Appendix 1—Government Response
Government Response to the Environment Audit Committee's
report: "The EU Emissions Trading Scheme: Lessons for
the Future" (Second Report of Session 2006-07)
Introduction
i) The Government welcomes the Environmental Audit
Committee's comprehensive report into the EU Emissions Trading
Scheme (EU ETS). We are keen to use its conclusions and recommendations
to help inform our input to the long-term future of the EU ETS.
ii) The Government welcomes the Committee's positive
comments about the administrative success of the EU ETS and the
leading contribution the UK has made on ensuring a robust cap
for Phase II.
iii) The Government welcomes the report's acknowledgment
of the UK's leadership in establishing and promoting the EU ETS.
This is a role we will continue to play through our work towards
the review of the Emissions Trading Directive and in the UK Government
vision on Emissions Trading published alongside the Stern Review.
iv) The EU ETS and the wider climate change issues
covered by the report involve a number of departments working
together. The ETS and many climate change policies areas are devolved
to the administrations in Scotland, Wales and Northern Ireland.
Whilst the Environmental Audit Committee's report is to the UK
Government, the Government's response would normally be formulated
in consultation with the devolved administrations. Given that
elections are about to be held in Scotland and Wales and that
Northern Ireland is in a post election period awaiting the establishment
of a devolved Assembly on 8 May, this response reflects input
from the relevant Government departments, but has not been agreed
with the devolved administrations.
v) The Government's responses to the specific conclusions
and recommendations of the Environmental Audit Committee's Report
are set out below.
CONCLUSIONS AND RECOMMENDATIONS
The EU ETS is the cornerstone of UK and EU
climate change policy
1. The Government has made it clear that the EU
Emissions Trading Scheme (ETS) is "the cornerstone of the
Government's policy framework to tackle climate change."
Given that the Prime Minister has repeatedly emphasised that,
as he puts it, "climate change is probably the greatest long-term
challenge facing the human race," and that tackling it is
thus "a top priority for this government, at home and internationally,"
it would seem no exaggeration to say that the Government has more
staked on the success of this one policy instrument than perhaps
any other. (Paragraph 1)
Climate change is a global problem needing a multilateral
solution. The EU ETS has built on the Kyoto Protocol to take the
world's most significant step in establishing a carbon price signal
across countries and sectors to ensure that emission reductions
are delivered in the most cost effective way.
The Government is committed to building on the EU
ETS as the main way of pricing carbon in the economy, to ensure
that emissions are effectively limited. However, emissions trading
may not be a suitable mechanism to price carbon in all parts of
industry or the economy. As the Stern Review showed, three elements
of policy are critical to minimise the costs of mitigation to
climate change: carbon pricing, technology policy and measures
to overcome barriers to behaviour change, such as energy efficiency.
Technology policy is needed to overcome the market failures associated
with research, development and deployment of low carbon technologies,
such as knowledge spillovers and externalities. Measures to encourage
behavioural change are necessary to overcome information asymmetries
and inertia. In addition, measures are needed to avoid deforestation
and encourage sustainable land use, alongside measures for adaptation
to the effects of climate change which can no longer be prevented.
The recent publication of the draft Climate Change
Bill seeks to provide a clear, long term domestic framework for
the UK to achieve its goals of reducing carbon dioxide emissions
while maximising the social and economic benefits and minimising
the costs of doing so. The Bill's proposals would provide greater
clarity and confidence for UK industry to plan and invest in the
technology needed to move towards a low carbon economy, and would
do so in a way which is consistent with a vibrant economy and
fair society. It will also demonstrate the UK's strong international
leadership - a key factor in helping to secure future international
agreements.
2. Within a matter of months the European Commission
is set to have reached decisions on the next two phases of the
EU ETS which will be vitally important, not just to the success
of this scheme, but to the establishment of carbon trading worldwide.
