House of Commons - Environmental Audit

Select Committee on Environmental Audit Eighth Report

The transparency of Government reporting

17. One of the main issues we have raised in our report and subsequent dialogue with the Secretary of State concerns the results claimed by the Government for Phase I of the EU ETS (2005-07). As mentioned above, most observers believe that too many allowances to emit carbon have been allocated in Phase I, meaning there is overall little or no incentive for firms to cut back on their emissions, and thus that the entirety of this Phase is likely to be ineffective in driving down emissions. The Government, meanwhile, has maintained that Phase I is indeed having a significant impact in the UK.

18. In evidence to us in December 2006, the then Environment Minister confirmed the Government's estimate of the annual impact of Phase I on UK emissions as amounting to some 4.6 MtC (million tonnes carbon).[6] We expressed some doubt as to these figures in our report and subsequent letter, citing the evidence which suggested that across the EU as a whole there was a surfeit of allowances in Phase I. In his response to our letter, the Secretary of State reaffirmed that Phase I was indeed having a major impact. In fact, he reported that the Government has now increased its estimate of the impact on UK emissions, to some 5.9 MtC a year.

19. We continue to find the Government's arguments on this point difficult to accept as they stand. There are two main aspects to our disagreement: (i) the Government's use of "business as usual" (BAU) projections of emissions to calculate the impacts of the EU ETS, and (ii) its assumption that where UK firms purchase a net amount of carbon allowances from the Scheme, this is necessarily equivalent to reducing emissions from within the UK itself by the same amount.

Using "business as usual" projections to calculate emissions savings

20. One way in which the Government estimates the impacts of the EU ETS on UK emissions is by way of "business as usual" projections. Essentially, what this means is that the Government attempts, on the basis of historical data and various other factors, to estimate what the level of emissions from UK installations in a certain year would have been in the absence of the EU ETS, and compares this to the amount of carbon allowances issued under the UK's National Allocation Plan for the same year. Whatever the difference is, the Government then reports as being the impact of the EU ETS on UK emissions.

21. The main problem with this approach is that it is a counterfactual exercise; it is clearly impossible to be certain about what level emissions would have grown to in an alternative future. As we noted in another recent report, the results of such projection exercises can be highly variable.[7] In a paper we commissioned on emissions forecasting, the National Audit Office (NAO), while praising many of the Government's forecasting systems, concluded that the Government ought to be more open about the uncertainties inevitably attaching to such projections. The NAO further concluded that the Government should not simply state one single figure as its projection for a given year, but should rather state a range of figures to more accurately reflect the range of probable outcomes generated by its models.[8]

22. There is also a further reason why in this case projections may be especially subject to uncertainty. The current EU ETS system provides an incentive for both firms and governments in each Member State to inflate their projections of BAU emissions, since these are the reference levels from which the cutbacks in their allocations of allowances are set for each Phase of the Scheme. Some observers believe that the majority of Member States did indeed inflate their projections of BAU emissions in deciding their initial National Allocation Plans, and that this is what resulted in the general overallocation of carbon allowances across the EU as a whole for Phase I.[9]

23. For all these reasons we concluded in our original report: "Calculating cutbacks in emissions caps with reference to Business As Usual projections lacks certainty and effectiveness. […] Both within the UK and across the EU ETS, allocations ought to be set with reference to a declining budget of absolute carbon emissions."[10] We would add further that where the Government uses BAU projections to calculate the UK impacts of the EU ETS, it should not publicise a single figure, such as "5.9 MtC per year"; instead, it should give a range of possible savings. Moreover, it should be open about the uncertainties involved in such figures, and the reasons for that uncertainty.

Distinguishing between funding emissions reductions abroad and cutting emissions within the UK

24. In contrast to most other Member States, the actual emissions of UK installations have been higher in the first two years of the EU ETS than their allocations of carbon allowances. In 2005, for instance, emissions from UK installations were 27 MtCO₂ (million tonnes carbon dioxide) higher than their allocations. The UK had thus to purchase a net total of 27 million carbon allowances from the allocations of other Member States to cover these excess emissions.

