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Lessons Learned Market-Based Approaches: European Union

Lessons Learned Market-Based Approaches: European Union. The Mansfield Pacific Retreat Abyd Karmali 27 August 2003. Key Messages. Governments across the European Union are increasingly experimenting with market-based mechanisms to address environmental problems

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Lessons Learned Market-Based Approaches: European Union

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  1. Lessons Learned Market-Based Approaches: European Union The Mansfield Pacific Retreat Abyd Karmali 27 August 2003

  2. Key Messages • Governments across the European Union are increasingly experimenting with market-based mechanisms to address environmental problems • EU will shortly launch world’s first international emissions trading market for greenhouse gases • EU-based companies have been encouraging a shift from command-and-control to more market-based approaches but are only now appreciating unanticipated impacts

  3. Outline of Presentation • Overview of EU Market-Based Mechanisms • Case Study: EU Emissions Trading Scheme • Lessons Learned

  4. A global environment, economics, and energy consulting firm • Environment and Climate Change Management • Regulatory analysis • Environmental strategy • Value-at-stake analysis • Emissions trading analysis • Market mechanisms design • Corporate Responsibility • Asset Acquisition & Deployment • Wholesale power market and renewables energy analysis • Transmission and interconnection assessment • Asset valuation • Due diligence • Asset & portfolio optimisation Helping clients manage the world’s natural, physical, economic resources in a sustainable way • Network Analysis • Regulatory strategy • Network benchmarking • Network valuation • Value of transmission • Other Services • Transport sector analysis • Energy efficiency • Information management systems • Economic & community development • Emergency management • Strategic communications

  5. Overview of EU Market-Based Mechanisms

  6. Agencies in EU increasingly using market mechanisms • Tradable permit systems • France: tradable development rights for land preservation • Netherlands: tradable fishery quotas • Deposit-refund systems • Austria: electric bulbs • Denmark: beverage containers and lead batteries • Environmentally motivated subsidies • Sweden: grants for bio-fuels • UK: enhanced capital allowance for energy efficient technology

  7. Heterogeneous policies used across EU for green energy • Providing direct financial incentives • Investment-based: subsidies on green investments, tax rebates, and incentives • Output-based: feed-in tariffs or preferential rates • Setting green energy quotas • Tradable: certificates for green electricity produced • Not-tradable: generators bid for capacity or are set portfolio quota

  8. Case Study: EU Emissions Trading Scheme

  9. EU ETS relies on ‘cap-and-trade’ approach • Limits are set on allowed emissions, the corresponding allowances can be freely traded amongst participating companies, so that: • Imposes direct cap on aggregate emissions – the source of the problem • Efficiency emerges from free trading • Market-based, lowest-cost ‘price of carbon’ emerges from the trading market • Also includes “baseline and credit” mechanism

  10. Overview of EU Emission Trading Scheme Market Absolute Target Holders (>20MW generators) Projects (JI, CDM) Verification Approval Reporting Government (Member states determine allocations)

  11. Strong underlying rationale for an emissions trading scheme Distance to target indicators (DTI): difference between (linear) targets and trends in 1999:

  12. Cost/Price (£/tonne CO2e) US$10 (market price of GHG in trading system) (2) (1) Tonnes CO2e QC QN Level of GHG abatement Typical company abatement cost curves highlight benefits • Q1 = total negative cost level of emissions abatement; • (1) = total cost savings to company • Q2 = total cost-effective level of emissions abatement and • (2) – (1) = net financial cost to company

  13. EU ETS provides significant boost to the CDM markets • The Clean Development Mechanism provides companies opportunity to generate additional revenue • First two projects recently had their methodologies approved by the CDM Executive Board • Korea HFC emissions reduction project • Brazil landfill gas management project • CDM credits can be sold into the EU ETS starting in 2008

  14. Lessons Learned

  15. Short-term drivers of value for EU based-companies Stakeholder Concerns Government policies Markets for project-based reductions Key drivers New revenue streams Operating costs Product prices Cashflows Sales Cost of capital Value impacts Can be quantified and compared against transaction costs Can be quantified and competitiveness impacts analysed Indirect, anecdotal data only Can value impact be assessed?

  16. Impact on UK power plant asset value from choice of allocation method 200 180 160 140 120 Value Index (Reference Value = 100) 100 80 60 40 20 0 Reference Case

  17. Impact of market-clearing price on a German power plant asset value

  18. Summary of Lessons Learned • Market-based mechanisms provide a new driver of value for companies operating in the EU • The critical interface between governments and companies relates to the method for allocating new forms of property rights • Companies need to be meaningfully engaged in the debate • Companies are only now realising the level of analysis required to fully appreciate the implications on their competitiveness

  19. Abyd Karmali Director, ICF Consulting Hamilton House Mabledon Place Bloomsbury, London WC1H 9BB United Kingdom +44.(0).20.7554.8752 akarmali@icfconsulting.com For More Information

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