Examination of Witnesses (Questions 280
- 289)
WEDNESDAY 15 DECEMBER 1999
MR PETER
AGAR, MR
MICHAEL ROBERTS
AND MR
PAUL EVERETT
280. Essentially you are arguing the Government
should pay rather than this being a financial liability on the
industry?
(Mr Dickinson) I think Government has a choice. If
Government is serious about wanting to engage business why only
under the current set of negotiated agreements, which as I say
is a fairly narrow set of business? It had a choice to extend
the current negotiated agreements, and we discussed about that,
and there are pros and cons of doing that. It had a choice to
encourage them to enter into taking on absolute targets on a voluntary
basis. It could also put mandatory targets on them, of course.
The Government could start putting forward legislation but I do
not think that is on anybody's agenda at the moment, to say that
you should start putting mandatory targets in place. If you are
asking industry to volunteer, there are many companies that will
volunteer at very low cost but business is taking on a cost, if
it has the choice to take on the cost or not, typically a business
will not take on a cost. So if Government wants to induce business
to take on these absolute targets, it will have to provide some
form of incentivisation.
Mr Loughton
281. I make the comment about if the sectors
with negotiated agreements should be included with the scheme
with absolute rather than relative emission limits that will make
it easier. Are you concerned that the negotiated agreement holders
will use the permits purely to meet their targets rather than
make the real reductions in their emissions if they are not incentivised
to do so?
(Mr Dickinson) I think you need to understand that
a permit only arises for sale when a real reduction has been delivered
beyond an existing target. Permits are not freebies in that sense.
Therefore for a firm in a negotiated agreement to be able to offset
a permit against its obligations, somebody else in the UK economy
will have had to beat a challenging emissions reduction target.
It will presumably have beat that more cheaply than somebody with
a negotiated agreement. I think the point was made earlier that
these are very energy intensive sectors, they are sectors which
have worked very hard on emissions, some of the marginal costs
of abatement may be higher than other sectors in the economy.
Yes, it does give them more flexibility in meeting their target
and the ability potentially to meet their targets more cheaply
but the environmental result is the same, the emissions are reduced
elsewhere, and from a competitiveness point of view it is better
for the UK economy because we have met our Kyoto obligations more
cheaply.
282. You mentioned the point that an expanding
company may need to buy in trading permits in order to facilitate
its expansion. There will be some companies who want to buy emission
permits not to actually expand but because they are rather lazy,
because it suits them to continue belching out emissions at the
existing rate and cover it with these permits rather than do something
about the emissions belched out. If they are buying them in from
smaller firms it will reach the stage where their expansion is
hampered because they are going to have to put out some degree
of emissions because it has sold all its emission permits. You
have an economic hinderance on one side and you are not improving
the emissions efficiency of the bigger firm that is in a position
to buy up these permits. What real incentive is there for the
permit gobbler actually to do something about the state of their
emissions?
(Mr Dickinson) The real incentive will be, of course,
the cost at which they buy the permits. Let us say, for a permit
to be generated somebody else must have reduced emissions. They
will have to reduce those emissions at a cost and therefore somebody
seeking to, as you say, gobble up permits will be needing to face
that cost. Business tends not to be lazy about money matters and,
therefore, they will look at the cost of buying permits from somebody
else and compare it with the costs of doing it themselves as a
business decision. From a UK point of view, if we deliver the
absolute target we have undertaken in Kyoto, if business helps
us to find the lowest cost way of doing that type of thing, that
is a good result.
283. The mechanics of that, who is going to
be trading these permits? Are we going to follow something which
I think is happening on the Sydney Futures Exchange where they
are becoming a centre for trading permits for the Pacific Basin?
You could—although at the end of the day I do not think
it would be a desirable one—get to a system where permits
would come down in price in market value because a lot of smaller
firms have done really rather well and are planning to market
permits. So your larger firm is buying them in rather more cheaply
on the open market. The end result because of the limit of emissions
is fine but there is no incentive therefore for the bigger firms
still to do something about emissions if the market value of those
permits comes down.
(Mr Dickinson) If the market value of permits was
very low then clearly firms would have less incentive to invest
in reducing emissions than they would have if the permit price
was high. We do envisage an open market where the permit price
is clearly transparent. Again, I would come back to the point
of saying you can see this on an individual firm basis as being
a bad thing because that firm is not reducing emissions directly.
However, if you think about the policy choice, we are trying to
achieve an obligation to reduce emissions to help with climate
change and we are trying to do that in the most efficient way.
