Industry-to-Industry Dialogue on Emissions Trading & Market Readiness
TABLE OF CONTENTS Background
The B-PMR’s Mission
Dialogue Agenda Challenges for Korean ETS Address by Seung Jick YOO, President of the Greenhouse Gas Inventory & Research Center of Korea (GIR)
7 10 11
Address by Michael Watters, Head of Climate Change and Energy Section, British Embassy Seoul Address by Mr. Hyung-Sup Lee, Deputy Director of ETS Task Force Address by Dirk Forrister, President and CEO, International Emissions Trading Association (IETA)
11 12 12
Dialogue Summary Theme I: Preparing for and Participating in ETS
Theme II: The ETS Lifecycle
Theme III: ETS Infrastructure
Theme IV: Operational Impact
Theme V: ETS Experience Sharing & In-depth Discussions
Breakout Sessions Group A: Industry I
Group B: Industry II
Group C: Infrastructure
Group D: Finance
Group E: MRV
List of Participants
BACKGROUND Introduction South Korea is the first Asian country to approve a national-level emissions trading scheme (ETS) legislation and will be the among the first Asian countries to implement an ETS. The foundation of the South Korea’s low-carbon economy is the Framework Act on Low Carbon, Green Growth which was enforced in April 2010. The Act set a target to reduce greenhouse gas emissions by 30% below ‘business-as-usual’ levels by 2020 and requires large emitters and energy intensive industries to report energy consumed and greenhouse gases emitted every year. According to estimates 1, South Korea would have to reduce its emissions by 244 million tonnes of CO2e by 2020 to achieve the stated emission reduction target. The cap expected to be placed under the ETS will require reductions from the industrial sector (83 Mt CO2e), the electricity sector (68.2 Mt CO2e), the building sector (48 Mt CO2e), and the transportation sector (36.8 Mt CO2e). Scope and Coverage The ETS is scheduled to begin on 01 January 2015 and will be divided into three phases — Phase I (2015-2017), Phase II (2018-2020), and Phase III (2021-2026). The government has announced the threshold emission limits for mandatory participation in the ETS. Industrial groups with annual emissions of over 125,000 tonnes of CO2e and individual facilities with annual emissions of over 25,000 tonnes of CO2e will be required to participate in the ETS. Industries may also voluntarily participate in the ETS. Six greenhouse gases namely CO2, CH4, N2O, HFCs, PFCs, and SF6 will be covered under the scheme. Around 500 entities are expected to be covered under the ETS. Allowance Allocation The emission allowance allocation to the covered entities will be determined through the South Korean National Allocation Plan which will be drafted by the Emissions Allowances Allocation Committee. The government will provide the majority of the allowances free of cost to the covered entities but will gradually reduce the number of free allowances. During Phase I, 100% of the emission allowances will be allocated for free. Later, up to 97% of the emission allowances will be allocated for free in Phase II. In Phase III, up to 90% of the emissions allowances will be given free of charge. Thus, the number of allowances to be auctioned will increase from 3% to 10% between Phase II and Phase III. Covered entities operating in the sectors considered energyintensive and trade-exposed (EITE) will be allocated 100% of the emission allowances free of charge.
The World’s Carbon Markets: A Case Study Guide to Emissions Trading
Use of Offsets, and Banking and Borrowing of Allowances The Ministry of Knowledge Economy will issue Korean Certified Emission Reductions (KCERs) to companies that produce verifiable additional emission reductions. The use of offsets will be limited to 10% of the total obligation and during Phase I and Phase II covered entities would not be allowed to use international offsets for compliance. During Phase III the use of international offsets, up to 50% of the obligation, would be allowed. However, the absolute number of international offsets must not exceed the number of domestic offsets used for compliance. Banking is allowed to the next implementation year of the same compliance phase or the first year of the subsequent compliance phase. Borrowing is allowed from the next implementation year up to a maximum of 10% of the total allowances to be surrendered. Non-compliance Entities that fail to meet the emission reduction targets are expected to be charged a fine equivalent to three times the market price of the emission allowances. This figure could be close to KRW 100,000 per tCO2e (about US $91 per tCO2e). Target Management Scheme (TMS) The Target Management Scheme (TMS) was launched in 2012 as a precursor to the emissions trading scheme. The scheme set emission reduction targets for various sectors and covers 490 entities. These entities are responsible for 62% of the country’s total GHG emissions. Trading, banking, and borrowing of emission permits is not allowed in TMS even though the entities are required to adhere to strict Measurement, Reporting and Verification (MRV) procedures. Timetable for implementation of Phase I of the ETS June 2013 December 2013
Launch of government-stakeholders dialogue
• Basic plans for ETS finalized • Designation of permit exchange • Draft National Action Plan, guidelines and directives
released for stakeholder consultation
• Trial emissions trading exercise conducted June 2014
National Action Plan finalized with guidelines and directives
• Designation of compliance entities • Entities/installations submit request for permit allocation
Permit allocation finalized in the Allocation Approval Committee
Phase I of ETS launched 4
SECTOR-WISE EMISSION REDUCTION TARGETS (%)2 Group/sub-group
Food and beverages
POWER Power generation and natural gas INDUSTRY
Presidential Committee on Green Growth
THE B-PMR’s MISSION Carbon markets are entering an important new phase of development, as emissions trading programs are emerging in new places around the world. Sixteen developing countries are participating in the World Bank’s Partnership for Market Readiness (PMR). As these programs take shape, IETA will mobilize its membership to assist in building business readiness for these new markets through the Business Partnership for Market Readiness (B-PMR). IETA’s membership spans the globe – with major energy, industrial, financial and service companies in virtually every PMR partner jurisdiction. IETA is positioned to assist in preparing local businesses to operate successfully in these new markets. By sharing experiences from existing carbon markets, IETA will promote common understanding with local businesses in PMR countries, share best practices, and, where appropriate, assist in the policy development processes. On October 24, 2012 in Sydney, IETA launched a new “Business Partnership for Market Readiness” – or “B-PMR” – to meet these new challenges. IETA aims to enhance the potential for workable international carbon trading models to emerge around the world. IETA will work in concert with the host governments, the World Bank and PMR donor countries on this initiative. Building upon previous experience, IETA will conduct a series of missions in a select group of five countries that are preparing emissions trading programs under the PMR. We will prioritize the programs that are most advanced – and those that invite IETA's involvement. The goal of the dialogues will be to raise the level of understanding and awareness of emissions trading by industries in PMRimplementing countries. They will explore how different market-based mechanisms operate and address challenges and opportunities industries may face when participating in carbon markets. The B-PMR missions will focus intensively on market preparedness in host countries – taking into account local business customs and dynamics. They will spur strong local interest in the practicalities of emissions markets and in best practices. After the initial missions, we will tailor follow-up work on the specific needs of each new market. The broad reach of IETA members will be paramount in this aspect of the program, providing local expertise, awareness and engagement. IETA upholds its principles by acting as a think tank, a convener of dialogues, an advocate, a market promoter, and a champion of best practices and market standards. The B-PMR is a natural outgrowth of these principles. The B-PMR is a special initiative governed by the IETA Secretariat and the B-PMR Steering Committee with underwriting from:
Greenstre LRQAlrqi morganstanl
EC Norton rose
DIALOGUE AGENDA Main Elements and Topics The dialogue include the following topics: • Trading strategies and internal allowance management • Allowance calculation and offset management • MRV at the installation level: day-to-day industry best practice for MRV management • Financial products and trading carbon • GHG auditing and verification • Data quality and quality control • IT tools and GHG trading infrastructure
Schedule Time: 2 days, 26 – 27 September 2013 Meeting Location: COEX Convention and Exhibition Center, Gangnam-Gu, Seoul Organizer: International Emissions Trading Association (IETA) Foreign Supporters: International Emissions Trading Association (IETA) British Embassy, Seoul Local Supporters: Ministry of Environment, Korea September 26, Day One - All-day Seminar Time
Opening Remarks 13:30-13:40
Opening remarks by President of the Greenhouse Gas Inventory & Research Center of Korea (GIR)
Mr. Seung Jick YOO
Opening remarks by Head of Climate Change and Energy Section, British Embassy Seoul
Mr. Michael Watters
Opening remarks by Ministry of Environment ETS Task Force Republic of Korea
Mr. Hyung-Sup Lee, Deputy Director of ETS Task Force
Opening remarks by President and CEO of IETA
Mr. Dirk Forrister
Introduction of Korea ETS
Ministry of Environment, Republic of Korea
Discussion & Tea Break
Theme 1: Preparing for and participating in an ETS (Examples and best practices from European companies that prepared for and participate in the EU ETS) 15:00-15:25
ETS Readiness: How firms prepare for and thrive in a CO2capped environment?
ETS Compliance: Rules and Policies that UK and EU Operators Follow
Roon Osman, Shell Trading
Abyd Karmali, Bank of America Merrill Lynch
Discussion & Tea Break All about Allowances: How to manage, surrender, and capitalize
Richard Chatterton, Bloomberg New Energy Finance
Theme 2: The ETS Life Cycle 16:45-17:05
EU ETS Reporting and Monitoring Guidelines: What is it and why is it important?
