China now has 8 active regional ETS, in total covering more than 1 billion tonnes of CO2 per annum. Preparation is well under way for the launch of the China National ETS, with the launch of the National exchange and allocation of allowances expected in 2020. In the initial phase the National ETS will cover power sector emissions only, although this is still represents around 4 billion tonnes of CO2 per annum, meaning that that China ETS will be more than twice as large as the EU ETS in terms of emissions covered.
BP is active in 7 of the regional schemes, trading allowances and offsets as well as structuring larger transactions, winning the award for Best Carbon Finance Innovation at the 2016 Green Carbon Development Summit. We have also partnered with Elion Resources to provide support for the restoration of the Inner Mongolia Kubuqi Desert through agreement to purchase forestry offsets from the project.
With offices in Shanghai and Beijing, we continue to build our business in a market that will become increasingly important in setting the agenda for global carbon trading.
The New Zealand ETS has been operational since 2010 and is supported by evergreen legislation. Credits traded are New Zealand Units (NZU) which are either allocated by the Government or issued to forestry projects. The Government is currently consulting on reforms to the scheme post 2020, which will likely see the introduction of auctioning and the removal of the current price containment mechanism.
BP has a compliance obligation under the NZ ETS through its domestic fuels business. We trade NZUs and also finance forestry projects to provide NZUs for our own and our customers requirements.
Australian Carbon Credit Units (ACCUs) are issued to domestic carbon reduction projects, and can be used by emitters to meet compliance obligations above their baseline emissions. BP has been active in this market since 2010, financing and contracting offtakes with land based carbon reduction projects, as well as providing market access to customers looking to purchase ACCU for either compliance or voluntary purposes.
The EU ETS is the world’s largest emissions trading scheme, and is integral in the drive to reduce greenhouse gas (GHG) emissions by at least 30% below 1990 levels by 2030.
BP has actively participated in the EU ETS since its inception. We traded the first exchange EUA in 2005, and have continued to expand our presence in Europe.
The EU ETS covers approximately 45% of emissions within the European Union from a variety of sectors including industrial activities, energy and aviation. In June 2017, the Council announced it was ready to begin negotiations with the EU Parliament regarding the implementation of a global market based measure for aviation in 2021. We will continue to adapt to changing legislation, in order to meet both our own compliance obligations as well as serving the needs of our third party customers.
Currently, around 40% of permits are auctioned, with the rest being freely allocated (for example, the aviation and manufacturing sectors mainly had allowances freely allocated, whilst the electricity sector is subject to 100% auctioning).
In 2015, it was decided that a Market Stability Reserve (MSR) would be created, in response to the high number of permits on the market relative to demand. This will begin to remove surplus allowances from the market from 2019, enhancing the stability of the scheme whilst boosting carbon prices in order to encourage for firms to adopt low carbon technology. BP anticipates further reform in Phase IV (2021-2030) of the scheme, and our dedicated analysts will continue to track regulatory change to support our third party customers.
Certified Emissions Reductions (CERs) are international offset credits under the Clean Development Mechanism (CDM) of the Kyoto Protocol, with one allowance equating to 1 tonne of CO2. However, there are quantitative and qualitative restrictions on the use of CERs to fulfil compliance purposes.
Regulated by the California Air Resources Board (CARB), the California Cap-and-Trade programme has been operational since 1st January 2013, and forms part of the Western Climate Initiative (WCI) alongside Quebec which also established Cap-and-Trade in 2013. The initiative aims to reduce greenhouse gas (GHG) emissions by at least 40% below 1990 levels by 2030.
The program rules apply to approximately 85% of emissions across a range of sectors including large electric power plants, large industrial plants and fuel distributors and require regulated entities to either reduce their emissions or surrender compliance instruments. There are two types of compliance instruments: allowances and offsets.
Allowances, which permit the holder to emit one metric tonne of CO2 or the CO2 equivalent of other greenhouse gases, are generated by the government and are distributed to by either free allocation or auction. The portion of emissions covered by free allowances varies by industry and by how efficient each facility is relative to industry benchmarks.