The EU ETS has received serious criticism for its design to
date, concerning the efficiency and effectiveness with which it
sets carbon allocations, and the way in which it relates to countries
outside the EU, both in terms of dealing with
international competition and of funding offsetting
projects in developing economies. These challenges must be addressed
if the EU ETS is to prove the credibility of emissions trading
as the foremost mechanism for tackling greenhouse gas emissions
worldwide. In meeting these challenges, and making a success of
emissions trading, Europe would be in the position to mould a
global carbon market, something which only underlines the importance
of getting the design of the Scheme right. The converse risk,
if Member States and the European Commission get the terms of
Phases II and III wrong, is that the credibility and potential
effectiveness of emissions trading is fatally and permanently
undermined. (Paragraph 10)
The Government agrees that the EU ETS needs integrity
and effectiveness in order to deliver cost-effective emission
reductions. This is why we have argued for a consistent and robust
approach to cap setting for Phase II; and underpins our long term
vision for improving the design of the scheme, to enable it to
become the basis of a global carbon market. We welcome the Commission's
decisions on Phase II caps. The market is showing a forward price
for 2008 of around €17 at the time of writing, suggesting
that it believes that Phase II will provide higher incentives
for reductions in emissions.
Linking the EU ETS to the Clean Development Mechanism
provides further flexibility for emission reductions and is an
important means of encouraging low carbon investment in the developing
world. The use of Kyoto project credits is subject to limits to
ensure a balance between flexibility and the need for domestic
abatement and to avoid oversupply weakening the market.
The Commission has initiated a review of the Emissions
Trading Directive. The review, and the revised legislative proposals
that will follow, will provide an opportunity to ensure that the
scheme delivers cost effective emissions reductions in the long
term. The priority areas announced by the Commission in its Communication
on the review[19]
chime well with those set out in the UK Government Vision on Emissions
Trading.
The record of Phase I
3. Two years into the operation of the EU ETS,
there is much to applaud. The very existence of such a complex
system, involving hundreds of firms and thousands of installations
in 25 countries, is an impressive achievement in its own right,
especially considering the tight timetable under which it was
set up. In operation, the Scheme has shown itself so far to be
an administrative success, with the overwhelming majority of installations
reporting their independently verified CO2 emissions,
and surrendering the appropriate number of allowances to cover
them, to the required deadlines. (Paragraph 15)
The Government agrees with the Committee's positive
assessment of the administrative success of the EU ETS. The fact
that the scheme was operational across the majority of the EU
by early 2005 demonstrates that nations can act swiftly and
decisively together to tackle climate change.
Lessons have been learnt from Phase I and the Commission
has asked for reductions from several Member States caps for Phase
II. The Commission has set out clearly its framework under which
it has taken decisions, which we welcome.
The level of compliance achieved is a credit to the
significant effort industry, regulators and verifiers have put
into understanding the demands of the EU ETS. It is important
that this solid base is built on for the future of the scheme.
4. While the Scheme so far has been an administrative
success, its record in reducing carbon emissions is far less impressive.
It appears to us that Phase I will have very little impact
on carbon emissions across the EU. Allocations of allowances to
emit carbon were too generous, and the market price of them consequently
too low, to drive a transformation in business strategies and
technical processes. Overall, the emissions projections appear
to have been inaccurate and inflated, and the national caps derived
from them too unambitious. There is some excuse for this in Phase
I, given the difficulties in collecting accurate baseline data
and the compromises needed to achieve speedy implementation of
the initial phase of the Scheme; and for these reasons it has
always been characterised as a "learning by doing" phase.
But lessons must actually be learnt, and things radically improved,
in Phase II and
beyond. (Paragraph 26)
It is important to remember that emissions trading
had never been tried before on this scale. Phase I can be seen
partly as a learning by doing exercise; it is vital that we take
forward the key lessons that will improve the effectiveness of
the EU ETS.
The studies mentioned below in response to recommendation
5 show how the scheme is already having a positive impact on business
behaviour in terms of taking into account the cost of their emissions.