Robert Hansor, LRQA
Carbon Asset and Carbon Offset Management: Experience sharing and best practices
Eric Boonman, Statkraft
Carbon accounting: The need for third party analysis and services for MRV
Changmin Yoo, PwC
Reception with the British Embassy Seoul. Location: COEX
September 27, Day Two Morning â€“ Seminar Time 8:30-9:00
Summary and Wrap Up Discussion of Day One
Theme 3: ETS Infrastructure 9:00-10:00
The Exchange: How carbon is traded Manuel Moeller, European on an Exchange and in the OTC Market Energy Exchange AG (EEX)
The Registry: How carbon is stored on a 10:00-11:00 Registry and how it functions 11:00-11:20
Andy Kruger, Markit Environmental Registry & Auction
Discussion & Tea Break Theme 4: Operational impacts
The substantial impacts of ETS to the operation and development of 11:20-12:00 enterprises in the EU: what you need to know
Jelena Simjanovic, Thomsonreuters
Pacific Rim Carbon Markets: Insights and Experiences from direct 12:00-12:40 participants in the Californian and Australian carbon markets
Lloyd Vas, Carbon Market Institute; Roon Osman, Shell
Lunch - kindly sponsored by EcoEye
September 27, Day Two Afternoon – Breakout Group Time
14:30-15:15 The World Bank's Partnership for Market Readiness (PMR) - overview and next steps
Speakers Xueman Wang, PMR Secretariat Lead, the World Bank
Theme 5: Sector Break Out Groups: ETS experience sharing & In-depth discussions 15:15–16:15 Group A: Industry Speaker(s): Julie Mulkerin, Chevron and Jason Lee, Solvay Energy Services Group B: Industry Speaker(s): Roon Osman, Shell Trading and Giles Dickson, Alstom Group C: Infrastructure Speaker(s): Manuel Moeller, European Energy Exchange AG (EEX) and Andy Kruger, Markit Environmental Registry & Auction Group D: Finance Speaker(s): Abyd Karmali, Bank of America Merrill Lynch and Eric Boonman, Statkraft Group E: MRV Group E: MRV Speaker(s): Hee-Jeong Yim, LRQA 16:15 – 16:45 16:45-17:15
Discussion & Tea Break Compliance Offset Programs in Korean ETS and Potential Issues
Domestic Offset Systems: Case Studies 17:15-17:45 and Examples on how offset credits are used around the world Experience sharing on broader issues 17:45-18:15 dealing with EU ETS and overlapping policies 18:15-18:30
Summary of B-PMR Mission and Closing Statement
Sangsun Ha, Ecoeye
Giles Dickson, Alstom
CHALLENGES FOR KOREAN ETS South Korea will be among the first Asian countries to implement an emissions trading scheme as a result it is likely to face challenges on a number of fronts as it endeavors for a cost-effective market-based scheme which helps in achieving the national-level goals of GHG emission reduction while helping the economy grow at a satisfactory rate. Baseline emissions – One of the major challenges faced by all carbon markets following the global economic crisis of 2008 is the overestimation of GHG emissions and the subsequent overallocation of emission permits. South Korea may face a challenge to accurately estimate the business-as-usual emissions trajectory up to 2020 which is critical to setting up the cap on emissions. Monitoring, Reporting & Verification – As the country would move from the Target Management Scheme (TMS) to a full-fledged emissions trading scheme, the responsibilities of the industrial participants would increase significantly. They would require substantial clarity on the MRV procedures and the penalties involved in case of misappropriation. Supply-demand mismatch – South Korea, like many other carbon markets, has placed restrictions on the number of offsets that may be used for meeting the compliance obligations. There are, however, concerns that sufficient number of offsets may not be available to fulfill even this restricted demand. As a result, the market may suffer from a substantial supply-demand mismatch with the supply significantly lagging the demand for compliance offsets which, in turn, could lead to price distortion. Carbon management – The participating companies would be required to formulate a comprehensive carbon management plan to comply with the ETS. Studying the compliance strategy of industries in other emission trading schemes like the EU ETS and the New Zealand ETS would benefit the Korean companies to develop a sound strategy to hedge their risks and fulfill compliance especially as they decide whether to manage carbon assets at the group level (centralized system) or the installation level (decentralized system). The B-PMR missions could play a crucial role in addressing these challenges and in helping all stakeholders fulfill their obligations in the most effective manner. This BPMR mission will focus on the specific needs of the Korean ETS to provide local expertise, awareness and engagement.
DIALOGUE SUMMARY Address by Seung Jick YOO, President of the Greenhouse Gas Inventory & Research Center of Korea (GIR) Mr YOO thanked the International Emissions Trading Association (IETA) for organizing the B-PMR workshop and welcomed all delegates. He reiterated the South Korean governmentâ€™s commitment to reduce greenhouse gas emissions and said that the ETS is the first step to cost-effectively reduce emissions. Mr YOO noted that while every ETS has to be designed in accordance to the domestic conditions, the experiences of existing ETS would prove valuable to the South Korean participants.
(Seung Jick YOO)
Address by Michael Watters, Head of Climate Change and Energy Section, British Embassy Seoul Mr Watters welcomed the initiative taken by IETA to host the trade mission in South Korea to help industries understand the various aspects of an ETS. He praised the South Korean government for taking the bold step of approving a cap-and-trade regulation even as some of the industrial sectors were apprehensive about the impact of the scheme on their international competitiveness. He emphasized the importance of low-carbon sector in the global economy as it has been one of the very few sectors driving growth even in this time of global economic strain. He stated that the EU ETS, the worldâ€™s largest emissions trading scheme, has its own negative and positive aspects which can be studied by the emerging carbon markets like South Korea. Industry-level discussion forums help stakeholders to become aware of the best practices and carbon management strategies followed across the world.
Address by Mr. Hyung-Sup Lee, Deputy Director of ETS Task Force Mr Lee introduced the various features of the Korean ETS to the participants and summarized the various low-carbon market initiatives implemented by the South Korean government. He stated that the government had launched the Target Management Scheme in 2012 which has worked very well as a precursor to the emissions trading scheme. He explained the various aspects of the ETS and the responsibilities of the various regulatory bodies and ministries of the government in the implementation and operation of the ETS.
Address by Dirk Forrister, President and CEO, International Emissions Trading Association (IETA) Mr Forrister thanked the Ministry of Environment, the Ministry of Green Economy, and the British Embassy in Seoul for their support and cooperation in hosting this trade mission. He gave a background of the B-PMR mission and summarized the recent efforts made across the world to set up market-based mechanisms to address increasing GHG emissions. He said that industry is key to the success of an ETS, as after the government formulates the regulation the industry is the major driver of the scheme. He noted that linkages between regional carbon markets would play a major role in reducing compliance costs. It is important that industries share their experiences with new entrants as it leads to potential harmonization of market regulations across the world.
THEME I: PREPARING FOR & PARTICIPATING IN ETS The fundamental aspects of an emissions trading scheme are common across jurisdictions. This enables experienced stakeholders to share their experiences, the challenges they faced and the strategies they employed to overcome those challenges. Industry experts and participants in the EU ETS shared some examples of best practices that helped them prepare and participate in the EU ETS. Roon Osman of Shell Trading explained the functional principles of an emissions trading scheme (ETS) and briefly described the various strategies that can be employed by the participating entities. An emissions trading scheme, also known as cap-and-trade scheme, is a much more cost-effective system of reducing emissions compared to a system that has a cap on emissions but does not allow trading of emission permits or mitigation instruments. Ms Osman gave a general illustration to explain how an entity which overachieves its emission reduction can profit from selling the additional mitigation to an entity which has underachieved on its target. Both the entities would end up achieving the required targets in a cost-effective manner and would thus escape possible penalty. A cap-and-trade scheme has a national-level or industry-level cap but individual entities do not have a cap on emissions. They may emit more than the emission permits allocated to them but would be required to pay for mitigation instruments. A company must take into account its carbon position i.e., the number of free emission permits available, internal cost of abatement, and market price of mitigation instruments. In the long-term though, it is advisable that substantial investments are made in new low-carbon technology. (Roon Osman)
The participating entities must also be aware of the various features of a cap-and-trade scheme – the emission reduction targets, emission permits available, liquidity options, various mitigation instruments available, a proactive mechanism to participate in policy formulation, and an ability to anticipate policy changes. A number of strategies to achieve the desired target are available to the participating entities. The entities may choose to purchase compliance instruments in the spot market or in the futures market to hedge risks or they may borrow allowances from future compliance periods.
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Cap-and-trade is one of the most cost-efficient mechanisms to reduce emissions. Participating entities must be aware of their carbon position and plan for longterm and cost-effective measures to achieve targets. Strategies for meeting targets must address all market-related and policy-related aspects. 13
Abyd Karmali of Bank of America Merrill Lynch shared his company’s experience as a financial intermediary. He explained the roles and responsibilities of a financial participant in an ETS and discussed the various critical policies necessary for the effective operation of an ETS. A financial intermediary plays a very important role in the effective operation of a transparent emission trading scheme. Some of the key tasks executed by a financial participant include: Trading instruments through the exchange and over-the-counter (OTC) Providing execution services to clients Providing liquidity Providing customized hedging services to clients Accepting indirect bids and helping clients procure large volume of emission permits • Providing transaction services and managing clients portfolio • Providing cross-commodity services in oil, gas, electricity to better manage the clients’ carbon position • • • • •
Some of the most critical aspects of an ETS that all stakeholders should be mindful of are: Emission cap and available allowances: The stakeholders, especially the participating entities, must be aware of the method for allocating allowances, the quantity of banking/ borrowing allowed, fines for non-compliance, and limits on the use of offsets.
