Memorandum submitted by EEF
INTRODUCTION
1. EEF is the representative voice of manufacturing,
engineering and technology-based businesses with a membership
of 6,000 companies employing around 800,000 people. Comprising
11 regional EEF Associations, the Engineering Construction Industries
Association (ECIA) and UK Steel, EEF is one of the leading providers
of business services in employment relations and employment law,
health, safety and environment, manufacturing performance, education,
training and skills.
2. Efforts to tackle the causes of climate
change are now a critical issue for government, individuals and
business alike. Policy makers are rightly focused on attempts
to reduce harmful emissions, but at the same time sufficient balance
needs to be struck between effective action and business competitiveness.
UK GOVERNMENT EXPERIENCE
3. EEF has played a key role in many of
the policy debates concerning climate change over recent years,
and we are delighted to have the opportunity to contribute to
the Environmental Audit Committee (EAC) inquiry "The Kyoto
Protocol: 2012 COP12 and COP/MOP2, Nairobi 6-17 November 2006".
We hope our views expressed in this document will contribute to
the design of any scheme that will help to meet the challenge
of greenhouse gas (GHG) reductions over the next few decades.
4. We believe that the UK government is
well-placed to show leadership on matters of climate change, given
the level of activity in this area of policy over recent years.
However, we feel that not all these experiences are positive,
and any leadership role by the government would be enhanced were
it to be bold and admit that there have been shortcomings with
the measures currently in place to address GHG emissions.
5. The measures introduced—particularly
the system of climate change agreements—to address CO2
emissions within the UK have met with some success. These measures
have contributed to the UK being in line to meet its Kyoto target
and it is likely that CO2 levels would be higher had
such policies not been implemented. However, over the last couple
of years total emissions have been rising and as a result the
government seems likely to fail its own domestic targets for emissions
reductions.
6. In addition, despite a decade of funding
to implement programmes for promoting energy efficiency, the results
have so far not met expectations. Plus, the experience of last
winter—in which there was a reliance on coal to meet base
load electricity production—also serves to demonstrate the
enormity of the task and the complexity of issues that need to
be addressed and managed.
EUROPEAN EXPERIENCES
7. In Europe the EU Emissions Trading Scheme
(ETS) is the main instrument for delivering reductions of CO2.
The Commission has indicated its intention that ETS post 2012
will become the "docking station" for international
trading of GHG emissions. In terms of establishing the scheme
and implementing the framework to facilitate the trading of CO2
the scheme has been a success.
8. But, with only one year's reporting so
far on the performance of ETS, it is difficult to assess its effectiveness
as a tool to reduce CO2 on a macro level. At the "coal
face" of the trading scheme, we are able to see how fundamental
elements of the design of ETS need to be addressed post 2012:
both to improve its effectiveness in order to better reduce GHG
emissions; and also to ensure international participation within
a system that proves sustainable.
9. The EU ETS, like the Kyoto protocol,
relies on a "cap and trade" system to reduce overall
European CO2 emissions. Cascaded down to the level
of an installation a cap will require companies to choose one
of three options: either to buy CO2 credits; to invest
in new technology that will reduce CO2; or cut production.
Cap and trade relies on the market to help deliver reductions
where abatement of carbon production is cost effective. For energy
intensive industries—where cost effective abatement potential
is a less available option—this means purchasing CO2
allocations or even cutting production. This inevitably introduces
distortions: and EEF would argue that any cap and trade system
needs to introduce a level of sophistication that links the cap
to abatement potential and technology. Some form of cap is necessary
to give a signal to investors; but it must also be recognised
that investment in emissions reduction technology in capital intensive
sectors may be slow to filter through.
