APPENDIX 17
Memorandum from Emissions Trading Group
The participating companies and associations
listed below, working with Government, have developed the attached
outline proposals for a UK Emissions Trading Scheme open to all
companies operating in the UK.
BENEFITS OF
THE SCHEME
The scheme is proposed as a means to ensure
delivery of industry's contribution to UK's emission reduction
targets with an improved degree of economic efficiency. It would
help to mitigate the effects of the requirement to meet these
environmental targets on the competitiveness of UK industry. It
would also have the potential to engage a wider range of participants
in emissions reduction than those that are currently engaged in
the Climate Change Levy (CCL) negotiated agreements. The scheme
could potentially provide the impetus for increased business investment
in environmental projects in other sectors (domestic/transport
etc). It would also provide the Government and business with experience
of carbon trading which would enhance the UK's influence in international
negotiations.
OUTLINE OF
THE PROPOSED
SCHEME
1. The scheme would be open to all companies
operating in the UK, who committed themselves to binding greenhouse
gas (GHG) limits agreed by Government under the rules of the scheme.
2. The scheme as a whole would be overseen
by an Emissions Trading Authority. The scope and composition of
this body would be further designed in discussions with Government.
3. The trading scheme would comprise three
categories of participant in trading in a common market. These
categories would be:
(i) Firms that had agreed with Government
annual emission limits for at least the period covered by the
trading process (the "absolute" sector).
(ii) Firms which had accepted an output related
emissions target under a CCL negotiated agreement (the "unit"
sector).
(iii) Firms which delivered specific GHG
emissions saving projects.
Absolute Sector Features
4. Companies in the "absolute"
sector would received tradable permits that matched an annual
emissions limit (agreed with Government and covering at least
the period covered by the trading process) expressed in tonnes
of CO2 equivalent. They would have an obligation to demonstrate
(with independent verification) that they had sufficient permits
to cover the actual level of emissions produced in each year.
5. Firms which entered into CCL negotiated
agreements with Government on the basis of an absolute emissions
limit and who wished to participate in the scheme would received
permits equivalent to the limit on emissions that was embodied
in these agreements.
6. Where firms were not involved in CCL
negotiated agreements, their limits would initially be set predominantly
by grandfathering (based on past emissions) combined with a commitment
to binding emissions reduction. The basis of allocation for years
after 2012 would be reviewed in 2005.
7. It is proposed that there should be a
tax incentive for firms (outwith the CCL Negotiated Agreements)
that volunteer to take on a binding emissions cap under this scheme.
Unit Sector Features
8. Firms which had agreed to an output related
target under CCL negotiated agreements would not receive permits
directly but would have the right to trade permits (subject to
certain limitations which will ensure the international credibility
of the scheme). Purchased permits could be used by these firms
to assist them in meeting their targets.
Project Sector Features
9. The scheme would allow for GHG savings
projects to generate credits which could be used to meet targets
or which could be sold into the market. Eligibility and emission
reduction rules would ensure the integrity of project based credits
(in particular the requirement that such projects led to genuine
GHG reductions compared to baseline levels).
Generic Features
10. Firms would have the option to agree
targets for all six greenhouse gases or for CO2 alone. Permits
would be denominated in tonnes of CO2 equivalent (using internationally
agreed conversion factors for other GHGs).
11. Mechanisms would be included to provide
equitable treatment of new entrants whilst preserving the integrity
of the trading scheme as a whole.
12. Firms could "bank" their unused
permits for use in future years—but subject to provisions
that would limit the overall level of banking into the Kyoto commitment
period.
13. Firms failing to meet their targets
would have to buy permits to cover any shortfall. If they failed
to do so, or otherwise failed to follow the rules of the scheme,
they would face penalties agreed in advance with Government.
14. International trades in permits and
other Kyoto mechanisms such as Clean Development Mechanisms (CDM)
and Joint Implementation (JI) would be recognised in the scheme
once the rules covering these matters had been agreed.
15. The Government would need to provide
assurance that firms participating in the scheme would be considered
to meet Integrated Pollution Prevention and Control Directive
(IPPC) energy efficiency requirements without the need for prescriptive
application of Best Available Techniques on a site by site basis.