Monitoring, Reporting and Verification procedures: Participating entities and verifiers must be aware of the specific MRV guidelines and standards and the deadlines to submit emission data. Registry and IT infrastructure: Participating entities should be well acquainted with the various features and operations of the registry. They should be aware of the transactions that are to be made through the registry. Eligibility of other carbon instruments: Information about quantitative limits, qualitative restrictions on the use of offsets, and linkages with other ETS enable the participating entities to manage their carbon portfolio more effectively.
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Financial intermediaries are among the most important stakeholders in an ETS and they help in the transparent operation of the entire system. Financial intermediaries also provide valuable services to the participating entities, especially those which may not have any prior experience of operating under an ETS. Compliance entities can use a basket of services offered by the financial intermediaries to cost-effectively manage their carbon portfolio and meet emission reduction targets. 14
Richard Chatterton of Bloomberg New Energy Finance shared data related to the possible share of emission reduction obligations among the participating entities, the expected demand for offsets, and the potential issues that the stakeholders are expected to face during the implementation and operation of the ETS.
The aim of the compliance entities should be to minimize the overall compliance cost by utilizing all the available compliance instruments and measures. The entities should take into account the allowances and offsets available and other long-term abatement measures. The entities should also determine what part of the compliance cost are they willing to pass through to the consumers. Some of the major issues that are likely to impact the ETS implementation and operation are listed below. • Concentrated market: Ten companies are responsible for 76% to the total GHG emissions covered under the ETS. As a result, the Korean ETS would be a concentrated market. • Indirect emissions: The coverage of indirect emissions may complicate the operation of the ETS as the emission allowances issued under the scheme may substantially exceed the emissions covered. • High cost of fuel switching: Fuel switching from coal to gas, which may help the entities reduce emissions, is likely to be significantly more expensive than the $90 per tCO2e penalty for non-compliance. • Insufficient offsets: The total demand for compliance instruments is expected to be significantly higher even after the 10% limit on offset use is exhausted.
Participating entities must take into account all compliance options to formulate a robust and comprehensive compliance strategy. The Korean ETS faces a number of issues which need to be addressed to ensure effective operation.
THEME II: THE ETS LIFE CYCLE For the implementation and operation of a transparent and cost-effective ETS robust and strict monitoring, reporting and verification procedures are imperative. Robust MRV guidelines and procedures ensure environmental integrity of the entire system and increase confidence among all stakeholders. For the participating entities a dynamic and comprehensive carbon asset management is key to costeffective achievement of all obligations.
Robert Hansor of LRQA discussed the various aspects of monitoring, reporting and verification (MRV) procedures in an ETS. Sound, robust and strict MRV procedures are essential to implement an effective ETS and maintain the environmental integrity of the system.
While taking specific examples from the EU ETS, Mr Hansor stated that the compliance entities are required to submit verified information on emissions according to a standardized template. This template includes activity data, emission/conversion factors, total emissions, and improvement opportunities. The entity must get all this data verified from an accredited third-party verifier. The compliance entities must also have a comprehensive monitoring plan in place. The entities may use the ‘building blocks’ approach or the ‘fall-back’ approach or a combination of the two. The entities must also report about the methods of calculation adopted for various parameters, aspects related to quality assurance, methodology of internal review, responsibilities outsourced to third parties. Some of the challenges that the entities may face while preparing monitoring and verification reports include calculation errors, inconsistent calculation methods, and unavailability of source data.
• • •
MRV procedures are essential for completeness, transparency, consistency, and accuracy in various aspects of an ETS. Compliance entities must define specific work flow and management approach to undertake monitoring and reporting exercises. Compliance entities should retain all data records and must provide complete access to the verifiers.
Eric Boonman of Statkraft elaborated on the various options the participating entities of an ETS have to meet their obligations and, if possible, make financial gains as well. Every carbon market is based on a set of fundamentals which influence the supply and demand in the market. Some of the most significant of these are: rate of economic growth, regulatory developments, offsets and linkages with other carbon markets, weather, and energy prices. To illustrate the importance of these aspects, Mr Boonman shared data to show the change in EU ETS carbon prices with the triggers in each of these aspects. Mr Boonman further shared four business cases through which a company may fulfill its obligation under an ETS. Through these cases he highlighted the various possible strategies that a company may employ to cost-effectively meet its emission reduction targets. Emission permits & international abatement: A company should evaluate if it can achieve the emission reduction target by purchasing emission allowances/permits or through internal abatement projects. Target achievement through internal abatement projects would require significant initial capital investment and the delivery of emission reduction may be delayed; however, the company would be shielded from the possible price fluctuations in the auctions for allowances. Purchasing offsets: Participating entities may invest in external offsetting projects which is a low-cost compliance option but certainty of future carbon price is crucial. 16
Borrowing and banking: A market with future contracts available can help companies hedge risks and meet their obligations in the most cost effective manner. However, the companies must be able to predict their positions accurately in order to take full advantage of the future contracts. Yield arbitrage: In this case, the company may purchase spot contracts of a commodity after securing the required financing. The company may store the commodity in an inventory and choose to sell it through future contracts. The company can repay the financing from the revenue realized from the sale of the contracts and can keep the balance as profit.
• • •
No matter which strategy a company employs it must develop an internal forward price curve based on supply and demand. The company should continuously monitor its carbon position. The company should look to proactively participate in the carbon market and learn from the experience gained.
Changmin Yoo of PwC explained the importance of carbon impact analysis for the compliance entities and how marginal abatement cost analysis can be used by entities to determine the most cost-effective way of meeting the emission reduction obligations.
The compliance entities must look for cost-effective measures to reduce their emissions to maintain profit margins. Various abatement measures should be analyzed to compare aspects such as reduction potential and expected pass through cost. Marginal Abatement Cost Curves (MACC) provide the entities with a comparison of the various abatement measures, their emission reduction potential and, cost of abatement. The entities can select the cheapest and most effective abatement measures first thus reducing their compliance cost. Sustainable supply chain management is one of the most significant measures to reduce greenhouse gas emissions. In addition to lower emissions, a more sustainable supply chain adds value to the brand of the entity and also helps it meet in advance some of the laws that the government may be planning to implement. Some of the measures that are cost-effective and result in substantial abatement include having a centralized warehouse location and reducing packaging material.
• • •
Compliance entities should systematically examine all the abatement measures available and choose the most effective and cost-efficient measures. Marginal Abatement Cost Curves help entities to analyze the abatement measures. Companies must look to improve supply chain sustainability by analyzing the carbon footprint at each level. 17
THEME III: ETS INFRASTRUCTURE The backbone of any ETS is its infrastructure which includes registry, transaction platforms for the primary as well as the secondary segments, financial intermediaries, and verifiers. A dynamic, robust, and secure infrastructure is essential for the effective implementation of an ETS. Manuel Moeller of the European Energy Exchange explained the importance and functions of an exchange in an ETS and the various trading instruments available to the stakeholders suitable for different types of carbon asset management strategies. There are three types of transactions in the secondary segment – bilateral, over-thecounter, and through exchanges. These transaction options differ from one another on the basis of liquidity and number of participants, transparency, level of regulation, and management of credit risk. Transactions through the exchange have been dominant in the EU ETS. Various forms of instruments are available for transaction through the exchanges. These include spot instruments and future and option instruments. Spot instruments are used to satisfy short-term needs and are delivered to the buyer within two days of the initiation of the transaction. Future instruments are usually used for hedging risk or speculative bidding. These instruments have a future delivery date and the delivery of instruments may take place several months or even years after the initiation of the transaction. These transactions are supported by a well-knit network of regulatory and financial bodies. The buyer and seller of instruments interact and deal through the exchange while a clearing house guarantees payments and physical delivery of allowances as well as (Manuel Moeller) anonymity of the entities. All the transactions are settled in the registry where instruments are transferred from the account of the seller to the buyer. Exchanges have well-established trading rules and mechanisms. The exchange sets a specific contract size and delivery period for instruments and may even carve out a specific segment for certain types of compliance instruments, usually based on their environmental quality. Compliance entities as well as other stakeholders can set up accounts with the exchange directly or through financial intermediaries.
Exchanges are essential for the operationalization of a transparent ETS.
Stakeholders, in addition to those having an obligation under the ETS, may open an account at the exchange and participate in trading.
Various types of instruments with different environmental attributes and delivery periods may be available in an exchange.
Andy Kruger of Markit Environment Registry and Auction discussed the role and importance of a registry in an ETS. He explained the various features of a registry and the process of auction of emission allowances.
In its simplest form, registry is an online tool which tracks environmental credits (allowances and offsets) through their lifecycle, that is, from generation to cancelation or retirement. A registry must provide robust security, transparency, and integration, derived from a proven, existing infrastructure. Stakeholders — compliance entities and offset generators — can open accounts in the registry and emission allowances and offsets can be transferred into these accounts after appropriate transactions are concluded. These instruments can be tracked throughout the registry using serial numbers. A registry also plays an important role in communication among the various stakeholders and training for participating in the auction. During the auction, the registry helps tracking the bids submitted by various entities. Following the completion of the auction, the auction engine runs and generates the results. The number of emission allowances are then transferred into the appropriate accounts.
A registry is imperative for the smooth and effective functioning of an ETS.
It ensures the safety and security of allowances and offsets; facilitates efficient trading between compliance entities and other stakeholders.
A secure, transparent and robust registry encourages investment and supports increased liquidity.
A registry works as a communication, tracking, and training tool for the various stakeholders.