The decisions made on Phase II NAPs will reinforce this message.
5. While this view is contradicted by the study
by academics from the Massachusetts Institute of Technology and
Fondazione Eni Enrico Mattei, we have some doubts as to the strength
of its conclusions. In view of the reliance which the Minister
is now placing on this one piece of research to argue that Phase
I has significantly reduced emissions in the EU, the Government
should commission an independent review of
the study's findings. Overall, we would welcome
more research into the effects of the Scheme on participating
companies. Where there is strong evidence that the EU ETS is driving
behavioural change that cuts emissions in absolute terms, this
ought to be given significant publicity, both to spread the lessons
of good practice and to bolster domestic and international support
for emissions trading. (Paragraph 27)
Since the Minister gave evidence to the Committee
there has been further emerging evidence that the EU ETS is having
an impact on industry behaviour. In a survey by Point Carbon published
on 13 March 2007, about two-thirds of the 800 or so EU ETS participants
who responded stated they had initiated internal abatement projects
as a result of the EU ETS.
Another survey for the European Commission conducted
by McKinsey and Ecofys[20]
also found that the EU ETS is impacting on corporate behaviour:
Based on this scheme, CO2 involves a real cost.
About half the companies already "price in" the value
of CO2 allowances and over 70% intend to do so in the future.
For half of the companies, the EU ETS is one of
the key issues in long-term decisions; for the other half, it
is only one among many issues.
About half of the companies claim that the EU ETS
has a strong or medium impact on decisions to develop innovative
technology.
We agree with the Committee that more research is
needed; in particular when sufficient time has passed for firms
to have considered more fully the abatement options available
to them.
6.
Overall, the extent to which the EU ETS,
and any other trading schemes, is judged a success should depend
on two main things: the extent to which emissions are reduced,
and the extent to which a stable and effective carbon price is
generated. To date, the EU ETS has had very questionable effects
on both measures. In particular, it
has been undermined by weak caps and inaccurate
and unsatisfactory methods of allocating allowances to individual
sectors and installations. Both shortcomings have been exacerbated,
if not wholly caused, by the instrumental role of a multiplicity
of national bureaucracies, which have set caps and allocations
through a methodology which was not just cumbersome, but prone
to being influenced by industrial
lobbying. (Paragraph 29)
The Government agrees that a key lesson from Phase
I is the need for realistic but tough caps to be set consistently
across the EU for future phases. Market scarcity will drive the
carbon price to incentivise emission reductions. That is why we
support the Commission's Phase II NAP decisions and its efforts
to strengthen the scheme in the future.
It is critical to get the level of the cap right.
Evidence from phase 1 suggests that the system used was not conducive
to setting a tight enough cap. The review of the Directive will
consider options for greater central control in setting caps .
The UK wishes to move towards greater use of auctioning
of allowances in future phases to ensure more efficient
allocation and to remove perverse incentives where there is free
allocation of allowances through more standardised methodology.
The prospects for Phase II
7. The Government ought to be commended for its
leading contribution to the robustness of Phase II, and future
strength of the EU ETS, in proposing a more stringent NAP than
many other Member States; as well as submitting it to the Commission
on time, unlike many others. That the United Kingdom had the only
national cap (in the initial batch of 10 to be reviewed) that
was accepted by the Commission as submitted, and without being
revised downwards, clearly highlights the fact that in terms of
setting limits to emissions the Government is leading the way
in Europe. (Paragraph 31)
The Government welcomes the Committee's commendation
of our Phase II NAP. The Government will continue to show international
leadership in the fight against climate change and demonstrate
the UK's commitment to meeting its responsibility for reducing
global emissions.
