Functioning of the EU Emission Trading Scheme
Dr. Brigitta Huckestein
Berlin, February 2018
Winter Academy 2018
Trading, Sales and Financing in the European Energy
Market and Industry
BASF – We create chemistry
Our chemistry is used in almost all industries
We combine economic success, social responsibility and environmental protection
Sales 2017: €64.5 billion
EBIT 2017: €8.5 billion
Employees (as of December 31, 2017): 114,000
6 Verbund sites and 352 other production sites
1
Reduction of greenhouse gas emissions with increased production
0
50
100
150
200
250
1990 1996 2002 2008 2014
Development since 1990
Index 1990 = 100%, BASF Group excl. oil and gas business
volume of sales product
absolute greenhouse gas emissions
specific greenhouse gas emissions
+102%
−50.2%
−75.4%
100
4
Outline
□ EU ETS targets
□ Carbon Leakage, Benchmarking and Free Allocation
□ Measuring, reporting & verification (MRV) /Trading
□ EU ETS: Fit for the Future ?
7
EU Roadmap for moving to a low carbon economy
Saving Greenhouse Gases by products is not enough to reach the EU climate targets 2050
Need to evaluate options in production
Different speeds for different sectors
Source: European Commission, The roadmap for transforming the EU into a competitive, low-carbon economy by 2050
-7%
-20% -54 bis -68%
-34 bis -40%
8
Climate protection products help to save the climate
6
ETS targets up to 2030
Mt CO2
-1.74% p.a.
ETS cap
Non-ETS -10% (2005-2020) - 30% (2005-2030)
ETS - 21% (2005-2020) - 43% (2005-2030)
-20% target -40%
target
1333
ETS Phase I/II ETS Phase III
GHG
cap
0
2000
4000
6000
1990 1995 2000 2005 2010 2015 2020 2025 2030
Free industry
allocation
- 556 2084 1816 -2.2% p.a.
-2,2 % p.a.
9
Strengthening of the EU ETS after 2020
Increase of the Linear Reduction Factor (LRF)
Voluntary cancellation of allowances
Market Stability Reserve (MSR) changes
Temporary doubling of the feeding rate: From 2019 to 2023, 24% of the total number of allowances in circulation will be put in the MSR
Feeding rate of 12% restored as of 2024 but then most likely a higher LRF!
Limited validity of MSR allowances: As of 2023, the number of allowances held in the MSR will be limited to the auction volume of the previous year; holdings above that amount will lose validity
First MSR review in 2021
Change from a purely volume based system to
a volume and (indirect) price driven system
10
Outline
EU ETS targets
Carbon Leakage, Benchmarking and Free Allocation
Measuring, reporting & verification (MRV) /Trading
EU ETS: Fit for the Future ?
11
Requirements for ETS in the industrial sector
Carbon Pricing through ETS to set incentives for emission
reduction
Advantages for GHG efficient production, disadvantages for GHG inefficient
production
Protection against carbon leakage
Industries in a globally competitive environment shall not be disadvantaged
Free allocation of certificates based on benchmarks Compensation of indirect costs (higher electricity prices)
Source: ETS Handbook
12
Structure of the ETS in Phase 4
15.5 Billion Allowances
Source: EU Commission 13
EU Emission Trading 2020 - 2030
Pro-duction
Bench-mark (BM)
Carbon Leakage Faktor
(CL)
Correction Factor =
Total number is limited
Regular adjustment (rolling average of 2 years, threshold 15%)
New Bench- marks
New CL list No differentiation between sectors
X X X
• Competitiveness until 2030 most likely kept • A change towards CO2-neutral Produktion requires investments,
which can are not re-financed via the ETS
Free Allocation
14
Carbon leakage rules
Sectors exposed: 100% free allocation of the benchmark
Less exposed sectors 3. Trading Period: 80% going down to 30 % 4. Trading period: 30 % phased-out after 2026 until 2030
Current carbon leakage list prolonged until 2020, < new list valid for 10 years
Quantitative assessment: Based on trade intensity multiplied with emission intensity (threshold: 0,2)
Qualitative assessment possible for sectors between 0,15 and 0,2 and a limited number of carbon leakage sectors (Prodcom)
15
ETS 2030: Carbon Leakage List
Σ kg CO2 (all installations)
Carbon Intensity = -----------------------------------------------------------
Σ EUR GVA (all companies which report under this NACE-Code)
16
How Carbon Intensity is calculated (and why qualitative assessment is essential)
Σ kg CO2 (all installations)
Carbon Intensity = -----------------------------------------------------------
Σ EUR GVA (all companies which report under this NACE-Code)
17
Benchmarks in the EU ETS
Source: ETS Handbook
18
Benchmark update
Update of benchmark values for all 54 benchmarks
Current benchmarks relate to 2007-2008
First benchmark update for 2021-2025 on the basis of 2016-2017 data
Second benchmark update for 2026-2030 on the basis of 2021-2022 data
Methodology:
Based on this data, determination of annual improvement rate for each benchmark (min.: 0,2% p.a.; max.: 1,6% p.a.)
