Select Committee on Environment, Food and Rural Affairs Minutes of Evidence


Memorandum submitted by Friends of the Earth (U39)

EXECUTIVE SUMMARY

  1.  2005 offers a historic alignment of opportunities for the UK to lead the world in efforts to tackle climate change. However, in order to convince the world that we are deserving of the leadership role that the Prime Minister has indicated he wishes to take, we must first demonstrate a commitment to meeting our national climate targets and to assisting Europe in meeting its Kyoto target.

  2.  The Government's review of its Climate Change Programme offers the potential to get the UK back on track to meeting its 20% carbon dioxide reduction target by 2010.

  3.  To do this the new programme must be designed using fundamentally different principles. A "top down" rather a "bottom up" assessment must be undertaken to identify those sectors where emissions are currently rising and policies targeted and designed accordingly.

  4.  Targets, and policies designed to meet them, must be adaptable and expressed in relation to net reductions achieved relative to a fixed baseline, and not in set amounts of carbon subtracted from a projected, and therefore uncertain, future baseline, as was the case in the previous programme.

  5.  The UK should commit to introducing a package of measures that give sufficient control over emissions to guarantee the delivery of sustained year on year reductions as soon as possible.

  6.  The programme review also provides the opportunity to increase the effectiveness of existing policies—the EU Emissions Trading Scheme, the Climate Change Levy and the Energy Efficiency Commitment—and to introduce new policies to plug the gaps in the existing framework. By, for example, introducing new measures to ensure renewable transport fuels and efficient vehicles penetrate the transport market and rising demand for energy in the commercial and domestic sectors is reversed.

  7.  Internationally, the UK should use its Presidency of the EU and Chairmanship of the G8 to move towards a renewed international consensus around the need to take urgent action to tackle climate change under a legally binding international framework. It should also be accepted that developed countries need to deliver immediate and sustained emissions reductions, and that to avoid technological lock-in to high emission pathways, public funding through international financing institutions should be available for only sustainable energy developments such as renewable energy.

INTRODUCTION

  1.  Latest scientific findings indicate that global sensitivities to increasing concentrations of greenhouse gases could be far greater than first thought, and that warming could be occurring far faster than anticipated. The need for a truly global, legally binding framework to bring down emissions rapidly is more pressing than ever.

  2.  The UK and Europe have been leading the world in the political battle to secure a legally binding international framework to tackle climate change. With Russia's decision to ratify it looks very likely that the Kyoto Protocol will come in to force early in 2005. This protocol seeks to reduce emissions from developed countries by 5% relative to 1990 levels. It is the first step towards much deeper cuts that will be necessary if we are to avoid temperature increases in excess of two degrees. To achieve this, the IPPC's Third Assessment Report indicated that global emissions, which have been rising by about 1.5% per annum, would need to peak and decline within the next 10-15 years.

  3.  In order to maintain credibility internationally, it is imperative that as well as continuing to demonstrate political leadership, the EU and the UK must meet their reduction targets and show that they can successfully decouple economic growth from rising emissions.

  4.  Under Kyoto the EU has a target to reduce greenhouse gas emissions by 8% (relative to 1990) by 2012. The EU is not currently on track to meet its target—in 2002 a reduction of 2.9% had been achieved meaning that we some distance from the linear path to meeting the target where we should have achieved a 4.8% reduction.

  5.  In 2001 the European Environment Agency predicted that a 7.2% reduction was possible with additional policies and measures and if several Member States, including the UK, over achieved their target. If no overachievement was taken into account, the reduction fell to just 5.1%.

  6.  The UK's contribution to the EU Kyoto target is to reduce by 12.5% but it is clear that in order for the EU as a whole to comply the UK will need to go further. This is entirely possible as the UK met its Kyoto target in shortly after agreeing to it in 1997 largely due to the dash for gas that occurred during the 1990's when a switch from coal to gas and the building of more efficient power stations lead to reductions of about 1% per annum for most of that decade.

  7.  In 1999 the UK set a more ambitious national target of a 20% cut in carbon dioxide emissions by 2010, and in 2003 in the Energy White Paper it set a long term target of a 60% cut in CO2 by 2050.

