As efforts to protect the environment and decarbonize have increased in recent decades, policymakers around the world have devised a variety of schemes to reduce industrial emissions. The Kyoto Protocol in 1997 committed developed nations to reducing their greenhouse gas (GHG) emissions by a defined amount from 1990 levels by 2012. The treaty was never submitted for ratification in the United States Senate, which unanimously opposed it because developing nations such as China were not included. On the other side of the Atlantic, the Kyoto Protocol was received much more favorably, with the (then) 15-member European Union (EU) ratifying the treaty in 2002. In 2005, the EU put the Emissions Trading System (ETS) is in place as a mechanism to help reduce emissions from power plants, industrial facilities and commercial aviation, which covers almost half of the EU’s total emissions. In today’s RBN blog, we explain the European cap and trade system, examine how the ETS is affecting the EU refining industry as a whole and drill down to the refinery level to discuss disparities in exposure to the carbon cost of a refinery in the Proxim.
This is the second part of our series, which delves into the complex world of oil refining and carbon regulation, and how carbon emissions are likely to increasingly affect the competitive playing field for oil refineries. Atlantic basin. In Part 1, we covered the extent of emissions from refining operations (which account for 3% of total US GHG emissions) and how the complexity of the refinery and oil shale plays a role in emissions intensity . We delved into where these emissions come from within the refinery and some ways to reduce them, and how, due to the nature of refining, the only way to make drastic reductions in emissions was through expensive carbon capture and sequestration (CCS). We also discussed some mechanisms that governments can adopt to “nudge” refineries and other emitters to invest in carbon capture and reduce their global emissions. Today, we look at one of three approaches: cap and trade.
In a cap-and-trade model like the EU ETS, the government sets a certain threshold for a regulated activity (the “cap”) and then lowers the cap over time. In this case, the annual GHG emissions serve as a regulated activity, with the limit reduced each year, usually by a couple of percentage points, until the specific emissions target is reached. The ‘allowances’ work as carbon credits in the ETS, with each one representing 1 metric tonne of carbon dioxide equivalent (MTCO).2e) emissions. They are distributed to emitters in a number of ways (more on that in a bit) and industries covered by the ETS must deliver an EU quota each year on April 30 for each metric ton of emissions from the previous year A secondary market is established so that issuers can freely trade allowances with each other to cover imbalances between an issuer’s emissions and available allowances – the ‘trading’ component of the scheme.
