Examination of Witnesses (Questions 420-439)
PAUL DAWSON,
LOUIS REDSHAW
AND CHARLES
DONOVAN
12 JANUARY 2005
Q420 Joan Walley: It is a question of
how you get a level playing field, if everybody is contributing
fairly and equitably.
Mr Redshaw: Yes.
Q421 Joan Walley: Can I ask you as well
about extending the scheme and if you have comments about extending
it to other greenhouse gases—we have really just been talking
about carbon—what would be the implications of that?
Mr Donovan: We have seen in a
couple of situations now where the non-CO2 gases, the cost of
reducing those gases is really quite diverse, and so you have
seen incidences, particularly in the emerging CDM market, where
reductions have been made in HFCs at very, very low cost; and
there are instances where it is actually much more expensive,
so we are not seeing perhaps renewable energy projects come through
in the developing countries that was in fact part of the objective
of the CDM. So wider coverage and more gases in some sense is
a good idea because you get more opportunities and you get more
gasses, but we also know that the costs of reducing all of those
now we have just made a much bigger pool and we may end up resetting
the supply and demand equation, and where that comes out we want
to make sure that that is consistent. So there has to be thinking
that it is not just a positive in terms of bringing in, we have
to know that economists use this marginal cost of abatement, and
there is a marginal cost of abatement for greenhouse gasses across
all of those different sectors, across all of the different countries,
across all of the different types of greenhouse gases, and some
thinking needs to go into at what point and how do you bring in
those types of sectors, gases and countries into a trading scheme?
Mr Redshaw: Just to expand on
that a little further. Our view, like with increasing the sectors
that are covered, is to increase the gases that are included because
the more opportunities you have to reduce, again the more efficient
the reduction that can take place. What I am reading from Charlie's
evidence there is that if you suddenly introduce a new gas into
the Trading Scheme that has a very low cost abatement you will
send our a price signal—in fact you will drop the price
of CO2 allowances which will cause an aberration. So these things
need to be done carefully. An example would be methane capture.
In the UK you have to capture the methane from a landfill gas
site and flare it, and methane per tonne has a global warming
potential of 21 times that of CO2. In other countries—I
am not certain how it works across the EU—of the world there
is no legislation for the capture of that gas, so you have a slightly
un-level playing field already with one country potentially making
money out of capturing gas when another country has to do it already
through legislation. So there are some potential distortions,
so it needs to be done with some consideration of the full picture.
Mr Donovan: I really believe that
Emissions Trading is a very, very powerful tool for what we are
trying to do, but that does not preclude the possibility that
dealing with some greenhouse gases may be better done through
traditional forms of regulation.
Q422 Joan Walley: I am exploring the
European Union Emissions Trading Scheme just that little bit further.
Do you think that there could be other key improvements in what
comes out at the stage of Phase 2? What sort of changes do you
think would be helpful to see in there?
Mr Dawson: I think it would help
to have a more streamlined and common approach to the determination
of the National Allocation Plans, and I think it would be good
to get those agreed sooner rather than later. Inevitably when
the scheme was being introduced over such a short timescale there
was always going to be delays in putting the Plans together and
getting those agreed. I think having done that once I would certainly
hope that Member State governments and the Commission could curtail
and streamline the process for agreeing the Plans the next time
around, and I think a common allocation methodology in terms of
allocating the allowances between sectors would be hugely valuable.
Mr Redshaw: And common ways of
treating new entrances and common rules for closure of plant across
the whole of the EU.
Q423 Joan Walley: Common laws of?
Mr Redshaw: Of closure, the definition
of closure of a plant. So in Germany, for example, you could close
an inefficient coal fired power station on one site in one part
of Germany and the same company could open another power station
in another part of Germany that is a clean gas fired power station.
They can transfer the allowances from one to the other and actually
make a profit out of being cleaner. The UK, if you close your
power station you lose allowances and walk away and if you open
another gas fired power station then you would get an allocation
from a new entrant reserve, which per megawatt hour produced by
a power station would be lower than you would have got from a
coal station. So in Germany you have a bigger incentive to be
cleaner than you have in the UK in that instance.
Q424 Joan Walley: Which could well be
uncompetitive as well.
Mr Redshaw: Because the compartmentalisation
of electricity markets it is difficult to say if there would be
any competition issues as such, but it would certainly be a more
level playing field if those rules were common.
Q425 Joan Walley: None of you have mentioned
about the possible use of greater use of auctioning or having
a single European-wide emissions cap. Not important?
