 Well, good afternoon, and welcome to our session on carbon trading, or probably should have called it carbon markets as a broader statement, but I think we used the shorthand version. I'm David Pumphrey. I'm a senior fellow and deputy director for the Energy and National Security Program, and it's certainly a pleasure to have such a distinguished group here to talk about this topic. When we started the debate about having a session, and Bill Ramsey and I were talking about doing it, and it looked like it was going to be later in the fall, I got a little worried that we might actually be behind the curve of the discussion in the Senate, that things may have moved along expeditiously in the fall. But I think we can see now that we're probably well ahead of the curve on this question. Carbon markets are a big part of the debate that is now going on, both cap and trade in a domestic setting, but also the creation of international markets, either through offsets or linking of current markets. And there's a lot of things that are being talked about that are based on speculation. And we thought it would be quite useful to bring in a group of people who can tell us about the experience in Europe in setting up a trading system, and then begin to expand that discussion into thinking about what are the issues we're going to confront as we look at moving into more global carbon markets rather than regional ones. In the U.S., we have begun to build carbon markets. They're on a regional basis rather than on a national basis. But this phenomenon is beginning, and I don't think the states who have started it are going to stop doing that. So we will have carbon markets in the U.S. of some type, whether they will be efficient, whether they'll do a good job of actually lowering the cost of mitigation in climate change terms will be an important question. But with that, let me first introduce Bill Ramsey, who is going to be the moderator for the session. Bill's a longtime friend from many different acquaintance, different jobs that we both had with the State Department, where he was working in the energy area and was ambassador to the Democratic Republic of the Congo, and then served as the deputy executive director at the International Energy Agency, has now moved into running the energy program at IFRI. I won't try to say the French pronunciation, I'll let you do that, Bill. And Bill's very experienced in energy issues of all types. So we thought it was very appropriate that he should be the moderator for this panel. So Bill, if you want to take over and introduce the other speakers. Okay. I don't plan to make any remarks at this point in time. I'll have plenty of opportunity as we go through the various speakers and then open up to the audience. I recognize enough faces out there to know that we've got a lot of intellectual muscle in the audience. And so we want to get some of your thoughts about this as well. These are tough issues. We're talking in large measure about the ETS, but it's about carbon markets more broadly. It's about how do you do this, how do you allocate the cost, how do you share the burden, how do you do this around the world, how do you link the various centers that are developing. And a lot of questions that we hope we can address. I don't suspect we'll answer any of them. But I would like to get into it right away because we only have two hours and need to need to get started with our speakers. First one being Barbara Wookner, who was a colleague from IEA for many years, been involved in the climate change issues and studying these matters, trying to get IEA papers in sync with what's going on in the marketplace, playing in the game, being at the cops, and that's a noble duty. Anybody who's been to a cop knows that you don't want to do it again, but she's done some and will be there again just shortly in Copenhagen and probably in Mexico. So I'd like to turn the microphone immediately over to Barbara. I don't know if your slides are up yet, Barbara. You may want to come over here and look at this. We'll try to stay under 15 minutes for each speaker and then get to you all as quickly as we can. So Barbara, Laura's yours. Well, okay. Thank you very much, Bill, and thanks a lot to the organizers for inviting me here to this event. I think it's obviously a particularly interesting time for me to be here in the U.S. and I think for everyone to follow what's going on now in the context of climate policy here in this country. And I am particularly happy to be able to share with you some of our work on the EUETS that we've done over the last years. And just to mention that this work is part of a bigger, of a larger project that we did in cooperation with other institutes where we have done an exposed evaluation of the first phase, of the pilot phase of the EUETS, and this is something which will be published very soon by Cambridge University Press. And in this context, I therefore would also to thank the others that have contributed to that, and particularly to Danny Elamann from MIT who has been really vital in driving this research. So what I want to do in my pre-15 minutes, it's already gotten better, is to verify whether we found in our research some evidence for an effect of the EUETS in this pilot phase, in the first three phase, three years. So I'm trying to see whether there has been a baitment, and this obviously is a fundamental question because the main purpose of any emissions trading system is to reduce emissions to some level that implies emission reductions. Just a brief overview of the EUETS in case you're not familiar with that. It currently covers about 40% of the EU greenhouse gas emissions. It's covering basically the power sector and energy in 10 sectors. It's going to cover more of that in our third phase, which is going to start in 2013. What is an important point, I think, is that it is a true multinational system. So we do have currently the 27 member states of the EU which are participating in the system, and we do have links to Norway, Iceland, and Liechtenstein. And in addition, we do have links to the Kyoto Protocol and its mechanisms through the certain amount of credits that are allowed to be used from clean development mechanisms and joint implementation. We are currently in our second phase. As I said, I will talk about the pilot phase, which will be a very short, let's say, introductory phase, which was basically really there to get the system running and to get everything in place. We're currently in the second phase, which is coinciding with the first commitment period of the Kyoto Protocol. And we have had an agreement on the changes to the EUETS directive that are going to be in place from 2013 onwards. So let me here provide some of the main overall insights that we've had in our project. And then I will focus on the last one in order to get a little bit more into detail. But first of all, I think it is important to mention that we all think that this pilot phase was useful. And we all know that there have been a lot of problems and a lot of difficulties with the EUETS. But still, it managed to achieve its primary goal, which was to put it in place and set a training infrastructure and to ensure that we're learning from our experiences in order to be able to reduce the greenhouse gases in line with security commitments in this first commitment period. What we've also seen, obviously, is that now we do have a real carbon price in Europe. So we have, obviously, problems at the moment due to the economic recession. But overall, the cap is becoming more stringent, which means that overall carbon price is becoming more significant. And we can see that the carbon price which has emerged on the market is reflecting the balance