EU ETS – Changing Trading Market Conditions

1. EU ETS – Changing Trading Market Conditions Nordic Energy Perspectives Helsinki 24th of January 2006

2. Agenda • Lessons learnt from the First Emission Trading Period • EU Commission Guidelines Phase Two • Allocation • Small installations • Defintion combustion intallation • CDM/JI as compliance instruments • New entrants and closure • Second Emission Trading Period: Price Drivers • The Kyoto gap • Allocation • CDM/JI Credits • Conclusion

3. Lessons learnt from the first trading period EXPERIENCES NEW DIRECTION Low contribution of ETS sector to reach Kyoto target Stricter national CAPs second period Harmonisation regarading allocation methods, NER, closure, small installations and def. of comb. installation Unharmonised procedures in EU ETS member states • Project based mechanisms: • High governmental activiy level • Moderate use in EU ETS to comply Governmental contribution by purchase programmes Limit of CDM/JI credit use in ETS to comply

4. EU Guidelines Phase 2: Allocation • Discussions on: • Harmonised allocation methodologies; • Regulations on auctioning and EU wide benchmarks • Guidelines: • EU-wide benchmarking is not sufficiently matured as allocation method • 10% auctioning is stressed by EU • Caps have to be lower than caps of phase 1 • Total allocation have to be reduced by 6% • 45% is now coverd by EU ETS • Total Gap (2003) is 296,5 Mio t • Total allocation cut of 128 Mio t • Total cap second trading period: 2063 Mio t (2190.8)

5. EU Guidelines Phase 2: Small installations • Discussions on : • Decision to leave out small installations <25 000 t/a • Simplified and cost efficient rules for small installations • Guidelines: • Small Installations: • Will be further considered in the EU ETS review • Cost saving potentials by simplifying rules • Less transaction costs in the 2nd phase • EU Comission consideration of combustion activities below f.ex 3 MW should not be counted for

6. EU Guidelines Phase 2: Definition of combustion installation • Discussions on: • Definition of ”combustion installation” • Guidelines: • Broad definition: including all combustion processes”…any installation, which includes one or more piece of stationary technical apparatus in which a combustion process takes place and that together on the same site and under the responsibility of the same operator has a rated thermal input exceeding 20MWth…”

7. EU Guidelines Phase 2: CDM/JI as ETS compliance instrument • Discussions on: • Limits for the use of project based mechanisms for compliance • Guidelines • There is no limit in the usage of Kyoto units by operators set by EU Commission(as long as the figure is consistent with the obligations under the Kyoto Protocol) • NAP II has to specify the max. amount of CERs/ERUs which may be used by operators to comply • As a percentage of allocation of allowances • Limit can be individually or collectively

8. Closing the Gap: Price Drivers in the EU ETS 2005-2007 2008-2012 General Price Driving Factors Economic Growth Economic Growth Weather conditions Weather conditions Price Drivers within Europe NAP 1 Allocations NAP 2 Allocations Relative coal/gas prices Relative coal/gas prices New ETS Entrants Governmental Purchase of AAUs Price Drivers outside Europe CERs from CDM CERs from CDM ERUs from JI Governmental Purchase of AAUs Supply of AAUs – Strategic Behaviour

9. Kyoto GAP • Kyoto Gap according to BAU emission projections for 2010 • Intended use of CDM and JI Source: EEA; 2005

10. Allocation Phase 2 Allocation according EU Commission Guidelines calculation Kyoto Gap (2003) * ETS share 2003 = Reduction of Cap Phase one

11. CDM/JI Governmental purchase volumes In Mio t CO2eq/a Sweden Austria 7 Spain 20 1 Belgium Denmark Finland 8,4 2 4,5 Ireland 3,7 Netherlands 20 39,6 3 Italy Luxembourg Total Period: 545 Mio t CO2eq 2008-2012

12. CDM credit availibility CDM Volumes until 2012 by project status in kt CO2 (acc. UNEP CDM Pipeline) Total volume 2008-2012: 548 Mio t

13. JI credit availability Total volume of already implemented JI projects 2008-2012; by host country in kt CO2eq Total JI Volume 2008-2012: 54,7 Mio t CO2e

14. CDM/JI credits: Intended Purchases 2008-2012 DEMAND IET Market Other trading markets New ETS countries Governm.purchase 550 Mio t EU ETS 1/3 2/3 EU market (60% of total supply potential) New projects CDM Projectpipeline 548 Mton CO2e JI Project pipeline54.8 Mton CO2e SUPPLY Source: UNEP, IETA

15. Changing Trading Market Conditions • First Emission Trading Period • No harmonised allocation methods • No transparancy • EU Commission Guidelines Phase Two • Stricter demand on • Allocation methods • Transparancy • MS and trading participants to show policies and measures to reach compliance • If not documented satisfactory, the Commission will propose a proportional reduction of the MS • Second Emission Trading Period: Price Drivers • New price drivers make credit prices uncertain