OTHER GLOBAL
EXPERIENCES
10. The USA refused to ratify the Kyoto
Protocol, primarily because of a disagreement with the capping
of CO2 emissions. However, with the backing of strong
public opinion, the USA does agree that GHG emissions should be
reduced and has committed to do this as a signatory to the United
Nations Framework Convention on Climate Change (UNFCCC). To meet
its commitments, the USA—along with China, Japan, India
and South Korea—has signed the Asia Pacific Partnership
(APP). Recognising the need for technology to help solve the problem,
"the partnership will collaborate to promote and create an
enabling environment for the development, diffusion, deployment
and transfer of existing and emerging cost effective, cleaner
technologies and practices, through concrete substantial co-operations
in order to achieve practical results".
11. Recent debate has questioned whether
the promotion of technological solutions may not be more effective
than imposing a cap. Whilst a cap may be essential for central
control it may not be as effective at delivering and incentivising
the step changes needed in technologies for the more intensive
industries. Add to this the fact the price of carbon is partly
driven by speculation—not by the nearness of technology
to market or the abatement potential—then a degree of uncertainty
creeps into the true cost of carbon.
12. EEF's view is that the two methods should
complement each other: a cap is essential to signal societal concerns
about emissions reductions and encourage investment; but only
the development and adoption of new technology can deliver those
reductions.
LESSONS FROM
EU ETS
13. Nairobi COP12/MOP1 is an opportunity
to explore the strengths and weakness of each of these systems
and begin establishing a framework that recognises these. There
is a danger that the European Commission and the UK government
will be so eager to sell the merits of cap and trade as it has
been implemented through the EU ETS that the weaknesses of the
scheme will be ignored and therefore not addressed.
14. EEF has experience of the limitations
of EU ETS both in terms of the way in which it can work against
incentivising CO2 reductions and also in the way it
can distort competition. In particular, imposing caps based on
governments' forecasts of companies' output up to six years ahead
is virtually guaranteed to result in inappropriate allocations
of emissions allowances.
15. The alternative allocation methodology
within a cap and trade scheme is auctioning of allowances. We
recognise that this might be the most economically efficient and
environmentally effective way of distributing allowances to the
electricity generating sector, and to any other such sector that
is able to pass the costs on to its customers as a result of not
being subject to international competition. However, obliging
sectors who are subject to international competition to purchase
allowances relating to the entirety of their emissions would simply
impose an additional, irrecoverable cost burden on companies.
It would not yield any additional environmental benefits compared
to the current system, because it would be unrelated to companies'
abatement potential. It would put companies at a severe competitive
disadvantage and encourage imports from countries not covered
by the scheme
16. We believe it is essential that the
price of carbon fully reflects the operational realities within
sectors and so fully demonstrates the abatement potential. This
requires a move away from the cap and trade model for those sectors
subject to international competition. Detailed energy efficiency
benchmarks could be established and regularly reviewed within
sectoral agreements negotiated with the relevant authorities.
At the end of each accounting period an ex-post adjustment would
then be undertaken that, on the one hand penalises companies that
had performed worse than the benchmark, but on the other hand
rewards companies that performed better than average. There are
a number of variants to this proposal that can be considered,
but the essential element is that the "accounting" takes
place in response to actual performance against energy efficiency
benchmarks. Thus, this removes the need for both government-imposed
allocations and auctioning, and thereby safeguarding the competitiveness
of the sectors as a whole.
17. We believe that one of the key advantages
of this approach is that it can be extended throughout the affected
sectors, in order to help engage international players and thereby
gradually act as an inducement to governments to develop an international
trading scheme. The GHG Emissions Directive is currently under
review and it is essential that the review gives time to allow
for developments that may come out of the COP12/MOP2 and discussions
around alternative arrangements such as the one proposed above.
CONCLUSIONS
18. This issue of Kyoto post-2012 is crucial
to the climate change agenda, and EEF is committed to working
with policy makers to look at ways of improving the working of
emissions reductions programmes in order to maintain the competitiveness
of UK manufacturing. Our main concern rests with the future design
of the scheme, and the ways in which allowances might be distributed.
Our key suggestion revolves around moving away from a cap and
trade model, and developing instead a sectoral agreement approach
based on benchmarking with ex post adjustment.
September 2006
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