between supply and demand. Another insight, which we've got a lot of attention from industries, that we've not been able, up to now in this first phase, to find any empirical evidence on an impact related to competitiveness. So we have not been able to see that there have been really losses in market share in industries. But it may be too early for finding that, because as I said before, we're just looking at the first three years. And it's been a very, let's say, weak target. So it has been free of location. So this may imply that in the future, this finding will change. Already talked about that it's been a major driver of the global carbon market. So it's been giving a major impetus to the CDM developments. And lastly, and I think this is the most important of that, is that we have seen that notwithstanding the weak target, and let's say the problems we've had, it has been able to achieve some emissions abatement in this first three years. So let me just give you some, let's say, issues which we think why it is important to talk about abatement in the first phase. And this is because emissions were significantly lower than the cap. And that has been referred to very often as overallocation, meaning that the cap has been set too high, and meaning therefore also that it's unlikely that abatement took place. But what must be taken into consideration is this lack condition is an exposed condition. So there was a significant CO2 price for almost two years. And therefore, operators which were in the facilities under the EUHS actually have faced a real constant when they had to, let's say, provide allowances equal to their emissions. And so the question remains whether companies in these two years had an incentive to respond to this price signal and therefore to reduce emissions. And this is important because to the extent that they did reduce emissions, that the end of the period circles that we have seen and which has been often referred to as overallocation only was actually larger than it otherwise would have been. So let me give you some background issues which are useful to be kept in mind when talking about abatement and overallocation. And first of all, it is clear that emissions will never exactly equal the cap. And a constraining cap will always result in long and in short positions. And there's many reasons for that. And the most important one is obviously the reason that motivates the trading, which are the differences in marginal cost of abatement. There's other reasons as uncertainties of weather or economic activities or fuel prices. And there is obviously the main reason that has attracted a lot of attention in the EUTS, which is deliberate overallocation. But what our point here is that it is impossible to distinguish, given the allowance and emission data only, of whether it has been overallocation or abatement, because emissions, the real extent of emission reductions depends on the counterfactual emissions, which means what emissions would have been absent this year at a price. And this is very difficult to construct this counterfactual. And we've tried that in our study. And we are aware that there will never be complete certainty on the extent of abatement because of this constructing of a counterfactual. And therefore, we do believe that any estimate and the reason we estimate must be arranged. But what we've seen also is that if you do an exposed estimate, as we have done in our study, then you can remove certain factors from certainties because you do know certain factors that have been determining emissions like economic activity, fuel prices, or weather. So in a way, it helps to reduce the uncertainties. So with this in mind, we actually try to, let's say, compare the actual observed emissions with the counterfactual, so with the historic emissions which we had to build up. And our approach, rest upon the belief that economic activity is a major determinant of emissions, and that the relationship that we see between economic activity and emissions that we've been observing over the years before the introduction of the EUGS would have continued also absent the CO2 price. So we take this relationship and we project emissions into the first phase in order to get counterfactual. This exercise, which already is very difficult, has been complicated by the fact that has been complicating lots of, let's say, initial exercises in the EUGS, which is the lack of data. We do, before the EUGS has been introduced, there was no information on what sectors or installations would be under the system. And so no data has been collected, and that has been one of the main difficulties in the first phase. And for this reason, our analysis relies upon proxies that if we have constructed using the only available data sources for historical data, which is the UNFCCC data, and data that we have been able to extract from the allocation plans in the first phase. So we are aware that there is problems with this data, but it's the best that is available, and we use it as a proxy for constructing the counterfactual. Let me now come directly to a graph that compares these projected emissions based on this past relationship with the observed emissions. This is the scale of the graph has been truncated in order to emphasize the trends and the annual changes, and what you can see here is in the light shading are the observed emissions in the ETS sectors, and the dark shading is the batement that we've seen, and the counterfactual in the three years that we've been constructing is actually the sum of the sector observed emissions plus the batement. And so what you can see here is that the counterfactual continues to rise, the counterfactual emissions continue to rise, as they have done since more or less the year 2000, but they actually observed the emissions show a distinct flattening, particularly in 2005 when the ETS was introduced, you can see that there's been a distinct reduction in emissions in these sectors. After these years emissions continue to increase, reflecting the strong economic growth that we have faced in Europe in these first years, but they're doing that on an all but lower trajectory than they would have done otherwise. Just to give you some numbers here, what our analysis shows, is that on average there probably was an abatement of around 210 million tons in this first phase. That's a small number, but it is something which needs to be kept in mind, particularly given the fact that usually the ETS has always been monitored and portrayed as being ineffective, but have no effect in general and has only had weaknesses, so we do believe that this is something important to keep in mind. The basic case that we see for abatement is that we have seen significantly CO2 price for a large part of this first phase. We've seen rising GDP and we've seen rising output in the sectors that are covered by the ETS, and we've seen effect that we have not taken into account in our calculation, like weather or the relative prices of fossil fuels that all worked in the direction of increasing the counterfactual emissions, so that means that our calculations are also rather on the safe side. And at the end, the important fact is that emissions are lower than the historical emissions, so even after looking for biases and trying to look for sensitivity analysis and what we could have done wrong, we have seen that there has been some reduction in emissions and we do believe that our central value of 210 million tons over the three years is a quite reasonable number, but we have a range between 120 to 300 million tons. We have seen that abatement has mainly happened in the EU 15 member states, so all mainly in the western European countries. The eastern European countries