Memorandum submitted by Friends of the
Earth England, Wales and Northern Ireland
Whether an international ETS is feasible, given
that targets and compliance penalties would need to be rigidly
enforced and bearing in mind the political pressures to which
an international ETS would be subject;
1. When considering international emissions
trading it is important to differentiate between the system of
inter-state trading in emissions allowances that will come in
to force when the Kyoto Protocol is ratified, and begin in 2008;
and the development of "company level" or "private
sector"[36]
emissions trading at an international scale.
2. The Kyoto Protocol is a market-orientated
international agreement between nation states. It requires Annex
1 countries (developed countries) to hold sufficient allowances
(AAUs) to match the level of emissions in that country in the
first compliance period (2008-12). The number of AAUs initially
allocated, represents the level of emissions from that country
in 1990, plus or minus the amount of reduction or increase in
emissions that have been agreed for each country—set out
in Annex B of the Kyoto Protocol. Countries therefore contribute
towards meeting the target within the Protocol by either, delivering
reductions at home, or, through purchasing emissions allowances
from countries who have exceeded their target (AAU trading), or
by purchasing approved emission reductions from projects in other
Annex 1 countries (Joint Implementation, JI) or in non-Annex 1
countries (Clean Development Mechanism, CDM).
3. The ability to trade and generate credits
is intended to enable participants to find the least cost route
to achieving reductions. For greenhouse gases, where the geographical
point of release is irrelevant, a market solution of this kind
is ideal. However, the initial aim of achieving a 5% reduction
in developed country emissions by 2012, relative to 1990 levels,
is unlikely to be achieved without the participation of the US.
Indeed the degree to which Russia can sell its "hot air"
or excess allowances to all other countries in the scheme, raises
the question of whether the Kyoto Protocol will deliver any additional
savings at all, beyond those that have resulted from lower than
projected growth in Russia's emissions.
4. The inclusion of credits from countries
who have yet to take on targets also raises the possibility that
Annex 1 countries will simply buy their way out of their commitments,
and in doing so, reduce the potential for countries who host these
projects to benefit from the potential for emissions savings these
projects represent, if and when they themselves take on a target.
A cap on the number of project credits that can be used for compliance
would provide some protection against this. [37]
5. Only one commitment period has been defined
in the Kyoto Protocol and questions relating to the development
of international trading between countries will inevitably arise
as negotiations begin over the second commitment period.
6. There have been many criticisms of the
Kyoto Protocol but the agreement was a political success given
the fierce opposition that existed, and still exists, to any kind
of legally binding agreement. The Kyoto Protocol and the Marrakech
Accords that govern trading within the Protocol are an important
first step towards the establishment of an inter-country emissions
trading scheme. However, elements are missing and lessons can
be learnt from experiences to date. For example, to ensure more
certain delivery of reductions in emissions within participating
countries, the list of participating countries will need to be
determined in advance of targets being set (the assumed list of
participants in the first phase (which crucially included the
US) clearly was not delivered). Allowance allocation methodologies
or target setting procedures will need to be clarified and refined.
Penalties for non-compliance will also need to be established
to drive the market—at present there are none. All of these
issues will need to be resolved before the Kyoto Protocol and
its successors can be claimed to have successfully introduced
a working international market in emissions reduction credits.
7. The process of allocation of emission
allowances under Kyoto can really only be described as a version
of political horse trading with no serious methodology underpinning
it. There was no systematic consideration of, for example, historic
liabilities, economic and technological potential for reductions,
current or projected per capita or per unit of GDP emission levels,
or geographic circumstances. This has lead to some commentators
calling for an altogether more prescriptive approach to be adopted.
Allocation systems based for example on pure per capita calculations
are simple and elegant in their design, however, they fail to
take into account important political and economic realities.
In a world where existing economic superpowers are quickly being
caught up by rapidly developing economies, there is little appetite
for creating additional redistributional effects in the global
economy.
8. Such is the urgency with which rising
global emissions need to be reversed, reductions can and should
be the goal of every country that is in a position to deliver
them. Rich developed countries must go first. Economic assistance
will be needed in some countries and therefore all existing international
finance institutions should be re-orientated, and new funds created,
to ensure that technological leaps to low carbon solutions are
incorporated in all countries currently investing in their energy
infrastructure.
9. Having touched briefly on inter-country
emissions trading we will concentrate the majority of our remaining
comments on the development of company trading at an international
level. The difference being that company level trading schemes
apply to individual sources of emissions within countries, with
Governments deciding who will participate, how many allowances
to hand out and what the rules for non-compliance will be. The
EU Emissions Trading Scheme (EU ETS) is the first example of an
international ETS and it has already proved to be easier (although
by no means easy) to agree the framework for this scheme than
for the preceding UN-negotiated Kyoto framework.
