|Date||June 23, 2022|
|Speaker||Vincent DUFOUR (Senior Vice President Japan & Korea, EDF International)|
|Commentator||TANABE Yasuo (Consulting Fellow, RIETI / Managing Director, EU-Japan Centre for Industrial Cooperation)|
|Moderator||YAMADA Satoshi (Director for International Projects Promotion, Trade Promotion Division, Trade and Economic Cooperation Bureau, METI)|
Carbon pricing is an instrument that places the burden of damage from greenhouse gases on the large carbon emitters. One carbon pricing system is called the emission trading system (ETS) in which mandatory markets set a cap on emissions for large emitters. An example of a successful ETS is in the European Union (EU) which is home to EDF, an electric utility company largely owned by the French state. In this presentation, Vincent DUFOUR of EDF addresses the EU ETS’ development from the beginning to the present. Also, Vincent DUFOUR touches on EDF’s views on carbon pricing and the EU ETS, and how they relate to Japan.
Carbon pricing is an essential topic to be considered in the dialog between the EU and Japan because it is a key question for the energy transition. The price of a one-ton CO2 equivalent will be a key driver in any kind of system in the future. Therefore, this is an appropriate time to have this session in order to share views about the merits of a well-functioning carbon pricing system in order to meet the CO2 reduction objectives.
EDF is committed to reaching net zero by 2050. On the road to net zero by 2050, there will be a lot to do for a company like ours in order to decide on new investments. These new investments are increasingly indexed to the evolution of the carbon price. This process of EDF putting carbon price as a key driver in investment started more than a decade ago when the carbon price became a strong instrument for EDF’s global strategy, and it has been influencing our major business decisions.
As a company and nation, we are facing a surge in energy prices due to the war in Ukraine. In Europe, the carbon price has been resilient despite the war in Ukraine and surge in energy prices.
At EDF, we have been observing with great interest the new initiative launched by METI to have a nationwide carbon exchange platform, which is intended to serve as the benchmark for domestic firms in their internal carbon price calculations.
What is EDF?
EDF is a French utility mainly owned by the French state, which is our majority stakeholder with around 84% of the total shares of our company. EDF is among the top three largest electricity companies in the world, and we are still an integrated company, which means that we are covering the whole electricity value chain from generation, transmission distribution, energy services and trading, and developing new businesses such as in hydrogen or e-mobility.
We are one of the largest investors in the energy sector with around €40 billion per year invested in new, low-carbon assets. 90% of our generation is carbon free, which means carbon pricing is a key tool for us, and it will be an additional reason to invest in very low carbon assets in the future. Compared to our competitors in Europe, our CO2 emission level is five times less than the European average. Last year, we adopted a new mission statement to reflect this important decarbonization trajectory for the future, and it is driving change to become carbon neutral before 2050. It was adopted with the support of EDF employees, meaning it is at the heart of our strategy and integrated into the behavior of our employees. Our new mission statement is “To build a net zero energy future with electricity and innovative solutions and services to help save the planet and drive wellbeing and economic development.”
EDF has been present in Japan for almost 20 years with a wide range of contacts, cooperation agreements, and utilities, and with whom we develop generation projects in third countries. We will open a new subsidiary in Japan named EDF Renewables Japan (KK), which will be dedicated to projects in the renewable sector and focus on offshore wind in the future.
What is carbon pricing?
Carbon pricing is an instrument that captures the external costs of greenhouse gas emissions. It means the cost of emission that the public pays for damage to crops, health care costs from heatwaves and droughts, and loss of property from flooding and sea level rise is usually in the form of the price of the carbon dioxide emitted. A price on carbon helps shift the burden of the damage from greenhouse gas emissions back to those who are responsible for it and who can avoid it. Instead of dictating who should reduce emissions, a carbon price provides an economic signal to emitters and allows them to decide to either transform their activities and lower their emissions or continue emitting and paying for their emissions. The overall environmental goal is achieved in the most flexible and least costly way to society.