16. ECON - Kontaktinformasjon Oslo ECON Analyse hovedkontor/ECON Management Postadresse: Postboks 5, N-0051 OSLO Besøksadresse: Biskop Gunnerus’ gate 14A Telefon: +47 45 40 50 00 Telefaks: +47 22 42 00 40 (Analyse) Telefaks: +47 22 41 41 44 (Management) e-post: oslo@econ.no Stavanger Kirkegaten 3 4006 STAVANGER Telefon: +47 45 40 50 00 e-post: stavanger@econ.no Stockholm Artillerigatan 42, 5 tr S-114 45 STOCKHOLM Sverige Telefon: +46 8 528 01 200 Telefaks: +46 8 528 01 220 e-post: stockholm@econ.se København Nansensgade 19, 6. sal DK-1366 København K DanmarkTelefon: + 45 33 91 40 45 Telefax: +45 33 91 40 46 e-post: copenhagen@econ.no Paris 18, rue de la Perle F-75 003 PARIS Frankrike Telefon: +33 1 45 78 70 03 Telefaks: +33 1 48 87 44 39 e-post: paris@econ.no

17. EU Commissions Timeline EU Commission GuidelinesPhase II EU ETS Review report of EU Commission on ”Directive” Deadline for amendments to NAP II Start of second ETS trading period Entry into force of revised monitoring and reporting guidelines Draft NAP II by member statesto be handed in 2006 2008 2007 31. Dec 06 1st Jan 08 June 06 July 06

18. Kyoto Gap including CDM/JI purchase Kyoto Gap (BAU emission projections for 2010) with consideration of governmental purchase of CDM/JI credits

19. Price Influences in the 2008-2012 Period • Demand Side • Kyoto Gap • Allocation: 6% percent reduction; what does it mean for countries short of allowances? • IET market activities • CDM/JI credit use • Governmental level • ETS installation level • Supply side: • New ETS Entrants: Bulgaria & Romania • Russia and Ukraine • Influence of other markets (Canada, NZ, Japan)

20. General availability of credits (1) • IET Market and other non EU countries: • Canada • New Zealand • Japan

21. CDM/ JI credit import into ETS • Due to relative strict allocation provisions of EU Commission: • Member states provide flexibility in use of project based mechanisms for compliance • Most likely: soft limits will be set in NAP 2 • Import volume does not change significantly if single states do not allow import

22. Experience from the 2005-2007 period and Further Guidance for the 2008-2012 period First Trading Period NAPs was assessed in a pragmatic manner General lessons for the 2nd NAP resulted in a convergence of choices across MS Second Trading Period 1. More use of emissions trading 2. Allocation has been more restrictive for power generators 3. MS with excess emissions intend to buy Kyoto units 4. Non-acceptance for ex-post adjustment 5. Some NAPs are more complex than needed Further Guidance on 11 Countries are not on track 1. Progress to Kyoto Target • Cap potential is based on GDP growth and carbon intensity red. rates • Total gap 296.5 MtonCO2e. • Proportional share of ETS Sector: 6% below 1st phase • Annual average allocation of 2.063 billion allowances 2. Setting NAPs 2 caps • MS face a considerable • challenge to realise volumes • If not documented satisfactory • Commission will propose a • prop. reduction of MS cap 3. Intended Gvnmt purchase If not documented satisfactory Commission will propose a prop. reduction of MS cap Definition of Combustion Installation: Broad Definition: 20 MW in the same network with the same operator Small Installations: < 3 MW aggregation rule not valid 4. P&M 5. Limit on JI/CDM compliance by operator To be specified for each inst. by the MS To early to determine best practice 6. New Entrants and Closures Beyond 2012: Further harmonisation desirable Commission stresses auctioning 7. Allocation Methods

23. Other Credits: EUAs and AAUs • EUAs: Bulgaria and Romania will enter EU ETS in 2008 • Their position 2008-2010 will be long: • Bulgaria: ~51 Mio t/a • Romania: ~64 Mio t/a • AAUs: Russia and Ukraine have excess allowances which could enter the EU market: • App. release of 540 Mio t (40% of total surplus units; [IETA, 04]) • Difficult to foresee supply:and thereby hard to determine price influence of the EUAs Need to be checked by other sources

25. CDM/JI Governmental purchase volumes In Mio t CO2eq/a Sweden Austria 7 Spain 20 1 Belgium Denmark Finland 8,4 2 4,5 Ireland 3,7 Netherlands 20 39,6 3 Italy Luxembourg Total Period: 545 Mio t CO2eq 2008-2012