EU Emission Trading System, Explained for non-experts

[0:07]Dear all, I am Doctor Prodip Bhowal. I am working in the area of UETs for the last 12 years. I decided to share my experience to explain. You emission trading system to the common people in a simple way. So, let's begin. We start with some fundamentals. Let us understand first the heat balance of our earth. The heat in the earth is coming from the sun. Sun is the biggest source of the energy and similarly lot of heat is also radiated into the atmosphere and the spaces. So in general in a stable situation the heat in and heat out energy should be more or less the same and our balance is zero. That means the temperature is maintained and in a steady manner in the earth. But when we have lot of greenhouse gases, then what happens that greenhouse gas traps those energies and doesn't allow them to go out. And in a process the energies are coming back and the net energy balance is now positive. Once we have a positive energy balance then this will be obviously increasing the temperature and our temperature goes up slowly, slowly. So that is what is happening is called the greenhouse impact. But in this U ETA system we will be mainly dealing with the CO2 because there are many greenhouse gases but EU ETS or in this presentations will be mainly concentrating on. Carbon dioxide emission. Now we quickly look at the graph, which some of you might have already seen. That rise in temperature over a period of time, most important thing in the recent time the rate of change is very high and if you are not able to stop it then it is going to have a disaster on us. Now in this slide, let us try to understand the relation, because it is sometimes quite difficult for a common people to understand the relation between the emissions, the climate change and the role of the UETS. So once we have more and more emission, our climate change will be more and more worse as soon as the climate changes. As the climate is becoming worse and worse, it is the job of the administration or the EU to take some corrective action so that we get back our climate or our earth. Remains livable area. So that is how the role of the ETS comes or UETS comes that they define different rules and regulations to curve or to reduce the emission and in a process making the climate better. Now as the climate is becoming more and more worse, the rules and regulations will be more and more strict and it will be more and more expensive. So that's how the feedback loop is is working and that's how the administration is working to reduce the emission and in a process making our our environment better. Now we see our learning methodology. We will be learning it through some question and answer sessions because this is the this is the most natural way of learning. Let us see in this, in this video, try to answer some of the most frequently asked questions. So let us go ahead. The first question is that emissions are going into the air. How can it be traded? Now for the purpose of trading that we need a commodity. What we need to trade like a sugars, silver, gold, steel, whatever it is. We need a quantity of measurement of quantity, we need a buyer, we need a seller. But what is happening in CO2 training, the moment we are emitting the CO2, it is going into the air and we have nothing at hand to trade. So how do we trade it for the purpose of trading? All emissions are recorded and certified, and then the certificates are traded. The moment we have the certificates now we are able to trade the certificates. That means when we are emitting, we have a emission certificate. Similarly, once we are getting a permit, so we have a permit certificate. So same certificate can serve in both the purpose, that means allowances at the same time actual emissions. That is how the trading takes place. Now let us summarize that commodity here is CO2 emitted. Measurement is tons of CO2. So one ton of CO2 is corresponds to one certificate or one unit and price is traded as a Euro per ton of CO2. We have a buyers, the mainly emitters of the buyers and sellers. We have EU, which is actually issuing the certificate and there are other players who can also the emitters can also sell and sell and buy. And also there are other small, small players, which will come in the subsequent slides. So we come to the next question in this trading who buys and who sells? You can see the European Union is actually issuing the certificates. So they are the biggest seller or they're putting the certificates into the market. Now we also have a small seller in this in this whole cycle, which is called the foresting companies or you can say NGOs who are plantation companies who are planting. And as we are planting the trees, the trees are going to absorb CO2 and they are also incentivized by giving them a certificate. Based on their plantation quantity, and then they in turns they are able to sell it in the market. Now comes the who are the buyers. The biggest buyers in this market is the emitters. So emitter emits and they need a permit for emissions. So permits are given in terms of certificates and we also have some small traders, like we trade the shares. Like once the CO2 price is low, somebody can buy it and then once the CO2 price is high, somebody can sell it. So this is typically the traders, but they are not actually contributing to the real CO2 project, but they are a part of the emission trading system. So let us summarize the flow. So U is issuing the certificates and these certificates are given to the to the emitters either free of cost a part and a part by they have to buy from the market. Then EU can also withdraw some of the certificate what they have issued, withdraw in terms of redemption of certificate or in case or also they can reduce the circulation of certificate in the market. Then comes the small foresters as we told they get the certificate depending on their forestations and they can sell certificates and they can earn some money and we have the traders who can buy and sell. So this is how is the summary looks like. We are coming to the next part of the question, who is the beneficiary? Where does the money go and where does the money come from? Let's go ahead. As we see this flow of money, the EU is issuing the certificate which is purchased by the emitters and emitters are paying the money. So main flow of money comes from emitters to the EU. And there are two secondary flow of money like the foresters who are also selling the certificates what they're earning by deforestation to the emitters and then the traders in the process of trading. They can also make some money but finally the emitter space for it. Now question comes at well from the money comes to the emitter for this extra payment. If the emitter gives from their own pocket, of course the business may not survive or their profitability will be so low