THEME IV: OPERATIONAL IMPACTS Jelena Simjanovic of Thomson Reuters explained the impact of ETS implementation on the entities in EU. A number of factors influence the compliance cost to the entities. These factors include rate of economic growth, fuel prices, weather, policy, and currency exchange.
Korea’s emission reduction target is based on the ‘business-as-usual’ trajectory until 2020. However, this trajectory may change due to a change in rate of economic growth, fuel prices and currency exchange rate as Korea is heavily dependent on imported fuel. Thomson Reuters estimates that South Korea needs to reduce emissions by 627 million tonnes of CO2e between 2015 and 2020 to achieve the stated target. The supply of offsets is expected to be around 100-210 million tonnes of CO2e, this would result in a shortage of compliance instruments equivalent to about 360 million tonnes of CO2e. 19
A number of initiatives can be taken to reduce the compliance cost and increase the supply of compliance instruments. The Korean ETS may be linked to other carbon markets to increase the volume and liquidity; the maximum limit on use of offsets can be increased; and the government can provide a long-term emissions forecast and increase borrowing provisions. Thomson Reuters shared the results of a survey which gauged the impact of EU ETS on compliance entities. • Between 2008 and 2012, compliance entities with surplus emission allowances to sell increased from 15% to 41%. • Around 59% companies reported that the EU ETS regulations have either already resulted in emission reductions or are expected to yield emission reductions in the future in their industry. • 45% of the surveyed companies admit that EU ETS is a decisive factor in their investment decisions while for 49% companies the ETS is an influencing factor in their decision-making process. • EU ETS is the most decisive factor in investment making process for power and heat, metals, and cement sectors. • About 52% of the surveyed companies see a linkage between EU ETS and the Korean ETS by 2030.
Fuel prices and currency exchange prices are expected to play a crucial role in determining the abatement options and prices in the Korean ETS.
The Korean ETS may face significant shortfall of compliance instruments. A number of short-term and long-term measures can be implemented to bridge the gap in demand and supply for compliance instruments.
Lloyd Vas of Carbon Market Institute shared the results of an extensive survey of Australian liable entities covered under the Carbon Pricing Mechanism (CPM) policy of the Labour-Green Party government. Some of the important results in the survey have been listed below. (Llyod Vas)
• 58% of the surveyed respondents believed that they had pre-existing capacity to manage compliance and obligations under the CPM. • 73% of the respondents engaged external service providers to assist them to meet the obligations. • The most common types of services are auditing and legal. • 75% of the companies established new governance policies and carbon risk management frameworks to comply with CPM. • About three-fourths of the entities developed strategies to adequately pass through carbon price cost to the consumers. • Only a fifth of the respondents saw new commercial business opportunities through the implementation of CPM. • About a third of the companies committed to financing energy efficiency and lowcarbon solutions and about three-fourths of the companies have factored carbon price in their future investments. 20
• Almost 40% of the entities developed a carbon procurement and trading strategy in anticipation of an emissions trading scheme earlier planned for implementation in 2015. • About half of the respondents have processes in place to track developments in international carbon markets including linkage with EU ETS.
• • • • • •
Policy uncertainty has impacted the commitment of liable entities in Australia to invest in their internal capacity to address GHG emissions. Australian entities extensively used the services of external service providers to assist them meet CPM requirements. Liable entities were required to formulate new work flows, governance and risk management frameworks were developed. New supplier-customer contractors had been negotiated to pass the carbon price to the consumers. Liable entities had focused on energy savings more than cutting GHG emissions. Liable entities were more focused on compliance rather than portfolio optimization.
Xueman Wang of the World Bank shared the progress made in the other emerging carbon markets around the world which are being supported by the World Bank’s Partnership for Market Readiness (PMR) program.
The PMR mission has 16 implementing countries including China, India, South Africa and Brazil. A total of 12 countries and the European Commission support the mission and have collectively mobilized $125 million in financial support. Six countries, including South Korea, have observer status under the PMR mission. The progress made in the various participating member nations has been summarized in the table below. Emissions Trading Scheme
Sectoral Crediting Program
* Kazakhstan is a technical observer in the PMR Most countries are in the early stages of policy formulation and are being urged to create readiness capabilities like data reporting and management, baseline setting and holding discussions regarding choice of mitigation mechanism. 21
THEME V: ETS EXPERIENCE SHARING & IN-DEPTH DISCUSSIONS Emerging carbon markets like South Korea face a number of challenges in the effective implementation of an ETS. The government and regulators are faced with a number policy and implementation-related issues while the compliance entities and project developers require clarity and guidance. Thus, it is essential for experienced stakeholders from existing ETS to share the strategies and tools which may prove helpful for the new market participants.
Sangsun Ha of Ecoeye explained about domestic standard for offset credits. Offset credits are greenhouse gas reduction or removal from non-ETS area with international level MRV. Offset programs include Clean Development Mechanism (CDM) projects, and in case of CDM projects, project in ETS area are also eligible. Use of offset credits is limited to 10% of the total surrendered units during the first compliance period, and offset credits generated in foreign countries is restricted up to 2020. After 2020, foreign project will be allowed with 50% of total offset limit. Korean projects under the CDM (96 in number), projects under the Korea Voluntary Emission Reduction Program (400 in number) implemented by Korea Energy Management Corporation (KEMCO), and projects under the forestry and agriculture offsetting scheme are eligible under the Korean ETS. Supply of offset credits is expected to remain lower than the potential demand. Demand for offsets is expected to range between 17 million and 56 million tonnes of CO2e per year. The supply of Korean CDM projects is expected to be around 9-10 million tonnes per year based on the historical average issuance rate and after the exclusion of controversial projects using methodologies related to adipic acid and HFC23. The potential supply from the projects under KVER is expected to be around 0.5-1 million tonnes per year. As a result, the supply of credit offsets would lag the potential demand by 30% or around 5 million tonnes every year, accumulating to 30 million tonnes by 2020. The compliance entities may also choose to continuously bank compliance instrument due to the uncertainty in the market which will, again, reduce the supply of compliance instruments in the market. One of the potential issues in using CERs generated from Korean projects under CDM is their transfer from the UNFCCC CDM registry to the Korean registry. While a physical linkage between the UNFCCC registry and the Korean registry is a cumbersome task, the government may consider the voluntary cancellation procedure of the UNFCCC. Project participant could request voluntary cancelation for certain amount of CERs to UNFCCC secretary. UNFCCC secretary could transfer the amount to voluntary cancelation account and publish the data in a webpage and issue attestation to the project participant. Subsequently, the project participant could submit the attestation to Korea ETS authority. The Korea ETS authority could then validate the attestation comparing with UNFCCC webpage data and issue Korea Domestic Offset Credits to the project participant. 22
Another potential issue is whether issued CERs could be allowed as early action or not. The competent authority would be concerned that it would be difficult to meet national mitigation target (30% reduction below 2020 expected BAU emission) if issued CERs is allowed as offset credits. However, the authority might not need to be concerned about the issued CERs as actual BAU would be expected BAU plus CER (real and additional emission reduction below validated baseline).
• • •
A number of schemes and mechanisms exist which will be the main suppliers of the compliance offsets to the Korean ETS. However, the supply is expected to significantly lag the demand. To make use of the CERs generated from the Korean CDM projects, the government would have to make arrangements with the UNFCCC CDM registry to avoid double counting.
David Antonioli of Verified Carbon Standard (VCS) gave a brief comparison of how the various established and emerging carbon markets operate. Verified Carbon Standard Auditing
Done by CDM DOEs accredited by International Accreditation Forum (IAF) members under ISO 14065
•Bottom up •Double validation •Positive lists •Performance benchmarks
•Multiple registry system •Central project database
•Pioneered AFOLU •Developed first jurisdictional framework •Tagging of VCUs
Clean Development Mechanism Auditing
•CDM Accreditation Panel •DOEs
•Initial submittal by proponents with review/approval by Meth Panel •Mostly project-by-project determination of additionality
CDM registry, run by UNFCCC
•Leading program in the world •AFOLU partially covered 23
China Certified Emission Reductions Auditing
•To date 3 Chinese DOEs approved •Specific Chinese requirements
•52 CDM methodologies with adjustments •More to be approved
To be announced
•International offsets not currently being considered •Unclear role for AFOLU •Learning by doing (7 pilots)
Australia –– Carbon Carbon Farming Initiative Auditing
•GHG and energy auditors (individuals) registered under National Greenhouse Energy Reporting Act of 2007 •Exemptions for small projects
•Positive list approach •Limited to agricultural sector
Administered by Australian National Registry of Emissions Units (ANREU)
•Linkage discussions underway with EU ETS •Uncertain future
Japan –– Joint Joint Credit Mechanism Auditing
To be announced
•Preference for positive list approach •Agreed with each partner country
Each partner government creates unique registry
•Individualized agreement with each partner country •7 agreements to date (Bangladesh, Ethiopia, Kenya, Laos, Maldives, Mongolia, Vietnam)
Verification bodies accredited by California ARB
•Standardized methodologies •ARB developers and approves methodologies
•Compliance Instrument Tracking System Service (CITSS) •Offset Project Registries
•Early Action is possible •Linked with Quebec •Buyer liability 24
South Africa Auditing
To be announced
Considering recognition of CDM, Gold Standard and VCS
To be announced
•Likely limited to projects in South Africa •May support projects in southern Africa •Offsets complement carbon tax
Giles Dickson of Alstom shared experiences from the EU ETS on broader policy issues. Europe has implemented targets for renewable energy and energy efficiency besides the emissions reduction target. The EU has implemented a number of low-carbon policies in addition to the emissions trading scheme, these include: targets for fuel quality improvement; targets to reduce carbon dioxide emissions from vehicles, and taxes on energy consumption. The EU ETS is expected to achieve 21% reduction in GHG emissions by 2020 from 2005 levels in the sectors covered. However, the low price of compliance instruments has failed to drive significant investments in low-carbon technology.
