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
 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 marketbased approaches but are only now
appreciating unanticipated impacts
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Outline of Presentation
 Overview of EU Market-Based Mechanisms
 Case Study: EU Emissions Trading Scheme
 Lessons Learned
3
A global environment, economics, and
energy consulting firm
Environment and Climate
Change Management
Asset Acquisition & Deployment
• Wholesale power market and
renewables energy analysis
• Transmission and
interconnection assessment
• Asset valuation
• Due diligence
• Asset & portfolio
optimisation
Network Analysis
•
•
•
•
Regulatory strategy
Network benchmarking
Network valuation
Value of transmission
Helping clients
manage the
world’s
natural,
physical,
economic
resources in a
sustainable
way
•
•
•
•
Regulatory analysis
Environmental strategy
Value-at-stake analysis
Emissions trading
analysis
• Market mechanisms
design
• Corporate Responsibility
Other Services
• Transport sector analysis
• Energy efficiency
• Information management
systems
• Economic & community
development
• Emergency management
• Strategic communications
4
Overview of EU Market-Based
Mechanisms
5
Agencies in EU increasingly
using market mechanisms
 Tradable permit systems
– France: tradable development rights
preservation
– Netherlands: tradable fishery quotas
for
land
 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
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Heterogeneous policies used
across EU for green energy
 Providing direct financial incentives
• Investment-based:
subsidies
on
investments, tax rebates, and incentives
green
• 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
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Case Study: EU Emissions
Trading Scheme
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EU ETS relies on ‘cap-andtrade’ 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
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Overview of EU Emission
Trading Scheme
Market
Absolute
Target Holders
Projects
(>20MW generators)
(JI, CDM)
Verification
Approval
Reporting
Government
(Member states determine allocations)
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Strong underlying rationale for
an emissions trading scheme
Spain
Ireland
Denmark
Portugal
16,5
Distance to target indicators (DTI):
difference between (linear) targets and
trends in 1999:
16,3
13,5
10,2
Netherlands
8,8
Austria
8,5
7,3
Italy
Belgium
6,1
Greece
5,7
France
-0,2
Sw eden
-0,3

Finland
United Kingdom
Germany
Luxembourg
-1,1
-8,4
-9,3
-30,7
-0,4
EU-15
-40,0

-30,0
-20,0
-10,0
0,0
10,0
20,0
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Typical company abatement
cost curves highlight benefits
Cost/Price
(£/tonne CO2e)
US$10
(market price of GHG in trading system)
(2)
Tonnes
CO2e
(1)
QN
QC
Level of GHG abatement
• 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
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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
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Lessons Learned
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Short-term drivers of value for
EU based-companies
Key
drivers
Value
impacts
Can value
impact be
assessed?
Markets for
project-based
reductions
Government
policies
Stakeholder
Concerns
New revenue
streams
Operating costs
Product prices
Cashflows
Sales
Cost of capital
Can be
quantified and
compared
against
transaction costs
Can be
quantified and
competitiveness
impacts analysed
Indirect,
anecdotal data
only
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Impact on UK power plant asset value
from choice of allocation method
Value Index (Reference Value = 100)
200
180
160
140
120
100
80
60
40
20
0
Reference
Case
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Impact of market-clearing price on
a German power plant asset value
300
Incremental energy value
Incremental emissions value
Net incremental impact
250
200
150
100
50
0
Low Price
Mid Price
High Price
-50
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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
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For More Information
Abyd Karmali
Director, ICF Consulting
Hamilton House
Mabledon Place
Bloomsbury, London
WC1H 9BB United Kingdom
+44.(0).20.7554.8752
[email protected]
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