Memorandum submitted by Shell
EXECUTIVE SUMMARY
— Shell believes the most efficient policy
approach for reducing emissions remains the use of market-based
instruments, in particular cap-and-trade. A successful EU-ETS
is in the interest of the UK, and as such we advocate for balanced
recalibration of Phase III of the EU-ETS and an allowance reserve
price in Phase IV and beyond to ensure a robust CO2
price is delivered by this system.
— An EPS combined with the EU ETS would
be ineffective at driving overall incremental emissions reductions
and with the above changes to the EU ETS would also be redundant.
If the Government is still committed to the implementation on
an EPS for the power sector, we recommend that the EPS has three
key features:
(1) it approximates the emission reductions that
would occur under the EU ETS with a robust CO2 price
(ie that are least cost);
(2) it treats all existing and potential new facilities
in the same way; and
(3) it should not prescribe premature application
of specific and particularly new and undemonstrated technologies.
INTRODUCTION
1. Shell welcomes the opportunity to submit
comments to the Energy and Climate Change Committee's Inquiry
on Emissions Performance Standards. We understand that the introduction
of an emissions performance standard (EPS) for the power sector
is a commitment of the Coalition Government to meet the UK's emissions
reduction targets. Our submission mainly responds largely to questions
1-3 posed by the Committee.
ETS AND EPS
2. Shell believes that the most efficient
policy approach for reducing emissions remains the use of market-based
instruments, in particular cap-and-trade systems for those sectors
where emissions reductions are likely to be driven by a robust
CO2 price (eg large stationary emission sources like
power plants). Mandates and standards are typically used in those
sectors where emissions are not very responsive to this price
signal (eg transport), and may be required to drive significant—but
not least-cost—emissions reductions (eg through use of biofuels
and vehicle efficiency standards).
3. We support the EU Emissions Trading Scheme
(EU ETS) because a robust CO2 price will drive the
most immediate and the greatest cumulative emissions reductions.
In models of the UK electricity market, this would be achieved
mainly through the replacement of coal with gas power generation
in the short term and the deployment of CCS, along with investment
in renewables and nuclear, in the medium and long term.
4. However, Shell recognizes that Phase
III of the EU ETS is at risk of not delivering a robust CO2
price because of the severe recession and the anticipated permanent
step-down in the level of EU output and emissions relative to
the pre-recession expectations on which the emissions cap for
Phase III was set.
5. The experience of the EU ETS during the
recession also raises the important issue of how best to design
cap-and trade systems in the face of inevitable uncertainties
from both the macro-economy and the process of technological change.
Rather than engaging in the ad hoc recalibration of the
cap in response to unexpected shocks, as is being proposed for
Phase III of the EU ETS, it would be more credible to introduce
an allowance reserve price in advance of any such shock. This
feature would signal to investors that future unexpected shortfalls
in emissions would be used in part to step up emission reductions
and at the same time reduce uncertainty in long-run investments
associated with the CO2 price. This would help to close
the gap between the long-run objective of limiting global warming
to 2oC and the need to reduce the uncertainty that businesses
face in making long-run investment decisions.
6. An EPS applied to the UK power sector,
which is already covered by the EU ETS, would be largely ineffective
at driving overall incremental emissions reductions. If the EPS
leads to emission reductions in the UK power sector beyond those
driven by the EU ETS CO2 price, it would reduce demand
for carbon credits and depress their price. This in turn will
reduce the incentive for further emission reductions in those
sectors to which the cap applies but that are not covered by the
EPS. In other words, the UK power sector would be shouldering
a disproportionately higher burden than other sectors or countries
that need to comply with the EU ETS. Alternatively, if the EPS
does not drive emissions reductions in the UK power sector beyond
what would have happened anyway at the prevailing CO2
price, then the EPS becomes a redundant policy instrument. At
most, an EPS could approximate the equivalent of a CO2
price floor for the UK power sector, driving behaviour only if
the CO2 price were to fall sufficiently.