8. That most of the draft National Allocation
Plans originally proposed by Member States for Phase II were so
inadequate suggests a worrying lack of public and political understanding
of the dangers of climate change, and of the need to tackle it,
across the EU as a whole. This highlights the vital role which
must be played by the Commission, given its ability to operate
at one remove from the competitive national interests of individual
Member States, to impose the cutbacks in allocations required
by the Scheme as a whole. A corollary of this is that the UK Government
must do its utmost both to persuade other EU states of the need
for greater action, and to bolster the position of the Commission
in guiding Member States in the right direction. (Paragraph 33)
The Government welcomes the transparency of the Commission
announcement of the basis on which they have assessed all Member
State Phase II NAPs. The Commission's Phase II decisions so far
give a very strong signal about the important role the scheme
has, and will continue to have, in tackling climate change.
The UK Stakeholder Manifesto on the EU ETS, launched
in March 07, has been signed by over 50 businesses and NGOs and
sets out how the Government and stakeholders want to see the emissions
trading scheme develop after 2012. The manifesto demonstrates
the high level of consensus that exists in the UK on the future
importance of the scheme. The manifesto should help shape discussions
across Europe around key priorities for the scheme.
9. The European Commission's decisions on the
National Allocation Plans for Phase II are encouraging not just
in terms of making it more likely that the EU ETS will begin to
drive real carbon abatement in its Second Phase, but in terms
of increasing confidence in the entire viability and future development
of the Scheme. (Paragraph 35)
The Government agrees with the Committee's assessment
of the Commission's Phase II NAP decisions. They show a clear
determination to ensure scarcity in the carbon market and to provide
clarity to business and should provide increased confidence for
Phase II. This has been reinforced in the Commission's Communication
that sets out its priority areas for the Review of the Directive.
10. While the Commission's decisions on the Phase
II NAPs are encouraging, it is important to keep the potential
impacts of Phase II in perspective. Its effectiveness in driving
carbon reductions depends on several variables, not all of which
can be known with certainty at this stage. And while it looks
likely that it will put the EU roughly on course to meet its Kyoto
commitments, this cannot yet be known for sure. Furthermore, in
order to meet UK and EU climate change targets beyond 2012, much
greater action both within the EU ETS and in the form of complementary
policies will be needed, and soon. (Paragraph 39)
The Government agrees with the Committee's observations.
Across the EU, the recent agreement to set an independent
binding target to reduce Europe's greenhouse gas emissions by
at least 20% by 2020 (compared to 1990 levels) and to increase
this commitment to a 30% reduction as part of an international
agreement demonstrates the leading role Europe is playing internationally.
The publication of the draft Climate
Change Bill would make the UK the first country to set a long-term
legal framework for reducing emissions over the next 45 years
and beyond, and the means to achieve them. The Bill proposals
are the start of a new phase of the Government's climate change
strategy, the foundation for domestic action and for galvanising
international action to combat climate change towards a post-2012
global agreement.
11. One decision on the shape of Phase II, which
will have a profound effect on its efficiency and effectiveness,
and with which we are signally disappointed, was taken long in
advance: the maximum limit of allowances which can be auctioned.
Under the ETS Directive, a maximum of only 10% of allowances can
be reserved for auction
in Phase II, rather than being allocated to firms
for free. We believe it was wrong of Member States and the Commission
to impose such a restrictive limit on auctioning in Phase II.
In our view, auctioning allowances should lead to more accurate
allocations, reduced public costs and bureaucracy, and greater
internalisation of environmental costs in business decisions.
In sectors where there are not strong concerns as to the effects
on competitiveness of requiring firms to purchase their allocations
upfront, we strongly support 100% auctioning. In auctioning 7%
of its Phase II NAP, the Government is doing far more than any
other Member State in this Phase, but this level is still far
less than the participants could withstand and which would be
good for the Scheme as a whole. (Paragraph 40)
A limit of 7% for Phase II represents a significant
step in greater use of auctioning within the limits of the Directive,
although the Government has made clear that it wants to see a
move towards significantly higher levels of auctioning in future
phases.
