Summary
Two instruments; Cap & Trade (CAP) and Differential Levy are both necessary and sufficient, to meet both the Energy Market Maxim (EMM) and the Climate Change Imperative (CCI).
Analysis
Synopsis - A view on the Carbon Market:
We have studied the carbon market in some detail see: www.rcmconsultingltd.com and follow the links.
Conclusions:
Two instruments; Cap & Trade (CAP) and Differential Levy are both necessary and sufficient, to meet both the Energy Market Maxim (EMM) and the Climate Change Imperative (CCI). (see full paper)
When they are applied together they:
Render unnecessary other proposed instruments such as EPS and RO.Ø
Ø Provide for the lowest rate of increase in the wholesale cost of electricity .
Remove the disincentive to investment from uncertainties inherent in the EUA market.
Remove the need for high price EUA market to incentivise early abatement investment.
Maintain the existing competitive positions of the energy companies
The implications of the levy:
It imposes no additional cost in the wholesale price of electricity.
The levy can be adjusted to provide for exactly the level of % incentive seemed appropriate to spur investment.
There is no implication of state aid as the incentive payments are funded directly from levy receipts. It is self financing from within the industry. The only issue might need to be resolved is its tax treatment.
The levy can be administered by the industry. There is no need for government intervention other than perhaps determining as a matter of national policy the percentage market average incentive to be applied under the levy, across the board to non-emitting power.
Reinvestment of the proceeds of EUA auctions is beneficial. It does not solve the problem of the investment incentive in circumstances of low and volatile carbon (EUA) market prices It could be used as part of the feed in tariff receipts for reducing and eventually eliminating LEVY imposition.
Overall:
One self evident outcome from carbon abatement at the current stage of technology is that there is an overall cost to the electrical generation industry from investing large amounts of capital and effort in CCS.
The increased costs which arise from investment in CO2 abatement/avoidance have to be recouped. In the final analysis this means that without continuing subsidy from the public purse it has to be the electricity consumer who pays through electricity pricing. The model clearly shows that electricity price rises will either in line with the abatement/avoidance investment profile or in line with EUA market prices. Whether this alliance is with one or other depends upon the imposition or not of the Differential Levy (DL). The model working under its current input parameters shows that wholesale electricity prices will eventually rise by c.20% - 25% but the rapidity with which that rise occurs can be mitigated by the adoption of a levy policy.
Off-setting income stream:
However the rise in electricity prices arising from abatement/avoidance investment cost would be significantly ameliorated if an offsetting income stream could be developed. This can be achieved by utilising the carbon captured in any CCS project for enhanced oil recovery (EOR). EOR provides the only external value added income stream available to the CCS business. Simultaneously it contributes to energy security and national income.
Europe and particularly the North Sea contain many billions of barrels of stranded oil. This is not stranded by its remoteness from infrastructure or markets but by current failure to grasp the technological opportunity of engaging in a major tertiary (EOR) production campaign with the soon to be available CO2 harvest from CCS before it is too late and the oilfield infrastructure is dismantled. The existing oilfield reservoirs make suitable and perhaps ideal CO2 sequestration sites and all of the component means and technologies exist now to embark on this EOR endeavour. If not acted upon, it could rapidly become seen as a major missed opportunity for the EU/UK.
Two instruments; Cap & Trade (CAP) and Differential Levy are both necessary and sufficient, to meet both the Energy Market Maxim (EMM) and the Climate Change Imperative (CCI). (see full paper)
When they are applied together they:
Render unnecessary other proposed instruments such as EPS and RO.Ø
Ø Provide for the lowest rate of increase in the wholesale cost of electricity .
Remove the disincentive to investment from uncertainties inherent in the EUA market.
Remove the need for high price EUA market to incentivise early abatement investment.
Maintain the existing competitive positions of the energy companies
The implications of the levy:
It imposes no additional cost in the wholesale price of electricity.
The levy can be adjusted to provide for exactly the level of % incentive seemed appropriate to spur investment.
There is no implication of state aid as the incentive payments are funded directly from levy receipts. It is self financing from within the industry. The only issue might need to be resolved is its tax treatment.
The levy can be administered by the industry. There is no need for government intervention other than perhaps determining as a matter of national policy the percentage market average incentive to be applied under the levy, across the board to non-emitting power.
Reinvestment of the proceeds of EUA auctions is beneficial. It does not solve the problem of the investment incentive in circumstances of low and volatile carbon (EUA) market prices It could be used as part of the feed in tariff receipts for reducing and eventually eliminating LEVY imposition.
Overall:
One self evident outcome from carbon abatement at the current stage of technology is that there is an overall cost to the electrical generation industry from investing large amounts of capital and effort in CCS.
The increased costs which arise from investment in CO2 abatement/avoidance have to be recouped. In the final analysis this means that without continuing subsidy from the public purse it has to be the electricity consumer who pays through electricity pricing. The model clearly shows that electricity price rises will either in line with the abatement/avoidance investment profile or in line with EUA market prices. Whether this alliance is with one or other depends upon the imposition or not of the Differential Levy (DL). The model working under its current input parameters shows that wholesale electricity prices will eventually rise by c.20% - 25% but the rapidity with which that rise occurs can be mitigated by the adoption of a levy policy.
Off-setting income stream:
However the rise in electricity prices arising from abatement/avoidance investment cost would be significantly ameliorated if an offsetting income stream could be developed. This can be achieved by utilising the carbon captured in any CCS project for enhanced oil recovery (EOR). EOR provides the only external value added income stream available to the CCS business. Simultaneously it contributes to energy security and national income.
Europe and particularly the North Sea contain many billions of barrels of stranded oil. This is not stranded by its remoteness from infrastructure or markets but by current failure to grasp the technological opportunity of engaging in a major tertiary (EOR) production campaign with the soon to be available CO2 harvest from CCS before it is too late and the oilfield infrastructure is dismantled. The existing oilfield reservoirs make suitable and perhaps ideal CO2 sequestration sites and all of the component means and technologies exist now to embark on this EOR endeavour. If not acted upon, it could rapidly become seen as a major missed opportunity for the EU/UK.
By Dr Rex Gaisford CBE Director at CARBONET Ltd
This author consults with leading institutions through GLG
Analyses are solely the work of the authors and have not been edited or endorsed by GLG.