have been allocated very often more allowances that are needed to cover their emissions, so we can see that it's been mostly on the EU 15 side. We've seen that both electricity sector and industrial sectors can observe some abatement, but the main focus has been in electricity, also because the dominant form of abatement has been through fuel switching, so we can see that, but what is interesting also that we've seen other forms of abatement as well, and there range from energy efficiency improvements, both in industrial facilities and existing power plants, to intra-fuel substitution and increased use of biomass and of waste derived fuels as well. This is just one emerging evidence, I'm not sure whether we have the time. Okay, that's good, so this is just to show a piece of evidence where several colleagues of mine have looked at the electricity sector in detail and looking really at the available data and looking what has been the range between the switching between coal and gas, and you can see here that there is the switchband where if the allowance price is above the switchband then the utilities prefer gas, if it's below the switchband they prefer coal, and we can see that the CO2 price give a clear incentive for utilities to switch from coal to gas in certain periods of the first years. What my colleagues there find is that there is abatement between 50 and 100 million tons in 2005 and 2006 in the power sector only, and this is broadly in line with the top-down estimates that I just showed you. So let me come to my conclusions on the EUHS where we see that we are aware that there have been a lot of problems, but I do think you have to see and you have to judge the EUHS also in the context of the very short time period when it has been launched, and also in the context of many problems, particularly data problems that we have faced. And we do think that the pilot phase was successful, it has provided important lessons also for other countries and regions that are currently trying to design emissions trading systems. We do have the infrastructure in place and most importantly, the carbon price has induced some emissions abatement. So the carbon price has managed that companies do respond to the price signal and they start looking for ways to reduce emissions. We do believe that this effect is an extremely important one. It is true that the abatement was modest over the first years, but you also have to keep in mind that the ambition of the pilot phase was very modest. It was really something just to get the system started and just to get everything in place. So in this light, we do believe that this is quite a big, big insight. I showed you that the exact magnitude is always something difficult to identify, so we do have poor data, we have obviously difficulties of creating this counterfactual, but we believe it's important just to make this point that whenever you see a long position and surplus on a market, on a carbon trading market, it does not imply that there has been over-occasion, but you have to look very much at the details in order to identify and distinguish between abatement, the primary goal of such a system, and over-occasion. So let me make a step back now and pull the findings that we have on the EU missions trading system in a little bit broader context, and this is something we have developed at the IEA, and which we do, let's say, propose as a two-tiered approach to greenhouse gas mitigation, where we say that on one hand, we do need market instruments, which are really essential to transmit this user-to-price signal, and we've seen that in the case of the EU chairs, and we've seen that also in the case of other trading systems or market-based systems that are being in place around the world and that are being currently discussed for the Copenhagen negotiations, but what we've also seen that trading is not enough, there are problems because the price signal is not always effectively transmitted to the end user, let's say, to the consumer, because there is market barriers in particularly in areas like energy efficiency, and so we believe that there is other targeted policy interventions that are needed in order to reuse emissions in certain areas. We also think that whatever kind of policy package or climate policy is being designed in domestic context and in international context, you always need to keep in mind what are the practical implications of these policies. Because on the long run, what we want to have is to ensure that we have an effective climate policy and to ensure that we have an effective broader market in the future. So there is little details, and I know my colleagues will talk about that, that are, for example, important in the context of linking, and these are all things that you should keep in mind by designing these climate policies. And so my last slide is just to show you why the reason for this kind of two-tiered approach that we have developed at the IA, we do believe that the main driver of this approach is actually cost minimization, because we do believe that countries have only a certain amount of money or of resources to spend on this problem. And so we think that it is necessary, absolutely necessary to optimize the use of this money. And so we think that it is better to focus the role of the carbon market on the more expensive areas. And this here is just a very simple representation of a marginal abatement cost curve, just to show you that there is areas and measures that have lower costs, like on the left side, where you usually have energy efficiency measures, which have low or no costs. And on the other side, you have the higher cost mitigation measures. All on the right side, you will probably have the carbon capture and storage. Technologies were very expensive. And so we believe that the market should focus on the more expensive technologies in order to where you need a premium on greenhouse gas reduction, while we think that the, let's say, the lower cost measures should be financed separately and where we believe there should be as assistance to policy implementation in countries. And with that, I'm going to finish. Thank you very much. We look forward to that study coming out and being able to look into some of the details, because there's a lot of other things going on in Europe during that time frame. They're the issue of causality and the issue of shifting the dash to gas and some of these other things. It'd be nice to look at that on a country, by country basis, to see the coincidence of actual abatement and other. Our next speaker is Maite Jaurie Guynodin from the IFRI. She's the energy program manager, which means she does all the work and I have all the fun. She's been with the energy program at IFRI for some four or five years now, and before that, actually, was here at CSIS with the Homeland Security Program. So as a prodigal daughter, come home to CSIS. As soon as she finds her slides on that machine, the floor is hers. Thank you very much. I'll figure my team. Hi, good afternoon, everyone. I'm particularly moved to be in this room today because a couple of years ago, I was in the same room, but at the time I was with the Homeland Security Program, at CSIS, so I would like to thank CSIS to give me the opportunity to... I mean, for its hospitality at the time, for giving me the opportunity to come back today and to discuss carbon trading with you. So the worldwide economic slowdowns that we are facing today will reduce global CO2 emissions, but only temporarily. I fear that the looming global recession is going to delay investment in low-emitting technologies and is going to postpone the fight against climate change are real, while industry seeks to protect their industry, protect