There are two main kinds of carbon pricing systems in the world: mandatory markets setting a cap on emission for large emitters (ETS) and voluntary markets for non-regulated entities engaged in reducing emissions. Mandatory markets are now representing a significant part of global CO2 emissions at around 50% of total CO2 emissions in the world after the launch of the Chinese ETS. We have 23 ETSs globally, including the EU, UK, which is fully linked with the EU system, China, which is limited to the power sector, New Zealand, Mexico, and the Republic of Korea. etc.
ETSs are implemented in countries emitting around 40% of greenhouse gases. It is highly liquid, which is different from voluntary markets that are less liquid. The market is smaller, and the price range of the two systems is a little bit lower in the voluntary markets than in the ETS with a price range from $13 to $100 per ton of CO2.
Some of these carbon markets coexist with national or regional carbon taxes, from the lowest level, which is around $3 in Mexico, to the most important (highest) level, which is $123 in Sweden for carbon tax. It is a growing trend to have carbon markets worldwide. Today, we have 44 countries and 31 provinces or cities that are operating a carbon pricing scheme through a carbon tax or an ETS. If we look at the carbon tax existing in the world, in 2020, we had 53% of the revenue stemming from carbon taxes, while the remainder was from carbon markets. Carbon revenues are directly used or reused by the general budget in order to allocate them for specific environmental and climate friendly development projects. It is important to have CO2 pricing because it gives a strong economic signal, puts value on CO2, and it is gaining momentum worldwide.
EDF’s role in Europe
EDF is heavily contributing to the energy security in Europe and reduction of the European CO2 footprint. Now, we are facing two main challenges: decarbonization and the security of supply, which is a growing concern for all OECD countries. In addition, EDF is contributing to the electrification process of the European economy.
By 2050, Japan intends to increase its electrification rate significantly. Europe will do the same by more than 35% by 2050. We believe that having a CO2 price will help reach this electrification goal in the future.
EDF covers many forms of CO2 emissions in its decarbonization strategy. We used to focus on scope one and scope two, and then we added scope three to our objectives. For scope one, we intend to reduce our emissions by 50% by 2030. For scope three, we intend to reduce our emissions by 28%. We have to convince our clients to also convert themselves to decarbonization and help them with the appropriate tools and services we can provide.
Progressivity of the EU ETS
Considering European carbon pricing, it started with a change in the climate policy or the emergence of a climate policy on the international stage with the Kyoto Protocol. Following the Kyoto Protocol in 2005, Europe decided to take the lead of the movement in favor of carbon pricing, and the European institutions decided to launch the EU ETS. Carbon pricing became one of the key elements of national and regional climate policies to reach the target of limiting global warming to two degrees.
In 2005, the EU ETS was established, and it first targeted the power sector. 17 years later, the EU ETS now covers 41% of the EU's global emissions. It has been very instrumental in helping the EU decarbonize.
The EU Emission Trading Program limits emission of CO2 from various sectors. It issues CO2 allowances and establishes participation in CO2 allowance auctions. The CO2 allowance represents a limited authorization to emit one ton of CO2 from a regulated source. The participants are audited annually and must submit allowance permits matching their emissions. The supply of allowances is capped, and the cap is declining annually.
There are 30 countries in Europe involved in the EU ETS with more than 11,000 power stations and industrial plants, which are included in the system, in the power sector. Until 2019, the EU ETS was a facilitator and one of various instruments. It did not play a central role in decarbonization. At the same time, it gave an orientation for all the sectors involved in the EU ETS. Since the last reform, the EU ETS has been playing an ever-growing role, and now, it is playing a driving role which matches the increase of the carbon price in Europe.
Progressivity has been key during the last 17 years of the EU ETS. Since 2018, it has shown a strong push in the level of the carbon price in Europe. It was clear from the beginning that the EU ETS would not only create a new market, but it would generate an alignment in the efforts to decarbonize all the sectors which would be covered by the new mechanism.