Mr Redshaw: I guess they are attempting
to achieve the same objective. A single auction would undo the
good work that has been done, giving free allocations to companies
that are facing international competition. A single cap for the
EU would have to be sub-divided into companies and countries nonetheless.
Mr Dawson: And unlike Phase 1
of the scheme Phase 2 takes place in the context of the first
Kyoto commitment period, where country targets are already determined.
So it becomes a lot easier to crosscheck the National Allocation
Plan against the Kyoto target rather than arguing about whether
or not you are on the path in three years' time to the Kyoto target.
Q426 Joan Walley: Having said that, you
are not saying that Phase 2 is already set in stone and there
is not any flexibility or changes that can be made moving from
Phase 1 to Phase 2?
Mr Dawson: I think that is true,
but I do not think—
Q427 Joan Walley: You think it is set
in stone?
Mr Dawson: I do not think it is
set in stone but I think there is less flexibility in Phase 2
because of the Kyoto commitment.
Q428 Joan Walley: So we are set on the
track that we are going down?
Mr Redshaw: If a country objects
to that or is not particularly happy about the Kyoto target they
have signed up to—and one is—then the further socialisation
of that would be unpopular in one and popular in another.
Q429 Joan Walley: I am sorry, which country
were you referring to?
Mr Redshaw: There are countries
that have gone past their CO2 emission limit by quite a large
amount—Greece, Portugal, Spain, Ireland—and there
are countries that have got very close to their emission reductions,
such as Germany and the UK, and to then turn around and ask those
countries to make further reductions is probably rather problematic,
having negotiated the reductions that are already being met, and
in the case of Portugal and Spain they have actually negotiated
increases under their Kyoto target.
Q430 Mr Savidge: Joan's line of
questioning has been basically talking about Phase 2 and I would
like you to look beyond 2012 and picking up one of the questions
Joan has asked. With the Barclays' Blueprint you are talking in
terms of including air and road transport, commercial and domestic
sectors and therefore almost creating a situation where other
policy instruments might be redundant if everything would depend
on international ETS. I wondered whether you think that we need
more evidence of Emissions Trading working before we can go quite
that far?
Mr Dawson: I think it is an interesting
perspective because I maybe see it from the other end of the barrel.
Many of the difficulties associated with Emissions Trading as
it is currently being implemented are associated to some extent
with Emissions Trading not going far enough. It is not including
other sectors, so some sectors are saying, "Why are we getting
a reduction target when transport"—as a classic example—"is
allowed to go on increasing its emissions unmitigated?" Part
of the problem with ensuring Kyoto ratification has been that
some countries—one in particular—deciding not to accept
an emissions target when other countries are not going to mitigate
their emissions. I think the arguments tend to be on who gets
what and to some extent that is inevitable, but I do not think
that that undermines the theoretical purity of Emissions Trading,
which is that it has an absolute cap on emissions. You know what
the reduction in emissions is going to be and you let people trade
and it delivers that reduction at the least cost. Many of the
so-called difficulties of Emissions Trading are either associated
with arguing about who bears that burden or associated with any
form of scheme to reduce emissions. The classic example would
be the monitoring and verification. Any scheme of emissions reduction
must monitor what emissions are reduced by whom, and that is as
much the case for Emissions Trading as any other form of global
reduction. So I think more ambitious plans to introduce Emissions
Trading would improve things immeasurably and remove a lot of
the current disagreements.
Mr Redshaw: And making it truly
international removes even more problems, in that we talked earlier
about the UK government giving 100% allocation to companies that
are competing on the international arena. If every country in
the world is facing the same cost production of CO2 as every other
company you are in a situation where you have a completely level
playing field. At the moment all companies that consume oil pay
the same price for oil and therefore there is no competitive distortion
because of different oil prices because everyone pays the same
price. If that cost is then increased by forcing companies to
pay for their CO2 as well, but on an equitable basis across the
whole world, then you have a level playing field.
Q431 Mr Savidge: Charles, would you like
to comment further on this issue of the idea of an international
Emissions Trading System as the all-encompassing policy
instrument, because you spoke in your submission about a wider
range of policies and you have already mentioned the possibility
of the need for regulation in relation to greenhouse gases, but
I wondered if there were other policies also that you felt ought
to be used?
Mr Donovan: The most important
thing for me—and while it is enjoyable to try to explain
all of the fine details about what is going to happen in the next
few years—we have a massive, massive undertaking ahead of
us, and that is where the focus should be just as much as on some
of these details we have gone over in probably excruciating detail
today. So in terms of looking at the long-term, Emissions Trading
is just one tool and I think the thing that I tried to highlight
in my memo was, yes, the policies that we have in place now need
to be implemented effectively, and that is the very first thing
that we could do with any kind of leadership that would arise
from the Presidencies of the G8 and the EU. But the other—and
really responding to your question directly about long-term—we
need a massive undertaking in social and technological research
in order to get to the kind of goals that we are talking about,
and it is not going to be sufficient to play around at the margin
with some of the rules of the scheme as we currently know it.