employment as much as possible, and to avoid bankruptcy. Once economic growth will return, hopefully, the needs to transform our energy system will be more pressing than ever. So in this context, what can be said about the tools that have been implemented already and are hard to be implemented? I would just like to remind that it is a combination of policy instruments, taxes, sectoral approaches, national measures and policy, cap and trade market that will be able to provide sufficient CO2 reduction. Cap and trade is just one of the mini-tools that will help us with the fight against climate change. So to summarize the main reasons that make cap and trade markets so popular for some, let's just say that reductions are supposed to take place where they are the less costly. It is up to the market forces to decide. Cap and trade gives certainty, or like Barbara explained to us, gives an idea, in fact, of the goal and of the reduction emissions that we can reach, but not on the price, as we will see. Whereas carbon tax gives certainty on the price, but not on the level of reduction that we will obtain. Also, it is already there. There are several carbon markets around the world today. Liquid, well-functioning carbon market, even if they are not yet sufficient enough. So if I may say a word on the European climate policy. In 2007, the European Council decided a 20% reduction target in 2020 compared to a 1990 level. This objective implies a collective reduction of 1,113 million tonne equivalent CO2. So this means that the maximum level of emissions in 2020 should not be more than 4,451 million tonne CO2 equivalent. This objective has been translated into a target of 21% emission reduction for the sectors covered by the EUETS. And an objective of 10% emission reduction for the non-EUETS sector in comparison with 2005. If I may just say a word on the compliance of the non-EUETS sector with this objective, you may have heard that France this year announced carbon tax of 17 euro, the tonne of CO2. And you have to understand that for France is quite important, since because of its energy mix, only 30% of French CO2 emissions are covered by the EUETS. So this tax mainly targets housing and transportation. And as much as I think that such a tool could be useful to induce a change of behavior and to a switch of technologies, for example, toward low emitting technology, at least in the middle term, one can wonder if the way this tax has been designed right now will be efficient enough. First, the level is not high enough. The proposition in the beginning was to have a tax around 32 euros a tonne of CO2. They settled for 17 euro. Second, for now, whole revenues will be distributed to a household, has green checks. And even if the tax increases, which is not guaranteed at this point, they will keep distributing the revenues to households. And third, French citizens question the true motive behind this tax that might just be a way to please green voters who scored really high during the last European election. To come back to today's topic, the EUETS has been at the core of the European Union Climate Policy. So Barbara told you that it covers around a little more than 40% of European CO2 emissions, emissions coming from the heavy industry sector and from the power sector. So we are currently in the second phase, who matches the first commitment period of the Kyoto Protocol. And Barbara told you also that the third phase has already been designed that will run from 2013 to 2020, 2020, being corresponding to the European Union emission reduction targets. So far, what did we learn? So the EUETS is supposed to deliver a clear, undistorted, and long-term carbon price signal. And experience of the first year shows that it is quite difficult to implement. First, a realistic cap is mandatory to create scarcity on the market, but also to reflect a true effort of reduction. Too many emission allowances has been distributed during the first EUETS. So Barbara pointed out that it was because of lack of historic data, but it is also because state members, low bid, in fact, the commission to be sure to obtain a maximum of quota to protect the industry. And this was one of the main reasons which led to a slump in carbon price at the end of 2007. Second, initially, ground-fazoring and free allocation seemed a good allocation methodology. It offered simplicity and an easy transition to carbon management. Phase one shows that companies made windfall profits by passing CO2 costs on consumers, while selling allowances they had received for free. And this was perceived as particularly unfair when it was companies who were also high emitters. During the second phase, in the beginning of 2009, companies sold unused allowances, again received for free, in order to raise capital because they were cash trapped and because of the impact of the economic recession. So all these distortions make clear the need for some level of auctioning and for a trading horizon that will give permits an increased value over time. Third, energy-intensive sectors, particularly exposed internationally, will be under the pressure of competitive distortions. So Barbara pointed out that we didn't see yet any carbon leakage, but this could happen. And in this case, this will cause some detriment to the environment, replacing CO2 emissions in countries less carbon efficient, but also in the economy. And lastly, I would like to say that the system today is not designed to absorb unexpected events, such as crises that we are facing today. So drop in economic demand translates both in a drop in a drop of production, but also in a drop of CO2 emissions. And the cap in phase two now looks relatively loose. Countries will be able to bank surplus allowances, enabling them to emit, to have higher emissions during phase three than the cap would suggest. So efforts that we are supposed to consent now are postponed to later, but this is the point that we will be able to discuss maybe with the other panelists. The EU climate and energy package that has been voted in January 2008 includes a directive emitting the current EU emission trading scheme. In 2012, it will be extended to aviation. And then in 2013, to aluminum, petrochemical industries and CCS. CCS development is particularly important with regard to China and India, since their emission trajectory will depend of the fact if CCS is commercially available or not. So a number of improvements have been made that will take effect from 2013. Among them, more than half of the quota will be auctioned instead of grandfathering. And so to summarize all these flaws that we saw, I would say that I would like to stress that how great care, in fact, should be taken, not to set in eastern any carbon market design that cannot be abandoned subsequently easily. It is quite difficult now for the EU to go from a free allocation methodology to auctioning. So, however, my view is that a number of flaws are still up and running. The EU ETS has already fixed the cap for 2020, like you saw on the first slide, at a level of 21% lower in 2020 than emissions in 2005. And moreover, a reduction rate of 1.74% has been fixed annually beyond 2020. And no review is expected before 2025. But the quota demands depends on a number of factors, including weather conditions, relative commodity prices, and economic growth. And they are all highly volatile factors and quite unpredictable. Change in this factor will affect the demand. And usually, when you look at other commodity markets, if the demand change, supply can adjust. But it's not the case in the EU ETS, or at least not in the way that it is designed. So my view would be that authorities should be allowed to review the state of the market on a periodic basis and