EU ETS & European Energy Market Dr Bill Kyte OBE Advisor, Sustainable Development, E.ON AG Chairman, UK Emissions Trading Group Ltd Chairman, Eurelectric Environment & SD Committee Energy Risk Europe London, 3 October 2006

WBCSD Scenario Unit Energy 2050 Risky Business July 1999

What is the Challenge? Energy Population Growth Environment Social ENERGY

Population Rapid growth in LDCs 1.6 billion without access to electricity Growth Rapid economic growth in Developing Countries Environment Local impacts Climate Change Social Access to clean water & sanitation Increasing living standards Globalisation Consumer choice

What is the Challenge? World Perspective – two objectives Provide the world’s energy requirements and Prevent dangerous climate change

Scenario A1B emissions range Scenario B2 emissions range Acceptable limit for CO 2 emissions? ppm Large-scale high-impact events Higher Very Low Risks to many Risks to some Unique and threatened systems Large Increase Increase Extreme climate events ºC 450 ppm 1000 ppm ppm ppm Source: IPCC 2001 CO 2, GtC

Today’s energy infrastructure 700+ coal power stations1.5 Gt 25EJ per year solar 500,000 5MW wind turbines GW coal power stations GW coal stations with sequestration GW oil power stations GW gas power stations GW nuclear plants GW hydro/ tidal /geothermal 50EJ non- commercial fuel 100 EJ direct fuel use (Biofuels) 500 million vehicles (Biofuels) 500 million low CO 2 (Biofuels) 800 gas or oil power stations 0.7 Gt 800 million vehicles1+ Gt Non-commercial biomass 1 Gt Direct burning of fuel 3-4 Gt 8.0 Gt 8 Gt carbon 309 EJ 2000 Non emmitting technologies 0 Gt Final Energy Non-commercial Solids Liquids Electricity Gas

2050 (B2-AIM) 2050 (A1B-AIM) Meeting future energy needs Final Energy Non-commercial Solids Liquids Electricity Gas 671 EJ 1002 EJ Intermediate growth, local solutions, less rapid technological change. Rapid economic growth and rapid introduction of new and more efficient technologies. 15 Gt carbon 16 Gt carbon

Low energy / carbon intensity development, enabled by societal and technology changes (550 ppm trajectory) 705 EJ A much lower CO 2 trajectory 9 Gt carbon Final Energy Non-commercial Solids Liquids Electricity Gas

Some options at a glance Gt 309 EJ 2050 (B2-AIM) 671 EJ Intermediate growth, local solutions, less rapid technological change. 15 Gt 1002 EJ Rapid economic growth and rapid introduction of new and more efficient technologies. 16 Gt 2050 (A1B-AIM) Low energy / carbon intensity development, enabled by societal and technology changes (550 ppm trajectory) 705 EJ 9 Gt

Options for change – enabling technologies A further shift to natural gas Nuclear power RenewablesBio-productsCarbon capture and storage Mass transportation Road transport BuildingsLow energy appliances Doing things differently Energy conservation and efficiency Emission reduction

Requirements for One Wedge Gas – 14,000 new CCGTs Coal – 800 GW with CCS (3500 Sleipners) Nuclear – 700GW (double present) Wind – 2 million 1 GW (present 40,000) Solar – 700 times current – 10 million ha Biofuel – 250 million ha (sixth world crops) Train – replace 50% of road use Road – 60 mpg average Houses – cut emissions by 25%

What is the Challenge? EU perspective – three objectives To provide the EU’s energy requirements; and help prevent dangerous climate change; and maintain EU competitiveness

The EU perspective Ageing infrastructure with uncertainty about investment criteria EU responsible for only 14% global GHG emissions which will fall to 10% by 2020 Lisbon Agenda

Installed Capacity in EU GW Retirements GW901 GW Installed Capacity 2030 Capacity additions over the next 30 years will be larger than today's installed capacity 607 GW New Capacity Installed Capacity 2000

Investment Requirements in European Electricity Market to 2030 Cumulative investments of US$ 1.4 trillion

Why the EU ETS? To meet, in the most cost effective way, the EU 8% Kyoto GHG target A mechanism for the EU 2 o C target 15 – 30% 2020 GHG target 60 – 80% 2050 aim To link with the global carbon market

The EU ETS Summary Carbon dioxide emissions in the industrial sector (46% of EU CO 2 emissions) Installation level – 12,000 installations Phased ‘Cap & Trade’ system Phases: ; ; 2012-??; ….. MS set ‘caps on emissions for phase in NAP MS issue allowances to installations for phase in NAP Installations surrender allowances annually to cover verified annual emissions Installations can trade allowances and use the Kyoto mechanisms (JI & CDM)

Impact of EU ETS Lack of harmonisation ‘Burden sharing’ of Kyoto target MS NAPs very different (allocation, NER, closure) An EU wide carbon price but fairly volatile Carbon priced into electricity Impact on energy intensive industries Both inside EU and global Uncertainty leading to lack of investment

Views on EU ETS EU ETS should be scrapped But other solutions less environmentally and cost effective than ETS EU ETS is panacea for everything ETS best suited to large stationary, well monitored sources EU ETS works but: ETS is not an instant fix – sets carbon price  Improvements needed

EU ETS Post 2012  The EU ETS post 2012 needs:  Global coverage  Competitiveness  Certainty  Transparency  Simplicity

Global Coverage  International  UNFCCC, Kyoto Protocol, AP6, G8, G20  CDM & JI  Flexible mechanisms must not be constrained  Major emitting countries  Only 20 countries are significant for the next 25 years

Competitiveness  Outside the EU  Global participation in climate change mitigation  Within the EU  Level playing field within sectors

Certainty  Predictability rather than certainty  Price can never be certain  Regulatory predictability  Medium/long-term targets based on scientific and economic assessment

Transparency  Transparency is required in Member State:  Climate change policies  NAP  MRV

Simplicity  Harmonisation is key to simplicity  Scope  Allocation rules  New entrant/closure rules  MRV

|Thank you