Ambitious renewable energy targets have led to significant proliferation of renewable energy infrastructure across Europe. The large-scale and increased use of renewable energy has also led to substantial reduction in GHG emissions. However, the high financial support to the renewable energy sector seems politically unsustainable and contributes to the uncertainty regarding the growth in the sector.
• • • •
EU ETS provides some crucial lessons from which new and emerging carbon markets can derive significant learnings. An ETS must have just the right number of compliance instruments available so as to give price signals to investments by the compliance entities. Emission reduction targets and cap on emissions must take into account the expected progress in renewable energy and energy efficiency sectors. The cap on emissions should be flexible enough to respond to variations in demand.
BREAK OUT SESSIONS GROUP A: INDUSTRY I The initial discussion focused on how to negotiate with the government on emission allowance allocation. The participants of obligated entities were eager to learn about the experience of the European entities. The European members described the history of the EU program and its emission allowance allocation methodology. A representative from Solvay highlighted that while negotiation of allocation is important, carbon management is also about identifying the opportunities and profiting from the system. Chevron outlined its experience of negotiating allocation and meeting compliance in USA and Europe. It emerged that collaboration is important between the industry to maximize its overall benefit. Consultations amongst industry and trade organizations such as IETA, play a crucial role if industry wants to benefit in totality. It also emerged that it is important for corporations to develop internal system to measure, report and trade carbon. While the small and medium enterprises may not have adequate resources to undertake these activities, bigger firms have the resources, and the experience of putting together teams for to undertake these activities. A representative from Korean steel company POSCO wanted to know how often people trade carbon, is it mostly a daily activity or an annual one. A Korean industry representative also wanted to learn about the important difference between auctioning and free allocation, including advantages and pitfalls of each approach.
GROUP B: INDUSTRY II Representatives from entities in the heavy industry, utilities, and power sector were among the participants in this discussion group. The Korean participants expressed a number of concerns regarding the lack of clarity in the ETS regulations regarding the BAU emissions trajectory and the emission reduction targets for each participating sector. The Korean representatives were advised to remain engaged in stakeholder consultations with the government and make them aware of their concerns. Another major concern of the participants was the possibility of the introduction of a carbon tax. A bill for the introduction of such a tax may soon be tabled in the Korean parliament. The speakers in the discussion group and the Korean representatives agreed that a dual regulation of emissions must be avoided. The speakers in the discussion group, while sharing their experiences from the EU ETS, advised the Korean representatives to clearly define the management flow in the company to meet the compliance obligation. Speaking from their experience in the EU ETS, the speakers stated that initially the officials in the Environment, Health and Safety (EHS) department or the communications department deal with the regulatory bodies while the task of meeting the obligation eventually falls into the hands of officials looking after operations and finance. 26
GROUP C: INFRASTRUCTURE The speakers and Korean participants mainly discussed the various operations of a registry and an exchange during the transaction of compliance instruments. A speaker from the European Energy Exchange explained the various services at the exchange including financial support for the participants and safety and security of the transactions and instruments. Participants further asked focused questions on how clearing house operations work and level of automation versus manual intervention. Discussion also revolved around the failure of registries. It was clarified that registries do fail sometimes, but the critical question is how long it takes them to come back online.
GROUP D: FINANCE According to the speakers participating in the discussion, the evolution of the Korean carbon market will depend on the types of financial instruments introduced. The speakers as well as the participants agreed that the Korean market is unlikely to see any activity in 2014 and little activity during the major part of 2015 as the compliance entities are expected to start participating actively only towards the end of the compliance deadline. The speakers advised that the Korean companies should decide on whether they would like to engage in carbon management on a centralized (group or company) level or decentralized (installation) level.
GROUP E: MEASUREMENT, REPORTING AND VERIFICATION (MRV) The speakers noted that there is lack of clarity on the supply and use of offsets to meet compliance which must be addressed. It is widely expected that the offsets generated from the existing projects in Korea would likely be ineligible for meeting the compliance targets under the ETS. The representatives of the participating entities were also concerned about the absence of MRV standards which may lead to penalties.
Q & A SESSION Does Shell have a trading department within the company? And why only one trading company? Reply by Roon Osman, Shell Trading
Within Shell we have a department for trading, which is the group I work for, that is responsible for trading all commodities on behalf of the Shell group, so mainly oil, gas and so forth. That department also looks at trading of carbon credits and EU allowances. So what happens is that the companies/operational units that are covered in the emissions trading scheme will all submit their numbers to the central trading team and will say this is what we need to buy and sell and then Shell trading will go out to buy and sell. The reason why we have one trading entity is that the group decided early on that this is the most efficient way to do things as opposed to different Shell companies buying and selling against each other in the market. So that is one way of doing it is to have one central entity for the whole group worldwide that makes the transactions at a group level. During EU ETS Phase 1, what were the popular services for companies to utilize? Reply by Abyd Karmali, Bank of America Merrill Lynch It was a more limited set of services because between 2005 and 2007 no offsets permitted within the EU ETS. So it was more about companies learning how to marry the power market and the fuel market activity with the emissions market and many companies were building this expertise. Financial institutions were there to provide liquidity to enable better price discovery and in the early stages of the pilot phase financial institutions and European utilities were really the biggest players in the market. So it created an efficient market very quickly and that was important for everyone who was active in the market to get familiar with it, and comfortable with it. Then as you may know, one of the challenges the European market had in the pilot phase is that we did not have the Target Management System (TMS), like we have in Korea, which helps put in place the knowledge about the quality of the emissions data.
Many European companies did not have that information and so at the first accounting period suddenly the market was affected by the knowledge that there was much less emissions reported than people anticipated. We also had the challenge that in the pilot phase there was no banking so that market became very short. I would say what the financials started doing very quickly was to establish the forward curve for the next phase. So that even though the price of 2006 and 2007 vintages went very low because of the position in the market, the forward vintages of 2008 and 2009 began to be very liquid. Before the ETS, Korea has a Target Management System (TMS) â€” this could create two types of policies or standards that a power company has to follow. Do you agree with this type of policy? Or, the interaction between the broader industry and power sector? 28
Reply by Abyd Karmali, Bank of America Merrill Lynch It is true that the industrial sectors in emissions markets will usually experience two impacts. One is the price of CO2 and, second, if there is an adjustment to the power price from the CO2. So it means the power price could change, which effects industry as well. And what we have seen in Europe and indeed in California is that different industries have different abilities to pass on the costs either through consumers or to other parties in the value chain. But it is true you should anticipate that there would be two different costs to manage. Can you be more specific about restricting CDM offsets by geography? Reply by Abyd Karmali, Bank of America Merrill Lynch Its more to do with the transfer of credits between counter-parties so that the credits can be used by Korean entities for compliance purposes. And specifically for every single Korean CDM project, there may be one or multiple project participants. Those project participants, in some cases, would have ensured that the credits are issued. When the credit issuance process happens, the credits move physically from the UN registry in Bonn to, in some cases, a Korean entity with an UNFCCC account, or possibly a foreign entity with a CDM account. These could become valuable credits in the Korean emissions trading program. So the question is how do we make sure there is no IT restriction in transferring those credits from outside Korea back to Korea. Even though it sounds like it might be a simple solution, actually it’s a bit more complex because a link might need to be put in place between the Korea registry and the European registry, and lets say the Korean registry and the Swiss registry. That is the only way to get credits back into Korea. So its more about Korean ministry of environment agreeing with its counterpart in other countries to put in place that IT link. Because the challenge is that once a credit is issued in Bonn, there is no way for it to go back from Bonn, it has to come through a different way to the entity that wishes to use it for compliance purposes. A lot of people point to the 2008 financial crisis as a contributor to the problems with the EU ETS today. From the banking sector, is there any explanation you could point out to why the EU ETS hasn’t been as successful as policymakers would like it to be? Reply by Abyd Karmali, Bank of America Merrill Lynch Europe had the misfortune in a way to be the first compliance emissions trading program at scale and we talked about the need to have information data for the scheme. But that is why Europe put in place a pilot to make sure the quality of the emissions data increased. Many companies themselves did not know what their quantities were so they benefitted from that learning processes. One area that I can point to where there will be a need to have much stronger planning is around the impact of complimentary policies. We see this in Europe in the interaction between the emission cap, renewable energy target and the energy efficiency directive. Each of those impact the power generation quantities and yet the emissions market isn’t really formally connected to what happens in renewable energy and energy efficiency. 29
