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“Using Carbon Markets to Encouragethe Uptake of Low Carbon Vehicles”

Meeting the Low Carbon ChallengeThe Low Carbon Vehicle Partnership

Third Annual Conference

Thursday 15 June 2006

Robert Rabinowitz, PhDECX Associate Membership

Ltd.robert@ecxeurope.com+44 (0)20 7382 7803

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The most liquid, pan-European platform

for carbon emissions trading

cleared | quoted | liquid | transparent | regulated

The world’s first and North America’s only voluntary, legally binding rules-based greenhouse gas emission reduction and trading system.

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What is Emissions Trading?

A mechanism for efficient allocation of capital to reduce greenhouse gas

emissions

€0

€10

€20

€30

€40

Plant A Plant B NoTrading

Trading

€10 per tonne

€30 per tonne

New regulations: each plant cuts 1 tonne.

Total Cost to Society:

• No trading = €40• Trading = €20

€30(Plant B)

€10(Plant A)

€10

pollutioncontrol

cost structure

€10

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“Cap and Trade” Emissions Markets

Example: Baseline, Target and Actual Emission Levels

0

20

40

60

80

100

120

Baseline Seller Buyer

Em

iss

ion

Le

ve

ls

Emission target: 95 tons (5% cut)

100 ton baseline

85 tons

105 tons

10 ton surplus

10 ton shortage

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PHASING OUT LEADED GASOLINE (1982-1987)

• 100% compliance• 10 billion allowances banked to offset later costs• Saved $250 million vs. “command-and-control” regulation

ACID RAIN PROGRAMME (1995-)

• Sulphur dioxide emissions reduced 38%• Compliance levels exceed 99%• Costs ≈30% of lowest estimate prior to launch• Health benefits exceed costs by a ratio of 40:1

LESSONS LEARNED:

• Flexibility on “when,” “where” and “how” is viable and enforceable• Multiple participants creates market liquidity• Essentially 100% compliance• Targets met early• Significant cost-savings

Successful US Environmental Markets

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The Global Carbon Market Today

EU EMISSIONS TRADING SCHEME

• Volume > 600 million tonnes• Notional value > €12 billion• Price: €7-€30

UN CLEAN DEVELOPMENT MECHANISM

• Volume > 500 million tonnes (mostly forward contracts)• Average Price: $5 in 2004, $12 in Q1 2006• Major “north-south” capital flows for sustainable development

CHICAGO CLIMATE EXCHANGE

• All 6 GHGs, major multinationals, independent audit & regulation• Included emissions ≈ UK National Allocation Plan • Over 10 million tonnes traded• Price: $0.8 per tonne at launch, now at $4

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CORPORATE AVERAGE FUEL ECONOMY (CAFE)

• Sales weighted annual average fleet fuel economy• Credits for exceeding target, alternative fuel vehicles• Since 1983 more than $618 million paid in penalties

AVERAGING, BANKING AND TRADING

• Applies to emissions from engine families• Use of standard factors such as mileage and engine life

LESSONS LEARNED:

• Use of fleet averages + standardized factors• Credits earned for actions apart from meeting direct targets• CAFE: Lack of trading + penalties = failure to meet target• ABT: Few participants = no liquidity = ineffective market• Disconnect from other sectors restricts flexibility + liquidity

Precedents in the US Auto Sector

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1. Inclusion of multiple emission sources with different mitigation costs

2. Minimal transaction barriers3. Certainty over rules, targets and

compliance value of traded instrument

4. Liquidity (necessary for actual transactions and risk management)

CONCLUSION:

• LINK TO GLOBAL CARBON MARKETS

Key Design Principles

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Trading Scenario

% Improvement per $1,000 of Sales

Manufacturer A

• 2010 Vehicle Sales: 1,000,000• Baseline Emissions: 200 g/km• 2010 Emission Target: 188 g/km (-6%)• 2010 Actual Emissions: 192 g/km (-4%)Manufacturer B

• 2010 Vehicle Sales: 500,000• Baseline Emissions: 150 g/km• 2010 Emission Target: 141 g/km (-6%)• 2010 Actual Emissions: 129 g/km (-14%)

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Calculating Compliance Positions

% Improvement per $1,000 of SalesDifference between fleet average and

targetNumber of vehicles

sold

Mileage multiplier

Manufacturer A

-4 g/km

1,000,000

160,000 km

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-576,000 tonnes CO2-0.576 tonnes per

vehicle

-€11,520,000-€11.52 per vehicle

Manufacturer B

12 g/km

500,000

160,000 km

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864,000 tonnes CO21.728 tonnes per

vehicle

€17,280,000

€34.56 per vehicle

Carbon intensity of fuel

CO2 = €20 per tonne

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Example of a Transaction

% Improvement per $1,000 of Sales

Manufacturer A

Total Liability = 576,000

Manufacturer B

Total Credit = 864,000

€9.52 million

Carbon credits =476,000 tonnes of CO2

388,000 tonnes CO2

banked

100,000 tonnes CO2 credits for

alternative actions

The Global Carbon Market

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Design Options

% Improvement per $1,000 of Sales

Target: Existing voluntary targets? Absolute or relative targets?

Credits: Reward for early action? Credits for scrapping most polluting vehicles or other activities?

Banking: Unlimited? Time limits? Absolute limits? Flow control? Borrowing?

Mileage Multiplier: 1 year or entire vehicle life?

Relation to Global Carbon Market:

Problem 1: Auto sector demand for credits increases burden on other sectorsAnswer 1: Set achievable targets that enable leaders to earn credits

Problem 2: Rising sales offsets efficiency gains - auto sector earns credits while emissions increase

Answer 2: Tightened targets to account for fleet growth or “gateway”

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Conclusion

% Improvement per $1,000 of Sales

• Using carbon markets to achieve a product standard is an innovative regulatory approach

• Clear regulatory metric: emissions per kilometre

• Cost-effective, high compliance levels

• Provides incentives to exceed targets

• Flexibility on how to achieve goal: e.g. manufacturing, consumer marketing and education, credits for other actions, reducing carbon intensity of fuels

• Need not be in conflict with use of carbon market to cap transport emissions