The Government is keen to work with other Member
States on auctioning in Phase II to develop best practice and
learn from each other. We also recognise the need to work closely
with industry to ensure a progressive transition to greater auctioning
and in clarifying the full implications of such a move.
Impacts on firms in the UK
12. The Government has been right to impose cutbacks
on the power sector's allocations, and to put a proportion of
its Phase II allocation up for auction. The power sector has no
grounds for complaint about this, given both that it is effectively
earning windfall profits from those allocations it is receiving
for free, and that it is broadly holding onto its profits rather
than investing them in low carbon energy generation. Revenue raised
by auctioning these allowances must not be subsumed into general
spending commitments, but should be used demonstrably to assist
measures to address climate change. The Government should also
examine the benefits of recycling a proportion of this revenue
in the form of reductions in other taxes. In the interim before
Phase III (which we hope will set a higher limit on auctioning),
the Government should examine the case for some form of windfall
tax on power companies, where they are continuing to earn windfall
profits and not investing them in low carbon generation. (Paragraph
48)
The UK will not be hypothecating auction revenue
to a specific area of expenditure because it would be taken out
of the Government's public spending framework and value for money
would not be guaranteed. In order to achieve value for money Government
must ensure that expenditure is allocated according to priorities.
Hypothecation could mean that expenditure may not necessarily
be allocated according to priorities - this would be inefficient
and distortionary. It is Government policy that HMT assess bids
for expenditure on their relative merits.
As set out in its 1997 Statement of Intent on Environmental
Taxation, the Government has made the commitment to look to shift
the burden of tax from 'goods' (such as employment) to 'bads'
(such as pollution). This has happened in practice, for instance
as seen in the 0.3 per cent cut in employer National Insurance
Contributions that accompanied the introduction of the Climate
Change Levy. As set out in the 2002 publication Tax and the
Environment, when considering the use of the tax system to
achieve environmental aims it is important that wider economic
and social factors are taken into account. Within this principled
framework, the Government continues to consider the use of the
tax system as part of a wider range of measures.
13. The Government is also right to reject calls
by the Clean Coal Task Group to promise new coal-fired power stations
more favourable allocations, since this would be to go against
the central point of the EU ETS, which is to put a price on carbon.
Moreover, it should maintain subsidies for renewables alongside
the pricing mechanism of the EU ETS. At the same time, given the
power sector's own admission that policy uncertainty is impeding
the flow of investment, the Government must provide clearer and
perhaps more prescriptive guidance as to the kind of energy investments
that the UK will need if it is to meet both its UK Climate Change
Programme and energy strategy objectives. This must certainly
be incorporated into the forthcoming Energy White Paper. (Paragraph
49)
The Energy White Paper will set out the Government's
thinking on a range of energy policy issues looking out towards
2020 and beyond. It follows the publication of the Energy Review
in July 2006. The Energy White Paper will set out how the proposals
identified in the Energy Review will be taken forward, and will
be informed by a series of public consultations that took place
following the review.
The Government's key mechanism for encouraging new
renewable generating capacity is the Renewables Obligation. Since
its introduction in 2002 there has been a step change in renewable
developments coming through with the RO providing around £1bn
of support to the renewables industry by 2010. The Government
is committed to the RO as a support mechanism for renewables and
as part of the current Energy Review is considering proposals
to provide more targeted support for emerging technologies under
the RO in order to help meet our long term targets.
14.
The impact of the Scheme so far on UK industrial
firms is largely indirect, in the form of higher energy costs.
Most of the recent rises in energy prices have come from other
factors; and to the extent that the EU ETS is responsible, Defra's
case that this is to be welcomed, as it ensures energy users pay
more of their carbon costs. We recognise that for some firms this
represents a genuine challenge. Overall, however, industrial sectors
should themselves acknowledge the need to pay external costs.