to intervene on the market if they feel the need to do it. They could, for example, set a reserve price mechanism. For example, for the quota to be actioned in 2013, this will act as a kind of a price floor. And this reserve price, already the value of today's allowances will begin to reflect that greater value since investors will have a better view of the upcoming period. Moreover, my feeling is that price floors and eventually selling can reduce price volatility. So it is true that banking and borrowing of permits can temper the market's fluctuation through longer-term price expectations. But the ability for the EU ETS, for example, in 2009 to sell free allocations on the market demonstrates that it wasn't enough to avoid a drop in price. All this being said, despite EU ETS falls, the EU succeeded in setting a constraint and the price on CO2 emissions. Barbara showed you some good results that I was happy to constate. And I guess with all the adjustments that we can make, the needed reduction could be delivered accordingly. The EU ETS is today the largest carbon market by far, and it is a driver for other markets, and especially the CDM market. There were also other policy objectives behind the EU ETS. There was, of course, the objective of reducing the emission. But the EU wants also to set an example in showing that industrialized countries are on the downward trajectory. And finally, the EU wants to encourage developing countries to participate in the carbon markets. So far, industrialized countries failed to persuade developing countries, and in particular the emerging economies, that their development could progress in the same ways as a fight against climate change. If we have a look at IEA projections, you can understand from this slide that most of future CO2 emissions will come from non-OCD countries. I mean, even if all the industrialized countries decided to reduce to nothing their CO2 emissions, it wouldn't be enough to fight against the climate change. So the latest WEO, that I didn't have the time to process entirely, states that emissions peaking in 2020 will require investment in non-OCD countries of US $200 billion in 2020. Industrial nations at this point won't be able to afford direct transfers to certain countries in light of rising debt and large budget shortfalls worsened by the economic recession. So we can only count on a well-framed carbon market to a channel, important amount of money towards these countries. So far, the clean development mechanisms that you might know under the CDM name remains the only instruments for integrating developing countries and the emerging markets into emissions trading. So its defaults are well-known. First, it is a project mechanism that avoids emissions but doesn't impact emission reduction directly. Second, it didn't impact the energy mix of host countries. Yeah, fast. Then, the most important CDM partners are China, India, and Brazil. There are just a few projects developed in Africa. Transaction costs are very high at the detriment of small projects. And there is also the question of additionality. Host countries having little incentive, in fact, to develop policy measures like energy efficiency measures, for example, that could lead to a loss of some CDM projects that wouldn't be eligible anymore. So obviously, the CDM would have to be scaled up. International climate policy could, for example, consider a sector, I mean, to extend the CDM mechanism to sector, for example, with regards to a predefined baseline like carbon intensity or energy intensity. Sectoral approaches will allow better diffusion of technologies already available in three-lice countries. And we can hope that they will prompt faster global emission reduction. And this will also reduce competition distortion between foreign districts posed internationally. So to conclude, because I can hear Bill behind me, I would like to stress that carbon markets are not commodity markets like others. First, because the primary objective is not to obtain the best price but to abatement of CO2 emissions. And second, because we mustn't forget that in other markets, supply can adjust to the demand. These markets are, in a way, artificial markets. One primary objective could be summer rights to control the earth's temperature. And because they are artificial markets, they depend more than others of good regulations that will condition their efficiency. I thank you very much, and I'm looking forward to your question. Thanks, Maite. Well, there you have a couple of policymakers' perspectives on how this all might come together and the design flaws and how we might do it in the future. But it reminds me a little of the conversations that Ed Chow and I have, or Ambassador Gray, about governments talking about pipelines. It's interesting for governments to talk about things, but it's the private sector that has to do it. Ultimately, who's going to trade those permits? And so we've asked Shell to join us to bring that private sector perspective. Graham Martin, as you can see by his bio, is involved in these things in North America. And I would ask him, once he finds his slides, to take the floor. OK, wonderful. Thank you very much, and thank you very much for having me here. It's a real pleasure to give Shell's perspectives on carbon trading and, more specifically, on the EU ETS. I would ordinarily ask you to read this slide. As you can see, my lawyers have been at the slide pack. But if you just rely on the fact that you can't rely on anything I'm about to say, we'll carry on. So just to set the scene a little bit, I work for a company called Shell Energy North America. We're a part of the Shell Trading Network. I'm based in Houston, so I cover a lot of the environmental markets in Canada and the US. But I work very closely with my colleagues in London who've been very instrumental in the EU ETS from its very early days, doing many of the first transactions in the clean development mechanism. So I'm really here on their behalf to give our thoughts. So what I thought I would do is run through some key design criteria that we think are important in the design of any emissions trading program. And then we can go through each of these slide by slide and I'll give a bit of commentary as to how we think the EU has done it. But I think these will be more generally useful in thinking about how might a cap and trade program look in the US and hopefully in North America. So we've got things like a long-term environmental objective, establishing scarcity, a move to auctioning. The system should treat CO2 just like any other commodity, which is contrary to what we've just heard. Recognizing key abatement and technologies, linking to offsets to really broaden the scope of the program and finally building on something on a sound infrastructure base. So I'm sure there are others, those are our thoughts and we'll go through them slide by slide. So if you think about the long-term objective in the EU, as you can see here, you've got phase one, phase two, and then what we think phase three is going to look like. There is still some uncertainty exactly how aggressive the EU is going to move in phase three. But what we've tried to show here is that if you look at it from going back five years and going out to 2020, there's a fairly predictable gradient and that's helping companies like ourselves have some confidence that there is teeth behind the regulation, that there's real motivation from a policy perspective to continue with these kind of programs. So these kinds of long-term price signals are important. Obviously with Waxman-Markey and the Senate bills, they're looking at emission reduction targets out to 2050, which really does help set the long-term objective, which