The EU ETS was put into force in four phases. The pilot phase was from 2005 to 2007, which was important because it helped change the culture of companies covered by the ETS because it created new reporting obligations to measure carbon emissions in a systematic manner. In addition, it forced companies to focus more on the carbon footprint from the beginning of the EU ETS in 2005. Then, we moved to a transitional period in phase two, and we saw a drop in prices to nearly zero. After, the ETS was reformed and put back on track in 2018. Two important reforms were conducted on allowances, which were shifted progressively towards auctions and free allowances were distributed to greener companies. Additionally, new sectors were added such as the carbon capture and storage installations, petrochemicals, ammonia, metal industry, and aluminum. Considering the situation after these reforms, the EU carbon price has been gaining importance, and it is still gaining importance despite the energy crisis.
The impact on the power sector
EDF and other larger utilities in Europe accounted for 30% of the ETS emissions in 2015. Since then, importance has been growing on the respective business strategies. It was important to integrate a shift in price because if the CO2 allowance price is €8 per ton, gas is not competitive. However, if the CO2 price is around €35 per ton, gas becomes more competitive than coal, and that is exactly what occurred with a shift from coal power plants to gas power plants in Europe. As a strong price signal, it forced the power sector to decarbonize, and helped it decarbonize and adapt the business model. Most players have reformed their governance and scope of activity, put the carbon price as a key driver of future investments, and shifted from coal assets to gas assets and renewables.
Advantages of a single carbon price
Carbon pricing helps businesses to plan future emission reduction at the local lowest cost to society. The ETS is market based and better for companies than CO2 tax as it provides environmental certainty. On the contrary, without the ETS, it could be hard to motivate business in a systematic manner. Additionally, the absence of a strong, clear signal could inhibit decarbonization and the capacity to follow climate friendly policies. The single most effective policy to make the energy transition a profitable proposition for businesses and society at large is the ETS. The revenues of the CO2 market can be reinvested to finance decarbonized solutions and are the best way to maintain a strong decarbonization trajectory despite a growing volatility on energy prices.
A carbon cross-border adjustment mechanism would benefit Japan
The EU is accelerating on the road to carbon neutrality, and the European Parliament voted for a reform on carbon markets. The next step is the carbon cross-border adjustment mechanism, which will become effective in 2023. It will expand the carbon pricing structures of the EU beyond its borders, which is important for Japan because it will also need to be addressed in Japan. The carbon border tax itself should progressively be introduced for oil refineries; glass, paper, and aluminum industries; the power sector; and energy intensive industrial sectors such as cement, steel, chemicals, and fertilizers. It means that the goods imported within the EU should be covered by equivalent carbon pricing under the ETS.
We believe the cross-border adjustment mechanism could be a game changer. It is important that Japan is able to have a well-functioning and single representative platform to be well-connected to European economies and access the European market easily with this new system.
- TANABE Yasuo:
What EDF is doing is very impactful on the policy side as well as on the global market side, and I have noticed the global stretch of the EDF. What is the strategy of this global stretch? What is your motivation and what is the key for this success?
There are utilities that still use a lot of fossil fuels that might be concerned about ETSs. How did you lobby the European ETS system from your experience stationed in Brussels?
What would you say is the electricity industry's position on the ETS globally, especially in the U.S.? There is emission trading in several states in the U.S., but there is no federal system of emission trading. How do you see this situation?
How do you see the Japanese situation regarding carbon pricing? The Japanese industry supports a carbon pricing and cap and trade-type ETS. METI promotes voluntary framework including emission trade, but there is no cap-and-trade system or mandatory requirements. The Ministry of Environment seems to prefer a carbon tax. In addition, the Ministry of Environment prefers to raise the carbon tax. How do you see this situation?
EDF is famous for having nuclear power sectors inheriting AREVA. However, the nuclear sector has been a bit of a burden in terms of companies’ profit. What do you see in terms of having this nuclear sector within your company?
- Vincent DUFOUR:
Historically, our international development started at the end of the 90s. It was strongly backed by the French government, and it came at the same time as when the European energy markets were deregulated or started to be deregulated. The notion of investing in decarbonized assets began in 2014, which was also when we started to support a stronger CO2 pricing. We invest between €12 and €14 billion each year which was mostly in Europe until the end of 2018.
