Public Power - January/February 2009 - (Page 37)

Notwithstanding the United States’ refusal to ratify the Kyoto Protocol, more than 175 countries moved forward, trying to meet the treaty’s requirements on carbon dioxide emissions. Perhaps most representative of what Kyoto in America might look like were the actions taken by the European Union, which had to work with its own harmonized structure while meeting the diverse interests of its then-15 member states and the 12 who would soon join. To meet thesetcarbon in the Kyoto pact, the dioxide emissions-reduction goals forth EU 15 agreed to develop a cap-and-trade system. The result was that on Jan. 1, 2005, just as it was admitting 12 additional nations to its ranks, the EU implemented the world’s most comprehensive cap-and-trade system for carbon emissions. The scheme covers large emitters in the power and heating sectors, and some energy-intensive industrial sectors. Altogether, covered facilities account for roughly half of all EU emissions. The Emissions Trading Scheme (ETS), the first phase of this cap-and-trade system, was a fairly loose and decentralized platform for capping carbon emissions and trading credits. Individual countries established their National Allocation Plans (NAP) and set their own emissions caps. Even though the NAPs were subject to EU approval, the individual states were granted extensive leeway in setting their own goals, and were also largely responsible for oversight once Phase I, which ran from Jan. 1, 2005 to Dec. 31, 2007, was under way. The result: emissions caps for the 25 EU members exceeded actual emissions in 2005. There were challenges during the early stages of implementation. There was contentious debate over which installations to cover, the rules for new entrants, and developing methods for allocating allowances to covered sources. Some advocates recommended allocating allowances using benchmarking measurements. This would distribute allowances based on a common emission rate (an average or best-practices rate, for example) multiplied by historical output. Typically, this favors newer and, presumably, more efficient plants. But “source heterogeneity” made the use of benchmarking difficult because sources differ within even the same sector. Two facilities with simwww.APPAnet.org ilar outputs in terms of some measure, such as tons, may vary in emissions because their end products are different. Therefore, the member nations generally used historical emissions as the criterion for establishing their caps. Another important decision was to allocate—rather than auction—most of the allowances. The maximum amount of allowances available for auction was set at 5 percent, and only four nations decided to auction any allowances at all. The allowance price in the first year of implementation rose to between 20 to 30 Euros per ton, reaching such heights because 2005 featured an unusually cold winter, a dry summer in southern Europe, and high oil and natural gas prices. The switching price—the allowance price at which it becomes economical to switch from coal to natural gas units—remained higher than the observed allowance price. This reinforced the belief that there was strong demand for allowances and that the price was too low. Another cause of the high prices was that “short” facilities (those facilities with more emissions than credits) were more active in the market than “long” facilities (those with more credits than emissions). Companies with long positions were under no compulsion to sell, and they took a wait-andsee approach. The “short” facilities were generally electric utilities, as many EU governments required most reductions to come from utilities because they can switch fuels and they do not compete with industries in other countries. Trading volume increased significantly as the program developed. Initially over-thecounter markets predominated, but trading on organized exchanges grew more extensive as well, though most trades still occur on over-the-counter exchanges. A European Commission report released in May 2006 significantly affected allowance prices. The report revealed that CO2 emissions in 2005 “were about 80 million tons, or 4 percent lower than the number of allowances distributed to installations for 2005 emissions.” Allowance prices fell to around 15 Euros as soon as the report was released. Prices fell again in September 2006, but did not reach zero, remaining instead at “the high end of the initially predicted price range,” or roughly 10 Euros. Moody’s Global Corporate Finance explained what happened. “The EU overestimated the number of carbon permits needed, companies sold their allowances, flooding the marketplace (and generally making windfall profits in the process) and the price of carbon plummeted.” Despite what seemed to have been an over-allocation of credits, and the bottoming out of allowance prices, economists A. Denny Ellerman and Barbara Buchner wrote in a report that the ETS achieved real carbon emission reductions. “It is unlikely that the trends in CO2 intensity that were evident through 2004 for the EU economies as a whole were not also broadly true for the EU ETS sectors,” Ellerman and Buchner wrote. “Given the observed increase in real output for the EU ETS sectors, it is very unlikely that CO 2 emissions from the installations included in the scheme would have declined in the absence of the EU ETS and the significant price that was paid for CO2 emissions in 2005.” Ellerman and Buchner also pointed out that not all EU nations were granted more allocations than needed. Nearly all installations in nine member countries had more allowances than they needed. In other nations, most installations were long, but several were short. In other countries, many installations were long by relatively modest amounts. Finally, in Greece, Austria, Italy, Ireland, Spain and the United Kingdom, most installations were, on balance, short. Windfall profits have garnered a lot of attention since the advent of the Emissions Trading Scheme. Even before implementation of emissions trading, it was expected that free allocations of carbon credits would allow long installations to profit off of those free credits. Ellerman and Paul L. Joskow explained how windfall profits theoretically work in a liberalized electricity market: “The January-February 2009 37 http://www.APPAnet.org

Table of Contents Feed for the Digital Edition of Public Power - January/February 2009

Public Power - December 2008 Contents Perspective 10 Questions Heat or Eat? Achieving Excellence in Nuclear Operations Training Grand Ambitions for Wind Power Visions of Green Carbon Trading Across The Pond Reliability Green Energy Customer Service DEED Hometown Connections Parting Shot

Public Power - January/February 2009

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