Markets need clear rules and regulations to govern
them if they are to develop effectively
10. The EU, in devising the EU Emissions
Trading Scheme has broken new ground. The mechanism provides,
in one integrated economic instrument, the ability to control
approximately 50% of the Union's emissions of carbon dioxide.
The mandatory nature of the scheme and the relatively high penalties
for non-compliance (40 Euros per ton in the first phase, rising
to 100 Euros a ton in the second—with cancellation of equivalent
future allowances in both) give it the potential to be a highly
effective tool in the fight against climate change.
11. However, allocation of allowances within
the scheme has proven to be a highly politicised process. Concerns
over effects on industrial competitiveness have served to hamper
Governments' ability to use the scheme to deliver emissions reductions.
These will need to be overcome and genuine effort required from
participants if it is going to deliver a significant environmental
outcome.
12. This issue, however, applies to all
conceivable efforts to combat climate change—no matter what
mitigation tool you might choose, the question of balance remains—regulate
too hard, set the level of a tax too high, hand out too few credits
and economic growth could be severely damaged. Do the opposite
and the tool will fail to deliver environmental benefits.
13. The question facing policy makers is
how best to achieve control over emissions whilst providing industries
with flexibility and incentives to change business models. All
this must be done in as least disruptive a way as possible to
the economy. Trading is one flexible way of doing this and the
degree of control, the absence of the need for public spending
and the fact that savings can be achieved at least cost has made
company level emissions trading a popular concept.
14. Trading also allows industries to determine
the cost of compliance and arguably they are far better placed
to do this than Governments, who will be relying on estimates
rather than experience. Little is genuinely known about the cost
of abating carbon—even in the UK—experience in the
sulphur market has shown that it is likely to be a lot less than
imagined. This means that if the right balance can be found we
will see considerable reductions but at a relatively modest price.
Abatement cost discovery is one of the most important ancillary
benefits of any trading scheme as this can be used to counteract
industry alarmism in future rounds of target setting.
15. Despite concerns over the high level
of allocations of allowances in the first pilot phase of the EU
ETS, from Jan 2005, across the EU, emitting carbon will carry
a price and for the first time industries directly responsible
for greenhouse gas emissions will have the price of those emissions
factored in to their company accounts. The effect of this on corporate
purchasing and investment decisions is potentially very significant.
Implementation of Kyoto through trading
16. The idea of moving forward with emissions
trading schemes at regional, national and international scales
is gaining ground around the globe. The hiatus created by the
prolonged uncertainty over the future of the Kyoto Protocol and
the US's steadfast refusal to take part have, perhaps, given impetus
to this trend. It must be stressed, however, that Kyoto still
represents the only credibly multi-lateral approach to tackling
climate change. Company level emissions trading schemes are merely
one tool amongst many that will need to be used to help countries
meet the requirements of the UNFCCC and subsequent legally binding
international frameworks to drastically reduce global emissions
of greenhouse gases.
17. The EU is not on currently on track
to meet its Kyoto reduction target (in 2002 a reduction of 2.9%
had been achieved meaning that we are some distance from the linear
path to meeting the target where we should have achieved a 4.8%
reduction). All eyes are therefore on the European Union's Greenhouse
Gas Emissions Trading Directive which introduced a trading scheme
which will establish the world's first international mandatory
cap and trade scheme for the control of carbon dioxide emissions.
18. Norway is developing a scheme in parallel
with the EU that will be linked to the EU scheme. Canada another
early ratifier of Kyoto is also in the process of implementing
an emissions trading scheme and a schemes is also being talked
of in Japan and very recently even in Russia[38].
In non-ratifying countries such as the US and Australia state
level emissions trading schemes are being discussed in defiance
of Federal level inaction.
19. In addition, countries such as China
and most recently Chile are taking their lead from the US's highly
successful sulphur and NOx emissions trading schemes and adopting
their own trading mechanisms to combat environmental problems.
It is not inconceivable that these and other non-Annex 1/B countries
may wish to implement their own national carbon emissions trading
schemes to enable them to comply with UNFCCC and Kyoto which require
that they develop national strategies to constrain emissions.
Links between schemes
20. As the location of emissions reductions
is in environmental terms immaterial, and the achievement of least
cost reductions desirable, there is a strong argument in favour
of creating interconnected company level trading schemes to bring
down global emissions.