That one instrument—it would be impossible to deliver the
kind of investment that we are talking about, simply using one
policy tool; it is a fallacy to think that we could rely so heavily
on one instrument. So there is a mix of things. But I think as
the paper that Barclays drew up pointed out very, very accurately,
Emissions Trading could be the lead in that and if you bring everything
under that umbrella you start to have a fairly coherent vision
of one of the major pieces that could help deliver.
Q432 Mr Savidge: An International ETS
system will be immensely administratively complex and costly.
Is there a natural geographical limit to the scale on which an
ETS can work, and beyond which it will become too complex or insufficiently
efficient to operate? I ask that generally.
Mr Redshaw: We are in an international
Emissions Trading Scheme right now with the EU ETS. You talk about
it being costly but any system whereby you have to monitor and
verify emissions, be it for taxation purposes or for any other
compliance obligations put on companies, the cost of that verification
is going to be the same, and the additional cost of Trading Emissions
versus being taxed is nominal. We do not believe that the geographical
constraints exist either. If the US, for example, would accept
a cap on their emissions that was similar to the EU's and therefore
would allow the two systems to operate together, it would be simplicity
itself. There is nothing to stop me having an office in Bermuda
and trading emissions on behalf of customers with the aid of electronic
platforms, et cetera. I guess the difficulty comes with verification
of emissions, but so long as you have—as we have highlighted
in our blueprint—audited emissions from companies and governments
underwriting their companies' emissions you avoid companies cheating
and you put countries on the hook and so avoid countries cheating,
and I imagine the electronic nature of trading means that the
administrative burden is actually very small.
Chairman: We have to go and take part
in a division; I am sorry about that. I think there will only
be one, so if you could bear with us until just around 5 o'clock.
We should be back within the next five minutes or so, and we can
then carry on.
The Committee suspended from 4.35 pm to 4.43
pm for a division in the House Chairman: We can
now start again.
Q433 Mr Savidge: As we were saying before
we were interrupted, your Emissions Trading System you suggest
expanding it to expand the EU ETS. Might it be more feasible to
think in terms of linking the EU system to other trading systems
like the one in US and Canada and so on? Might that be the more
practical approach for seeking a single worldwide trading system?
Again, perhaps you would like to say something about how feasible
you think it would be to get a single worldwide trading system
at all?
Mr Dawson: In terms of an extension
of the ETS we were talking much more in terms of extending the
concept of the ETS and that would require a global agreement,
rather than extending the ETS in and of itself: ie trying to agree
an international scheme that looked relevantly similar. I think
that carries over to consideration of linking to other schemes.
I think that the key element of an effective Emissions Trading
Scheme is that there is an absolute cap on emissions and the ability
to trade those emissions to meet that cap. I think the problem
with some of the other so-called Emissions Trading Schemes is
that they include relative caps on emissions where credit is given
for emitting less than a certain established baseline, where that
baseline typically is still upwards and emissions continue to
grow. I think you see that within the project-based credits under
the Kyoto Protocol and the CDM-JI. I do not know too much about
the Canadian scheme—I think Louis can talk a bit more about
that. I think unless they have that inherent cap and trade—absolute
cap, not a relative cap—then it becomes very difficult to
link into a scheme like the EU's. The danger is that you allow
credits to be given a common currency within the EU when they
are achieved in economies and countries where emissions are actually
continuing to grow, and you are thereby devaluing the absolute
reduction of emissions that you are achieving through the cap.
Mr Redshaw: So absolutely, linking
of any trading scheme to the EU ETS is desirable because it broadens
the scope and increases the opportunity to reduce at a lower cost.
