ETS CHANGES COULD HELP NER 300, BUT MANY SAY EFFORTS ARE TOO LITTLE, TOO LATE

Advocates Say Long-Term Certainty More Important for CCS

Tamar Hallerman
GHG Monitor
06/08/12

Carbon capture and storage advocates in Europe are hoping that plans to consider short- and long-term fixes for the European Union’s Emissions Trading Scheme this summer could help increase the price of CO2 offset credits enough to buoy the New Entrants Reserve competition (NER 300), but many observers are pessimistic that the alterations could come soon enough to make an impact. The NER 300 competition aims to partially fund several large-scale CCS and renewable energy projects by selling 300 million CO2 offset credits on the ETS gradually and in two tranches. However, the recent nosedive of the market for CO2 credits—plagued with chronic oversupply due to the prolonged recession and the decreased emissions that resulted—has earned NER only a fraction of the money expected since monthly auctions of credits began late last year.

With the price of credits hovering at a record low of €6 ($7.5) per ton—down from a high of €28 ($35) per ton in 2006—European leaders are planning to meet this summer to discuss intervention options to help prop up the market until a more permanent fix is found. Given the relative structural rigidity of the ETS, as well as the threat of less developed member states such as Poland banding together to oppose any major alterations, EU commissioners are considering the relatively easy fix of ‘backloading’ the next trading period of emissions allowances as an initial first step to combat plunging prices. That process would hold back a portion of the credits that must be traded from 2013-2020 until the end of that time period, temporarily increasing the price of offsets.

Short-Term Fixes Could Increase NER Pot

Given that the European Investment Bank will continue to sell off the first group of credits for NER through the end of the year, some CCS advocates said any fixes that could help boost prices on the ETS market in the short term could be helpful to the competition and subsequently any CCS projects that could ultimately benefit from NER funding. If the pot of money generated from the sale of credits is higher, the more of a business case demonstration projects selected to receive NER funding would have at the end of the day, advocates said. Simone Ruiz, European policy director of the International Emissions Trading Association, said that if a short-term fix like backloading is approved and entered into force as soon as possible, the European Investment Bank could gain a modest increase in the price for the CO2 allowances it is selling off for NER, likely a €2-3 difference per credit for the last few batches it sells as part of the first tranche. “It depends very much on the timing of the current approval,” she told GHG Monitor, adding that there could be more of a price impact on the second tranche of credits expected to be sold next year.

Despite the modest price increases that could come in the short term as a result of backloading, several others interviewed said most easy fixes likely will not have much of an ultimate impact on NER or CCS. “We’re not sure that short-term fixes to the system will actually give the long-term visibility that is needed [to bring about CCS projects],” said John Scowcroft, general manager for Europe at the Global CCS Institute. Backloading could also be too little, too late, some said, because most of the CO2 credits for NER will likely already be sold by the time the changes are implemented. Ruiz added that the backloading option is also expected to lead to a potential flood of credits entering the ETS later between 2013 and 2020, a move that could ultimately crash the market. “If at one point in time there is no fuller vision of the scheme, these allowances that are set aside would have to be put back into the market, so there is certain risk that could lead to a price crash,” she said.

Long-Term Fixes Needed for Certainty, Experts Say

Most interviewed said that what is ultimately needed is a set of long-term fixes to the ETS that can provide the largest amount of certainty to potential CCS investors over a period of decades. “In the case of EU’s ETS and its relationship with CCS, it’s best to say that a carbon price or signal is a necessary prerequisite for the deployment of CCS, but it is not sufficient,” Scowcroft said. “The key issue we’re looking at here is the need for long-term visibility, which will enable people making investments that will be coming on-stream in 10 to 15 years to have a clearer idea of what the forward price curve is going to look like in the years to come.” In particular, Scowcroft said any fixes that could help contribute to the longer-term operational costs of CCS projects in addition to capital expenditures will likely have a larger effect than a higher CO2 price, as are efforts to level the playing field for demonstration plants.

EU commissioners meeting later this summer will likely consider several longer-term fixes to help bolster CO2 prices. Most prominently, many leaders have suggested upping the EU’s emissions reduction goals for 2020 to catalyze more clean energy investment. However, less developed countries such as Poland have blocked similar measures in the past. Others have suggested limiting the cap on credits available under the scheme or changing the timing or rules of CO2 auctions for credits, but all require amending the ETS’ legal framework, a move that is difficult to do and could open up the scheme to extra scrutiny and political infighting, some said. 

Eivind Hoff, director of Bellona Europa, a Norwegian-based environmental group, said his organization is advocating for any fixes that provide long-term market certainty. “When you look at what has worked and what has not worked to encourage capital expenditure-heavy investments [including CCS], what matters is the predictability for investors that their assets will provide a return over the long term,” Hoff told GHG Monitor. “I think that there is an increasing realization that ETS as it is currently designed is not how you deliver that certainty for investors.”

Ultimately, many interviewed said that the worst outcome for the ETS, as well as the future of NER 300, is for the EU to let the market advance on in its current trajectory. “We want to see as much money coming out of NER 300 as possible, so anything you can do to bolster the price is good, and the earlier that is done the better,” Hoff said. Scowcroft emphasized that long-term certainty is key moving forward. “In the short term, NER 300 is dependent on today’s price, which in its current state means that there won’t be much money available for the purpose of the competition. But in the broader scale of things it’s really much more important to have clear visibility going into the future and knowing what the supply and demand is going to be, which will enable investors to decide whether they’re going to make that move,” Scowcroft said.