  8.  Current trends show that the UK's Climate Change Programme is failing to deliver sufficient reductions to meet our 20% target by 2010. The last published version of the DTI's Energy Paper outlining projected energy trends and resulting emissions indicated that with existing polices and measures we were on course to meet only a 15.2% reduction. Even this is optimistic given that in 2003 we were only 7.5% below 1990 levels and that the power sector has recently highlighted flaws in the projection methodology that may lead to even higher projected emissions.

  9.  The review of the Climate Change Programme will need to introduce new policies and measures and to toughen up its use of existing measures if it is to succeed in making up the projected shortfall. The most important challenge for the programme is to deliver a package of measures that provide control over all sources of greenhouse gas emissions that we can then apply with increasing pressure to meet whatever cuts the latest scientific results indicate are necessary. At present, in developed countries, annual reductions of approximately 1-3% are required.

  10.  The two ways of delivering emissions reductions are to decrease the carbon intensity of our energy system by for example switching from coal to gas and increasing our use of renewable energy, and increasing our resource productivity ie improving energy efficiency. The existing CCP contains a mixture of measures which seek to achieve these aims in various ways in various sectors—however, there appears to be no consistency of approach to emissions in different sectors and little sign of any top-down assessment of whether the coverage of the policies is adequate or the measures sufficiently robust. Annex I provides a rough overview of the type and coverage of existing measures in the programme.

  11.  The fact that emissions have fallen and risen in no discernable pattern since the late 90's indicates that the partial coverage and range of types of measures being used do not provide Government with sufficient control to guarantee reductions in emissions of carbon dioxide.

SECTION A

REVIEW OF THE UK'S CLIMATE CHANGE PROGRAMME

Changing the Framework

A top down approach

  12.  One of the most fundamental changes that can be made to the programme is to adopt a more "top down" rather than "bottom up" approach to designing policies to achieve our emissions targets—that is to start with the question: Which sectors' emissions are currently rising and need to be addressed? Rather than building towards a given target using estimated amounts of carbon saved from various policies and measures that exist already, or are planned for introduction. A top down approach would lead to more effective targeting of policy and more comprehensive coverage.

Adaptive targets and policies

  13.  Policies should also be designed so that they are adaptive and reach targets relative to a given baseline year (1990 in the case of the 2010 20% CO2 reduction target) rather than set amounts of carbon removed from a projected future emissions scenario. The existing programme has largely failed to deliver because many of the policies were not able to adapt to changing circumstances (such as high gas prices relative to coal and increasing demand for energy) and targets were expressed as set amounts of carbon irrespective of what that delivered in terms of net reductions against the baseline year.

Strengthening Existing Policies

  14.  A number of measures already that are designed to deliver emissions savings and Government has theoretically at least a reasonable degree of control over emissions in at least one sector—industrial (including the power sector). However, the effectiveness of existing measures will be determined by how Government chooses to implement them. So far generous allocations in the EU Emissions Trading Scheme and weak Climate Change Agreements and indicate that substantial savings, even in this sector, are unlikely to be achieved for the majority of the remainder of this decade.

The EU Emissions Trading scheme

  15.  This covers approximately fifty per cent of our emissions of carbon dioxide that come from industry. The scheme, which places a cap on emissions but enables trading of emissions permits to be used to assist with compliance, will come into force in 2005. The first round of trading runs from 2005-08 and the UK has used it to achieve a 5.5MtCO2 reduction from Business as Usual Projections for the power sector.

  16.  Allocations in the first phase have been generous and taken us a long way from a linear path to meeting the 20% target in 2010. There can be no adjustment to allocations once trading begins and so we have effectively ruled out achieving any additional saving from 50% of our emissions until 2008 when the second traded period begins.

  17.  It is true that UK industries could still decide to beat their caps and sell credits overseas, taking us closer to the target, however, the opposite is also true—credits can be imported taking us further away.