Even more importantly, they must accept that they will soon have
to be given some cutbacks in ETS allocations, and make some real
reductions in their emissions, in order to play their important
role in the UK and EU Climate Change Programmes. In any case,
even if they were to avoid future cutbacks, the cutbacks given
to the power sector would then have to be proportionately bigger
if we were still to achieve our emissions targets, which would
in turn result in higher energy prices; thus they would still
not be able to escape from the rising costs of carbon. (Paragraph
54)
The Government policy on allocations for Phase II
was to allocate allowances sufficient to cover Business As Usual
emissions to all sectors with the exception of the Large Electricity
Producers. The UK Phase II NAP stated that it is the Government's
long-term objective to move away from free allocation of allowances
so that the full cost of carbon is taken into account by business
in making investment decisions. We would expect that - subject
to considerations of the impact of carbon constraints on the competitiveness
of regulated sectors—all sectors will play their part.
15. This does not necessarily mean that the
concerns expressed by industrial groups are not genuine. The Government
should analyse and consult on the extent to which the economy
needs greater support and guidance in terms potentially of R&D
investment, skills training, and trade agreements in order both
to realise the necessary carbon savings in the timescale required,
and to do so without incurring the "carbon leakage"
of firms relocating to countries with lesser carbon constraints.
(Paragraph 55)
Government agrees with the Committee that policy
should aim at avoiding carbon leakage. The Government will carry
out further research on competitiveness implications for sectors
arising from the EU ETS, and from different approaches to the
allocation of allowances.
16. Above all, however, where there are genuine
concerns as to "carbon leakage", the emphasis of both
Government and industrial lobbies should be firmly on developing
trade agreement or protection measures, rather than seeking to
water down the carbon caps on the UK and EU. (Paragraph 56)
We are working hard to develop a better understanding
of the likely impact—in terms of firms' decisions about
the level and location of production—of carbon constraints
on UK and EU industrial sectors. In 2005 the Department of Trade
& Industry commissioned research from Frontier Economics on
the impact of the Phase II ETS on UK competitiveness—which
used case studies to assess the potential impact of different
allocation decisions on the competitive position of UK industry.
In addition, further work is underway—to help to inform
the Government's position regarding the European Commission's
review of the EU ETS—to assess the impacts that different
allocation decisions would have on EU competitiveness. The European
Commission has also recently published a study by the consultants
McKinsey[21]
Ensuring that trade agreements facilitate sustainable
development, and take account of economic, social and environmental
considerations has been a priority of the EU, supported
by the UK Government, for several years. The broad objectives
of EU policy had been to promote the liberalisation of trade in
environmental goods and services and consistency between international
trade and environmental laws, in order to encourage the diffusion
of environmental technologies (including low carbon technologies)
and to establish a clear and consistent framework of international
trade and environment rules.
The EU aims to ensure that both multilateral and
bilateral trade negotiations and trade preference schemes promote
sustainable development through, inter alia, consistency
with international environmental agreements, facilitating
trade in environmental goods and services, and encouraging trading
partners to follow international best practice. The
current Doha Round of multilateral trade negotiations was the
first to include the environment as a dossier within the negotiations,
and the draft negotiating mandates for the Bilateral Free trade
Agreements (FTAs) the European Commission is proposing to negotiate
with India, the Republic of Korea and the ASEAN countries
contain a section aimed at promoting sustainable development.
In addition, the EU's Generalised System of Preferences Plus (GSP
Plus) Scheme provides enhanced trading preferences for developing
countries which are signatories to seven major international environmental
agreements (including the Kyoto Protocol) as well as agreements
on human rights and labour standards.
However, the UK Government continues to have reservations
about the desirability and effectiveness of using barriers
to trade to achieve environmental objectives, as opposed to seeking
to create incentives by liberalising trade in new technologies
and creating an international carbon market. The use of protective
trade measures to achieve climate change objectives was criticised
in the Stern Review: the Economics of Climate Change[22][1].
