It is common knowledge that power producers in many countries outside the EU are not facing carbon constraints similar to those present under European Union Emissions Trading Scheme.
As a consequence, there are, however, investors that consider building power facilities outside the EU and importing electricity (provided technical and regulatory requirements allow). It seems that such a situation may be perceived as a regulatory gap that should be eliminated as quick as possible in order to avoid undermining the objectives of the revised EU ETS Directive.
As can be seen from the European Commission’s website, Directorate-General for Climate Action just in June 2011 carried out a public tender to procure a “Study on incentives to build power generation capacities outside the EU for the electricity supply of the EU” (see contract notice 2011/S 84-137104).
Specifications to Invitation to the said tender (further referred to as ‘Specifications’) remind that - contrary to the situation prevailing in the first and second period of the EU ETS - as from 2013 power producers will have to buy allowances necessary to comply with the EU Emission Trading Scheme and the cost of emitting carbon will then turn into real production costs for electricity producers.
According to the Specifications, while power producers in the EU will act on a level playing field, this is not likely to be the case for power producers outside the EU not facing carbon constraints which translate into economic and business related considerations. The Specifications also observe that such electricity could, in theory, not only provide competitive advantages to their producers/suppliers arising from the absence of comparable carbon constraints, but may be perceived as carbon leakage from the production of electricity generation.
The degree of the threat at issue depends obviously on the interconnectors, but business analysis in some cases may justify even building new crossborder electricity transmission lines, in order to benefit from electricity imports generated outside the EU.
Even more dangerous to the integrity of the EUETS seem investments in electricity generation from renewable energy outside the EU, if - the electricity generated is to be supplied to the EU and - the country, where the investment is undertaken, is entitled to issue Certified Emission Reduction units (CER) under the UN Clean Development Mechanism (CDM), set up in order to stimulate, among other things, emission reductions in countries not subject to mitigation efforts under the Kyoto Protocol (for particulars see the original text of the Specifications).
What is the main concern in these remarks that just in June 2011 the study is commissioned to analyse the impact of full auctioning on the investment decision of power generators facing the option to invest inside or outside the EU with a view to supplying electricity for consumption in the EU.
Let's remind that the third trading period will begin in a one and a half year. I wonder when the Directive 2003/87/EC will be amended to capture electricity importers into EU as compliance entities. Power generators have the choice to build capacities for the supply of electricity to the EU inside or outside the EU and this seems to be the real threat to integrity of the EUETS. The sound and reliable assessment of the economic and microeconomic effects of full auctioning on the said investment decisions is really necessary.
The interesting comparison in that regard is envisioned in the current shape of the design of the cap-and-trade scheme in California. The current wording of the draft regulations (July 2011 Discussion Draft of the Article 5: California Cap on Greenhouse Gas Emissions and Market-Based Compliance Mechanisms (Subchapter 10 Climate Change, Article 5, Sections 95800 to 96022, Title 17, California Code of Regulations), published by the Californian Air Resources Board (source: http://www.arb.ca.gov/cc/capandtrade/meetings/meetings.htm)) in § 95811(b)(2) in Subarticle 3 (stipulating entities covered by the California scheme) mentions, among so called ‘First Deliverers of Electricity’, not only electricity generating facilities (i.e. the operators of an electricity generating facility located in California) but also electricity importers.
The said draft regulations make also a distinction as regards the inclusion thresholds for covered entities. In the case of the electricity importers of specified sources of electricity the applicability threshold for an electricity importer is based on the annual emissions of the electricity generating facility from which the imported electricity originated. The applicability threshold for an electricity importer from a specified source which emits 25,000 metric tons or more of CO2 per year is zero metric tons.
In the case of electricity importers of unspecified sources of electricity under Californian cap-and-trade draft regulations the applicability threshold for electricity delivered from unspecified sources is zero MWhs.
It could be simplified that a electricity importer under the California draft regulation has a compliance obligation for every metric ton of CO2e emissions associated with electricity imported into California from a source in a jurisdiction where a GHG emissions trading system has not been approved for linkage and where the thresholds have been exceeded (with the reservation with regard to the data verification). Resource shuffling is prohibited.
So, the current state of affairs is that it is probable electricity importers will be included in the California cap-and-trade from the beginning of the first settlement period and as regards EUETS up to now the European Commission only analyses the question. The said issue seems, however, not so complicated – there are unsophisticated arguments to predict that if electricity importers don’t be included as covered entities into EUETS as from 2013, the scheme (and the relevant industries) will be exposed to serious challenge.