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Sectoral Crediting Mechanisms (SCMs): An initial assessment of electricity and aluminium

Sectoral Crediting Mechanisms (SCMs): An initial assessment of electricity and aluminium

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Sectoral Crediting Mechanisms (SCMs): An initial assessment of electricity and aluminium

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  1. Sectoral Crediting Mechanisms (SCMs): An initial assessment of electricity and aluminium Jane Ellis and Richard Baron www.oecd.org/env/cc COP/MOP1 - CPEQ WBCSD Side event Montréal, 7.12.05

  2. Presentation outline • Why sectoral crediting mechanisms (SCMs)? • Background • Common SCM requirements • Aluminium sector insights • Electricity sector insights • Conclusions

  3. Background (1) • Why electricity and aluminium? • Have examined how SCMs that are rate-based, policy-based or fixed limits could work in each sector

  4. Background (2): three structures for SCMs • Policy-based • Evaluate and credit reductions pertaining to well-identified policies • Fixed limits • Fixed caps on sectors’ (and installations’) emissions • Rate-based • Baseline set in terms of t CO2-eq per unit of output • Critical issue: national or international-level baseline?

  5. Common themes Electricity Aluminium • Environmental effectiveness determined by SCM design (e.g. baseline level), rather than its structure (e.g. rate-based, policy-based) Baselines Eligibility Projections

  6. Initial insights: aluminium • International-level, rate-based mechanism most appropriate • This study: Focus on primary production • Issues to be resolved: • how to encourage participation? (voluntary agreements exist) • boundary definition (include electricity emissions?) • data availability for sector projections? • role of governments and linkages to national systems • fairness / perverse incentives/ leakage to other sectors

  7. National-level SCM seems most appropriate Fuel resources and power generation mix vary significantly (e.g. Brazil and China) Issues to be considered vary. For instance: Policy-based: ex-post estimates required to quantify CO2 reductions, as baseline could vary with sector’s development. Outcome hence uncertain for investors. Rate-based: various options exist for baselines (national average tCO2/MWh…) Fuel by fuel: discourages fuel switching, but takes local conditions into account. Does not encourage demand side energy efficiency. Fixed limit: less flexibility could lead to an agreement on a relatively high baseline (and the possibility of overly-generous allocation of credits) Initial insights: electricity

  8. Options for baselines (rate-based)

  9. SCM: Policy Challenges • Governance issues: • Who negotiates on behalf of sectors (especially if international agreements are envisioned)? • How to turn SCM into effective incentives at domestic level? • Interaction with existing mechanisms • CDM, Article 17 trading, EU ETS, other trading systems • Approval process: what can we learn from CDM?