing, active international marketplace • Worldwide Q-based policy shift (and "Madisonian" market convergence?) • 30 years international ET experience Significant local environmental concerns

R. Raufer, IETG

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