Select Committee on Environmental Audit Minutes of Evidence


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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