that they will not be interested to continue to this business. So according to the business rule, this emitter has to pass the cost to someone else. So someone else means the person who is buying product from them. So the buying product is the consumers. So you can see the consumers are ultimately paying for the CO2. How, how the customers are paying? Whenever the customers are buying any product, so with the product there is a cost of CO2 directly or indirectly. So sometimes they know they are paying for the CO2, sometimes they do not know. For example, they are buying a product for producing that somebody is using electricity. And for the production of the electricity, they need to see you, they need to pay for this CO2. This is how the whole chain works. And finally the price of the CO2 is coming on the product and whenever this consumer is buying, consumer is paying for it. Okay, let's go to the other side of the picture. So other side, is that where the money goes? Because it's not a small money, it's a billions of euro. So the main money goes to funding research and development projects. And in a process, and also subsidizing the different green project, like windmills, like solar panel, ethanol production. So this is how the the whole flow of the money works. Let us go to the next question, how can trading reduces the emission? This is very important we have seen about the trading, but we need to understand that what is the benefit of UET assistance and how it is going to reduce the reduce the CO2 emission. So emitters are emitting at the same time. Emitters can be a largest contributor for reduction of emission. If the emitters are able to reduce their emission then their product cost will be go low and they are becoming more competitive compared to the market and they can earn more money and that's how they will be encouraged to invest into latest technology of low emission technology and also develop their own work process so that it wastage is minimum. And on the other hand, the companies who are not able to reduce their emission, they will be penalized in terms of their cost will be very high. So their profitability will go down and possibly they will not be able to survive in the market. So this is called the incentive and penalization process. That's how we expect the emitters to to make largest contribution in terms of reducing the emission. Next comes the R&D. So these R&D people, if they are able to develop some technology then there will be low emission in the atmosphere and we will be able to reduce the climate change. Now, similar thing is for this renewable energy, so the moment we are using renewable energies, we are not emitting CO2 or greenhouse gases and that is why it will help us to reduce the emissions and reduce the change in the climate. And then comes the forestations. So naturally once the forestation takes place, the CO2 will be absorbed and our atmosphere will be better. Now here one thing I would like to shortly talk about the circular economy. That means we should be able to use our material as much as possible before we actually reject it. Because the moment we are cycling, we are using CO2 and once we are emitting CO2, once we are producing from the scratch, we are also emitting lot of CO2. For an example, if we are producing one ton of steel from iron ore, our emission is more than two tons of CO2. But if we are using the scrap, recycle the material in the electric arc furnace and then our emission is around 400 kilograms per ton of steel plus some emissions coming from the electricity production. So you can see there can be big difference if we are able to make use of our material as long as possible and as much as possible. So with that we go to the next questions that who creates the rules for trading. I think it is quite obvious that the rules are created by the European Union after consultation with all the different member countries. It's very important to concentrate the member countries because their energy basket may be different in different country and the law can have a different impact. For example, some country has a lot of nuclear energy, so they don't emit CO2, so their CO2 cost will be very low. And there's some country where electricity is produced out of coal, in that case their their cost of energy will be will be quite high. So it is a complex subject and lot of negotiations takes place before the law is finalized so that there is a balance between all plus and minus. So ultimately European Commission for the Energy, Climate Change and Environment is responsible for developing the laws, implementing them and monitoring them their impact and there is a climate action website. So anybody can go there and they can go get lot of latest and deeper informations if they want. And there is a link for it, which I will be giving in the description of this presentation. Now we come to the last part of two questions. Is this trading inside the EU or it is trading international? And is this trading compulsory for the emitters? So answering to the first questions that this system called UETS, it means this is strictly EU system. But however, the other part of the world, they are also trying to understand, they are trying to learn how the UVTS is working and adopting a part of it. But here the two terminology, I just want to mention carbon leakage in CABM because once we are in the international trade, we cannot implement something of our own. It must have must be aligned with others, at least the external trades. Otherwise what will happen? There will be a cost difference, the cost of the European companies will be higher and the cost of the non-European companies will be lower and will not be able to compete. So that is why some kind of compensation is given in terms of carbon leakage and there is a lot of discussion of implementing a cross border adjustment mechanism. So this will be discussed more detailed in the subsequent part. Now, is this studying compulsory for the emitters? Yes, this studying is compulsory for all large emitters. For the small emitters it is not necessary. It is not necessary. But in the subsequent part we will go even more detail that how it is it is decided that who is supposed to be in this scheme and who is not supposed to be in the scheme. So with this we are coming to the end of our part one. So in this presentation we explained different aspects of UET system for in a very simple manner. Now the viewer can have an idea that how this UET system is helping. In the coming parts of this series we shall go more into detail about the UETS mechanism. We have the contract given below, so if you have any questions, you can write to this email so we will be answering your questions. So let's make our earth better. And I would like to thanks to all of you for your time and hope to see you soon in our next part for the time being. Goodbye.