16. The rules of the scheme should be developed
in a way that does not present barriers to the involvement of
the electricity generation sector. Its involvement would require
special consideration in the design of the scheme due to the interaction
with Government energy policies, and the need to avoid "double
counting" emissions between consumers and producers of electricity.
NEXT STEPS
The outline proposals remain under development,
and further work is required before they could be put into operation.
In particular, the following areas need to be addressed in the
context of more widespread consultation on the scheme.
The nature of Government support for the scheme.
Clarification of other outstanding issues, in
particular;
(i) integration with CCL negotiated agreements;
(ii) participation of the electricity generation
sector;
(iii) status and scope of Emissions Trading
Authority; and
These issues will need to be clarified before
detailed work to establish the legal and contractual framework
of the scheme can be commenced.
Guidance on the schemes from the EU to ensure
that it does not present concerns to the competition authorities.
OUTLINE PROPOSALS FOR A UK EMISSIONS TRADING
SCHEME
1. BACKGROUND
1.1 The Kyoto Conference on Climate Change
in December 1997 proposed the establishment of a legally binding
agreement on reductions of greenhouse gas (GHG) emissions by developed
countries. The EU has agreed to reduce emissions based on a basket
of six gases by 8 per cent of 1990 levels by the period 2008-12.
The UK's legally binding target under EU burden sharing will be
12.5 per cent of 1990 levels by 2008-12—ie greater than
the 8 per cent for the EU as a whole. The Protocol resulting from
Kyoto identified emissions trading as one of the means by which
reductions could be achieved. International Emissions trading
makes environmental sense because GHGs have a global effect.
1.2 Emissions trading at a national or international
level enables industry to achieve specified reductions in carbon
emissions in the most economically efficient way. Companies are
allocated an emissions target. Those that can reduce emissions
at least cost can go further than their target and sell the excess
to companies who are finding it more difficult or expensive to
reach their target. Conversely, those companies which have found
it difficult to reduce emissions can buy the extra permits they
need from those who have gone further than they needed to, effectively
paying someone else to do their abatement for them. Following
the Marshall report of November 1998 which recommended the development
of a pilot emissions trading scheme with interested players, the
Government has been keen to encourage emissions trading under
the negotiated agreements, as a way of creating flexibility for
businesses in meeting their targets.
1.3 In his Budget statement of March 1999
the Chancellor announced proposals for a climate change levy to
apply to all business energy users from 1 April 2001 wholly recycled
via a reduction in employers national insurance contributions
and investment in alternative energy and energy saving technology.
The Government is currently negotiating sectoral agreements with
energy intensive industries whereby climate change levy reliefs
will be available in exchange for commitments to challenging energy
efficiency targets under the Integrated Pollution Prevention and
Control (IPPC) Directive.
2. COMMITMENT
OF PARTICIPATING
COMPANIES
2.1 Against this background, the development
of a UK Emissions Trading Scheme (ETS) has been taken forward
by an Emissions Trading Group (ETG)—set up following an
initiative by the CBI and ACBE—and involving representatives
from business and Government. (Participants are listed in Annex
13.) Through a combination of various papers from within the group
and specialist consultancy input the ETG has carried out a wide-ranging
study of the design requirements of an ETS including experience
from the US, Norway, Canada, Denmark and New Zealand.
2.2 The broad framework of an ETS has been
agreed and the participating companies undertake to work together
with Government on the remaining details of the scheme with the
aim of having it operational as soon as possible and no later
than 1 April 2001. Progess of this scheme is contingent on Government
action detailed in Annex 1. A work plan for this purpose is at
Annex 2.
3. BENEFITS OFFERED
BY A
COMPREHENSIVE UK EMISSIONS
TRADING SCHEME
(ETS)
3.1 We believe that the establishment of
a UK ETS which is open to all UK companies would make a major
contribution to the achievement of the UK's environmental policy
objectives and obligations. In particular it will assist the UK
to meet its legally binding target under EU burden sharing of
12.5 per cent of 1990 levels by 2008-12 with an improved degree
of economic efficiency and with greater assurance.
