Best Practices: EU Emissions Trading System Phase 3

Published: 25 January 2011

14 pages, 4 figures

EXECUTIVE SUMMARY

Phase 3 of the European Union Emissions Trading System (ETS) will begin on January 1, 2013. With the key elements of the Phase 3 policy now agreed in law, this report provides an early view into the impacts of ETS Phase 3 on the utility, industrial and aviation sectors. In contrast to ETS Phase 2 which was hampered by lobbying, loopholes and recession, Phase 3 will impose a top-down cap on EU emissions. According to 16 industry experts interviewed by Verdantix, significant changes include charging power utilities for 100% of their allowances, a higher expected trading band for the carbon price, carbon efficiency benchmarks for industrial sectors, and the inclusion of aluminium, aviation and gas production sectors in the ETS for the first time. To optimize ETS Phase 3 strategies participants should invest in an enterprise-wide energy and carbon management system, decide on a carbon trading strategy to match risk appetite and carbon exposure, manage uncertainty by closely tracking unresolved policy decisions and anticipate additional risks from the flow through of allowance sales and higher electricity costs.

TABLE OF CONTENTS

PHASE 3 CHALLENGES EXISTING PARTICIPANTS AND NEW ENTRANTS
Lobbying, Recession And Loopholes Impacted ETS Phase 2
ETS Phase 3 Imposes A Top-Down Cap On EU Emissions

ETS PHASE 3 IMPLICATIONS VARY BY SECTOR
Power Utilities Will Need To Pay For 100% Of Their Allowances
Energy And Emissions Intensive Industrial Sectors Face Carbon Benchmarks
Aluminium, Aviation And Gas Production Sectors Join The ETS

BEST PRACTICES TO OPTIMIZE ETS PHASE 3 STRATEGIES
Invest In An Enterprise-Wide Energy And Carbon Management System
Decide On A Carbon Trading Strategy To Match Risk Appetite And Exposure
Manage Uncertainty By Closely Tracking Policy Developments
Explore The Risks Created By The Flow Through Of Allowance Costs

TABLE OF FIGURES

Figure 1. Member States Battled To Raise The ETS Cap Through National Allocation Plans
Figure 2. Carbon Price Forecasts For Phase 3 Are Subject To Policy Uncertainty
Figure 3. Phase 3 Will Impose A Tighter Cap And More Robust Market Rules
Figure 4. Trading Strategy Should Be Shaped By Carbon Exposure & Appetite For Risk

COMPANIES MENTIONED

Akzo Nobel, American Airlines, APX-ENDEX, ArcelorMittal, Arkema, Barclays Capital, BASF, BlueNext, British Airways, Cambridge Energy Research Associates, CantorCO2e, Centrica, Corus, Deutsche Bank, DNV, Dong Energy, E.ON, Ecofys, Econcern, EcoSecurities, EDF, EDP, Eesti Energia, Emirates, ENEL, ENI, Ernst & Young, Euro Disney Associés, European Cement Association, European Commission, European Confederation of Iron and Steel Industries, European Energy Exchange, European Union Climate Change Committee, GDF Suez, Hydro, Iberdrola, Iberia, ICE, IHS, International Emissions Trading Association, International Maritime Organization, JPMorgan Chase, Lafarge, Lufthansa, Mondi, National Grid, NEK, Orbeo, Public Power Corporation, PwC, Repsol, RWE, Shell, Sympliciti, Solvay, South Pole Carbon, StatoilHydro, Stora Enso, Tarmac, Tui Travel, United Nations Framework Convention on Climate Change, Vitol, Wilbury Stratton