21. In political terms, however, it does
matter where emissions reductions take place and the world is
looking to the rich developed countries, who are responsible for
the majority of historic and current emissions of greenhouse gases,
to take action first. This raises a political problem in that
early action in these countries will disadvantage certain industries
putting them at a competitive disadvantage. This risks emissions
being exported rather than reduced as environmentally damaging
industries move to countries who have yet to take action. The
European Aluminium Association, or EAA, is claiming that as much
as 50% of aluminium smelters across the EU might move to non-Kyoto
countries due to rising EU energy prices as a result of the Emissions
Trading Scheme. [39]
22. One way of limiting competitiveness
impacts in the EU is to support the linking together of emissions
trading schemes. The EU Emissions Trading Directive already establishes
the possibility for discreet trading schemes involving Annex 1
countries to be linked together, however, there is little detail
available on how such a link might operate. In addition, the European
Parliament recommended an amendment to the Linking Directive that
would enable trading schemes in non-Annex 1 countries also to
be "linked". Again, there is little detail available
about how this might be achieved. Indeed it could be that this
recommendation was as much a political statement as a serious
statement of intent. Nevertheless it seems certain that the EU
will not wish to remain isolated in its pursuance of cap and trade
measures and will seek to encourage other countries to follow
their lead.
ISSUES OF
CONCERN:
Likely diversity of schemes
23. Emissions trading schemes can be designed
in many different ways and it is highly likely that schemes in
different parts of the world will adopt different rules and methodologies.
This is already the case between initial proposals for the Canadian
scheme and EU one although modifications are now expected to the
Canadian scheme to make it more compatible with the EU.
| EU scheme | Canadian scheme (proposed)
|
| Mandatory | Mandatory |
| CO2 only to begin with | All six gases
|
| Overall cap set at beginning of scheme |
Intensity targets create "cap" |
| Caps established by MSs—Commission state must be consistent with Kyoto targets and domestic policies
| Caps set by Gov—16% below BAU |
| No cap on costs—fine for non-compliance 40E ton/CO2 in 1st period plus allowance reduction
| Cap on costs of $15 Canadian per ton CO2e |
| No use of domestic credits | Use of domestic credits
|
| Proposed link to KP flex mex—eligibility criteria likely to be restricted
| Proposed link to KP flex mex eligibility criteria unlikely to be restricted
|
| No fungability with AAUs | No fungability with AAUs
|
| |
Compliance implications
24. Diversity between schemes makes the establishment
of links potentially problematic. If allocations are more generous,
or the rules in one scheme more lax than another, then complete
fungibility would result in a race to the bottom with participants
in stricter schemes circumventing the rules by buying in lower
value credits from other schemes. Gateways and restrictions on
the flow of emissions credits can help to minimise this risk,
however, they would need to be carefully designed. At present
it looks likely that this job will fall to the EU where questions
relate to linking to the EU scheme, however, over time a fully
independent supra-national body will be needed to oversee this
process.
Verification
25. As well as careful consideration of rules and methodologies
the linking of schemes requires rigorous compliance mechanisms
including monitoring and verification of baselines and emissions.
Confidence amongst traders, participants and NGO stakeholders
is essential for the proper functioning of any internationally
linked emissions trading scheme. If links are created between
schemes, the integrity of all schemes will be determined by the
least tightly verified scheme, if the flow of allowances is unrestricted.
It is in the interests of all parties, and in the proper functioning
of a market, that verification is rigorous. A supra-national independent
body that is able to verify the verifiers would help to build
confidence in the carbon market by providing an additional layer
of security for all participants.
The rules gap
26. The desirability of internationally consistent rules,
compliance and verification regimes was accepted when trading
was introduced to the UNFCCC in the drafting of the Kyoto Protocol.
The Marrakech Accords provide detailed provisions for this. There
is no equivalent rule book for company level trading. It is important
that compliance and verification rules keep pace with the fast
moving political discourse about international company level emissions
trading. To date these issues have been given insufficient attention
and too few resources have been applied to considering the framework
and rule book that must be in place before links can be established.
Prompt action on Trading
27. It was accepted in COP 7 that in for the Clean Development
Mechanism within the Kyoto Protocol to operate effectively rules
should be established under the UNFCCC that enabled it to be set
up early in expectation of ratification.
28. The same rationale and set of provisions used to
establish the CDM Executive Board can be used to establish a monitoring
and verification body for company level carbon trading schemes
that would help to facilitate the establishment of schemes in
more countries and enable schemes to be effectively linked without
risking their environmental integrity.
The suggested supra-national body would not necessarily become
involved in the setting of targets within individual trading schemes
but would concern itself primarily with overseeing the relationship
between company level trading and the achievement of internationally
agreed reduction targets. It could also set criteria for linking,
design gateways between schemes, and monitor and verify the environmental
integrity of individual trading schemes once designed. It could
also play an important role in communicating best practice, capacity
building, and encouraging the development of common international
standards.
Examples within other multi-lateral agreements
29. The precedent of establishing supra-national bodies
to verify compliance with international agreements is well established.
In 1957 countries came together to establish the International
Atomic Energy Agency. They recognised that atomic energy represented
a risk of potentially global proportions—the widespread
effect of the Chernobyl disaster only serving to prove the case.
