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ECONOMIC REPORT 2015
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A) EU Emissions Trading Scheme
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
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.
0
5
10
15
20
25
30
2008
2009
2010
2011
2012
2013
2014
2015
EUA Spot Price (€/te CO
2
e)
Source: ICIS Heren, Intercontinental Exchange
*August 2015 predicted average
*
Figure 49: Monthly Average Spot EU Allowance Prices, January 2008 to August 2015
9. Appendices
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