The same is true in California. California has benefitted from the European process but still there are big questions about the role of transport fuels in California. If the policies succeed in the transport fuel in California then that would mean less pressure on the California emission trading program. But if they arenâ€™t successful, who will bear the burden? Probably the companies in the emission trading program. Those are the kind of interactions that are very important to specify in the beginning so that companies can plan carefully and include that in their scenario planning strategic exercise. According to a BNEF report, the Korean carbon price will be much higher than in any other markets. How did you come to that result and do you see problems with this result for the future of the SK ETS? Reply by Richard Chatterton, Bloomberg New Energy Finance You must be referring to the white paper we published. We have done similar thing with the Chinese power sector which got some pretty interesting headlines. The main conclusion from the report is that if we look at the 813 million ton BAU in 2020 and we take 30% of that, and break down the market into ETS sector and non ETS sectors and we take the MOTE roadmap, we assume what the cap in going to be on the market in 2020 if the cap and BAU remain where they are today. It is impossible for the carbon price to be below the penalty price. This was the conclusion of our analysis. The $90 here is not enough. So, we were misquoted, and we did not say what the price would be, but we said the price would exceed $90 because of this additional compliance provision as has already been discussed. This will be the ceiling, the top compliance price that companies will need to pay so therefore, this will set the cost of carbon in the market. So this is what grabbed the headlines and unfortunately clouded some of the more nuanced analysis which was behind it. How do other systems (EU, Australia, etc.) include indirect emissions? Reply by Richard Chatterton, Bloomberg New Energy Finance Not in the same way as it is being done in Korea or is being proposed. In the EU ETS and, more explicitly, in Australia there is consideration of the cost of emissions in power generation but that is in the form of compensation that is given back to companies. So industrial sector companies can ask for, and hope to be granted, additional allowances in order to compensate them for the cost of carbon in the power price. This is in a sense coverage of indirect emissions. They are being calculated in Australia and being factored into the allocation process of allowances. In Korea it is the other way around, indirect emissions are being calculated so that companies can become compliance entities. The very large companies in Korea that have very little direct emissions, like electronic manufactures among them, will not be included in ETS if indirect emissions were not covered. So some of the top 10 entities will primarily be indirect emitters and I can totally see why the MOE has chosen to include them. It increases liquidity, boosts the profile of the scheme, it means that many of the biggest and brightest companies would be included that otherwise wouldnâ€™t have been involved. 30
Also, with the power sector regulated the way it is, it is impossible to pass through costs and encourage demand-side efficiency and incentivize companies to reduce power consumption unless you put a price on indirect emissions because the power price comes up against this regulatory ceiling. The only precedent for it is the design of the ETS pilots in China. There is no operating market that regulates indirect emissions. California does include indirect emissions from power that is imported from neighboring states but that is, for obvious reasons, because it needs to be on a level playing field in terms of costs with power that is generated within the state. So, companies have to pay a little of their indirect emissions to account for those imports. But its not completely covered in the same way it is being proposed in Korea. Please talk more in detail about the accreditation process. Reply by Robert Hansor, LRQA
The bane of our existence are the accreditors. They are the authorities who supervise verifiers and provide the approval that the verifier is qualified to go out and apply its standards and provide that reasonable level of assurance of the data. Previously, within the EU ETS was a very decentralized process where national authorities were able to understand accreditation procedures perhaps in an inconsistent way. So verifiers were accredited, for instance LRQA in the UK, German verifiers accredited in Germany and so on and so forth in other member states. Because the national accreditation authority had inconsistent understanding of the approach of European ETS accreditation standard, there were verifiers operating to different levels and different places. The new verification and accreditation regulation implemented in the phase III enables the member states better understand the various procedures and standards. The change in regulations is unlikely to affect us as we are already following quite strict standards. Accreditors now frequently visit our UK offices to understand the procedures we follow to train our staff and select the right verifiers for the right installations. The Chinese pilots are coming online and the accreditation guidelines are very unclear at this moment which is going to be difficult because once you have something which is not clear you have inconsistencies, then you have verifiers working at different standards. What were the market offerings in 2005 during the first Phase of the EU ETS? Reply by Eric Boonman, Statkraft The European market started developing in 2003 while the brokersâ€™ markets started in 2004. While the brokers were not acquainted to the concept of emissions and emissions trading, we were aware that a number of large companies were eligible for quite generous allocation of emission allowances. These generous allocations have now resulted in the windfall profits which have been the subject of discussion of quite some time now. 31
But, it was a pilot phase, lets face it. Companies needed to get into the scheme, they needed to get used to about it so what happened is that they made good money, but in the second phase, finally we had the statistical data, and we knew in Europe how much we were exactly emitting so that we could create a short market, at least that is what we thought before the recession. But what were the products in those days? Well, there was no spot market, there were no allowances yet, so the forward market started to develop. Normally, you start with a spot market and on the basis of a spot market, you create a forward market. This market did the exact opposite. The market started with some OTC trading, we needed to have some master agreements in place, so there were a lot of law firms coming together. I think IETA played a very important role in that in drafting master agreements because we didnâ€™t know what would happen if things go wrong, how do you deal with that, there was so much uncertainty. There was some trading between wholesale companies. Over time people started realizing that we needed to do bit more than EUAs, we also need to invest in offsets. And then, the linking directive linked the EU ETS market to the international offsets. Companies started realizing that they could generate much cheaper offsets in China than in Europe. That is where a lot of speculator funds were coming in. You saw speculators raising money from industrial companies and utilities. These companies were very interested in that as they had no clue what to do. Investing in these funds was like trial and error for them. Suddenly, they knew how it worked and they could do it themselves. Only in 2008, more sophisticated financial products became available, we saw options, not only simple call options that you could exercise at end of the term but also knick in options or age in option developing. Although that market has never really taken off big time. Other than that, utilities who sold allowances were approaching their customers and basically offering carbon compensated power. We developed carbon compensated households, one of the early products that was developed. How do you deal with anonymity and buyer/seller name? What role does the clearinghouse have in dealing with anonymity? Reply by Manuel Moeller, European Energy Exchange The clearing house works as a link between the buyer and the seller. The clearing house has an account in the registry which is used for completing the transactions. During a transaction, the seller transfers the instruments into the account of the clearing house which, in turn, transfers the instruments to the buyerâ€™s account. Thus, the anonymity of, both, the seller as well as the buyer remains intact.
How is the carbon exchange different from existing other markets (like gold, stocks, etc.)? Reply by Manuel Moeller, European Energy Exchange 32
Europe has regulated exchanges for a number of commodities and these are very similar to the exchanges in South Korea. The European exchanges have clearing members. An exchange without clearing members may be simpler but it does have some disadvantages. South Korea may or may not follow the same system as being followed in the EU. How do you deal with registry security? What happened to the stolen credits-how did it happen and where did they end up? Reply by Andy Kruger, Markit It was very elaborate and took a lot of effort. What they did immediately is that they transferred the allowances out, and we can see it in retrospect they did it, using the forensics. They transferred the allowances on the exchange on the trading floor, and they started hitting bids along the way and transferred as quickly as they got them out and the money went to off shore accounts. That is one of the learning experiences. Now we know how to prevent against that. People who want to be criminals will always figure out a way around the system, but you can be one step ahead of them trying to prevent it. (Andy Kruger)
Due to this security breach the entire system was frozen for few days and now we have a centralized registry and its not been repeated. In the presentation, you mentioned that there are limited abatement opportunities in the power sector in Korea. What are the abatement incentives for wind and solar production? Reply by Jelena Simjanovic, Thomson Reuters In our study, we only considered the fuel switching cost to the South Korea utilities. We noted that South Korea has limited capacity in terms of renewable energy generation. It lacks adequate onshore wind energy and solar energy resources; offshore wind energy projects, however, may be feasible but the cost of abatement from those projects could be as high as $150 per tonne of CO2e. Therefore, it is important that there be revenue recycling within the Korean ETS to enable the compliance entities to take significant and cost-effective measures to reduce emissions. What are the complimentary policies in the Korean abatement curve? Reply by Jelena Simjanovic, Thomson Reuters The major aim of the complimentary policies is to encourage sectors not directly covered under the ETS to reduce emissions. These policies help in achieving the overall policy target to reduce emissions. For example, in California, complimentary policies covering renewable energy and transport fuels are interacting with the capand-trade scheme. How renewable energy policies would interact with and affect the ETS in Korea is still unclear.
How to ensure 1 tonne of Australian reduction is equal to 1 tonne of EUAâ€™s? Reply by Lloyd Vas, Carbon Market Institute It was clear from the beginning that the Australian Carbon Pricing Mechanism was designed with a goal to forge linkages with other carbon markets. So there was always a view to international standards, the UNFCCC, and what is happening in Europe. Australia uses same Global Warming Potential as international standards. Australiaâ€™s National Greenhouse Gas Energy Reporting Scheme uses international standards as well.
So in terms of fungibility of a tonne in Europe and tonne in Australia, that does allow for market linkage. But it is quite right that without such fungibility, it shall be difficult to link two markets. Just to add, the Australian â€“ EU link is a one-way link. So from 2015, Australian companies can use European allowances. From 2018 onwards it will be a two-way link, that is still subject to some negotiation. But following the change of government in Australia, the launch of the emissions trading scheme, and the consequent linkage with the EU ETS, is now doubtful. With so many new carbon markets emerging, how likely is it for them to eventually link up as a global carbon market? Reply by Xueman Wang, World Bank We, at the World Bank, push for the 3Cs concept in all the emerging markets under the PMR program. The 3Cs concept stands for credibility, comparability, and consistency. As a number of members of the PMR program are still working to establish market mechanisms, they have a great opportunity to develop systems which are compatible and comparable with systems in other countries. We are also helping domestic offset markets to develop rules and procedures which would make their offsets compatible with international carbon markets. One of the key roles of the PMR program is to facilitate communication between the emerging markets so that they may collaborate closely in developing a potential linkage in the future.