The Norwegians are actively seeking to link their scheme to the
EU scheme—of course they are not part of the EU. The trouble
with the current American scheme is that it is a voluntary scheme
and emission credits over there trade for between half a dollar
and a dollar. It is voluntary; there is no price signal. If the
price in a voluntary scheme got high people will just walk away
from it. In the EU scheme if the price gets higher people have
to pay more for it because they have to comply—there is
a finite supply of emissions allowances. So there is no prospect
at all of linking with the existing US trading scheme—and
it is not a US trading scheme, it is actually a group of companies
that have got together and put this thing together. There is also
no prospect, in our view, of a link with the Canadian scheme,
for the reasons that Paul has highlighted, but, in addition, the
Canadian government intends to cap the cost of CO2 at 15 Canadian
dollars, which is around eight or nine Euros. That means that
you could not have the EU scheme working hand in hand with the
Canadian scheme because if the going gets tough Canadian companies
can go and buy allowances from their government, essentially,
and, okay, so there is a potential gateway to stop the allowances
going into the EU. But if the allowance price in the EU is 12
Euros European companies cannot buy Canadian allowances to meet
their requirement; but if the price is lower in the EU, say six
Euros, then Canadian companies can buy EU allowances and comply
with their obligations with those EU allowances. These are some
of the ideas that have been floating around. Which means actually
that you are going to drive the price of the EU allowances up
for European companies because there is no two-way street. The
chance of linking with those are extremely slim until those schemes
are designed so that they are comparable to the EU scheme. We
will definitely encourage that linkage but there are hurdles that
need to be overcome before it can ever happen.
Q434 Mr Savidge: You suggest using a
potential finance tariff levied against non-participating countries
as a way of encouraging compliance. Do you feel that a similar
measure might be appropriate in the short-term as far as addressing
competitiveness issues are concerned?
Mr Redshaw: What it does is give
that level playing field that everybody is looking for and actually
incentivises, because if you have a country that is facing, as,
say, the US is facing an import duty into the EU, that company
not only is competing on a level playing field with EU companies
but actually back at home their costs are probably higher because
they are potentially less efficient. So what that does is to incentivise
those companies to push for Emissions Trading within their own
countries and those countries then to adopt Emissions Trading
in order that there is a truly level playing field for those countries
that do not have emissions caps. So it is a highly complex subject;
you could not just slap a tariff on imports of certain goods:
(a) you have to work out what the what the CO2 intensity of that
good is, which is no simple feat—the CO2 intensity will
vary from one country to another and one factory to another within
that country—and (b) of course you have the issue of the
WDO.
Q435 Mr Challen: This is to Mr Dawson
and Mr Redshaw. You say on page 5 of your document, which Mr Savidge
has described as the "Barclays' Blueprint", that "The
agreement on a common per capita allowance in 2062 represents
a `fair' ultimate allocation of allowances," which sounds
to me like you are moving towards a Contraction and Convergence
model, as put forward by the Global Commons Institute; I do not
know if you are familiar with that?
Mr Redshaw: Yes.
Q436 Mr Challen: Does that represent
the corporate view of Barclays Capital or the corporate view of
the Barclays' group of companies? To what extent has that view
been accepted within the organisation?
Mr Dawson: I think we were using
that as an example of an approach that might be used as opposed
to proposing it as a Barclays' view. Clearly it is one way in
which you could envisage reaching some form of consensus on who
should ultimately get the rights on that carbon dioxide. I think
in trying to propose an international scheme we were looking for
a benchmark that might prove acceptable, and at some future date,
obviously.
Q437 Mr Challen: From your knowledge
of Barclays as a whole do you think that such views would be welcome
or acceptable?
Mr Dawson: I think Barclays is
very committed to its environmental responsibilities. I cannot
say that that position is Barclays' position but I know that Barclays
has a strong commitment to environmental matters.
Mr Redshaw: In terms of efficiency
of trading there will be minor impacts on the cost of metals production
in Europe and on the cost of refining oil products. To the extent
that there is a truly level playing field for international commodity
trading, certainly from the commodities desks' perspective the
fewer distortions the better.
Q438 Chairman: Can I pursue that a little
further? We have a document here, Barclays Capital Memorandum,
with Barclays' logo on every page. Are we to assume that these
are some personal opinions from you two and not an official document
submitted by Barclays?
Mr Redshaw: The way we approached
this is we were asked to submit evidence and we sat down—Paul
is an economist and I am a trader—and we attempted to determine
what would iron out the problems as we see them with the current
EU ETS and the Kyoto mechanisms, and if you want to satisfy the
requirements of, say, the United States, who insist on developing
countries being included in the trading scheme, and the developing
countries saying, "Why should we be in it if the US are not
in it?" and if you want to satisfy what we would perceive
as just fairness, you come out with the solution that we have.
Q439 Chairman: You make a very compelling
case and your document is extremely helpful and, if I may say
so, extremely well written. I just think it might be helpful to
all concerned if the whole might of the Barclays machine got behind
this agenda and started talking to the government about it and
to the EU and to the US. You have that kind of power to do that.
Mr Dawson: We are here representing
Barclays. You have correctly pointed out that the document has
Barclays written on it and we have agreed its contents with our
colleagues.
| 
