Tradable CO2-permits in Danish and European energy policy

The name of the project was 'Tradable CO2 permits in danish and European energy policy'. The project was conducted in co-operation between Elsamprojekt A/S (project manager), Risø National Laboratory, Aarhus School of Business and I/S Eltra. The three major objectives of the project were: 1) To identify and analyse the economical and political issues that are relevant with regard to the construction of a tradable CO2-permit market as well as proposing a suitable design for a tradable CO2-permit market for the energy sector in the EU. Experience form the tradable SO2 permit market in the US is taken into consideration as well. 2) To present an overview of price estimates of CO2 and greenhouse gas permits in different models as well as discussing the assumptions leading to the different outcomes. Furthermore, the special role of backstop technologies in relation to permit prices is analysed. 3) To analyse the connection between CO2-permit prices and technology choice in the energy sector in the medium and longer term (i.e., 2010 and 2020) with a special emphasis on combined heat and power and renewables. In addition, the short-term effects on CO2 emissions and electricity trade of introducing tradable CO2-permits with limited coverage (i.e., a national system) as well as complete coverage (i.e., including all the countries) in the Nordic electricity system is analysed. Among the conclusions of the project are: 1) The US-experience with an SO2-trading scheme shows that a tradable permit market can work in a non-bureaucratic manner, although there are important differences between CO2 and SO2. 2) The political reality of CO2 emissions reductions implies that it makes sense to start out with a one-sector one-gas emissions trading scheme to get the system underway in a consistent manner. The energy sector is the obvious candidate for such a scheme. 3) The initial allocation of permits is likely to be the most critical point in the establishment of any trading scheme. Undoubtedly, in the initial phase, some kind of free distribution of permits to large capital owners will be necessary for the acceptance of the scheme. In the longer run, the scarcity-induced profits should be distributed as widely as possible. Preferably, this should apply not only between capital owners and workers but also internationally between countries reflecting the fact that everybody has the same right to emit greenhouse gases into the atmosphere. 4) The inclusion of backstop technologies is critical to estimates of the price of permits. 5) the establishment of a CO2-trading scheme will improve the competitive situation of CHP and natural gas technologies, whereas the expected permit prices will not allow new renewable technologies to penetrate the market