APPLICATION OF
AN EPS: KEY
PRINCIPLES
7. Should an EPS nevertheless be considered,
to be effective it should have three key features:
— the standard should bring about emission
reductions choices similar to the least-cost reductions induced
by a robust CO2 price under a cap-and-trade system;
— it should treat all existing plants in
the same way and not discriminate between new plants and existing
ones, in order to maintain the incentive for investment in new
capacity; and
— it should not prescribe the application
of specific technologies. This risks forcing premature mass deployment
of promising technologies in the development phase, such as CCS
or renewables. The technologies need to be tested both technically
and economically in the demonstration phase before moving to deployment
at scale.
DESIGN OF
AN EPS: KEY
LEVERS
8. Portfolio approach: An EPS can be applied
to a power plant using any fuel. If the aim is largely to decarbonise
the power sector by 2030, it would be reasonable to apply the
EPS to all fossil-fuelled power generation—which is responsible
for the vast majority of emissions in the sector. Greater compliance
flexibility and a more diverse generation mix can be achieved
through application of an EPS at a company portfolio level, in
which the emissions from an operator's total generation capacity
are averaged so as to provide increased compliance flexibility
and a robust generation mix. This portfolio approach can be extended
to include renewables and nuclear power generation as well as
a credit trading system whereby operators with emissions below
the limit could sell emissions credits to those wishing to emit
more than the set limit. These two additions would provide further
flexibility to balance out higher emission plants should they
be required to maintain security of electricity supply.
9. Timing and scope: A key design option
critical to reducing emissions is how early the EPS comes into
effect and whether it is applied to existing as well as new power
plants. Modelling shows that to be effective an EPS should start
early and be applied to both existing and new power plants. Such
a design will also expedite emissions reductions in the UK because
there is such a large share of generation capacity due for decommissioning
or refurbishment to meet other emissions regulations.
10. Size: The size of power plants regulated
by an EPS must also be set. This limit should be set to reduce
emissions from their greatest sources yet allowing for security
in local generation capacity as well as limited administrative
burden. A size limit of 300MW capacity could meet such a requirement
to balance interests in the UK.
11. Intensity values: The most common metric
used to set an EPS in the power sector is a maximum allowable
emissions rate expressed as grams of CO2/MWh. In setting
this intensity value, the current state of available technology
and mitigation options must be taken into account. In other words,
the EPS limit must be achievable. Regulators who have introduced
an EPS on fossil-fuelled power generation have, therefore, chosen
to set the target emissions rate for fossil-fuelled power plants
at a level equivalent to a modern combined cycle gas turbine plant.
Such a rate would prevent unabated coal-fired power stations being
built and ensure the phase out of existing ones. Intimately linked
to the target rate is the trajectory to achieve it. Due to construction
lead times (also increased through elevated demand) and the imperative
of maintaining security of electricity supply, the EPS should
be phased in over time. The UK could set intermediate target intensities
to correspond to the emissions trajectory of the overall UK emissions
reduction target.
12. Other metrics: Two other potential metrics
can be considered for an EPS: a percentage reduction in emissions
per plant, per annum; and a mandate to use best available technology
(BAT). A percentage reduction in emissions should be avoided.
This will tend to be unfair due to the variation in the portfolios
of operators, because it penalises early movers who have already
responded to calls from government to reduce emissions.
In the case of the BAT approach, prescribing specific technology
increases the cost of compliance to the sector as other less costly
mitigation options that may be available to certain plants cannot
be pursued. (Indeed it is specifically because it avoids this
drawback that the Emissions Trading System approach is preferable.)
Another pitfall of prescribing BAT is similar to the risk identified
in paragraph 8 above ie that it could force demonstration stage
technologies such as CCS before they are fully tested technically
and commercially.
CONCLUSION
13. Shell believes the most efficient policy
approach for reducing emissions remains the use of market-based
instruments, in particular cap-and-trade. A successful EU-ETS
is in the interest of the UK, and as such we advocate for balanced
recalibration of Phase III of the EU-ETS and an allowance reserve
price in Phase IV and beyond to drive emission reductions in the
power sector.
14. If the government should nevertheless
decide to pursue an EPS, then its design will be critical to avoid
unintended outcomes and achieve desired objectives. As such, we
would welcome the opportunity to engage on the design of an eventual
EPS.
September 2010
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