An independent Secretariat was formed under the auspices of the
UN with signatory countries providing funding. Rights were established
that enabled IAEA teams to independently inspect and verify national
monitoring and reporting procedures with respect to civil uses
of nuclear power.
CONCLUSION
30. The establishment of a global system of governance
for company level trading is essential if schemes are to be introduced
in other countries and links between them established. The UK
is well placed to begin international discussions towards this
goal having been the first country to introduce its own domestic
carbon trading scheme, and, consequently, having become a global
centre for emissions trading expertise through early experimentation
with this important mitigation tool.
What other alternatives to an international ETS exist; and
whether an ETS would be more effective than such alternatives
in maximising carbon reductions worldwide and in channelling investment
in low-carbon technologies into less developed countries
Russia is considering setting up a domestic emissions trading
scheme that could link to the EU scheme, and a potential Canadian
one, from 2008. http://www.pointcarbon.com/article.php?articleID=5148&categoryID=147.
31. An international company level ETS is simply one
way of stimulating emissions abatement activity in countries and
sectors of the economy that are included in the scheme. Alternatives
range from the maintenance of discreet trading schemes in individual
countries or blocks of countries, to the introduction of a global
tax on all sources of greenhouse gases.
32. The reason there is considerable interest in company
level trading is that it provides participants with flexibility,
enables savings to be achieved at least cost and Governments with
a degree of control over emissions (in cap and trade schemes Governments
limit the total amount of emissions allowances created, whereas
taxes rely on high enough price signals to effect demand).
33. There is momentum behind company level trading that
indicates that it will be widely adopted as an emissions mitigation
tool—the pressing question is with what degree of environmental
integrity? The same cannot be said of either global taxes or carbon
taxes and given the urgency of the need to limit global emissions
there may be insufficient time for this to develop. Of course
as the impacts of climate change become more apparent this situation
may change.
34. The question of how to channel investment into low
carbon technologies in developing countries is a crucial one given
the rate at which some countries are industrialising. The introduction
of cap and trade schemes in rapidly developing countries would
establish a price for emissions, meaning that more polluting developments
would have a financial penalty relative to cleaner alternatives.
However, this is unlikely to be a viable option in the short term
for all but the most rapidly developing countries. Not least because
many countries lack the well established regulatory, monitoring
and verification infrastructure and culture that are essential
to underpin trading schemes. An alternative and complementary
approach would be to establish international financing facilities
that will provide loans and guarantees for clean technologies
and refuse financing for high emission projects. Existing financing
institutions should adopt new policies that create a maximum emissions
limit for all new infrastructure projects funded.
What approach and specific objectives in relation to climate
change the UK Government should adopt during its presidency of
the G8 and EU in 2005; and
G8
35. The G8 summit in July will need to lead to a firm
consensus amongst the G8 that immediate and sustained activity
is necessary to tackle climate change under a legally binding
internationally agreed framework. A key test of work streams begun
in the G8 will be whether they culminate in re-invigorated discussions
and negotiations at and around the first meeting of parties to
the Kyoto Protocol in December of the same year.
36. Key milestones towards this goal could include:
— agreement to review the adequacy of commitments
which should have happened in 1998 (UNFCCC Article 4 para 2.d);
— agreement to establish an international framework
governing the development of company level emissions trading schemes
enabling in the long term all UNFCCC signatories to design and
implement effective schemes to control their domestic emissions;
— consensus amongst G8 and OECD countries to divert
public funding away from projects which lock us into high emissions
pathways and to support instead truly sustainable renewable energy
developments; and
— consensus between developed and developing countries
about the reorientation of global agricultural subsidies towards
supporting biofuels and away from food production.
Re-engaging US and Australia
37. Pressure must be applied to Annex 1 countries remaining
outside the Kyoto Protocol to re-engage in international negotiations
and take on legally binding emissions reduction targets. Under
the Kyoto Protocol negotiations for second commitment period targets
must begin in 2005. However, if these negotiations are only carried
out with under the Protocol, non-signatories will be excluded.
It is therefore important that a parallel negotiation is begun
under the auspices of the UNFCCC. Article 4 para 2 (d) requires
that a review of the adequacy of commitments under the Framework
Convention be carried out no later than 31 December 1998 and such
a review is clearly therefore long overdue.
38. In addition to restarting negotiations the EU should
also take action to protect the competitiveness of its directly
affected industries be seeking redress through traditional trade
measures. Sanctions could be applied if non-ratification of the
Kyoto Protocol can be shown to create trade distortions, in which
non-compliance is shown to create an effective subsidy.
More on G8 ask on trading
39. The G8 offers an opportunity to achieve agreement
to work together to introduce an international framework for the
development and potential linking together of company level emissions
trading schemes.