If through emissions trading you say "We release a lot of
emission reductions from sectors who are not large, who are small
companies and who are not involved in, for example, negotiated
agreements" then that is done much more cheaply and much
more efficiently than the large energy intensive users and that
is surely a good result for the UK economy and not a bad result.
284. Do you think then—you have mentioned
this in your submission—such a trading exchange or mechanism
should be regulated by the FSA?
(Mr Dickinson) We think it is almost inevitable that
it will need to be regulated by the FSA because you will be trading
a paper permit as opposed to a real tonne of carbon and, therefore,
that will fall into the cap of financial instruments. We do not
see regulation by the FSA as being onerous in this particular
context.
285. It is a financial product between professionals
and informed bodies. You are not going to have Mrs Miggins of
Acacia Avenue buying up trading permits as a virgin investor,
it will be for professional bodies.
(Mr Dickinson) Yes, we would see it as being trade
between professional bodies and professional companies, etc..
We see no restriction ultimately on who goes out to buy a permit.
What has genuinely happened in America under the sulphur trading
scheme is that schools have got together and they have bought
sulphur permits as an environmental project. There is no reason
once you have set up a carbon trading market of a sort why such
things should not happen but that needs to be properly regulated
and brokers need to be properly accredited.
286. On that basis, it is a completely open
market, you could get some environmentally friendly philanthropists
to go and buy up all the trading permits so that there is a complete
market squeeze so industry could not buy them.
(Mr Dickinson) I think you need to think about buyers
and sellers. In any market you have the capacity for people to
come and buy but you have to have a willing seller. You do not
get permits for nothing, you get permits for reducing your actual
emissions. A willing seller is somebody who has reduced their
emissions. If somebody is going in and buying up emissions reductions
at £1000 a tonne then no doubt he will invest a lot of money
in reducing emissions.
Mr Loughton: It is an interesting scenario.
If good old Sir James Goldsmith was still alive and he was using,
as he did, his vast wealth for environmental causes, the Mexican
rainforest or whatever, he could come in and buy up those permits,
those that were available on the market, completely corner the
market—
Mr Blizzard: Greenfinger!
Mr Loughton
287. Greenfinger, that is very good. If he had
industrial interests in other countries, say he was involved,
as he was in the past, in the paper industry or whatever in other
parts of the world, he could buy up all the tradeable emissions
permits in the UK, such that the paper industry could not buy
any, such that there would be capped emissions. He would be able
to destroy the UK paper industry to the benefit of the paper industry
he had in another country. Theoretically if market forces are
allowed to do their stuff that could happen.
(Mr Dickinson) Yes, and like all financial markets
there are regulations and provisions that try and prevent predatory
behaviour of that sort and those would apply to this market.
Mr Gerrard
288. Just one further point on this issue of
whether people will actually reduce emissions if they can trade.
How do you reconcile that with the IPPC requirements because you
have been arguing it in terms of your finance of the scheme but
what about the IPPC requirements which are site specific?
(Mr Dickinson) That is a very good question. Nothing
in the proposal can in any way contradict the IPPC requirement,
particularly on other greenhouse gases which count as local pollutants.
The position on emissions trading is if you have a target—very
similar to the negotiated agreement—for reducing the CO2
emissions, we would hope to have some flexibility on the application
of IPPC for energy efficiency but there is no expectation of flexibility
on IPPC for methane, nitrous oxide and the greenhouse gases. However,
what it does do is allow companies to gain benefit from going
further than what IPPC ask them to do. In other words, if a site
has a requirement given to it by the environmental agency to reduce
by 10 per cent the methane emissions and it discovers it will
reduce it by 20 per cent for a little bit of extra cost, it actually
induces it to go further and to trade those permits and make value
out of them.
Chairman
289. Apart from sulphur dioxide in America are
there any other extant examples of emissions trading?
(Mr Dickinson) There are a number of emissions trading
schemes under development at the moment. To my knowledge there
are no other schemes up and running. There is a Canadian scheme
which is on a different basis, which is on a credit basis, the
Norwegians and the Australians are working up these schemes but
we are probably leading edge in this. I think this is one of the
areas that the Government has seen as being quite attractive.
Given that we will eventually see, under Kyoto, the development
of an international trading market, if the UK is successful in
getting this scheme up and running, then we have first and middle
advantages for things like doing the financial service for these
schemes.
Chairman: Thank you very much indeed.
This has been a very useful session.
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