25. In some publications the Government has presented these results as though this purchase of allowances has reduced UK emissions by an equivalent amount. A Defra press release from January 2007, for instance, reported that actual emissions for the whole of the UK were 554.2 MtCO₂ in 2005, some 6.4% down on 1990 levels; but that "Adjusted for emissions trading, UK CO2 emissions in 2005 were about 527 million tonnes - approximately 11 per cent lower than 1990 levels."[11] To reflect the impacts of the EU ETS in this case, then, the Government has subtracted 27 MtCO₂ from the actual figures for emissions from the UK for that year.

26. Our first concern here is that buying emissions credits from other countries does not necessarily translate into cutting emissions—whether in those countries, or in fact anywhere. The value of carbon credits—i.e., whether one carbon credit really does represent one tonne of carbon dioxide—is only as real as the trading schemes which issue them are effective. An effective scheme is one which is designed and audited so as to ensure that, in order to gain surplus carbon credits to sell to others, a participant has to do something to achieve a genuine and measurable reduction in an equal amount of emissions. Examples of ineffectiveness, meanwhile, could include a firm's being given an initial grant of more carbon credits than it needs to cover its emissions; being allowed to claim credits for making cuts in emissions that would have happened anyway (for instance, by shutting a plant that was slated for closure in any case); or building new plants that create more emissions in order to then abate them, and sell credits for doing so.[12]

27. Regarding EU ETS credits, as discussed above, the rationale behind the Scheme is that installations in all Member States ought to be allocated progressively fewer carbon allowances than they would normally require. This should give a financial incentive to firms to change their processes and make cuts in their emissions, leaving them with surplus allowances they could sell to other firms which find it harder to cut their emissions. Where there has been an overallocation of carbon allowances, many firms would have surplus credits to sell, without having to cut their actual emissions. Buying allowances in these circumstances has been described as "buying hot air", rather than funding other firms to invest in their own emissions cuts. Although the UK bought a net total of 27 million ETS allowances from the rest of Europe in 2005, the effect of this on the net emissions of the EU as a whole is difficult to estimate, but certainly would not necessarily amount to an equivalent reduction. Not only would it be wrong to state unequivocally that emissions from the UK had gone down by 27 million tonnes, but it would be wrong to make an unqualified claim of any reduction of 27 million tonnes, occurring anywhere.

28. A second issue is that, even where trading schemes are effective, and purchasing carbon credits does fund equivalent cuts abroad, this should still be clearly differentiated, within all Government reports and statements, from making emissions cuts within the UK. This is necessary to ensure proper scrutiny of progress towards meeting domestic targets within this country.

29. Emissions trading can be very valuable, enabling emissions cuts to be made in the most economically efficient manner, irrespective of location. In particular, emissions trading provides an incentive for richer countries to finance low carbon infrastructure in the developing world (since it is cheaper initially to cut emissions there), with mutual benefits to both sets of economies. The Government is entirely right to make the argument that "whether a tonne of carbon is emitted in Birmingham or Bangalore" makes no difference to its impacts, and thus that: "Because greenhouse gases are well mixed in the atmosphere it does not matter whether an emission reduction takes place in the UK or elsewhere."[13]

30. However, there is a certain minimum effort which must be made within the UK, if we are to make a proportionate effort towards meeting global emissions targets, based on a "Contraction and Convergence" or similar model.[14] Clarity in reporting emissions cuts made within the UK is essential for focusing attention on the significant efforts required to achieve this minimum level, and meet our requisite milestones in the years ahead.

The need for greater transparency and ongoing scrutiny

31. In the light of these concerns we warmly welcome the strong agreement in the Government Response that "Government publications should be transparent about the level of emissions reductions taking place in the UK, and the net inflow (or outflow) of emissions reductions from elsewhere", leading to the specific assurance that:

In the Government's view the most informative combination of data is to show

i) UK CO₂ reductions within the UK

ii) the total of CO₂ and CO₂e reductions within the UK and abroad funded by the UK.[15]

32. However, as we noted in our letter to the Secretary of State, we remain concerned that the Government is not always making these distinctions truly explicit. For instance, we are concerned by Defra's use of such rather bland phrases as "Adjusted for emissions trading", "when the effect of the EU Emissions Trading Scheme is taken into account", and "CO2 incl ETS" to refer to the practice of subtracting 27 million tonnes of CO₂ from the UK's figures for 2005, on the basis that UK installations had bought a net total of 27 million ETS allowances that year.[16]

33. Even more pointedly, we drew the Secretary of State's attention to Budget Report 2007, which in its chapter on the environment appears to have incorporated this subtraction of 27 MtCO₂ from the UK's emissions for 2005 into its sole presentation of UK emissions in that year (Figure 2). The small print at the bottom of the chart explains: "(figures take into account the effect of the EU ETS)".