40. For the EU countries represented at G8, this provides
an opportunity to insulate against competitiveness impacts that
may occur as a result of their early action. For Japan and Canada
it offers similar advantages enabling them to meet their Kyoto
commitments without being isolated. For the US it offers a means
of consolidating initiatives already gathering pace at State level.
The need for co-operation
41. The Marrakech accords to the Kyoto protocol outline
rules governing inter-country trading but there is no equivalent
for company level schemes. Without a strategic international framework,
interlinked company level schemes could result in poor environmental
integrity and a weakening of individual schemes as abatement costs
and verification standards will naturally drop to the level of
the least tightly implemented scheme.
42. Company level trading means that Nation States have
reduced control over their in-country emissions. It can therefore
result in countries being traded out of compliance with any national
or international targets they may have—resulting in a negative
financial impact on the public purse as compensating credits will
need to be purchased by the State.
43. The work stream for the G8 would therefore need to
cover:
— Standardised verification and monitoring rules
— Harmonisation of compliance and allocation rules
— Rules for linking schemes
— Extension of best practice
— Capacity building internationally (especially
in rapidly industrialising countries)
— Assessing implications for compliance with UNFCCC
and Kyoto.
EU Presidency
44. The UK's EU Presidency offers an opportunity to influence
the future development of the EU Climate Policy. Russia's ratification
of the Kyoto Protocol now means that targets for future commitment
rounds can begin to be discussed. The EU must continue to press
ahead not only with meeting its existing target but also in setting
challenging new targets.
45. To date the EU has failed to adhere to a linear path
towards its Kyoto target and few, if any, countries within the
EU can claim to have achieved adequate control over their emissions.
In the face of uncertainty the question of control is key. If
it transpires that climate sensitivities are greater than first
thought then we must have in place policies and measures that
can be quickly adapted to new information.
46. In this context the biggest challenge for the EU
is therefore not meeting a long term reduction target in 20 or
30 years but in successfully placing itself on a linear reduction
pathway as soon as possible and working to seek agreement from
other countries that they will seek to do the same. Friends of
the Earth is currently consulting internally on the level of targets
we will be recommending, however, initial discussions indicate
that they will need to be in the region of a 3% per annum reduction
from 2010.
47. Another important point that must be accepted is
that departure from linear reduction paths towards targets, means
that targets must be made more stringent to compensate. Increased
concentration levels of gases will be achieved if the volume of
emissions over time is higher than would be the case if a linear
reduction path is adopted. This is the case if high emissions
are sustained and reductions only achieved towards the end of
the target period—if this occurs to achieve the same reduction
in concentrations a deeper cut needs to be achieved at the end
of the period.
48. As successive commitment periods are likely to run
consecutively from 2008 this will be less of a problem in the
future, however, the degree to which non-linear pathways to existing
targets have been taken (ie between 1997 and 2008) and the increased
commitment to global warming that has occurred as a result, must
be assessed and considered in the process of setting new targets.
49. In addition, the EU has significant influence over
how public money is spent in international finance institutions.
Historically huge sums of money have been spent underpinning fossil
fuel developments, locking in emissions for many years to come.
Friends of the Earth is calling for public money in the shape
of international loans and guarantees to be diverted away from
projects with high emissions—particularly export focussed
projects, which have delivered little in the way of economic advantage
to host countries and simply served to provide developed countries
with cheap fuels. Instead public subsidies for truly sustainable
renewable energy projects should be greatly increased.
On trading
50. The EU Emissions Trading Directive is the most significant
piece of climate legislation to date anywhere in the world and
the EU should be congratulated for introducing it as it is an
example of the kind of policies and measures that will be needed
to give Governments control over emissions.
51. However, implementation to date has been weak with
the substantial lobbying power of directly affecting industries
undermining Governments' ability to set challenging caps on emissions.
52. The UK should use its Presidency to ensure the review
of the EU ETS recommends the setting of an EU-level cap for total
allowances that is consistent with the EU's Kyoto target. It should
also seek to achieve greater harmonisation of allocation rules
and tougher critieria in Annex III of the Directive to prevent
over allocation.
53. The Directive can and should be strengthened for
the second phase.
Friends of the Earth recommends the following
(for more information please refer to Annex 1):
— set a challenging European level cap on total
allocation of allowances in the second phase of trading (2008-12);
— increase the harmonisation of rules governing
how Member States allocate allowances to participants including:
fixing the baseline years for future allocations; introducing
compulsory auctions; establishing technology benchmarks for new
entrants; providing consistent incentives for plant closures;
and agreeing banking and borrowing rules;
— committing to 100% auctioned system in the third
phase of trading;
— introducing tough penalties for abuses;
— introducing tough caps on use of overseas credits
(ie Joint Implementation and Clean Development Mechanism credits)
to meet domestic targets.
54. If progress can be made on these issues then the
EU should also continue to explore ways in which trading can be
extended to cover other greenhouse gases and other sources of
emissions eg aviation and land-based transport emissions.