On the other hand, an offset is a compliance instrument voluntarily generated by project within the US or Quebec by a private market participant and represents the reduction, removal or avoidance of one tonne of GHG emissions that would not have otherwise occurred.
At the end of the compliance period, covered entities must relinquish compliance instruments – either allowances or offsets -- in an amount equal to their GHG emissions for the compliance period. BP actively trades in both the California allowance and offset markets.
BP is also involved in developing California Offset projects in a variety of sectors, particularly in the forestry sector. For example, BP has purchased all of the offset credits generated by the Colville Improved Forestry Management project, which may be traded as part of the California cap-and-trade scheme.
Alberta announced the elements of a provincial Climate Leadership Plan in 2017, which comprised putting a price on GHG emissions, ending pollution from coal-generated electricity by 2030, developing more renewable energy, capping oil sands emissions to 100 megatonnes per year, and reducing methane emissions by 45% by 2025.
On 1st January 2018, Alberta implemented a Carbon Levy of C$30 per tonne on diesel, gasoline, natural gas and propane for heating and transportation, with exemptions for agricultural use and rebates for lower-income households. Revenue from the levy will be invested in initiatives that reduce emissions and support adaptation and transition to a lower carbon economy. The levy rate is intended to increase annually in line with the federal Pan-Canadian Framework.
Concurrently, Alberta started a three-year phase-in of a Carbon Competitiveness Incentive Regulation (CCIR) designed in consultation with industry to reduce GHG emissions, while maintaining competitiveness and encouraging clean investment, economic growth and diversification. (CCIR replaced the provincial Specified Gas
Emitters Regulation.) CCIR is an output-based pricing system which applies to facilities with over 100,000 MtCO2e in annual emissions since 2003, with opt-ins for facilities over 50,000 Mt, entities that compete with regulated facilities, or emissions-intensive, trade-exposed (EITE) industries.
Under CCIR, benchmark methodologies are established by sector, with oil sands based on top-quartile performance or better, electricity on best natural gas and others on a risked percentage of production-weighted average emissions intensity. Emitters which do not meet the sectoral benchmarks have three compliance options: pay into the Alberta energy innovation fund at the prevailing Carbon Levy rate, earn emissions performance credits (EPC) from emissions reductions below benchmarks, or surrender carbon offsets or EPC against their emissions.
Carbon offsets must be generated from provincial projects which comply with protocols approved by the Alberta Climate Change Office (ACCO). For 2018, offsets and EPC usage are limited to 50% of emissions, with 10% from new issuances since 2017 and the remaining 40% from new or old pre-2017 issuances. The usage limits then rise annually to 15% new / 40% new or old in 2019, 20%/40% in 2020, 20%/40% in 2021 and 60% new from 2022 onwards. There is also an expiry schedule for offsets and EPC, with 2014 and earlier issuances expiring after 2020 compliance, 2015 and 2016 after 2021, and new 2017 after eight years.
The scheme, covering only CO2 emissions facilities within the power sector with more than 25MW capacity, involves 9 North Eastern states within the US: Connecticut, Delaware, Maine, Maryland, Massachusetts, New Hampshire, New York, Rhode Island, and Vermont is regulated by RGGI Inc.
The RGGI covers 20% of the total CO2 emissions from the covered states, and establishes a regional cap on the amount of CO2 that power plants can emit by issuing a limited number of tradable CO2 allowances..
Market participants trade Regional Greenhouse Allowances, which permits the holder to emit one tonne of CO2. Quarterly auctions are held for the majority of allowances.
Similar to California, the use of US-originated offsets, from five project categories including landfill methane capture and forestry, is permitted to cover a certain portion of an entity’s liabilities.
There is a price floor which increases annually in line with inflation. Further, the cost containment reserve was implemented in 2014 to prevent prices from exceeding certain levels. If prices exceed the cap, additional supply of CO2 allowances are released back into the market. However, up until 2020 the cap will be reduced, encouraging firms to find innovative ways of reducing CO2 emissions to meet compliance obligations.