for a company like ourselves, when we look at emission reduction projects, these projects have 30 year lives and so it's very important to have that long-term objective. So we've already heard a little bit about establishing scarcity. Obviously to do that you need a cap, you need a cap to be below emission levels for allowances to have any sort of value. I have a slide at the end which shows what happened when that wasn't the case in phase one. And so you really do need a lot of good data and I think we're going through that process in the US right now. I think that there was probably a lack of good data in the EU but a lot of those issues have been overcome. And the EU is an interesting one because it's not like the federal program in the US where something is just done on the federal level. The EU obviously is a collection of different countries. That EU objective has to be devolved onto each individual country. And so every country then has to make sure that it's assigned the right amount of allowances to industry to ensure that the overall target is met. And there are obviously some, still some adjustments going on. And I guess you might call it tinkering with the program. But on the whole I think as we've learned from phase one the EU's done a pretty good job of ensuring some scarcity in phase two and beyond. The issue of auctioning or allocations is probably one of the most contentious issues in the US right now. And the way we look at it in Shell is really to think about how the price of CO2 is gonna be embedded throughout the economy as a whole. And when you start off on a program typically what you find is that CO2 prices affects the company that holds the obligation, the regulated company. But over time as that price finds its way throughout the value chain then it really does spread throughout the economy to the consumer. And the idea is that in the long term if you're auctioning these allowances which is really the only sustainable way to do it that auction revenues are recycled back to the consumer through the tax system. But it takes time for us to get there. And I think it would be a mistake to just auction 100% allowances off the bat because there's a lot of trade exposed industries. There's an uneven playing field. But for some industries and I think the power sector in Europe was an example of this where you had free allocation off the bat that there was this potential for windfall profits that auctioning may have avoided. So treating carbon like any other commodity I'd agree that the supply is relatively fixed if you do have a cap on allowances and a fixed number of offsets that you're allowed to use. I'd agree that they are created by regulation. So it's not necessary something like oil where the market is created because people need it. But at the end of the day if you're gonna set up a market and you're gonna tell companies like ourselves to be involved in that market then we do have exposure to prices. And the best way in our opinion to manage that exposure is to allow as much normal market behavior as possible to occur. So that means avoiding price caps, price flaws. That all that really does is prevent carbon from getting to its true level. And to encourage things like liquidity. So respect some property rights once given allow banking. Don't restrict trading to just companies with compliance needs because whenever we go out in the market to hedge the chances of us finding somebody with an equal and opposite need is very remote. So you need somebody on the opposite side of the transaction, you might call them speculators to be there. They perform a very valuable function. And finally allowing all forms of trading. Exchange based trading is very important but a lot of transactions do occur in the over the counter markets or bilaterally. So there isn't a one size fits all approach. And I think from this perspective the EU has actually done a fantastic job and you'll see how that's manifested itself on my last slide. So number five, recognizing new technologies. Shell believes that carbon capture sequestration is going to be critical. It's one of the few technologies that can really deliver significant emission abatement projects. And at the moment, CCS is not recognized in the CDM. And so there's some work to be done there. We're working very hard with folks over in the EU to try and achieve that. And we hope that that won't be the case when we have a US program. If you think about offsets and linkages, I think the EU has done a good job of linking to other emission reduction opportunities in other countries through the clean development mechanism. And as we get more, I'll just bring all of these up here, as we get more countries on board, it's important that they all link together. The wider the pool of abatement opportunities, the lower the cost of abatement. And so you need that linkage and compatibility between programs to encourage global investment and emission reduction projects. And I think that Shell's gonna be touched more on that linking in the next presentation, so I won't spend too much time on that. Finally, a foundation infrastructure. It's important that we're all speaking the same language. It's important that the infrastructure is in place. And from this perspective, I think as a practical matter, the EU didn't do such a great job. A lot of the registries weren't set up at the beginning of the program. There was a number of years where there was no registry link between emission reductions generated through the clean development mechanism and companies' own accounts on their country registries. So if you'd invested, in some cases, millions of dollars in projects in China or India, and you were relying on those credits being used for your compliance in Europe, that there were some nervous months when we all wondered whether all the registries would get linked up in time. Thankfully, a lot of that has now been rectified. But something to bear in mind when you're looking at the US program is that it's important to get a lot of that nuts and bolts out of the way before the system comes into place. So if you look at what's been going on in the EU, one of the things I hear commonly is that the EU failed in phase one because the price went to zero. And carbon was worthless and why did we even bother? And as you can see from the gold or yellow-ish line here, that represents the price of EUAs to be delivered in December, 2007. So it represents the phase one price. And you can see that it reached a high of over 30 euros in April, May, 2006, and eventually traded at cents on the dollar. And the simple reason for this is two-fold. One, that there were more allowances in phase one than emissions. But critically, phase one allowances weren't allowed to be banked into phase two. And I think if you had that banking, you wouldn't have seen that precipitous price drop. But at the end of the day, you could also make the argument that, well, it was a trial period, it was a test run, so do you necessarily want a large bank of allowances moving over into when the program started for real in 2008? But from this perspective, so the cap part of cap and trade maybe was said a little bit too high, but the trade part actually was functioning very well. If you look in, I guess this is the middle of Q2, when prices dropped from 30 euros to 13 euros, look at the blue bars down at the bottom of the chart. You can see a real peak and that's traded volume. And what would have been very dangerous is if during this period of new information coming to light, everybody in the marketplace had just kind of shut up and not really done anything. That would have been a signal of a market failure. But in fact, you actually had record volumes trading. And