3.2 Our proposals for a comprehensive UK
ETS should also ensure that commercial benefits will accrue to
the generality of UK industry. These would vary according to category
of participant. Those who have negotiated agreements under the
CCL would be able to meet set targets with an improved degree
of economic efficiency. We propose that those not in negotiated
agreements should receive tax incentives in return for binding
emissions reductions targets. Overall, the scheme will help to
mitigate damage to UK competitiveness arising from the requirement
to meet our environmental targets.
3.3 In addition, we see a UK ETS as assisting
in developing expertise and international trading opportunities,
including offering access to CDM and adding to IPPC flexibility.
4. PRINCIPLES
In order for any emissions trading system to
be successful it must meet certain criteria:
Environmental rationale—the trading system
must, and must be seen by all parties, to be achieving a valid
environmental objective.
Economic rationale—the trading system
must, and must be seen by all parties, to be more flexible and
cost-effective than other ways of achieving the environmental
objective.
Credible—the system must be credible since
only credible systems succeed. Hence, the administrative procedures
must be adequate to ensure compliance with the climate change
goals. There must be an element of trust since in many cases pragmatic
solutions to problems will be needed. Appropriate monitoring and
verification will enhance credibility.
Simplicity—simplicity is essential and
deviations from simplicity should only be introduced when demonstrably
necessary. Multitudes of academic and institutional studies, of
every increasing complexity, have been undertaken seeking illusionary
perfection. No system will be perfect and good simple, pragmatic
solutions will succeed where more complex ones will fail.
Equity—without perfect knowledge (in which
case there would be no need for trading) any system will be inequitable
particularly during the early years. In a successful system there
will be something for everyone and inequities will rapidly diminish
with time. Since the valuation of companies and their investment
policies have been based on certain explicit and implicit rights
it is important that any trading system does not introduce a step-change
shock to the status-quo but enables the achievement of the desired
objective.
Transparency—the system must be transparent
so that there is national and international confidence in the
system. An imperfect system with good transparency is to be preferred
to any system with poor transparency.
Credit for past action—the system must
give credit for action already taken which has resulted in certifiable
GHG reductions.
Certainty—in order to inspire business
confidence, encourage innovation and investment there must be
a high degree of certainty so that business can invest. This means
that allocation must be as far into the future as possible and
that permits must have long validity.
Inclusive—the process should be as inclusive
as possible in the long-term though some restrictions will be
necessary in the short-term.
5. COVERAGE OF
A UK ETS
5.1 The UK ETS would be voluntary and open
to all companies. Companies would be able to choose whether to
participate but once committed to participation would be bound
by [regulation or contract]. All companies operational in the
UK, partnerships and joint ventures and other organisations such
as NGOs would be potentially eligible to participate. Foreign
companies could join via their UK national arms; trading subsidiaries
would join at subsidiary group level. Further detail on the basis
of participation in the scheme is included in Annex 12.
5.2 The market would be open to participation
by companies in the following ways:
(i) Companies could become core participants
by accepting an absolute cap on their emissions. These firms are
referred to henceforth as the "absolute" sector.
(ii) As a special case, companies which have
entered into CCL Negotiated Agreements with Government based on
energy or carbon efficiency may join the scheme with a target
expressed in terms of emissions per unit of output. These firms
are referred to henceforth as the "unit" sector.
(iii) Firms may also generate GHG "credits"
for sale by undertaking specific GHG emissions reduction projects.
These "credits" would be interchangeable with carbon
permits used in the "absolute" and "unit"
sectors—and, for simplicity of language, are referred to
as "permits" in the rest of this document.
5.3 Firms would be able to participate in
the scheme using all six greenhouse gases—provided that
they were measurable, monitorable, verifiable and reportable.
They would be converted to CO2 equivalent using IPCC conversion
factors. If companies wish to include gases in addition to CO2
then all GHGs must be included after a suitable transitional period
to allow for verification. The unit of exchange would be a permit
or credit representing a tonne of CO2 equivalent.