55. The latter are likely to be best accounted for at
the point of production fuel rather than through downstream customers
or car manufacturers. The fact that emissions from these sectors
are projected to grow (although recently land based emissions
appear to be levelling off) means that their inclusion in the
scheme could provide important additional demand for credits,
raising the price of carbon meaning that more expensive abatement
options in other sectors become economic. If they remain outside,
with no comparable policy interventions, then industrial sectors
will quite correctly start to complain that the burden of meeting
reduction targets is not being equitably shared across the economy.
This will lead to increased pressure on Governments to provide
generous allocations.
56. Additional measures to constrain growth in emissions
in these sectors will, however, also be needed irrespective of
whether they enter the scheme.
What contribution individual departments can make (eg. FCO,
DEFRA, HMT, DfT, and DFID), and whether they are sufficiently
"joined-up" in delivering a coherent UK agenda
57. Government has made efforts to create links between
Departments by for example creating the interdepartmental Sustainable
Energy Policy Network to oversee the delivery of the Energy White
Paper. Integrating environmental considerations, in particular
climate change, throughout Government policy, continues, however,
to present something of a challenge to Government.
58. Even though the Department for Trade and Industry
was the lead Department on the Energy White Paper they are also
a powerful voice within Government opposing measures that they
believe will threaten certain sectors of industry's competitiveness.
This was never more apparent than in the discussions surrounding
the allocation of emission allowances within the first phase of
the EU ETS. The section of the DTI which specialises in maintaining
relations with industry acted as a conduit for a range of industries
to make very strong cases against challenging targets. The DTI
has an important role to play in maintaining the wellbeing of
the industry operating in the UK but this must not be at the expense
of progress towards a low carbon economy. Certain high emitting
or energy intensive industries will need to adapt to life in a
carbon constrained world and it should be the role of DTI to facilitate
that transition as quickly as possible—not to seek to reduce
Government's ambition to deliver easily affordable carbon savings.
59. The Department of Transport now has a Public Service
Agreement committing it to helping to deliver the Government's
climate change targets and this is welcome. However transport
is responsible for roughly a quarter of the UK's emissions of
carbon dioxide, and this share is set to rise in coming years,
making the Department for Transport (DfT) a key player in reducing
emissions.
60. DfT must play a full and positive role in reducing
emissions of CO2. However events since the Spending Review do
not bode well. The Transport White Paper "The Future of Transport:
a network for 2030", published in July, projected CO2 emissions
from road transport continuing to rise for at least the rest of
this decade[40] with
emissions still possibly above 1990 levels in 2025[41].
DfT has failed to address the problem of rising traffic levels
as a cause of rising emissions, seemingly placing all its faith
in technology as a solution. We share the concerns of your Committee
that "the Future of Transport White Paper had nothing new
to say on the practical steps the Department for Transport would
take to tackle carbon emissions from transport"[42].
61. The draft guidance to local authorities on Local
Transport Plans (LTPs), published by DfT in August, did not include
tackling climate change as one of the priorities. Instead it is
included in a list of "other quality of life issues"
about which the draft guidance says "the Department does
not expect local transport strategies and LTPs necessarily to
be aimed at dealing with these issues as key priorities"[43].
Given the importance of local authorities in delivering integrated
transport, we find this astonishing.
62. DfT must accept that technology alone will not be
enough to substantially reduce emissions from transport. The Interdepartmental
Analysts Group (which was set up to inform the Government's response
to the RCEP recommendation of a 60% cut in carbon dioxide emissions
by 2050 and brought together officials from DTI, DEFRA, DTLR,
HM Treasury and the PIU) concluded that: "substantially reducing
carbon emissions from transport will require a combination of
measures to reduce traffic demand, enhance the transport infrastructure
across all modes, improve the energy efficiency of vehicles and
encourage the introduction of low carbon fuels"[44].
The Tyndall Centre for Climate Change Research has reached the
same conclusion[45].
63. There must be a "climate filter" on all
of the DfT's work. There should be clear targets for reducing
carbon dioxide emissions from the transport sector, with specific
targets for both the contribution of technology and for demand
management. Among policies required are:
(a) DfT should press for tougher regulation on vehicle
fuel efficiency, with the next agreement between the EU and ACEA,
representing car manufacturers, being made mandatory rather than
voluntary.
(b) The introduction of a renewable transport fuel obligation
to stimulate the development and commercialisation of alternatives
to fossil fuel based fuels.
(c) Continuing traffic growth will make a major contribution
to rising carbon dioxide emissions and must be tackled through
a range of measures including investment in improved public transport
alternatives, investment in making streets safer for cycling and
walking and the cancellation of road-building schemes that will
lead to traffic growth. These policies reflect the manifesto of
the "Way to Go" campaign, of which Friends of the Earth
was a key part[46].