so although there was a big move in the price, the actual underlying market was functioning reasonably well. The other point I wanted to make about this is, well, a couple of obvious ones, obviously volumes have grown almost exponentially, I guess over the next couple of years. If you look towards the end of 2008 and 2009, you can see in the bold line that's kind of drop in from again 30 euros down to about 10 euros over Q3 and Q4 of 2008. This is the price of a face to allowance effectively. And of course, this was a time when the economy was really suffering. And so again, many people say, well, that's a reflection and that just shows that the market isn't really working. It's not doing what it was supposed to do. I think our response would be, well, actually, that's exactly what it's supposed to do. So as economic productivity declines and emission rates fall, then this is exactly the kind of time when companies need a bit of a break on their costs. And a market does exactly that. You don't need as much emission reduction to meet your goal for that particular phase. And so the price comes down somewhat automatically. So I think this overall, I wouldn't say the EU is a flawless system. But in terms of creating a very robust market where companies can rely on the carbon price signal and factor that into their own internal policies, I think the EU has done very well indeed. So that really is it. I'll just draw your attention to the website down there. Our Chief Climate Change Advisor, Mr. David Hone, does a lot of blogging on topical issues around policy. So hopefully you might find that very interesting. But look forward to questions later. Thank you. President Zimm, who has known many of you on the circuit as a former Norwegian energy advisor and years in the Norwegian government doing a lot of work in transmission of work, electricity systems, 10 years as the Vice Chairman and Board of Directors of the Norwegian Transmission System Operator. So in terms of integrating low carbon energies into the real world, he's got some real experiences. But let me turn it forward to you again. Thank you very much and thank you CSIS and David for inviting me to speak. I've been invited to give you about 10 minutes of introduction to linking markets. As you may know, the European Commission has been very vocal or at least very explicit in terms of their ambitions to link up the European program with the future US cap and trade program. Moving to the US, there hasn't been a lot of public discussion about these issues. But in the current bills, there are provisions that would allow such linking with programs of comparable stringency. So the scene is set for this kind of linking to take place. What I'd like to do is just to show you with a few, very few slides, four or five slides, something about the theory of linking and something about how that can be applied to a linkage between a US program and a European program. And maybe then identify some issues that actually could have political implications and could pop up in a way when we get into the more implementation phase of this. So for the purpose of time, I'm not going to spend a lot of time on presenting my company. We, most of our businesses at the global level in Europe, we have 30 people in Washington DC trying to serve an emerging US market. Let's go to linking basics. So I assume we have two separated carbon markets, A and B. And we create a joint common market between them. So what's going to happen? Well, immediately you're going to see trade flows between the two market components. So there will be allowances of permits going each way, and the money will flow the opposite directions. And what does that mean in terms of effects? Well, you'll get eventually, or ultimately, a price equalization in this combined market. And you get some advantages from a market efficiency point of view in terms of you get lower price volatility, more liquid in the market. You get less vulnerability to market manipulation, and so on. The important thing is that if you look at these two markets collectively, they will be able to reduce their total compliance cost when they do this together than when they do it separately. So that's a very important takeaway. It's maybe not so easy to monetize politically, but in a global context, it's very important because it will allow us to set more ambitious greenhouse gas reductions targets in the long run. So I assume we have a situation where there is, we have two markets. And one in the market either have higher cost of abatement or more stringent targets, ambitious targets. And the other one has low cost of abatement or less stringent targets. And you try and link these markets. What happens? Well, obviously, you're going to see that permits are going to move one way. And you're going to see capital moving the other way. And what does that mean for region A? Well, it will mean a higher price for carbon. It will mean a higher cost of compliance for the emitters. But the price is you get more investments. You get an inflow of capital. You get more domestic reductions than you would otherwise get. And you get some advantages in terms of jobs, new technology, maybe better improved energy security, and so on. On the other side, what will they get? Well, their advantage is the low carbon prices, lower cost of compliance. But they have to pay for it. They get fewer reductions than they would otherwise get. What's in it for both? Well, total abatement cost is likely to be lower. And there is a more efficient market that normally translates into a lower carbon cost overall. So let's put this into practice and look at what would happen if we tried to link up a European program with a North American program. And I say North American because I assume or I predict that you will have a joint US-Canadian market. And we link these markets. Now, the situation is more or less like the A and B. We are likely to see a significantly higher carbon cost in Europe because simply the phase three of the EU ETS, which starts from 2013, is going to be relatively stringent. We're coming out to recession, so we're going to see relatively high carbon prices in Europe. Depending on the target that Europe will be setting, I mean, it's either 20 or somewhere between 20 and 30, you can see at least prices ranging from $35 and up. And then when you look at the US, when you look at the bills that have been proposed and we look at our models and you look at the EPA models, you're going to see prices maybe in the same time frame. On half of that, maybe 10 to $20 per ton, maybe a little bit more, but basically there is a significant difference. So Europe will buy permits big time and money will flow to the US. But the interesting thing here is that if you look at North America, the size of the North American market is about or at least three times that of the EU ETS. So the interesting effect is it doesn't look that bad because in the US, you will get a somewhat higher price for carbon. In Europe, you get a significantly lower price for carbon. So is this a political problem? We'll see. So what will this mean? Well, US emitters will face higher cost of compliance. There is extreme attention to cost in the US discussions, political discussions about capital trade. Will this increase be significant enough to become a political problem? Well, we have to look at the other side of the equation because there is something we get. So we get investments. We get inflow of capital. We get more domestic reduction. Actually, we get more project in the US. We get more economic stimulus, more green jobs, more technology, more clean energy, improved energy security possibly. The other side, Europe is going to get fewer domestic reductions. Well, Europe