5.4 Trading would not remove the obligation
for a site to meet specific IPPC targets for GHGs other than CO2.
Companies would not be able to buy permits to enable them to meet
their IPPC targets without making real improvements. However,
a firm that implemented improvement projects (be they under Government/EA
regulation or voluntary) that result in reductions in GHG emissions
below their targets would be able to trade the CO2 equivalence
of the improvement relative to the target.
6. OPERATION
OF THE
SCHEME
6.1 The Scheme would entail the allocation
of permits in response to agreed targets, the buying and selling
of such permits through a regulated system and end-year reconciliation
against targets. Targets would be aggregated, as necessary, from
site to company level.
6.2 There would be provision for participants
to sell banked permits (see paragraph 7.2) and leave the scheme
without penalty in cases where agreed obligations had been met
or in the event of some force majeure.
7. NATURE OF
PERMITS
7.1 Each permit would convey the right to
emit one tonne of CO2 equivalent in a specific year under the
rules of the scheme. Conversion to CO2 equivalent would be in
accordance with factors published by Government; it would be important
that these factors correspond to internationally agreed conversion
rates. Changes to these factors must be well publicised, predictable
and gradual. The permit would transfer the right to emit and the
seller would be accountable for meeting their reduced allocation.
Each permit would have a unique serial number traceable to its
site of origin.
7.2 Banking (the ability to carry forward
unused permits to future years) would be a practical necessity
but would need to be subject to various conditions. In order to
ensure that the ETS delivers it share of the Kyoto agreement the
overall amount of banked permits available for use in the market
in the commitment period should be no more than [x] per cent of
the total market size. Banked permits should be subject to a small
levy to discourage hoarding. Under this levy firms would have
to surrender free of charge to the Emissions Trading Authority
[1] per cent of their banked permits each year for resale. Borrowing
would not be permitted.
7.3 Permits would be issued to companies
on the basis of sites they held. Rules for acquisition and disposal
of sites would need to be drawn up to prevent monetary distortion
but permits could be traded independently of the site to which
they relate. In the event of a liquidation, permits would remain
with the permit holder to be disposed of by the liquidator.
8. ALLOCATION
OF PERMITS
8.1 Permits would be issued by the Government
and allocated (by the Emissions Trading Authority) for the period
2001-12 to the entity which owns the relevant assets. This consistent
approach between 2001-12 would provide reassurance to those taking
investment decisions. However we propose that the basis for allocation
post 2012 should be reviewed in 2005 (once national targets for
the second Kyoto commitment period are known) so that changes
can be considered well ahead of later Kyoto commitment periods.
8.2 In agreeing the allocation of permits
the general approach would be that the past emissions reductions
of participants would be allowed for through grandfathering with
the expectation being that the backward look would normally be
for five years (or longer if certifiable data is available). Along
with this allocation firms would agree a target for emissions
reductions by the commitment period (norms for this target may
have to be published by Government to remove the requirement for
firm by firm negotiations). Beyond 2012 grandfathering might need
to be replaced by benchmarking, rolling grandfathering or auction.
Allocation issues are discussed in more detail in Annex 3.
8.3 Firms that agreed an "absolute"
target for emissions with the Government as part of a CCL negotiated
agreement would be allocated permits in line with those targets,
and the general principles above would not apply.
8.4 The trading scheme would provide firms
in the negotiated agreements with the means to deal with any difficulties
that they may have in meeting their targets through buying permits,
rather than having to take drastic action or to seek to re-negotiate
their agreements with Government. Re-negotiation of targets set
would be particularly undesirable from the point of view of the
long term credibility and transparency of the market. If the Government
did agree to re-negotiate targets under a negotiated agreement
with a firm or sector, the Emissions Trading Authority would expect
to be consulted in the process.
9. HOW PERMITS
WOULD BE
OBTAINED
9.1 Permits would be issued free of charge
by the Government via the Emissions Trading Authority.
9.2 The UK ETS would combine cap and trade
with baseline and credit. Participants in the UK ETS would receive
permits in one of the following ways:
(i) Firms in the "absolute" sector
would receive permits equal to the emissions cap that they had
agreed.