  18.  The initial allocation was the Government's best opportunity to constrain emissions as the scarcity of allowances will set the price of carbon and in turn influence behaviour. It is true that scarcity will be determined by how all 25 members of the EU allocate, but the UK was seen to by many to be setting the pace, and, as the second largest emitter in Europe, controlled a sizeable portion of the market. Despite this the UK chose to allocate very generously for more details see Annex II.

  19.  The Review of the Climate Change programme will need to determine the level of reduction required from industry in the second phase of trading (2008-12). Allocations will need to be significantly reduced—in all probability savings will need to be tripled—if we are to stand a chance of meeting our 20% target.

  20.  The rules of the game also need to be tightened at a European level (see EU Presidency below for details).

Climate Change Levy

  21.  The climate change levy has the potential to deliver significant emissions reductions by internalising the cost of carbon intense fuels and profligate use of energy. However, so far, its impact has been limited primarily because of the low level at which it was introduced—energy costs for most businesses remain a relatively small expenditure item.

  22.  In the industrial sector where energy costs are high, most sectors have secured exemptions from the levy and instead signed "Climate Change Agreements" with Government. These negotiated agreements have so far been very generous and have failed to deliver significant savings in all but the iron and steel sector where there was a large falling off of capacity.

  23.  These same sectors are likely to seek exemptions from the EU Emissions Trading Scheme which would otherwise introduction of a cap and trade mechanism to constrain emissions. If this is to be allowed the UK Government must ensure that targets under future CCAs are tough and absolute (ie not expressed as targets per unit of production) in order that they require an effort equivalent to the effect of the trading scheme.

  24.  The classification of levy-exempt forms of energy includes renewable energy but the definition used is different to the one used in the Renewable Obligation in that it makes imported sources of renewable energy eligible and includes energy from mixed waste incineration. These loopholes should be closed.

  25.  The Levy Exemption Certificates that act as proof of exemption can be attached to non-renewable units of electricity and sold as "levy exempt" without the corresponding "Renewable Obligation Certificate" or "ROC". This means that there is significant potential for double selling and the weak incentive the levy creates for renewable energy is still further weakened. The Government should introduce proper accreditation for all renewable electricity offerings in the domestic and commercial sector and ensure no double counting occurs.

The Energy Efficiency Commitment

  26.  The principle tool for delivering energy efficiency in the domestic sector is the Energy Efficiency Commitment (EEC). The demand reduction achieved in the scheme is calculated using derived figures for set activities, which are sometimes weighted to encourage investment in particular activities (eg promotion of more efficient appliances). Targets are not expressed as a percentage of energy supplied and are not measured against the 1990 Kyoto baseline. Consequently there is no requirement to prove a net reduction in supply or demand as a result of the scheme being in operation. The weighting of credits further undermines the transparency and breaches the environmental integrity of the scheme. In other words, although efficiency may on paper appear to be improving, overall demand for energy and the associated emissions, can continue, and are continuing, to rise.

  27.  The EEC establishes the concept of a regulatory approach to delivering energy efficiency and uses trading mechanisms to enable participants to meet targets. However, by being "bottom-up" in its design, it fails to address fundamental market failures where suppliers are incentivised to sell more units of energy to their customers, sometimes offering tariffs with banded structures that reward profligate use with lower per unit rates. These contradictory market forces help to undermine the overall effect of EEC on total demand which continues to rise year on year.

  28.  Friends of the Earth proposes a move towards a far more flexible traded mechanism incorporating features from the Renewables Obligation. These should include the immediately setting targets expressed as a percentage of the overall supply of energy rather than a set amount of energy supplied (as is currently the case), greater incentives to trade, and a buy-out mechanism to limit cost impacts.

  29.  The shift to a more flexible traded system is unlikely to be able to be fully implemented until after 2008 when the design of EEC will be next revisited. In the meantime, we recommend that the principles of a more trading based system be piloted in the commercial sector (see below).

New Policies to Address Gaps

  30.  It can be seen from the table in Annex I that there are significant gaps where no substantial measures exist to ensure a shift towards a less carbon intense economy. Friends of the Earth recommends the following measures be introduced to better complete the policy framework:

CROSS SECTORAL MEASURES:

Renewable Heat Obligation

  31.  This would in effect be a cross cutting measure that, like the Renewable Obligation, would incentivise investment in renewable energy across industrial, commercial and domestic sectors.

