Environmental Trading –

Commercial OpportunitiesCommercial Opportunities

EI Ideagen workshop

University of Limerick, Kemmy School of Business, 18:45 November 23, 2010

Professor Frank J Convery, Director, UCD Earth Sciences Institute (frank.convery@ucd.ie)

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What it takes to create a new business

Market opportunity – a product or service that gives consumers what they want, and that you can deliver at a cost lower than you can get in the market place.

Courage – to go where no one has gone beforeCourage – to go where no one has gone before

Skills –technical, financial, managerial, communicative, perseverance

Luck – timing and interest

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Which of these is the most important?

Calvin Coolidge: Nothing in the world can take the

place of persistence. Talent will not; nothing is

more common than unsuccessful men with talent.

Genius will not; unrewarded genius is almost a Genius will not; unrewarded genius is almost a

proverb. Education will not; the world is full of

educated derelicts. Persistence and determination

alone are omnipotent. The slogan ‘Press On’ has

solved and always will solve the problems of the

human race.

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Focus here

Opportunity because of:

1. The creation of the carbon market (European

Union Emissions Trading Scheme – EU –ETS)Union Emissions Trading Scheme – EU –ETS)

2. The introduction of a CO2 tax in Ireland.

Scope: if you can sell a product or service in

Ireland, the EU market is available.

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Still some deniers our there..

Michael O’Leary CEO of Ryanair: Irish citizens and

visitors are now going to be penalised by the

mindless bureaucrats of Brussels, encouraged by

these eco-loonies, whose predictions about global

warming are the modern-day equivalent of those warming are the modern-day equivalent of those

doom-mongers in the middle ages who used to run

around towns and cities preaching that the end of

mankind was nigh! It wasn’t, nor will the world’s

climate pay the price for low cost flights

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European Union Emissions Trading

Scheme (EU ETS)

Reference: Pricing Carbon, by Denny Ellerman, Frank J Convery and Christian de Perthuis, Cambridge University Press, 2010.

Undertaken because of failure to introduce carbon tax.

Who: Power sector and heavy industry in EU 27 – about Who: Power sector and heavy industry in EU 27 – about 50% of EU CO2 emissions

What: CO2 emissions

When: Pilot in 2005-08, real programme 2009-2012, and 2013-2020

How: Fee allocation of allowances to installations – must have enough allowances to cover emissions at year end.

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Learning by doing

1. Price rose for 18 months in pilot period, then collapsed in 2007, because:

Too many allowances given out

And couldn’t bank them forward from pilot period

Solution

Tighten up supply (2008-2012)Tighten up supply (2008-2012)

Reduce supply some more in 2013 to 2012 (-20%)

Allow banking to 2020

2. Utilities captured rents – passed through value of allowances in electricity prices, but had got allowances for free

Solution

Auction allowances from 2010

In Ireland – impose a levy

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Transaction Costs for Participants

Three categories

• Set up costs

• Meet compliance requirements

• Trading costs• Trading costs

Survey of all Irish participants

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Transaction Costs per tonne low, but….

Category Total Costs per tonne CO2 (€)

All 0.09

Large 0.06Large 0.06

Medium 0.87

Small 2.02

Key point: very low cost per tonne, except for small installations

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Estimate of Total Transaction costs for

all firms in EU ETS in pilot period

Million Euros

Large 282

Medium 178

Small 12Small 12

Unidentified 351

Total 822

This is about the same amount they spent on abatement.

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Key sources for EU ETS – staying

informed.Carbon Market News published by Point Carbon

http://www.pointcarbon.com

http://www.pointcarbon.com/news/1.1487008

See Irish EPA

http://www.epa.ie/whatwedo/climate/emissionstrading/http://www.epa.ie/whatwedo/climate/emissionstrading/

The Registry

http://www.epa.ie/whatwedo/climate/emissionstrading/registry/

Inventory and Projections

http://www.epa.ie/whatwedo/climate/emissionsinventoriesandprojections/

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Energy Prices and carbon prices closely

linked

Consumers often regard carbon and energy as

two elements in the same ‘bundle’.

But energy prices don’t always move together..

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Oil and natural Gas prices in real terms

40

50

60

70

80

90

100

US

$ p

er

Me

ga

jou

le (

MJ)

0

10

20

30US

$ p

er

Me

ga

jou

le (

MJ)

Oil $/MJ Gas $/MJ

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Irish Carbon Tax

1. Rate and relation with EU ETS

Symmetry with allowance price - €15 per tonne

2. Coverage

All non EU ETS CO2 emissions applied to fossil fuels consumed in Ireland

collected upstream, at the earliest point of supply.

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Exclusions

Key exclusion is methane and nitrous oxides (about 30% of emissions), mainly associated with

farming.

Why?

1. Measurement Reporting and Verification (MRV) 1. Measurement Reporting and Verification (MRV) issues

2. Politics: Pliny the elder: The agricultural

population, says Cato, produces the bravest

men, the most valiant soldiers, and a class of

citizens the least given of all to evil designs.

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Impact on Fuels at time of

Budget Announcement

Fuel Type

Unit

Current

Price

€

Carbon Tax @

€15 (VAT

incl.)

% change in

price

Petrol Litre 1.19* 4.2 cents 3.5%

Auto-diesel Litre 1.10* 4.9 cents 4.4%

Kerosene 1,000 Litres 600 €43.14 7.2%

Marked Gas Oil 1,000 Litres 626 €46.87 7.5% Marked Gas Oil 1,000 Litres 626 €46.87 7.5%

LPG 1,000 Litres 690 €27.97 4.1%

Fuel Oil 1,000 Litres 660 €52.15 7.9%

Natural Gas 13,800

kwh**

685 €47.86 7.0%

Peat Briquettes Bale 3.85 39 cents 10.1%

Coal 40kg 15.20 €1.79 11.8%

* Price of petrol and auto-diesel in December 2009 when carbon tax was introduced for that fuel.

** Average annual household consumption

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Issues with Carbon Tax

Environmental effectiveness? – need to track performance against the counterfactual

Confounding effect of the Great Recession

Border leakage (land border with UK) – differences in currency and tax provisionsin currency and tax provisions

Symmetry with allowance price (EU ETS) – will it be sustained?.

Holding onto the tax – abolition possible but unlikely

But pressure for exemptions….

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Carbon Price incentivises innovation

24 hours a day, 365 days a year, the carbon prices says:

If you find a new, better or cheaper way to If you find a new, better or cheaper way to reduce emissions, at a cost that is lower then

the value of allowances, you will have an immediate payoff.

Unless we get innovation, we won’t succeed in addressing the challenge.

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Kinds of Innovation

We need:

Smart technology

Smart managementSmart management

Smart policy

The Innovation ecosystem –enterprise, finance, research and development, policy

Ireland has got most of this right.

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Where we need innovation

Energy efficiency – reducing our consumption

Renewables – increasing supply of low to zero carbon energy

Wind, wave, tide, photovoltaics, biomass, geothermal, heat pumps

Wind, wave, tide, photovoltaics, biomass, geothermal, heat pumps

Energy storage

Carbon capture and storage

Sectoral – agriculture (methane), transport, energy supply and transmission, industry, commerce.

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Will this ‘artificial’ market last?

Yes. Carbon tax because the Irish government is

broke.

Yes. Emissions trading because so many now

have a vested interest in its continuance.

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Can you see a window here for you?

What are your own relevant skill sets and

personal attributes?

How can you build on these to develop a

potentially viable proposition?potentially viable proposition?

Where does your comparative advantage lie?

How would you find out what consumers really

want and are willing to pay something for?

What is your next step?

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