Opinions and recommendations on ETS:

Why does the EU ETS matter for Norwegian gas?

Opinions on ETS

Statoil: Why ETS matters

Statoil is the largest oil and gas operator on the Norwegian Continental Shelf (NCS). Our annual equity emissions from the offshore installations in Norway amount to some 4 million tonnes of carbon dioxide. Norway became part of EU's emissions trading scheme (EU ETS) since 1 January 2008 and Statoil’s emissions on the NCS are consequently included in the European scheme.

Statoil’s relation to the EU ETS goes beyond compliance. Being the second largest supplier of natural gas to Europe and a resourceful implementer of new technologies, it is of primary interest to Statoil to support policy measures that will ensure cost efficiency and a level playing field for competitive industries in addressing GHG emissions. In that context, Statoil believes that a well-functioning EU ETS, driving energy efficiency innovation and fuel switching, should remain the cornerstone of EU climate policy, and calls for policy makers to take actions to restore confidence in the European trading scheme.

Driving energy efficiency and carbon performance through carbon pricing

Offshore activities on the NCS have a long history of carbon taxation, and Statoil is possibly today the oil and gas company in the world with the highest CO2 cost exposure. In 1991, the Norwegian government introduced a carbon tax that is still in place. For the last 10 years the upstream carbon tax on the NCS has varied between €30 and €45 per ton CO2 emitted. According to the White Paper on Climate approved by the Norwegian authorities in June 2012, the tax will rise to €50 per ton CO2 emitted in 2013. This comes in addition to the CO2 emissions allowances purchase under the EU ETS.

As a consequence of this CO2 cost exposure, the petroleum industry on the NCS has realised CO2 emission reduction measures equivalent to nearly 50 million tons since 1991. Statoil is probably today the most carbon efficient upstream producers in the oil and gas industry. In the 2011 International Association of Oil and Gas Producers (OGP) benchmark, the average emission intensity for 35 companies is 23kg of CO2 per barrel of oil equivalent, while Statoil's average was 9kg CO2 emitted per barrel of oil equivalent produced.

The Norwegian experience has also demonstrated that high CO2 cost level is a key driver for the development of low carbon technologies, such as Carbon Capture and Storage (CCS). The CO2 tax was one of the reasons for Statoil's decision to separate carbon dioxide from the offshore well stream and inject it into geological layers deep beneath the Sleipner field. Every year since 1996, Statoil captures and stores around one million tonnes of carbon dioxide from natural gas production at Sleipner.

No shift towards cleaner fuel with the current carbon price

Among the different carbon pricing policy measures, Statoil believes emissions trading should be the preferred one. Market-based policy instruments, such as cap-and-trade, allows for both cost-efficient compliance and for active risk management through trading. Alternative command-and-control type instruments significantly lessen business opportunities, risk control abilities and options for compliance cost management. In a European context they also undermine the level playing field created by European-wide regulation.

Ideally, the emissions market should be driven by scarcity of allowances, creating a cost of emissions (“cost of carbon”) that is high enough to stimulate fuel switching and energy efficiency in the short term, and new technology and carbon-efficient investments in the long term. However, generous distribution of free allowances in combination with overlapping policies and the economic turmoil in Europe has created a situation in which the EU ETS is oversupplied with allowances all the way to 2020, and possibly even further. The price on emission allowances has collapsed to around 8 €/ton of CO2 and individual Member States in the EU currently move forward with national regulations that contribute to undermine the common emissions market.

As part of the European Gas Advocacy Forum, Statoil together with other energy companies showed that switching from coal to gas could help Europe to achieve its goal of cutting CO2 emissions by 80% by 2050. Replacing old coal plants with new natural gas-fired plants could lower CO2 by 60-70% per kilowatt-hour generated – taking into account the entire life cycle, from exploration and extraction right through to decommissioning and disposal. Even the most modern coal plants can emit twice as much CO2 per kilowatt-hour as natural gas combined-cycle power plants.

Despite highly touted climate policies in Europe, Europe’s coal consumption in 2011 increased by 3.3% compared to 2010, and EU coal imports from the US increased by 49%. Analysts diverge on the minimum carbon price required to allow a shift from coal to gas, however all agree that the current level under 10€ is way too low.

The need for policy intervention to restore confidence in the EU ETS and align with long term EU climate ambitions

Statoil sees the EU ETS as the preferred instrument for cost efficient reduction of GHG emissions in Europe.  The EU ETS provides a predictable framework for industry in the long term, rewarding the most carbon efficient solutions, and achieving targeted emissions reductions in a cost effective manner. As the most liquid carbon market in the world, it is serving as a blueprint for emerging cap and trade schemes globally. Harmonisation and linking between these schemes could lead to an international CO2 price.

The EU ETS has succeeded in both creating an EU-wide price on carbon emissions and ensuring that approximately 45% of the EU’s GHG emissions are capped at a level consistent with adopted climate targets. However, the current oversupply of allowances poses a threat not only to the EU ETS itself, but also to the merit of common and market based instruments in climate policy in general. The current situation also undermines the role of natural gas in the future European energy mix.

Statoil has therefore called in favor of an EU ETS recalibration, based on the following principles: (i) that it is a one-off event which is justified by the extraordinary economic circumstances, and that this is communicated clearly; (ii) that adjusting the supply side will go in parallel with setting the overall targets for the years beyond 2020; (iii) that the EU considers introducing a more flexible approach to the target and cap setting for the next phase of the EU ETS.

Making the Green Journey Work, A Position Paper by the European Gas Advocacy Forum, May 2011

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                        ETS - Emissions Trading Scheme