In our strategic plan for 2030, we plan to triple our international investments with a focus on the Indo-Pacific, where we have started to partner with various Japanese companies. Basically, that is the way we shifted from a French-based company to a European company, and then now globally.
Regarding ETS lobbying, we moved from an originally skeptical approach to a progressive mindset when we decided to put decarbonization at the center of our strategy. With this new strategy, we started to be much more committed to having a single carbon price of reference to drive our transformation. Therefore, we have been active in lobbying since 2012 when the full ETS was not in a good position. At that time, we established a large coalition with other energy producers to advocate for a change in the linear factor and to withdraw a huge number of allowances from the markets to make the price increase. Since then, the ETS has been put back on track.
Globally, the electricity industry has also moved from a skeptical position to a much more committed stance. For example, in Canada, Hydro-Quebec and Ontario Power are very committed. In the U.S., at the national level, the electricity sector is not as powerful as the rest of the energy sector. The energy sector is very much involved in the shale gas exploitation, and they still have a strong influence on national politics.
At the regional and local levels, the situation is different because states like California are early adopters. Some states have succeeded to have local or regional legislation in favor of carbon pricing. The federal structure of the U.S. is helping to have the regional or local markets gather themselves, which could be a key tool for large emitters. It would be better to have a national ETS functioning in the U.S., but that will not come anytime soon.
In Japan, Keidanren is focusing on the long term and encourages a cap and trade. We believe that there are many advantages with compatibility with the EU ETS in the long run, by providing predictability. Moreover, the ETS is progressive, so the cap-and-trade system can be adjusted provided you discuss it with the different sectors. Carbon taxes are less predictable and less progressive, which can be seen as an additional burden and cost for companies while the ETS is more adjustable. In addition, the ETS is less subject to political changes, and it is a market-based approach. It is important for private companies to have this predictability and market-based approach.
Regarding the voluntary market, there are more than 400 members right now. It is a good start to unify a growing number of players and share the same direction as the EU ETS did for most of the power sector companies in Europe. However, it may not be enough to align Japan with other OECD countries which already have ETSs.
The nuclear sector is often a profit loss sector. However, not all of the nuclear sector is profit loss. Existing nuclear plants are profitable and with the CO2 prices growing, they are becoming more profitable. If nuclear plants can operate with robust safety standards, it creates additional value for companies like EDF and their clients because the electricity price will no longer jump, and they will be much more predictable in the long run.
Nuclear power is one of the most efficient ways to combine the two key issues which will remain in the global landscape for the coming decades. The first one is massive decarbonization. We need to have massive decarbonization, and Prime Minister Kishida emphasized the importance of having 100 nuclear reactors, which would be the equivalent of one million tons of LNG. This gives a clear economic signal that Japan has something that is profitable and massive for decarbonization.
The second point is the importance of the security of supply with renewables, which will remain intermittent in Japan. In the future, nuclear power will provide a strong baseload, so it is very useful to ensure a higher level of the security of supply. It will require a high cost for new nuclear power plants, but the return on investment will be valuable for many years.
- YAMADA Satoshi:
Who decides CO2 emission values?
- Vincent DUFOUR:
The EU ETS, which is organized as a part of legislation, defines the goal and the level of emissions, permits, and allowances which can be used. Auction is free, and all allowances are capped. Now, we have an auctioning system, which is more of a market-based system than a capping on allowances that we had in the beginning, which has been decided by the European institutions.
- TANABE Yasuo:
Are you hedging to respond to fluctuation of the CO2 price?
- Vincent DUFOUR:
We have coverage of the matter in our trading activities. However, that is not the most important part because we are an industry and as an industry, we see the ETS or the carbon pricing as a driver. We have two instruments to cover our risk, and trading is used to do so. We are doing it, but it is not a key tool to gain profit.
*This summary was compiled by RIETI Editorial staff.