Download Economic instruments and clean coal technologies

December 2008
PF 08-13
Profiles
Economic instruments and
clean coal technologies
‘More financial incentives
are needed for CCS’
‘There is uncertainty as
to how CCS projects can
be funded’
‘The EU ETS remains the
only international cap
and trade system for
CO2’
Clean coal technologies increasingly
play a key role in government policies
to mitigate greenhouse gas emissions.
This report examines several major
international developments in climate
change policy since the publication of
The impact of emissions trading on the
coal industry by the IEA Clean Coal
Centre in 2004. The first phase of the
European Union Emission Trading
System (EU ETS) was completed
between 2005 and 2007 with an
evaluation and recommendation for
improvements published by the EU in
January 2008.
There have been a range of studies
and reports published covering climate
change and the role of economic
instruments including the Stern Review
(2006) and the Intergovernmental Panel
on Climate Change (IPCC) Fourth
Assessment report published in 2007.
In addition, carbon capture and storage
(CCS) has been identified as a
potential key technology in mitigating
carbon dioxide emissions. However,
there has been considerable uncertainty
around how CCS projects can be
financed.
The recent EU review of proposed
changes to the EU ETS and CCS
directive provides a good opportunity to
assess the impact and effectiveness of
emissions trading and other economic
instruments on the coal industry. The
EU ETS remains the only mandatory
cap and trade system for CO2 emissions
which operates across national borders.
There are proposals to establish
emission trading systems in other
countries including the USA, Australia
and New Zealand.
The EU ETS is often quoted and
used as an example of how an
economic instrument such as emissions
trading can be used to mitigate GHG
emissions. With many countries also
opting to use this mechanism it is
useful to explore how successful it has
been with regard to clean coal
technologies. In the Phase I trial
trading period of the EU ETS between
2005 and 2007 it was partially
successful in creating an incentive to
reduce CO2 emissions through the
establishment of a carbon price and
institutional frameworks to allow
Carbon market volumes and values in 2006-07
Volume,
MtCO2-e
2006 value,
million US$
Volume,
MtCO2-e
2007 value,
million US$
Allowances AS
EU ETS
1104
24,436
2061
50,097
New South Wales
20
225
25
224
Chicago Climate Exchange
10
38
23
72
UK ETS
NA
NA
1134
24,699
2109
50,394
537
5,804
551
7426
Secondary CDM
25
445
240
5451
Joint Implementation
16
141
41
499
Other compliance and voluntary transactions
33
146
42
265
611
6536
874
13,641
1745
31,235
2983
64,035
Subtotal
Project based transactions
Primary CDM
Subtotal
Total
trading of substantial volumes of
European Union allowances (EUAs),
which are the units traded within the
EU ETS. This occurred even when the
price for the EUA dropped
dramatically in 2006. This is a
reflection of how the EU ETS carbon
market is not a typical commodity
market and is policy-driven with
several variables influencing it,
including science, media, and public
opinion. Demand for EUAs is also
based on policy decisions and on how
the allowances are allocated to market
players as well as the use of the Clean
Development Mechanism (CDM),
Joint Implementation (JI) or the
banking of allowances for future
trading periods.
In terms of transaction and monetary
value the EU ETS dominates the global
carbon market, compared to the
voluntary market. According to the
World Bank, over two billion EUAs
were traded in 2007 at a market value
of US$50 billion. Point Carbon reported
that in 2006 the volume of carbon
traded increased from 1.6 Gt to 2.7 Gt
in 2007. The table gives details of the
carbon credits traded internationally in
volume and value.
The European Commission has
indicated a desire to have 10-12 CCS
demonstration projects implemented by
2015. This is an admirable and essential
goal, to reduce GHG emissions as well
as to accelerate the deployment of
CCTs. However, the European
Commission has been unclear about the
financing of these projects. There is
uncertainty around the share of
investment the European Commission
will provide. Other countries such as
the USA are also exploring economic
instruments providing revenue to build
demonstration CCS projects.
The report evaluates the first phase
of the EU ETS and the proposed
changes for the next two phases, as well
as what is happening in other countries.
The economic instruments examined
are a carbon tax, fiscal incentives,
emission trading and the use of
voluntary agreements. The main
conclusion is that no one economic
instrument will be enough to provide
incentives for CCS projects in their
current form. Some of the key
conclusions from the report are:
● Progress has been made in
developing financial incentives for
CCS although there is still a
financial gap to bridge. Even with an
EUA price of around A28 this would
●
●
●
●
still be A12-15 short of making CCS
a more attractive investment and that
is at the low end of the scale with
some analysts predicting that an
EUA price of A60 would be needed.
Developing countries where coal is
expanding rapidly such as China and
India will need some form of carbon
price to encourage the development
of CCS. The CDM currently does
not recognise CCS but the current
Bali Action Plan UNFCCC
negotiations may find a solution.
Fiscal incentives such as feed-in
tariffs, enhanced capital allowances
and capital grants which have been
used by policy makers to increase
the uptake of renewable power such
as wind could also play a role in
increasing the use of CCS.
A carbon tax is unlikely to play a
major role internationally due to the
difficulty of agreement on a suitable
level and how to distribute the
revenue. Voluntary Agreements can
play a role in developing countries
where there are no mandatory
emission reduction policies.
However, the majority of developed
countries, such as those in Europe
have a mandatory emissions trading
system with many other countries
developing this option, so Voluntary
Agreements will likely only play a
role in sectors not covered by
emissions trading.
More financial incentives are needed
if CCS is to be deployed within the
next 10–15 years at a major scale.
Each issue of Profiles is based on a
detailed study undertaken by IEA
Clean Coal Centre, the full report of
which is available separately. This
particular issue of Profiles is based on
the report:
Economic instruments and clean
coal technologies
John Kessels
CCC/142, ISBN 978-92-9029-461-0,
48 pp, November 2008,
£255*/£85†/£42.50‡
*
†
‡
non-member countries
member countries
educational establishments within member
countries
IEA Clean Coal Centre is a
collaborative project of member
countries of the International
Energy Agency (IEA) to provide
information about and analysis of
coal technology, supply and use.
IEA Clean Coal Centre has
contracting parties and sponsors
from: Australia, Austria, Brazil,
Canada, China, Denmark, the
European Commission, Germany
India, Italy, Japan, Republic of
South Korea, the Netherlands,
New Zealand, Poland, Russia,
South Africa, Sweden, Spain,
Thailand, the UK and the USA.
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