Phase 3 benchmark values reduced with that annual rate applied over the period 2008-2023 and 2008-2028
Exception: hot metal benchmark will be reduced by 3% (0,2%) for 2021-2025 period
19
Product Benchmarks
Source: ETS Handbook
20
Values include both direct emissions (process and steam) and indirect emissions (electricity)
HVC = ethylene + propylene + contained butadiene + contained benzene + hydrogen (non fuel fraction) + acetylene as products
EU Cracker Product Benchmark
1.8
1.6
1.4
1.2
1.0
0.8
0.6
0.4
0.2
0 0 20 10 30 40 50 60 70 80 90 100
CO2 emissions/Mt of HVC
Crackers %
Average
Cracker benchmark value (0.702 t CO2 / t HVC)
21
Fall Back Benchmarks
Source: ETS Handbook
22
EU ETS system for allocation of free certificates
Product-BM Heat-BM Fuel-BM Historic Emissions
Historic activity level
Product output of plant
Measurable heat consumption of plant
Fuel consumption of plant
Emissions
Benchmark GHG efficiency of process t CO2 / t product
GHG efficiency of heat generation t CO2 / TJ
GHG efficiency of fuel t CO2 / TJ
Benchmark Value
Individual values for 15 GHG intensive processes
62,3 t CO2 /TJ (natural gas fired boiler with 90% efficiency)
56,1 t CO2/TJ (emission factor for burning natural gas)
97% of historic emissions
Benchmarking methodologies
x
no no no
Heat Benchmark, Fuel Benchmark, Historic Emissions
are fall-back options
Product Benchmark is the first
priority: 70% of chemical industry
emissions stem from processes covered
Example: Chemical plants BASF SE Ludwigshafen: Percentage of emission certificates allocated according to respective methodology 62
%
33%
5%
23
Low-carbon funding mechanisms
Innovation Fund
Support carbon capture and storage (CCS) and renewables as well as breakthrough technologies in industry in all Member States
Initial endowment: 450 million allowances
400 million in 2021-2030 (NER 300 monetary leftovers/ 50 million from MSR)
Potential increase from free allocation 'buffer’, 50 million added after 2025
Commission to adopt a delegated act to set out further details
Modernisation Fund
Support modernisation of energy systems and just transition in 10 lower income Member States
25
Indirect cost compensation
State aid based compensation regime continued
Enhanced reporting and transparency provisions
Annual reporting in Q1 on compensation paid in year x-1
Member States should seek to use no more than 25% of auction revenue
If 25% exceeded, Member States to publish a report including relevant information on power prices for large industrial consumers benefiting from compensation
Enhanced reporting will apply as from 2018
Carbon Market Report: new chapter on indirect carbon cost compensation schemes already in 2017 report
26
Outline
EU ETS targets
Carbon Leakage, Benchmarking and Free Allocation
Measuring, reporting & verification (MRV) /Trading
EU ETS: Fit for the Future ?