  32.  Heat accounts for roughly a third of our demand for fossil fuels and yet there is no dedicated measure designed to support the development of renewable sources of heat as it is not included in the existing Renewable Obligation.

  33.  Friends of the Earth supports the introduction of an obligation on all suppliers of fossil fuels for heat such that a rising proportion of their business is provided by renewable sources of heat eg biomass, ground source heat pumps and solar thermal. A fuller briefing on how such a measure could be practically applied is available.

IN THE COMMERCIAL SECTOR:

Demand Reduction Obligation (or Trading in "Negawatts")

  34.  There are few measures in this sector, beyond the weak climate change levy, to encourage either energy efficiency or the switch to less carbon intense fuels.

  35.  Friends of the Earth recommends that a "demand reduction obligation" be introduced in the commercial sector. This would take the form of a cap and trade system with a buy out mechanism. The obligation could be applied to the utility companies serving the commercial sector or to commercial customers themselves. The scheme would provide a financial incentive for the obliged parties to seek out cost effective ways of reducing the growing demand for energy in this sector, by setting a target for the total amount of energy to be supplied in a given year. The target could initially be set at "no net growth in demand".

  36.  Those companies beating their targets can trade over-compliance with those unable to meet their targets. The existence of a buy-out mechanism would ensure that there was no absolute limit of the amount of energy that could be provided (unlike in the EU Emissions Trading Scheme where there is no buy-out) but that a cost would be internalised by those exceeding their target. The benefits of such a scheme are that unlike in the case of a tax it is a flexible mechanism and introduces a positive financial incentive as well as a penalty.

IN TRANSPORT:

  37.  Aviation: Uniquely, aviation is currently free from any policies or measures designed to curb emissions. This must be addressed or forecast increases will swamp savings made in other sectors.

  38.  Government must internalise the environmental cost of emissions by introducing an emissions charge either as a stand alone charge or by increasing Air Passenger Duty. It must also begin proceedings to opt aviation into the EU Emissions Trading scheme (see EU Presidency).

  39.  Road transport: In distinct contrast the number of new regulations that have been introduced in the industrial sector, efforts to curb transport emissions have been largely reliant on fiscal incentives or voluntary action. Fiscal measures such as road fuel duty need to be increased, with revenue raised going to provide real alternatives and Vehicle Excise Duty could similarly be increased for gas-guzzling cars like 4x4s, recycling the revenue back to greener cars.

  40.  In addition however new measures are needed to enable new technologies to effectively penetrate the market including:

A renewable transport fuel obligation:

  41.  There is currently no measure, other than a weak duty rebate for biofuels, that incentivises the commercialisation of renewable fuels in transport. As in the electricity sector, if the introduction of alternative fuels is to effectively reduce emissions, it must displace existing fuels. A price signal alone is insufficient to ensure this happens as incumbents in the market will have little incentive to change business practices and new entrants will find it extremely difficult to enter what is a highly consolidated and mature market.

  42.  In July of the this year a new law was introduced in the Energy Act enabling the Government to introduce a Renewable Fuel Obligation similar to the Renewable Electricity Obligation. Government has, however, yet to make any announcement about whether it intends to set targets and introduce such an obligation. The Government must use this measure to help to bring about increased fuel diversity and reduced emissions and an early announcement would ensure that companies who are interested in investing in renewable fuels locate in the UK, creating jobs and revenue streams for farmers, rather than in other European countries who have already introduced far more favourable support mechanisms.

A legal requirement to improve vehicle efficiency:

  43.  A clear timetable of regulations designed to ensure the rapid uptake of high efficiency vehicles such as "hybrids" should be introduced such that by 2010 all new cars sold meet stringent new upper limits on fuel consumption per mile travelled. The only measure intended to increase the efficiency of vehicles is a voluntary agreement at EU level. This phased agreement is coming under increasing pressure from car manufacturers who have sought to water down the next round of commitments. The voluntary nature of the measure will prevent it from achieving substantial improvements and if hybrid vehicles are not to remain niche products, regulations will need to be introduced to help them compete with cheaper, less efficient alternatives.