has been talking about creating more reduction domestically. So is this a problem for Europe? Anyway, then to stay within my 10 minutes, we'll just have to make this a little bit more complicated. So we have not only flows between Europe and the North America permits, but we have these concepts of offsets that also will play into this. So if we then assume that the United States will be relatively generous and say that in order to contain our costs, we have to import offsets from CDM or any other crediting mechanism at the global level. Current bills suggest 500 million tons per year, increasing up to 750 if we can't find enough domestic offsets, which you will not be able to. So we're talking big numbers. And then what about Europe? Well, Europe has been very active in terms of using global offsets. And I just have to slip in a comment to Barbara, because I do think it's very interesting to use the magnifying glass to find the reductions in Europe. But after all, the main result of the EUETS has been generating a project pipeline of 10,000 reduction projects globally. I mean, the EUETS has been the main driver of a pipeline that will generate not 200 million tons of reductions, but 1.6 billion tons of reductions by 2012. It has leveraged about $100 billion worth of clean energy, clean tech investments. So I know that your project was focused on the Europe, but I just wanted to supplement you. And mention the very important that was the point with the EUETS system. We want to use offsets. We need to contain our costs as well, so we will allow imports of credits. So what happened was just intended. But Europe is moving towards less dependence on offsets. So they've said that in phase three, we're going to use less. We're going to prioritize the least developed countries, maybe Africa. So they will scale down their use of offsets. So basically, what does this mean? Well, the significant use of global offsets in the US will keep prices down at the low level. Low use of offsets in Europe will mean that European prices will be higher. So what does this mean? Well, Europe will be even more interested in buying permits from the US, because they're good. And this is quite interesting, because then in a way, what happens is that it's the European program that will generate demand for in the high price of global offsets. And US, United States, demand for global offsets. So in a way, it's the kind of the EU importing low global carbon prices. And it's effectively a swap in a way. And this is all assuming that there are no quantitative restrictions on these flows. Now, let's look at another issue finally. And this is the issue of forestry and ag offsets. In the United States, there is a lot of interest and a lot of expectation in terms of how many reduction can be generated by the forestry and the agricultural sector. Generally an open attitude towards inviting those offsets into the program, domestic as well as international. So if this happens, you will see some significant flows of red offsets, of domestic offsets. And then what will happen, what we know is that Europe has been very skeptical of these instruments for different reasons. So they're kind of careful in touching the forestry side. So even if they don't, what will happen? Well, it's the same thing. So we have actually then a low carbon price in the US caused by using all these biosecustration offsets. Generate an interest in Europe to buy more permits from the US. So this is again a kind of a swapping. It's a kind of a greenwashing of offsets that Europe doesn't want. But it shows that these partial linkings or indirect linkings with offsets does not prevent prices and market forces to penetrate all the markets. So you get some price penetration and policy leakage. And all these, I don't have the solutions, but I do think that some of these issues are potentially politically contentious and that they need to and will be addressed when we get to that point. So those were my observations. Thank you. Well, it's always a pleasure for a moderator to have the last speaker provoke the audience. And I suspect from what I'm hearing muttering on my left, it may have provoked a few of the panelists as well. So what I'd like to do is to give an opportunity to the panelists to comment to anything that they may have heard that they would like to comment on from other panelists. Just let's take a couple of minutes for that. And then I'd like to open the floor to the audience. So does the panel have any observations on other panelists' comments? Madam, please. Thank you very much. Well, I do have a lot of observations, but let me start with the first one, which was directed. To me, I think I showed in my presentation that we have had several findings in our projects. And one of the findings is exactly that the UETS has been a main driver of the global market, and we do consider that as an important thing. There will be a chapter in the book, so maybe it could be good to read that in the book before we look at everything else. But I think this is something which is broadly known. So I think for me, important here, for me, it was really important to look at the side of the abatement, because this is something which has not attracted a lot of attention. And this is something which is not well known. And as I said, it might be a small number, but it's still something important, because it shows that administrative systems can set incentives to change behavior and to make the carbon price, let's say, be reflected in investment decisions. And so I think this is something important, and this is why I try to focus on this point. And another point I just want to, well, I had some comments on Mita's presentation, but I have to admit that I've fully subscribed to what Graham said in his presentation. I do think it's really important to create a long-term signal, and any climate policy instrument or any climate policy architecture should be able to provide this long-term certainty in order to give investors a certainty to do their investment decisions. So I think it's important to maximize the confidence in the system, and to, I think sometimes that too much, it's already an artificially created market, so too much regulatory interference with the system and with the market, I think could undermine the market. And I think I agree that you should let the market work and you should try to not interfere too much in order to not undermine also the confidence from the investors and the entities under the system from the beginning. So that's my comment. Okay, and it's unfortunate that the table is as short as it is, because obviously from this good discussion, we need to have an Indian and a Chinese official at the table to talk a little bit about their attitude about offsets and how much they're going to allow Europe to mine offsets in the rest of the world, or how much they would like to have Europe carry its own burden. If you look at the evolution over time of European energy policies, the energy intensity is dropping quite dramatically over the last years, but if you look at the carbon intensity of the society, it's not dropping anywhere near as quickly. And if you break down the achievements of the Europeans in meeting their Kyoto target, the EU-15, and look at that eight or seven or eight percent reduction, about half of that is in nitrous oxide and methane. It's not in carbon dioxide at all. And the carbon dioxide is more in terms of structural readjustment from the five lender and a dash to gas in the UK. So how much really effective, reduced carbon emissions have we achieved in some of these countries? Let's see what the audience has to say. Any questions from there, please, right here? Gentleman with the glasses, yeah.