27
Data flow of emission reporting
Operator collects data
External Verifier
Authority demands additional
data
MRV
Authority
Operator
4
3 Operator forwards the verified report to authority
1
Check and verification of data by external third party
2a
2b
Verifier approves amounts of emissions
Union registry
28
GHG emission data acquisition on an installation level
Input Output
Installation
Fuels
Raw materials
Electricity, heat
Greenhouse gases
Products including by-products and waste
Kind of data:
Accuracy of data:
Frequency:
Amount, carbon content
Detailed definition of requirements
(depending on source stream)
Continuously or discontinuously
(depending on installation)
29
Bureaucratic effort of ETS
Example: BASF SE Ludwigshafen
Large emitters with GHG emissions > 25000 t CO2e/a
Small emitters with GHG emissions ≤ 25000 t CO2e/a
0%
25%
50%
75%
100%
Number of
plants
Bureaucratic
effort for
operating
company
GHG
emissions
50%
50% 56%
44%
99%
1%
30
Key Learnings on Measuring, Reporting & Verification
Qualified and well-trained personnel required at
► operating company
► authorities
► external verifiers
Setup of well-functioning data flow / IT-structure is essential and takes time
Definition of methods to guarantee accuracy of measurement influences time and cost requirements at operators
To start a system requires much more than a political decision
31
Key basics of certificate trading
Open and harmonized market on European level
Low entrance barriers: only account at registry necessary
Various market players: utilities, industry participants, banks, traders
High liquidity: exchanges + bilateral over-the-counter
Banking and borrowing of certificates between years and trading phases possible: inter-temporal optimization of companies (phase I no banking and no borrowing)
Frequent auctions with almost no restrictions (minimum price etc.)
Future/forward products enabling market participants to optimize their positions (currently relevant for power production)
EU ETS market well functioning: Emission reduction target achieved at the most cost-efficient way.
32
Outline
EU ETS targets
Carbon Leakage, Benchmarking and Free Allocation
Measuring, reporting & verification (MRV) /Trading
EU ETS: Fit for the Future ?
33
EU ETS Developments
Target: Reduction of CO2 Emission in most cost-efficient way
Status: Currently around 2bn certificates less demand than scheduled supply target achieved at most cost-efficient way
(~ 5 EUR/t until phase 4 decision)
Ongoing discussions: Measures to increase price levels
2012 set aside (rejected)
2013 backloading (implemented in 2014)
2014 market stability reserve (MSR)
2017: Revision - MSR + cancellation of certificates
ETS Structure is changing: Faster emission reduction enforced
Last certificate even before 2057
Trading of certificates
34
As an energy intensive sector, where would you invest? Industry Policy
Low raw material costs
Low electricity costs
Increase of industrial production
New investments in energy intensive
sectors
Decrease of CO2-Emissions by
using more gas and efficient new
installations
Uncertainty about global level playing
field in climate policy
Uncertainty about free industry
allocation
Uncertainty about political motivated
interventions of the EU COM
(backloading, CSCF, MSR, …)
Policy of high electricity and raw
material prices
Decrease of industrial production
35
Cefic/Ecofys Roadmap: GHG emissions
GHG Emissions - Process - Combustion - Indirect
Reduction of GHG Emissions - Energy Efficiency Improvement - Fuel mix change - Decarbonisation of Electricity - N2O abatement - Carbon Capture and Storage
Reduction of GHG Emissions due to lack of growth
36
CO2 Reduction in the Chemical Industry DECHEMA Scenario calculations (w/o fuels production)
120 Mt
(Million t) /y
emission in
2050
Carbon neutrality possible with
New production installations
Enourmous amounts of electricity
High investment and continuously higher production costs
Comparable action in other world regions
120 Mt
(Million t) /y
emission in
2050
37
What is needed in the future?
Until 2030, the ETS with Carbon Leakage
protection measures is the key instrument for
climate protection measures
Options in the Non-ETS-Sector to be fully
exploited
Decarbonization in global production only
possible in a global context
Industry needs support, not addidional burden
38
A fair ETS saveguards production in Europe
1. Sufficient free allowances for the whole value chain
Compensate for differences
between non-EU- and EU Industry
2. Enable investments
Give a perspective for industrial
growth in Europe
3. Strengthen innovation
Realistic expectations about
timescales
39
Go for global Climate Protection
40
Thank you for your attention!
Contact:
BASF SE
Dr. Brigitta Huckestein
COM/EE
67056 Ludwigshafen
We help our customers to reduce their CO2 emissions
* CO2 equivalents = units for measuring the impact of greenhouse gas emissions on the greenhouse effect
Prevention of greenhouse gas emissions through the use of
BASF products 2016 (in million metric tons of CO2 equivalents)
1,110
570
Without using BASF’s products
Using BASF’s products
Emissions avoided: 540 (Attributable to BASF: 11%)
3
Energy and climate protection
* Excluding oil and gas production
- 40%
Greenhouse gas emissions
per metric ton of sales product by 2020 (baseline 2002)*
Energy efficiency
Coverage of our primary energy demand through certified energy management
systems (ISO 50001) at all relevant sites
90% Status 2016:
-37.2 %
Status 2016:
42.3 %
5
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