(ii) Firms in the "unit" sector
would not receive permits directly—but would be able to
trade in permits. If they were beating their efficiency targets
then they would be able to sell permits to other firms. If they
were not meeting their targets directly they would be able to
buy permits to make up the difference.
(iii) Firms undertaking a specific approved
GHG emissions reduction project would receive a grant of permits
equivalent to the savings from the project.
10. TRADING
10.1 All participants in the trading scheme
would be able to buy and sell CO2 equivalent permits. it is envisaged
that trading would take place electronically with all trades (and
the initial allocation of permits) being registered with an Emissions
Trading Authority (see 14 below). Transactions would be subject
to a fixed settlement period. The process would be transparent—with
prices visible to all participants and permits remaining traceable
back to their point of origin once sold (this is to aid the international
verification of the scheme).
10.2 Outside parties would also be able
to enter the market and trade in CO2 permits, subject to registration
with the Emissions Trading Authority. These could include brokers,
agents or NGOs. It is envisaged that initial trading would be
on an over the counter basis, ie spot trading on variable terms
and conditions. In due course an Emissions Trading Exchange might
be established but in the short term all that would be needed
would be a registrar to centrally register all trades.
10.3 Although all permits will be traded
in a single market the existence of two main categories of market
participant ("absolute" and "unit") requires
special consideration to ensure that the quality of what is being
traded in the market is maintained. This requires that:
(a). Verification standards for both groups
of participant are the same.
(b). The fact that the "unit" sector
can meet their targets whilst growing output (and thus potentially
emissions as well) does not lead to a situation where permits
from the "absolute" sector become unacceptable internationally
because they are not related to emissions reductions.
The rules proposed to deal with these concerns
are set out in Annex 4. In particular the latter concern (output
growth in the unit sector) would be addressed by a "gateway"
which would control net sales from firms in the "unit"
sector to the "absolute" sector. [This limit could either
be set at zero or a set maximum percentage.]
10.4 Provision would need to be included
under the CCL negotiated agreements to allow permit trading to
be of value to firms in meeting their targets under these agreements.
11. GHG REDUCTION
PROJECTS
11.1 Additionally all firms would be able
to propose GHG reduction projects to gain permits. These would
need to be approved [by the Emissions Trading Authority] as set
out in Annex 7. In order to avoid double-counting, such projects
could not relate to the GHG emissions of firms elsewhere within
the trading scheme (or CCL negotiated agreements).
11.2 Potential participants in this category
could include firms with projects to reduce GHG emissions through
working with their suppliers, firms with activities not currently
affected by CCL or, eventually, firms wishing to promote projects
in the household and transport sectors, CDM/JI or sinks. GHG savings
from all individual GHG projects would require equivalent verification
to those elsewhere in the scheme.
12. THE ELECTRICITY
GENERATION SECTOR
12.1 The Electricity Generation sector is
a key source of GHG emissions in the UK, and it is highly desirable
that they become participants in the overall trading scheme. Entry
under either an absolute cap or a unit efficiency basis could
be considered—but, due to the size of the sector and the
possible complexity of issues involved, particularly the interaction
with wider Government energy policy, it is suggested that the
rules for entry of this sector would need to be the subject of
separate consideration. It is important to ensure that the general
rules of the scheme are developed in a way that does not present
barriers to the involvement of generators. It will in all cases
remain open to electricity generators to propose specific GHG
reduction projects as set out in 11 above.
13 NEW/LATE
ENTRANTS
13.1 Firms volunteering to join the trading
schemes after it had been initially set up can be split into two
categories:
— Late Entrants—Firms with sites
which were in operation (and producing emissions) before the start
of the trading scheme.
— New Entrants—Firms entering
the market with new capacity that did not exist before the start
of the scheme.
13.2 Late Entrants would be allocated permits
on the basis of the general rules set out in section 8 above.
13.3 New Entrants must have a fair opportunity
to access permits. In practice, this means that all companies
wishing to invest in new capacity (and therefore create new emissions)
should be on an equal basis with other companies in their sector
whether or not they have existing plant in the UK. This requires
that different rules be in place for the "unit" and
"absolute" sectors.