64. Tackling climate-changing emissions must also be
a priority for transport at the regional and local levels, as
this is where much of the delivery of integrated transport takes
place.
65. DfT's responsibility also covers aviation, an area
in which your Committee has worked tirelessly in recent months
to expose "the glaring inconsistency of facilitating so large
a growth in carbon emissions at a time when we need to make huge
cuts to minimise the worst impacts of global warming"[47].
We share the Committee's concerns and believe that expansion of
aviation on the scale forecast by DfT will make achieving longer-term
carbon dioxide reduction targets at best much more difficult and
at worst near impossible. We believe that emissions targets impose
a limit on aviation growth, which must be the key factor in future
decisions about airport expansion, and that the Government, including
DfT, must use a range of powers—planning controls, local
air pollution emissions controls, fiscal and other economic measures—to
ensure that these limits are met.
66. The Treasury is clearly hugely important and has
made some important moves towards setting the right economic framework
to deliver a low carbon economy. It has not however been anything
like as bold as it needs to be. The Climate Change Levy was an
important step towards progressive green taxation. However, its
implementation has been confusing. It is unclear whether the tax
is a tax on energy use or on carbon emissions. Practically speaking
it is both as it applies to direct use of emitting fuels and indirect
emissions arising from electricity. In terms of acting as a carbon
tax, however, it fails to grade taxation according to the carbon
content of fuels and therefore fails to incentivise a switch to
cleaner fuels. As an energy tax it fails to properly incentivise
behavioural change as it is set a too low a level to make a difference
to the companies who pay it. Energy intensive companies who would
be affected by a tax, even one set this low, are required instead
to meet a voluntary emissions reduction agreement that is negotiated
with DEFRA.
67. The Treasury has a potentially important role to
play in the development of UK and International climate policy.
The Chancellor could champion root and branch reform of IFIs for
example to ensure that all loan and finance agreements for energy
infrastructure projects meet minimum efficiency standards and
maximum emissions limits. He could also encourage the setting
up of new adaptation and mitigation funds to help poorer countries
tackle climate change.
68. Closer to home he will need to integrate the management
of carbon emissions into the budget. From 2008 the level of our
emissions will become a potential asset or liability, with a price
attached. The Chancellor could and should manage our carbon budget
on behalf of all of Government in such a way that minimises the
risk that the public purse will need to pick up the bill as a
result of us failing to meet our international targets, and maximises
the financial benefit we would accrue from making early and cost
effective reductions in our emissions.
Department for International Development
69. The UK is a significant shareholder in many Multilateral
Development Banks (MDBs), and DFID is the UK Government department
with responsibility for formulating and communicating UK policy
for MDBs. MDB investment portfolios in extractive industries and
power generation are currently weighted heavily towards fossil
fuels. DFID support for existing MDB policy contradicts the UK
Government aim of promoting global action on climate change through
promotion of low carbon energy technologies.
70. International financial institutions play a significant
role in development of global energy infrastructure through provision
of direct loans, and facilitation of private finance through guarantees
and insurance. IFI energy finance is heavily weighted towards
fossil fuels, which, eg comprise 83% of World Bank energy portfolio,
while renewables comprise 14%.
71. The lifetime of this energy infrastructure is of
the order of 40 years or more. Thus present day investment in
fossil fuel locking-in to considerable period of fossil fuel dependence.
In the case of IFI's this is often in countries with poor existing
energy infrastructure and huge potential to follow less carbon
intensive development pathways.
72. IFI financed projects make a significant contribution
to global fossil fuel infrastructure and hence greenhouse gas
emissions. Friends of the Earth estimates that over the last 10
years IFIs have provided at least $110 billion for fossil fuel
projects. Since 1992 the World Bank alone has provided over $11
billion for fossil fuel projects, this included $4 billion for
oil projects, of which over 80% were export oriented. The cumulative
lifetime ghg emissions from these World Bank financed projects
is estimated at 47 billion tons of CO2.
73. IFI finance of fossil fuel projects promotes society's
continued dependence on high carbon energy technologies in a number
of ways. IFI are providing substantial levels of funding for fossil
fuel projects, but its significance is greater than a simple calculation
of total finance. IFI funding guarantees political stability,
insures the deal, reducing the associated risk and therefore the
cost of private capital, effectively subsidising fossil fuel production,
and ultimately consumption. The benefits of IFI subsidy are enjoyed
by Kyoto signatories and non-signatories alike.
74. The recent World Bank Extractive Industry Review
(EIR) concluded that IFI funding of extractive industries fails
to alleviate poverty and promote development, and recommended
a moratorium on World Bank funding of coal projects, and a 2008
phase-out from oil in order to meet the challenge of climate change.
The EIR also recommended a rapid switch of World Bank energy finance
renewable energy.