Figure 2 Graph depicting UK emissions from Budget Report 2007

Source: HM Treasury, Building Britain's long-term future: Prosperity and fairness for families, Economic and Fiscal Strategy Report and Financial Statement and Budget Report, March 2007, HC 342, p 168, www.hm-treasury.gov.uk/media/F/D/bud07_chapter7_273.pdf

34. This is an example of something which our report specifically recommended should never be done:

24. […] Above all, [the Government] must ensure that whenever it publishes graphs depicting historic UK emissions and plotting their projected progress in future years, this always shows historic and projected emissions from the UK only, and never incorporates, in the same line, estimated reductions funded abroad. (Paragraph 74)[17]

35. The lack of transparency in this chart is underlined when it is compared with another graph, published in January 2007 by Defra, which depicts the trend in actual CO₂ emissions in the UK (Figure 3). This clearly shows that emissions from within the UK were almost unchanged in 2005 (actually going down by 0.1% from 2004 levels, but essentially showing very little change since 2003), not sharply down as the Budget 2007 chart suggests.

Figure 3 Graph depicting UK emissions from the Defra website

Source: Defra statistical press release 24/07, "2005 UK climate change sustainable development indicator and greenhouse gas emissions final figures", 31 January 2007, www.defra.gov.uk/news/2007/070131a.htm

36. We are disappointed by the Secretary of State's response to our argument on this point:

The Government does not agree with this specific recommendation of the Committee. This is because emission reductions occurring abroad may, by international agreement and subject to agreed rules, count towards the UK's emissions reduction commitments under the Kyoto Protocol; and in reality because they are funded by, and in effect caused by, UK operators subject to the EU ETS. Furthermore the net UK carbon account which will be compared with the budgets established for successive five year periods will, we anticipate under the provisions of the draft Climate Change Bill, include credits for emissions reductions outside the UK. The Government may therefore wish to publish graphs that include both types of emissions reduction.

37. We would have no objection—beyond a concern that the uncertainties of emissions trading are highlighted—to a graph which clearly depicted actual UK emissions and separately depicted the estimated impacts of emissions trading. However, we are concerned that the conclusion, "The Government may therefore wish to publish graphs that include both types of emissions reduction," means that the Government may intend to continue publishing graphs such as the one we have highlighted from Budget Report 2007. We would not find this acceptable, even if the Government were also to publish the more transparent type of graph (i.e., one that depicts actual UK emissions separately from estimated reductions funded abroad) in other publications. The Secretary of State's reference to the importance of emissions trading to the proposed regime of UK carbon budgeting only underlines the importance of our point.

38. As a result of our concerns we asked the Secretary of State whether the Government has, or is planning to develop, a code of practice concerning the transparency of emissions reporting, including uses of emissions trading. The Secretary of State replied that the UK greenhouse gas inventory is compiled and reported according to internationally agreed guidelines, that the UK's EU ETS data are drawn up under EU regulations, and that overall UK emissions figures are produced and published under the National Statistics Code of Practice. Thus he concluded: "The Government does not therefore see the need for a new code of practice".

39. While we appreciate the rigour involved in the compiling of official UK emissions figures, our argument concerns the Government's presentation of these figures. We are not certain that the issues of presentation we have highlighted are covered by any of the official guidelines referred to by the Secretary of State. Accordingly we may choose to explore this matter further with the forthcoming Statistics Board in due course. In a recent report we recommended that the forthcoming Committee on Climate Change be given a specific duty to audit Government emissions reporting, and we look forward to following the development of that Committee's duties.[18] We may also choose periodically to monitor the transparency of the Government's emissions trading reporting ourselves.