13.4 If a sector is the subject of a negotiated
agreement that has set a target for CO2 equivalent per unit of
output then new entrants will also be expected to adopt a "unit"
target. They will thus be on an equal basis to any other firms
participating in the sector who do not have their ability to increase
output constrained by an emissions cap.
13.5 If the sector is subject to an absolute
GHG emissions cap, then all participants (new and existing) will
need to obtain additional permits if they wish to expand capacity.
Existing players may be able to generate surplus permits by increasing
the efficiency of existing operations or closing down plant. Alternatively
they may buy permits from the market. New entrants will have to
buy permits from the market.
13.6 The requirement for new entrants to
buy permits in order to add capacity in the "absolute"
sector need not be considered a barrier to entry, as existing
players also face similar costs (buying permits or investing in
efficiency). However there is a concern that there might not be
sufficient liquidity in the market to allow new entrants to buy
at a reasonable price.
13.7 In order to address this concern it
is proposed that permits should be made available through two
mechanisms:
(1) The Government should issue a small additional
tranche of permits ([1 per cent] of total allocated), and these
should be auctioned on a regular basis to all comers. Proceeds
from this auction to be retained by Government.
(2) A small percentage of banked permits
[1 per cent] must be surrendered annually [to the Emissions Trading
Authority] (see 7.2) for regular auctions to all comers with the
proceeds being re-circulated within the scheme.
These two mechanisms would ensure the availability
of permits.
13.8 The position regarding new entrants
would be reviewed (along with the overall allocation process)
in 2005. This would examine the continuing need for the methods
mentioned above and other possible methods of allocating permits
to new entrants.
14. EMISSIONS
TRADING AUTHORITY
14.1 An Emissions Trading Authority could
be established to take overall responsibility for the ETS. This
would be a regulated non-profit organisation [Further work is
required on the precise relationship of this body with Government
and the basis of its funding—see Annex 11]. Duties to be
considered for the Emissions Trading Authority could be:
— Approval and registration of entrants
to the scheme.
— Issuing of CO2 equivalent permits,
perhaps with an independent appeals mechanism.
— Registration of all trades and administration
of trading market.
— Monitoring of firms compliance with
emissions targets including verification.
— Administration of penalties for non-compliance.
— The issue of an Annual Report on
progress as a contribution to UK/Kyoto Targets.
— [Registration of certified verifiers/accreditation
of brokers?]
Some of these tasks may be delegated (for example
the administration of the trading market).
14.2 Because entities would be transacting
the right to emit GHGs as opposed to GHGs themselves, it seems
likely that trading would be subject to the provisions of the
Financial Services Act and be overseen by the Financial Services
Authority.
14.3 The fiscal treatment of permits will
need to be reviewed to ensure that it does not create a barrier
to trading.
15. MONITORING,
VERIFICATION AND
COMPLIANCE
15.1 Monitoring, verification and certification
procedures for GHGs are well established and discussed at Annex
7. In essence, each firm would be obliged to record their emissions
according to an internationally accepted methodology using standard
conversion factors published by DETR such as those in Annex 7,
report these at regular intervals to the Emissions Trading Authority
and demonstrate that they had sufficient permits. They would need
to demonstrate that their emissions had been adequately verified
using a certified registration body with international recognition.
The verification process would vary according to category of participant
("absolute", "unit" or project) but would
be of equivalent rigour.
15.2 [The Emissions Trading Authority] would
validate the verification process with periodic audits.
15.3 Penalties would apply in the event
that firms either failed to comply with the scheme rules or with
their agreed cap. Some illustrative examples are included in Annex
9 which addresses compliance and penalties. It is envisaged that
minor variations from CCL targets would be met by firms buying
permits, or if they failed to do so, by penalties under the trading
scheme rather than removal of levy concessions or a requirement
to renegotiate agreements. However, a firm in a negotiated agreement
would retain the option to take penalties under the agreement
if that was preferable to them. The Emissions Trading Authority
would be able to expel firms that persistently break the rules
of the trading scheme and refer them to Government for removal
of their levy concession.
