Oil & Gas UK Economic Report 2015

9. Appendices

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A) EU Emissions Trading Scheme

in renewables and thereby undermined further the demand for allowances. As the European economic recovery since 2010 has been muted, EUA prices have remained depressed, undermining confidence in the ETS as an effective policy instrument. After reaching a low of €4/te CO 2 in 2013, EUA prices in the first half of 2015 have averaged more than €7/te CO 2 and seem likely to rise modestly over the remainder of Phase III. In an effort to reduce the chronic surplus of allowances and to restore the ETS’ credibility, the EU finally agreed in 2014 to defer the auction of 900 million allowances within Phase III (so-called ‘backloading’) to reduce the surplus in 2014-15. In April 2015, it intervened further to create a new Market Stability Reserve (MSR) from 1 January 2019. The MSR will act as a reservoir, absorbing the surplus and raising EUA prices by the mid-2020s. Although there is no explicit carbon price target, efforts tomodel the impact of these interventions suggest that prices may be in the range €20-30/te CO 2 by 2025, but still below the €40-60/te CO 2 thought to be decisive in shifting energy demand to lower-carbon fuels.

Although the UKCS is a major source of energy production, it is also a significant industrial consumer of energy and a source of GHG emissions. As such, the offshore and onshore installations that form part of the UK upstream are covered within the EU ETS, which was intended at its inception in 2005 to be the principal policy instrument for EU decarbonisation. The scheme imposes a carbon cost on all participants, requiring themto purchase EUAllowances (EUA) for their GHG emissions unless they are granted free allowances. The UK upstream sector receives free allowances in the current ETS Phase III (from 2013 to 2020) for part of its emissions since it is deemed to be vulnerable to ‘carbon leakage’ and international competition from producing areas that do not face a carbon price. The demand for EUAs from industrial sectors collapsed during the economic recession in 2008-09, causing the carbon price to fall sharply as the supply of allowances was unable to respond. The effect on the carbon price was exacerbated by the effect of the 2009 EU Renewables Directive, which mandated new investment

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Figure 49: Monthly Average Spot EU Allowance Prices, January 2008 to August 2015

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10 EUA Spot Price (€/te CO 2 e) 15

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*August 2015 predicted average

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Source: ICIS Heren, Intercontinental Exchange

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ECONOMIC REPORT 2015