STAKEHOLDERS INTERVIEWS Yeol-Reol Choi, Hyosung Question: In Korea, the ETS will come into effect in 2015. Based on the new policy and system introduced so far, do you think there is enough support from the South Korean government? Answer: The law and its implementing ordinances for Korean ETS were announced last year. It established the basis that a company could cope with in a way, but it is not enough. If and when the details are announced, a company can deal with it much more effectively. Question: How will your company participate in ETS? (Yeol Reol Choi)
Answer: My company, Hyosung has 50 installations and emitted a total of 130-140 million tonnes of GHG emissions every year. Hyosung will participate in Korean ETS as a compliance entity. Question: What is the biggest challenge for an ETS in South Korea? Answer: As I mentioned earlier, the detailed standards for allowance allocation to the companies have not been decided yet. So it is not easy to forecast the overall format of the Korean ETS. This kind of uncertainty is the biggest problem that companies are facing now. In this sense, it is very good that I can learn about ETS more through foreign cases in this workshop. Question: How many people are in your company that look at the carbon issue? Answer: Under the strategy headquarter of Hyosung group, there is a green management team where Iâ€™m working with my team leader and another employee, and also there are people in charge for Target Management Scheme in each installation. We are in consistent communication with each other to handle this issue. Question: Did you find this IETA workshop useful? Answer: Yes, it was good that I learned about ETS and foreign cases because there are many uncertainties with the policy and the system for now since ETS will be implemented for the first time in South Korea. Especially it was very helpful that people from various categories such as industries, government, and verification organizations gave a talk.
Ian Lee, LG Chem Question: Can you please introduce yourself? Answer: Yes, my name is Ian Lee and my Korean name is Chongyu Lee, and I am from LG Chemical, here to learn how the carbon market will work and how the carbon pricing will be impacted by the different factors. 35
Question: Do you think there is enough political support for the ETS in South Korea? Answer: I donâ€™t think so because the policies on TMS and ETS has been changed often. For companies like LG Chem it is very difficult to understand and prepare for the ETS. So I think the government should fix and finalize the target like BAU, and the plan for ETS that is going to be implemented very soon. Question: How will LG Chemicals participate in this ETS?
Answer: LG Chem has prepared for the TMS so we have our own IT system to gather transparent data from the plants manufacturing products. We started to understand how ETS will work and we have our own department which is called energy climate change team. I donâ€™t think companies in Korea have their internal teams for preparing for ETS, so LG Chem is doing pretty well in terms of preparation. Question: What do you think is the biggest challenges to an ETS in South Korea? Answer: Like what I said, the government changes its policy attitude very often and there is just a year for the ETS to be implemented. I think a year is very short for companies to prepare perfectly. To repeat, government should finalize their target and plan first. Question: So at LG Chem how many people are looking at the carbon issues? Answer: At the headquarters we have six members in energy climate change team which is responsible for preparing for ETS, but LG Chem has a lot of plants in local areas and each plant has their own mangers to take care of environmental issues like carbon. Question: Do you find this IETA workshop was useful? Answer: Yes, I think it was useful. I learned a number of plans and strategies adopted by the companies participating in the EU ETS and this would help us develop similar strategies for the Korean ETS.
Changmin Yoo, PwC Question: Can you please introduce yourself? Answer: Hello, my name is Changmin Yoo, I am the Director for Sustainability and Climate Change practive here in Korea. Question: What exactly is your role and what are your doing now a day in the Korean carbon market?
Answer: I am helping some of my government clients and private sector clients to understand their abatement costs and develop their carbon strategy in anticipation of the upcoming emissions trading scheme starting from 2015. Question: Do you think there is enough political support in Korea to go ahead with the emissions trading scheme? Answer: There has been strong support from the previous government, but lately, with the change of leadership earlier this year, many private sector participants are not sure if the support will continue. (Changmin Yoo)
Question: What exactly will be the role of your company in the Korean ETS once it is implemented? Answer: My companyâ€™s role will be in two parts. One is that we are one of the largest greenhouse gas verification companies so we help private sector companies verify their emissions. And second role is that we help companies to invest in low carbon infrastructure and we help them conduct economic and feasibility studies. Question: You must have worked with several Korean companies in the past. What do you think are the major challenges to a successful carbon program in Korea? Answer: I think the biggest challenge will be the uncertainty of the policy because many ETS policy (components) have not been decided yet and there has been some lack of transparency on the communication channel between the government and private sector. Question: Finally, you were here in this IETA trade mission. Do you think it was useful and do you have any feedback? Answer: I find it quite useful. Many Korean companies are interested in understanding what was the experience in other markets such as EU and Australia. A number of speakers from other jurisdictions share important insights during the course of this mission.
SPEAKERS Dirk Forrister Dirk Forrister is President and CEO of the International Emissions Trading Association (IETA). Previously, he was Principal and Founder of Forrister Advisory, an independent consultancy firm specializing in climate change, clean air and clean energy policy and markets. Until late 2010, he was Managing Director at Natsource LLC, the manager of one of the world's largest carbon funds. Previously, Mr. Forrister served as Chairman of the White House Climate Change Task Force in the Clinton Administration. His experience includes serving as Assistant U.S. Secretary of Energy for Congressional, Public and Intergovernmental Affairs; Energy Program Manager at the Environmental Defense Fund; and legislative counsel to Congressman Jim Cooper, the author of two early climate change laws. Forrister serves as an honorary Fellow with IETA, as well as a member of the Advisory Boards of the National Center for Atmospheric Research and the American Carbon Registry.
Abyd Karmali Abyd Karmali is Managing Director and Global Head of Carbon Markets at Bank of America Merrill Lynch. He is the company's point person for carbon business opportunities and serves on Bank of America's Environment Council which steers the bank's USD 50 billion environmental business initiative. Mr Karmali has worked for more than twenty years on climate change, carbon markets, and climate finance. In June 2013, Mr. Karmali was selected to serve as an inaugural private sector representative to the Board of the new UN Green Climate Fund, whose mandate is to scale up low-carbon finance to emerging markets. He is also Special Advisor to the Climate Markets and Investment Association (CMIA) after serving as its elected President from 2008-2013. Additional roles include member of UNEP's Climate Change Advisory Group, Council of the International Emissions Trading Association (IETA), Steering Committee of the UK Governmentâ€™s Capital Markets Climate Initiative, and International Advisory Board of CleanStar Mozambique. Over the past six years, his teams have won several awards from the Financial Times, Environmental Finance, and The Banker for a variety of innovative climate finance transactions. His voluntary sector activity includes chairing Just Energy, an Oxfam seeded social enterprise focused on energy access, and advising Conservation Strategy Fund, which is focused on enhancing natural capital such as biodiversity and ecosystem services. Karmali was previously employed with management consultants ICF International and the United Nations Environment Programme. He holds an MS in Technology and Policy from Massachusetts Institute of Technology.
Andy Kruger Andy Kruger (BSME and JD, Admitted in CT) is responsible for global business development related to Markit’s Environmental Registry and auction capabilities. In addition to his formal training as an engineer and attorney, Kruger brings Markit’s clients over 25 years of pioneering experience in the energy and environmental sector. He has been invited to participate in discussions from The White House to Wall Street to “Main Street”, and has advised governments, NGOs and corporations regarding environmental- and energy-related legislative and regulatory developments. He also offers unmatched environmental and energy permitting, market and brokerage knowledge. Kruger thus provides Markit customers with a first-hand understanding of the importance of Markit’s secure and easily-useable suite of products. Kruger also speaks Spanish, and has been accepted as a member of the Society of Automotive Engineers.
Changmin Yoo Changmin Yoo has been leading the energy and climate change department at PwC Seoul office as well as leading the firm’s practice of international development assistance. With his capacity he has been heavily involved in cross border M&A activities, with the focus on renewable energy and energy efficiency related projects. Prior to joining the Seoul office he has been seconded to PwC Sydney office as a manager at the sustainability and climate change practice where he conducted several carbon assurance and conducted emission abatement cost analysis engagements. He has been in charge of helping Korean donor agencies invest in green ODA projects in less developed countries. He is a frequent speaker at industry association seminar. He spoke at CNBC and wrote several articles on renewable energy in numerous journals including Environmental Finance magazine.
Richard Chatterton Richard is lead analyst for Global Carbon Markets at Bloomberg New Energy Finance (BNEF). The BNEF Global Carbon service provides clients with comprehensive analysis of the short- and long-term outlook for UN offsets (CERs and ERUs), as well as an understanding of the development of emissions trading in South Korea, China and elsewhere in the world. Richard is responsible for all of BNEF’s Global Carbon Markets output, which includes policy analysis, fundamentals modelling, and daily trading analysis/ coverage of news events. Richard joined the BNEF carbon markets team in 2011 having previously worked at Camco International developing CDM projects in China, South East Asia and Africa. Richard has a BSc in Physics from the University of Durham and an MSc in Sustainable Energy Futures from Imperial College London.
Eric Boonman Eric Boonman has over ten years of experience in green energy and environmental markets and is currently the Head of Carbon Origination in the Global Environmental Markets department of Statkraft. Statkraft is the largest renewable energy producer in Europe and is active since the inception of the EU ETS in the entire carbon value chain both as a compliance buyer as well as a service provider. Statkraft is expanding into new environmental markets across the globe and is a Steering Committee Member of the Business Partnership for Market Readiness (BPMR). Before this, Eric was the Global Head of Environmental Markets at Fortis Bank where he was instrumental to the set up and growth of the team from 2005 onwards. Fortis Bank established itself as a major player across the energy and environmental value chain. Eric has set up and led origination teams in Hong Kong, New York and Houston. Eric started his career in 2001 as a green trader at Dutch utility Nuon. Eric holds a Master in Economics and is also a regular speaker on international clean tech and environmental conferences.