16. INCENTIVES
TO PARTICIPATE
16.1 Each potential participant in the UK
ETS would need to consider various incentives including:
— The opportunity for cost reduction.
— The opportunity to make trading profits.
— Flexibility in the application of
IPPC energy requirement to their plant.
— Preparation for expected future international
opportunities.
— Preparation for expected future legislation.
— Potential to develop emissions trading
expertise.
— Corporate positioning on environmental
issues.
16.2 It should be recognised that companies
participatiing in the trading scheme would in some cases be taking
on additional risk. Firms that volunteer to join the scheme and
accept a cap on their emissions (as opposed to firms who have
already accepted a cap/unit target as part of a negotiated agreement)
would incur additional expense to meet targets or pay penalties.
Although direct savings in CCL from lower energy consumption provide
an incentive to improve efficiency and thus cut emissions—they
do not provide any incentive for a company to take on a binding
emissions reduction target.
16.3 If the scheme is to attract a wider
participation from UK companies than those already in the CCL
negotiated agreements then an additional incentive will be required.
This is especially the case for the early phase of the scheme
where the price of permits is not well established. It is suggested
that the most obvious means to encourage wider participation would
be to provide a tax incentive for companies that volunteered for
the scheme outwith the negotiated agreements.
16.4 Although we agree with Marshall that
companies with very low levels of energy use and small companies
would not want to volunteer, this still leaves a significant number
of other companies which are not covered by the negotiated agreements.
We calculate that the emissions from those companies could amount
to approximately 14 million tonnes of carbon.
16.5 The tax incentive would need to be
set at a level sufficient to attract companies to participate.
In exchange for this, participating firms would need to accept
an emissions cap based on the initial allocation principles set
out above with the target to achieve emissions reductions.
17. COMPATIBILITY
WITH INTERNATIONAL
AGREEMENTS AND
IPPC
17.1 A UK ETS would need to be capable of
dovetailing with future international schemes so that UK firms
can benefit from international trading. International trades could
be accepted as a source of additional permits and registered with
the Emissions Trading Authority whilst international sales of
permits could be registered with the Emissions Trading Authority
and deducted from the firms balance of permits. It is envisaged
that the UK ETS could progressively embrace international requirements,
bearing in mind in particular that these will be geared to an
absolute emissions cap.
17.2 In the meantime, the creation of a
UK ETS would provide an opportunity to develop expertise in the
prospective international market place. it would also be possible
for firms to be able to acquire permits on the basis of CDM schemes
when these become operational, (possibly in 2000) and use them
in the UK system.
17.3 In order to facilitate bi-lateral international
trading (ie between companies) it is important to ensure that
firms are deemed to be entities. This issue is due to be resolved
at COP6.
17.4 Within international negotiations,
it will be important to press the claims of verification mechanisms
developed in relation to the UK ETS and to flag up that supplementarity
(concrete ceilings) should at least not be applied disproportionately
and preferably avoided completely as unhelpful to the introduction
of trading. It will also be necessary to resolve issues of international
trading liability.
17.5 On GATT and GAS issues it will be necessary
to secure confirmation of preliminary legal advice that elements
of emissions trading are not goods or services for these purposes.
17.6 It is vital that participation in the
UK ETS via a target is deemed to be a fulfilment of IPPC Energy
Efficiency Targets. Emissions trading must not be ruled out by
unduly prescriptive IPPC permit conditions as to the methods to
be used to meet requirements for energy efficiency, eg any suggestion
that they be applied on a site by site basis and/or are driven
by the presence of a local pollutant (whether or not one of the
six GHGs). This concern is addressed further in Annex 9.
17.7 We recognise that any additional tax
incentive must not fall at the EU state aid hurdle; the aim should
be to avoid suggestion of distortion between company sectors.
17.8 It is not thought that the proposed
scheme violates any EU competition laws. However, it may be helpful
to obtain guidance on this matter from the Commission.
17.9 It is expected that trading under the
scheme will come under the UK FSA and may, in future, be affected
by European financial services legislation.
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