Emissions Performance Standards

Memorandum submitted by Shell (EPS 25)

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;

3) it should not prescribe premature application of specific and particularly new and undemonstrated technologies.


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.


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;

· 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 CO 2 /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.


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