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Emissions trading and the missing link

Emissions trading is on track for its European launch in 2005. In the world's first large scale "cap and trade" market for CO2, all major industrial processes in the EU will be seeking to reduce their emissions of six greenhouse gases. Big industry will not, however, be rushing to secure any of its supplies of electricity from wind power plant, not until the missing link between emissions trading and clean power technologies is in place. Even then, emissions reduction mechanisms will only provide an extra incentive for green power investment. They will never drive a market for wind power development on their own.

Before renewable energy projects can financially benefit from the EU's emissions trading market, the Kyoto flexible mechanisms must be made a part of it. That will require politicians to act

Emissions trading is on track for its European launch in 2005. In the world's first large scale "cap and trade" market for CO2, all major industrial processes in the EU will be seeking to reduce their emissions of six greenhouse gases, including the most damaging of them all, carbon dioxide. Big industry will not, however, be rushing to secure any of its supplies of electricity from wind power plant, not until the missing link between emissions trading and clean power technologies is in place. Even then, emissions reduction mechanisms will only provide an extra incentive for green power investment. They will never drive a market for wind power development on their own.

In its present form, the EU's cap and trade system wields both a stick and a carrot to persuade defined industries and activities to reduce their existing CO2 emissions. Combined, these activities represent 46% of the area's carbon dioxide pollution. It is not the purpose of the EU emissions directive to promote renewable energy, but to reduce emissions in the most cost effective way. It applies only to activities which emit CO2, thus under the directive a wind plant cannot be used to reduce emissions.

The directive only caps the emissions released from the main process of an on-site installation. The emissions generated by the "auxiliary energy" used to power a paper mill or steel producer are not part of the emissions trading framework. For this reason, the directive does nothing to encourage a major user of electricity to invest in wind power. What it does do is encourage the user to reduce its emissions to such an extent that it can trade it superfluous emissions allowances to others covered by the directive.

Impact on energy

More relevant for wind power is to look at the impact of emissions allowance trading on the energy sector. From 2005, the emissions of all combustion plants larger than 20 MW will be capped, requiring power plant owners to clean up their technologies. If they do not, they must buy more allowances from the market or face strict financial penalties. Large European energy producers will be heavily impacted by the new directive -- and energy prices are expected to rise to cover the additional cost of reducing emissions. Wind prices, on the other hand, are likely to continue falling, making wind power increasingly competitive in comparison.

For wind, the benefits of trading emissions allowances do not go much beyond that. Fossil fuel plant are not about to be replaced with wind power stations. First, it is nearly impossible for any new plant to compete with an old written-off power plant. Neither the stick nor the carrot of emissions trading are big enough to bridge the difference in cost. Assuming a CO2 allowance price of EUR 20/tonne and a CO2-saving of 0.7 kg/kWh of renewable energy, the price advantage is just EUR 0.012/kWh.

Second, it is still unclear whether a power station which has been shut down in one period will still be considered in the following period. In the worst case, it will not be part of a new allocation scheme. That means the emission reduction is taken into account for a much smaller time than the depreciation period of the wind plant.

There are far more attractive options open to the energy industry for gaining the most out of trade in emissions allowances. Operation of power plants can be optimised to keep CO2-emissions down, leading to a slight shift away from (CO2-intensive) lignite/coal plant to gas turbines; closure of CO2-intensive plants is likely. Next, high priority can be given to efficiency improvements in existing fossil plants, with refurbishment intensively pursued. Utilities also have an incentive to build generation units rated at less than 20 MW, for which there is no emissions cap -- in this way a producer could even increase its CO2 output while reducing its need for CO2 allowances. Last but not least, the capacity of existing hydro and biomass power plants will be fully exploited.

Flexible mechanisms

The missing link before emissions trading will drive any new wind power projects lies in the "flexible mechanisms" identified by the Kyoto protocol -- Joint Implementation (JI) and the Clean Development Mechanism (CDM). These are not part of the EU's cap and trade directive. The Commission, however, is due to publish a second directive this year with the aim of introducing flexible mechanisms in 2005 as part of the EU emissions trading market. Until that directive is passed, emissions trading in Europe is restricted to trades between "direct emitters," with other methods of CO2 reduction excluded.

The beauty of flexible mechanisms is that they create another tradable commodity within the emissions trading market, one which is of far more value to wind than CO2 allowances -- emissions reduction units (ERUs). Industrialised countries can earn ERUs by investing in emissions reduction projects in other industrialised countries. The advantage is that mitigation costs can be lower than those for national action. Replacing dirty coal generation in Poland with wind power creates far more ERUs than investing the same sum in the Netherlands to replace relatively clean gas-fired generation. For countries struggling to meet their Kyoto targets on greenhouse gas reduction, ERU trading is good news.

Most climate protection projects that will result from the system hold interesting perspectives for wind energy. There are four types of ERU project: those aimed at cutting CO2 emissions from activities not covered by the EU emissions directive, such as reducing the CO2 output of small coal or gas fired power stations; projects within the EU that reduce emissions directly or indirectly, such as JI; projects between EU member states and other Kyoto participants outside the EU, such as JI; and CDM projects between EU member states and non-Kyoto participants, especially developing countries.

All four types of project will open the benefits of emissions trading to all owners of wind turbines, within Europe and beyond its borders, but there are inevitable caveats. It may be that installations already receiving government aid will not also be accepted as emission-reduction projects. On the other hand, if a wind project is not financially viable despite an existing support program -- and the addition of income from ERUs lifts it over the border line to profitability -- then it becomes "additional" to what would have been built and will most likely be accepted as a climate protection project.

Not a substitute for support

Income from emission reduction units will provide useful but secondary support for wind energy. That is only right and proper for wind deserves more. The added value of wind power goes beyond that of its role as a zero emissions technology. Not only is it clean, but it also saves the use of finite natural resources such as gas and coal; as a local source it paves the way for energy independence; and it is a safe technology with no incalculable risks for us, our children or our grandchildren.

Market support programs for wind power are intended to recognise these benefits. Emissions trading, which is aimed at reducing the undesirable effects of existing technologies, must not be seen as an alternative to stimulating the market introduction of clean energy technologies. Wind deserves more support per kilowatt hour than just the CO2 value of an emissions trading allowance.

Emissions trading holds two main dangers for wind. Utilities will argue that if wind is benefiting from the emissions trading market it needs no further support. Customers will argue that they are paying wind power producers twice over for the green value of the product -- through a wind energy support program and in paying the price of emissions reductions.

One challenging solution would be to create a Europe-wide system of green power credit trading. The emissions trading directive could be complemented by companion directives which cover resource consumption, security of supply and safety aspects. It is a distant goal worth pursuing. The introduction of such directives would make separate wind support programs in each country superfluous -- doing away with the barriers to cross border trade of green electricity which prevent the most efficient development of renewables.

But as long as the Kyoto protocol -- and in its track the EU emissions trading directive -- only recognise the value of wind power as a zero emissions technology, other systems of support must stay in place so that a price is put on all wind energy's benefits to society. To make continued support acceptable to taxpayers, creative marketing of green power plays an important role. Credible, certified wind power offerings will help spread awareness of all the benefits of wind energy to a large audience, and not just the benefits of its emission reductions.

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