IN THE DOMESTIC SECTOR:

  44.  The domestic sector does not currently pay the climate change levy and the primary tool the Government has introduced to incentivise energy efficiency is the Energy Efficiency Commitment which applies to utility companies supplying energy The most important step Government could take to reduce emissions in the domestic sector is to introduce a top down market based mechanism that incentivises energy companies to sell energy services rather than units of energy (see above).

  45.  In the meantime, many additional measures could be introduced to increase incentives for householders to reduce their energy demand and to switch to cleaners fuels including:

    —  Stamp duty rebates for efficient homes.

    —  Much tougher building regulations applying to existing as well as new developments.

    —  A domestic business tax allowance allowing private landlords to claim investment in energy-saving materials against profits.

    —  Council Tax reduction for householders installing energy saving measures.

    —  Reduced rate of VAT to 5% for the supply and installation of energy efficient products or materials (in non-grant schemes when householders employ contractors).

IN THE INDUSTRIAL SECTOR:

Rates reform

  46.  New rules governing how business rates are calculated are to be introduced in April of next year and are likely to hand a significant rebate to coal fired power stations while increasing the rates payable by clean renewable alternatives. This example of how perverse effects can be introduced, undermining Government's climate objectives, highlights the need for far greater integration between Departments and to deliver clear unequivocal policy signals. A solution to this particular problem would be for Government to create a new formula for the calculation of rates which was a least in part based on carbon emissions per unit of production.

SECTION B

UK PRESIDENCY OF THE EU

  47.  Two important policy decisions will be being discussed next year: the EU's position on reduction targets post 2012 and the review of the EU Emissions Trading Scheme.

POST 2012 TARGETS

  48.  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. 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 at least a 30% reduction by 2020.

  49.  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.

EU EMISSIONS TRADING SCHEME

  50.  The EU Emissions Trading Scheme represents the most significant piece of climate legislation anywhere in the world to date and if it is implemented effectively it has the potential to control approximately half of Europe's emissions of carbon dioxide.

  51.  However, experiences to date have shown that the level of subsidiarity in the scheme allows too great an opportunity for Member States to undermine the effectiveness of the scheme in the name of protecting international competitiveness. A review of the Directive will commence in 2005 and under the EU Presidency significant progress could be made towards improving this ground breaking tool.

  52.  The UK needs to pursue the following objectives:

    —  set a challenging European level cap on total allocation of allowances in the second phase of trading (2008-12);

    —  extend the scheme to cover other sectors including land based transport and aviation;

    —  extend the scheme to cover other greenhouse gases;

    —  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; and

    —  establish consensus on the need to introduce a UN procedure to oversee the development of company level trading internationally.

DIVERSION OF PUBLIC MONEY TOWARDS SUSTAINABLE ENERGY DEVELOPMENTS

  53.  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. More information on this recommendation is provided in Annex III.

SECTION C

UK CHAIRMANSHIP OF THE G8

  54.  The UK's chairmanship of the G8 in 2005 provides a key opportunity to achieve political consensus amongst the world's richest countries on the urgent need to take international action to tackle climate change.

  55.  Our Prime Minister has already stated that his two priorities will be climate change and Africa. On climate change he has indicated that he will pursue three themes:

    —  consensus on the most recent scientific evidence with a view to agreeing a global environmental limit;

    —  work to speed up the deployment of existing carbon abatement technologies; and

    —  work to engage high emitting developing countries such as China and India.

  56.  Friends of the Earth largely supports these aims and hopes that they will deliver tangible outcomes. 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 the first meeting of parties to the Kyoto Protocol in December of the same year.

  57.  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);

    —  consensus between developed and developing countries about the reorientation of global agricultural subsidies towards supporting biofuels and away from food production;

    —  agreement to establish an international framework governing the development of company level emissions trading schemes enabling all UNFCCC signatories to design and implement effective schemes to control their domestic emissions; and

    —  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.

  More information on each of these suggestions is available from Friends of the Earth.



 
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