Robert Hansor Robert Hansor manages LRQA’s carbon auditing business in the Asia region and has been qualified as a lead assessor and technical reviewer. He is also a member of LRQA’s global steering committee for climate change services, and was also a lead assessor in ERM prior to joining LRQA. He has been involved in carbon auditing/EU ETS knowledge transfer and capacity building between the EU and China for the past 5 years with LRQA, ERM, International Carbon Action Partnership (ICAP), IETA and the British Embassy/UK Foreign & Commonwealth Office. He has built carbon auditing teams in China and Asia (including EU ETS verification services for Asian airlines, CDM, ISO14064) for LRQA and ERM. He speaks at leading technical events and conferences around the region (in China, Australia, Japan, Indonesia, India, Thailand, Vietnam, etc) on carbon auditing, risk management and ETS. He has been interviewed as an expert on carbon auditing, and had articles published in leading news publications, including the Financial Times, South China Morning Post and Carbon Finance Magazine.
Giles Dickson Giles Dickson is Vice President for Environmental Policies & Global Advocacy in Alstom. He heads Alstom's 14-strong global team that promotes the Company's thinking on energy, environment, climate and transport policies and engages governments and others on how to support the transition to the low-carbon economy. Alstom provides technology and equipment for power generation and transmission and sustainable transport. 40
He joined Alstom in 2008 as Director Government Relations Europe for Alstom Power. He was previously a UK Government official for 16 years, working mainly on EU affairs, finally serving as Environment Counsellor at the UK Permanent Representation to the EU. He is a Vice-Chairman of the BUSINESSEUROPE Industrial Affairs Committee and a member of the Board of the International Emissions Trading Association.
Lloyd Vas Lloyd Vas is the Markets and Research Manager at the Carbon Market Institute. He has been involved with CMI since since its transition from the Asia-Pacific Emissions Trading Forum (AETF) in 2010. He has extensive knowledge and experience in international carbon markets having worked with Camco in London and Beijing. Since arriving in Australia in 2009 he has held positions with the Victorian Government’s Carbon Market Development program and Innovative Carbon. Lloyd was previously a Senior Investment Executive at Standard Life Investments with a focus on fixed income and ethical investment portfolios.
Roon Osman Roon Osman heads up the Asia Pacific region for Environmental Products and related energy markets at Shell Trading. Her team focuses on managing the compliance of Shell Group in this region, as well as providing risk management and transaction services to customers and other compliance entities. Prior to this role, Roon was responsible for building a CDM portfolio for the Shell Group, which resulted in excess of 80 CDM projects globally. She was responsible for Shell Trading being the first entity to ever receive an issuance of CERs from a CDM project. She has spent over 10 years working in environmental markets and has a BSc in Environmental Health and an MSc in Environmental Technology from Imperial College, London.
Jelena Simjanović Jelena Simjanović is the Emerging Markets Manager at Thomson Reuters Point Carbon (TRPC). In this capacity Jelena leads development of the TRPC’s content, market analysis and strategic partnerships in Asia and South America. Prior to Thomson Reuters, Jelena consulted on a wide range of topics in the energy space for a variety of organizations, including the California Attorney General’s Office, Lawrence Berkeley National Laboratory, and the World Bank. She is a published author who most recently co-authored a book on the role of distributed power systems in the U.S. power sector, published by the Brookings Institution.
Jelena earned Master of Science in Energy and Resources, and Master of Public Policy degrees from University of California, Berkeley. In addition to being specialized in Management of Technology and Engineering and Business for Sustainability, she is fluent in four languages.
Manuel Moeller Manuel Moeller is an emissions markets expert in the Strategy & Market Design department of the European Energy Exchange AG (EEX), based in Germany. Mr Moeller is responsible for market development and strategic initiatives in EEX’s emissions market, including EEX’s offerings for emissions auctions and international carbon markets. Prior to joining EEX in 2010, he held positions as policy officer in the International Climate Policy Division of the Germany Federal Ministry for the Environment, based in Berlin, and in the Climate Protection & Energy Strategy Division at the Ministry for Economic Affairs for the German state of North Rhine Westphalia, based in Düsseldorf. Mr Moeller holds a diploma degree in Political Science from Freie Universität Berlin.
Xueman Wang Xueman Wang is the team leader for the World Bank’s Partnership for Market Readiness (PMR) – a global program that brings together major economies and key market players to design and pilot market-based approaches, carbon taxes, and other cost-effective instruments to achieve climate change mitigation objectives. Xueman, a Chinese national, was one of the lead authors for the World Bank flagship report 2010 World Development Report –“Development and Climate Change.” Her areas of expertise include climate policies, carbon market and finance. She works closely with many emerging economies to help them develop their domestic carbon markets. She has extensive knowledge and deep understanding of China's climate polices and development of domestic carbon market. Prior to joining the World Bank, she was with the Secretariat of the Convention on Biological Diversity in Montreal, Canada, working on the Biosafety Protocol, and trade and environment. Before that, she worked at the UN Climate Change Secretariat in Bonn, Germany, where she was responsible for climate negotiations and the compliance regime. Prior to the UN, she worked at the Treaty and Law Department of the Ministry of Foreign Affairs of China, as one of key negotiators for the Climate Change Convention and other environmental agreements.
Sangsun Ha Sangsun Ha is the Managing Director, Carbon Asset Management Division at Ecoeye Co. Limited. He has been actively involved in the development of a number of Clean Development Mechanism (CDM) projects. These include projects located in China, Sri Lanka, Bangladesh, Vietnam, and Cambodia. He has also been associated with CDM registration consultations for over 20 CDM projects in South Korea. Ha also has experience in trading environmental commodities like the CERs. He has been involved in assisting CER transactions for a number of South Korean CDM projects in the spot and the OTC market. He has provided policy consulting services to a number of Korean regulatory bodies and public sector companies. Prior to joining Ecoeye, Ha had worked at Samsung Electronics and LG Production Research Center as an energy & GHG mitigation manager.
David Antonioli David brings more than two decades of experience working on environmental issues to his role as VCS Chief Executive Officer. Joining as the organizationâ€™s first CEO in 2008, his leadership and vision have helped grow the VCS from a start-up to an organization with more than a dozen employees and representatives in five cities internationally, including its headquarters in Washington, D.C. In addition to his internal leadership responsibilities, David serves as the outward face of the VCS Program, guiding all public and private outreach efforts to government, business and environmental leaders around the world. This wide ranging experience has made David a sought after speaker on the world stage, including high-profile roles at major conferences like Carbon Expo and North American Carbon World as well as Carbon Forum events all around the world. He is frequently quoted in Point Carbon, Ecosystem Marketplace and many other international publications. David holds a Bachelorâ€™s Degree in Sociology from Princeton University and a Masters in Public Policy, with concentrations in Environmental Policy and International Development, from the John F. Kennedy School of Government at Harvard University.
LIST OF PARTICIPANTS S. No.
ETS Task Force
SY Energy Solution
ETS Task Force
ETS Task Force
APPENDIX I Profile of International Emissions Trading Association The International Emissions Trading Association (IETA) is a nonprofit business organization created in June 1999 to establish a functional international framework for trading in greenhouse gas emission reductions. Our membership includes leading international companies from across the carbon trading cycle. IETA members seek to develop an emissions trading regime that results in real and verifiable greenhouse gas emission reductions, while balancing economic efficiency with environmental integrity and social equity. IETA is dedicated to: •
The objectives of the United Nations Framework Convention on Climate Change and ultimately climate protection;
The establishment of effective market-based trading systems for greenhouse gas emissions by businesses that are demonstrably fair, open, efficient, accountable and consistent across national boundaries; and
Maintaining societal equity and environmental integrity while establishing these systems.
Goals and Objectives IETA works for: •
The development of an active, global greenhouse gas market, consistent across national boundaries and involving all flexibility mechanisms: the Clean Development Mechanism, Joint Implementation and emissions trading;
The creation of systems and instruments that will ensure effective business participation.
To be the premier voice for the business community on emissions trading, the objectives for the organization are to: •
Promote an integrated view of the emissions trading system as a solution to climate change;
Participate in the design and implementation of national and international rules and guidelines; and
Provide the most up-to-date and credible source of information on emissions trading and greenhouse gas market activity.
To achieve its goals, IETA focuses on the following Work Program areas: •
Develop components of the GHG market and trading systems IETA has established a number of working groups that meet in workshops and seminars on topics that include accounting, taxation, trade agreements, registries, validation and verification, as well as issues in the CDM. IETA continues to map down initiatives that work in developing components of the GHG markets to help create a functioning GHG market.
Promote market mechanisms and participation in GHG markets There continues to be the need for promoting market mechanisms and trading as one of the solutions available to businesses in order to minimize societal impact, within the framework of sustainable development. This includes substantial efforts, such as GHG Market Fora in non- Annex I countries, the Annual IETA Forum on the state and development of the GHG Market, and the Carbon Expo Fair and Conference.
Development of a global GHG market A critical element in IETA's work remains the linking of trading regimes among Annex I countries, and its significance for the GHG market. Another important issue is that of responses of business when operating in such a diverse environment. Cooperation with WBCSD, WEF and other organizations that have complementary roles must play an important role.
Capacity Building IETA develops and delivers courses on validation and verification based on the Validation & Verification Manual being developed with the World Bank as well as workshops on contracts for the CDM.