75. Renewable energy technologies have huge potential
in developing countries. The G8 renewable energy task force identified
lack of finance as the key barrier to deployment of renewables,
and suggested that with concerted action, in a decade 200 million
people in developing countries could have access to significantly
improved biomass cooking, and access to electricity for up to
800 million, including 600 million in developing countries
76. There is substantial evidence to demonstrate that
developing countries whose economies are heavily dependent on
extractive industries display poor developmental outcomes. Furthermore,
the emissions generated when these fuels are combusted contribute
to climate change—itself the biggest threat to global sustainable
development. IFI finance should be redirected away from high carbon
energy sources, and towards provision of sustainable renewable
energy.
77. DFID must acknowledge the significant contribution
to promotion of fossil fuels represented by IFIs, and work to
divert public funding away from projects which lock us into high
emissions pathways and to support instead truly sustainable renewable
energy developments. DFID should cease support for high emitting
fossil fuel development through IFI finance and bilateral aid,
and address the lack of financing available for low carbon and
renewable energy technologies.
Specifically:
78. DFID should adopt a climate policy consistent with
UK Government aspirations for global action to avoid dangerous
levels of climate change.
79. DFID should assess its current and historical support
for fossil fuels and whether these projects have helped or undermined
the meeting of Millennium Development Goals.
80. DFID should formulate a strategy to address the causes
of climate change to augment its strategy for adaptation. This
must involve a coherent strategy of support for sustainable low
carbon and renewable energy provision in developing countries,
including timings and targets, and withdrawal of support for high
emitting fossil fuel projects over a clear timetable. Minimum
efficiency and maximum emission standards should be set for all
energy infrastructure projects to facilitate the development of
only the best available technologies.
81. DFID should promote G8 Rnewable Energy Task Force
recommendations of enhanced IFI support for renewables through
increased R&D, subsidy programmes, capacity building and finance.
82. DFID should take a proactive responsibility for its
votes in multilateral development banks, requiring a rigorous
assessment of the cumulative impacts of projects, and their climate
impacts, and only vote in favour of projects which have a significant
and demonstrable poverty alleviation benefit. These assessments
should be published on DFID's website.
References:
Papers presented to EA/INECE International Conference on
Compliance and Enforcement of Trading Schemes in Environmental
Protection, Oxford, 17-18 March 2004.
Greenhouse Gas Market 2003—emerging but fragmented,
IETA, December 2003.
Linking Domestic and Industry Greenhouse Gas Emissions Trading
Systems, by Erik Haites in association with Fiona Mullins for
EPRI, IEA and IETA, October 2001.
36
Neither "company level" nor "private sector"
is a truly adequate descriptor, in practice Governments themselves
will be involved in these schemes as they themselves are point
sources of emissions (eg schools, hospitals). "Installation
level" or "point source" emissions trading would
be an alternative but this too fails to capture the fact that
in future, mobile sources of emissions, for example, aeroplanes,
and, sources of emissions that are derived from down stream consumption,
eg petrol producers, are likely to be participants in these schemes.
"Sub-national" might work but this becomes confusing
when you consider sub-national participants can trade internationally. Back
37
An interesting side effect of the EU ETS also enabling the use
of international project credits for compliance, is that companies
and countries will now be competing to secure low cost credits
from overseas projects (CERs). If supply is limited this will
push the price up above abatement costs for in-country emissions
reductions reflected in the price of European Allowance Units
(EAUs). Emissions in the EU will in reality be able to be achieved
relatively cost effectively and with a reasonably high degree
of certainty so the relative price of CERs and EAUs will be carefully
monitored by companies in the scheme when deciding on abatement
strategies. Back
38
Point Carbon 03.11.04 RUSSIA KEEN TO LINK TO EMISSIONS TRADING
SCHEMES Back
39
Dow Jones Newswire 11/11/04 EU Emissions Rules To Hit Aluminum
Competitiveness. Back
40
"Department for Transport "The Future of Transport:
a network for 2030" (July 2004) chapter 10. Back
41
"The Future of Transport" chapter 1. Back
42
Environmental Audit Committee "Budget 2004 and Energy"
(August 2004) paragraph 46. Back
43
Department for Transport "Full Guidance on Local Transport
Plans Second Edition" (August 2004) chapter 3 paragraph 76. Back
44
Interdepartmental Analysts Group "Long-term reductions in
greenhouse gas emissions in the UK" (September 2002). Back
45
Tyndall Centre "How can we reduce carbon emissions from
transport?" (July 2004). Back
46
Details of the Way to Go campaign's manifesto and how much it
would cost to implement are contained in "Paying for Better
Transport", available at http://www.foe.co.uk/resource/reports/paying-for-better-transport.pdf. Back
47
Environmental Audit Committee "Aviation: Sustainability
and the Government's Second Response" (September 2004) paragraph
3. Back
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