40. Shortly before publication of this report the Government published another high-profile graph depicting UK emissions in Pre-Budget Report 2007 (Figure 4). This was similar to the graph in Budget Report 2007, which we had criticised in our letter to the Secretary of State for the Environment, but contained an important difference. The recent graph provides separate trend lines for UK emissions, one line depicting actual emissions from the UK, and the other depicting UK emissions minus the Government's estimate of the impact of the EU ETS. This is an improvement, and suggests that our criticisms have started to be taken on board.

Figure 4 Graph depicting UK emissions from Pre-Budget Report 2007

Source: HM Treasury, Meeting the aspirations of the British people, 2007 Pre-Budget Report and Comprehensive Spending Review, October 2007, Cm 7227, p 115,

http://www.hm-treasury.gov.uk/media/C/8/pbr_csr07_chapter7_258.pdf

41. However, we would argue strongly that it does not go nearly far enough. First, there is no recognition of the uncertainties of emissions trading, in particular whether the net purchase of 27 million EU ETS allowances has reduced carbon emissions anywhere by that amount. Second, the graph's only explanation for the difference between trendlines is the quite uninformative phrase "with and without trading"; there ought to be notes to the graph which explain exactly how the "with trading" trendline is calculated. Third, the presentation of the trendlines is inconsistent: in the case of the "basket of greenhouse gases", the actual level of emissions in 2005 is pale, while the "with trading" line is bold; but for "carbon dioxide", actual emissions in 2005 are in bold and "with trading" emissions are pale. It would be clearer if in both cases the actual emissions were in bold, and the "with trading" trendlines were pale. This would help to make it clearer to the reader what was the trend of actual emissions from the UK.

42. Overall, we believe this graph is still highly lacking in transparency, in that it would still suggest to most readers that emissions from the UK have recently begun sharply to decrease, which is certainly not the case. We would also note, that in contrast to the graph from the Defra website, it does not depict the target level of the UK's 2010 target of reducing CO₂ emissions by 20% from 1990 levels, and thus does not help observers gauge the UK's performance against this target. We will continue to monitor Government presentations of UK emissions for their transparency.

Concluding remarks

43. We would conclude by reiterating our support for the EU ETS, and for emissions trading in principle. The problems affecting Phase I of the EU ETS should not be viewed as discrediting the concept of emissions trading; and Phase II already looks set to make significant improvements. We believe the Government should be more open about the problems of Phase I, and the uncertainties and complexities of emissions trading in general; and that the increased accountability this would result in would help to strengthen the foundations of emissions trading. Conversely, a lack of transparency could undermine both the effectiveness of emissions trading and public and financial confidence in it.

44. We have published this unusually detailed commentary on a Government response because of the great importance which emissions trading can play in contributing to UK and international efforts to mitigate greenhouse gas emissions. We do not, however, require a formal Government response to this short report. We will no doubt continue this dialogue in future reports.

6 Environmental Audit Committee, The EU Emissions Trading Scheme: Lessons for the Future, Q310 Back

7 Environmental Audit Committee, Seventh Report of Session 2006-07, Beyond Stern: From the Climate Change Programme Review to the Draft Climate Change Bill, HC 460, pp 8-17 Back

8 National Audit Office, Emissions Projections in the 2006 Climate Change Programme Review, December 2006, pp 20-21 Back

9 Environmental Audit Committee, The EU Emissions Trading Scheme: Lessons for the Future, p 23 Back

10 Environmental Audit Committee, The EU Emissions Trading Scheme: Lessons for the Future, p 83 Back

11 "Greenhouse gas statistic show UK on track to double Kyoto target", Defra press release 25/01, 31 January 2007 Back

12 Environmental Audit Committee, The EU Emissions Trading Scheme: Lessons for the Future, p 72 Back

13 Government Response to the Environmental Audit Committee, Second Report of Session 2006-07, The EU Emissions Trading Scheme: Lessons for the Future, response to recommendation 22 Back

14 Under a global Contraction and Convergence agreement, emissions budgets allocated to each nation would be progressively amended until all would arrive at an equal per capita level, consistent with an internationally agreed stabilisation level. Back