This argued that the risks of the potential misuse of trade measures
to achieve these objectives could have significant impacts in
international relations and damage the scope for future co-operation;
which the report argues is essential to tackling this global problem.
The report also argues that barriers to trade increase economic
inefficiencies, impede the flow of new technologies, could have
detrimental effects on developing countries and are likely to
be complicated and difficult to introduce. An international carbon
cap and trading scheme (the principal recommendation of the report)
is seen as a better mechanism for achieving the transition to
a low carbon economy. The UK Government will continue to
work towards the development of an international scheme.
The EU ETS and the UK Climate Change Programme
17. Without the expected contribution of Phase
II of the EU ETS, UK carbon emissions in 2010 are projected to
be only just over halfway to the 20% target, a very significant
shortfall. Treating Phase II as though it will deliver actual
savings of 8MtC in full, and then treating this as though all
8 million tonnes of carbon reductions are going to take place
within the UK, therefore makes a very significant difference to
the credibility of this target. (Paragraph 60)
The EU ETS is designed to deliver emissions reduction
where it can be delivered at least cost. Therefore reductions
may well be delivered outside the UK. The Government's target
recognises the contribution to emissions reductions made by firms
buying emissions reductions from outside the UK. The Government's
firm view is that there is no other sensible and transparent way
of reflecting the existence of international emissions trading;
although we agree strongly with the Committee 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. Unless Member States can
count emissions reductions from the Emissions Trading Scheme,
there is limited incentive to use tight caps within the scheme
as a means of achieving emissions reductions.
In the Energy Review we highlighted that the EU ETS
does not, in itself, determine the amount of carbon emissions
saved within the UK over time. This will be determined by the
price of carbon (which is determined internationally) relative
to the cost of lowering emissions in the UK.
The Regulatory Impact Assessment accompanying the
UK's Phase II National Allocation Plan estimated that 3MtC (11MtCO2)
of cost effective abatement could be achieved annually in the
UK with an allowance price of €20. However, because UK companies
have the flexibility to buy emissions allowances when this is
more cost-effective than reducing their own emissions some purchase
of allowances can be expected by UK firms to meet the cap set.
This flexibility ensures that savings delivered by UK industry
are delivered at a lower cost than if companies were only allowed
to follow the first route. The effort level of 8MtC also helps
take the UK closer to the 2010 goal and increases the scarcity
of allowances necessary for the market to function properly. Furthermore
emissions will be reduced globally through the efforts of UK organisations.
This is important, given the need to reduce concentrations
of greenhouse gases on a global scale, and for these reductions
to take place in the most cost-effective way.
Setting cutbacks from Business As Usual projections
18. Calculating cutbacks in emissions caps with
reference to Business As Usual projections lacks certainty and
effectiveness. As the Government has implemented it, it means
making a specific cutback from a moving target; and if BAU projections
are revised upwards, so the cap and the number of allowances to
emit carbon moves up with it. In other words, if emissions are
projected to be worse than expected, then rather than the cap
becoming tighter to redress this extra upward pressure on emissions,
in effect it is made looser to make it easier for participating
firms to accommodate it. Both within the UK and across the EU
ETS, allocations ought to be set with reference to a declining
budget of absolute carbon emissions. (Paragraph 66)
Government believes that it is important to set caps
with reference to the science of climate change, and in the context
of international agreements. We recognise the uncertainties around
BAU forecasts, but believe that they have a place in the wider
discussion around how the cap should be set for future phases.
We will be considering with the Commission and other MS how best
to set future EU ETS caps as part of the Review of the ETS during
2007.
19. In addition to this lack of certainty, the
practice of setting cutbacks from the moving target of BAU projections
creates an obvious lack of transparency. When Defra announced
last June that the UK's national cap for Phase II "is expected
to deliver additional savings of 8 million tonnes of carbon each
year, roughly equivalent to the emissions of 4 ½ million
households", the likelihood is that most people including
MPs, civil servants, and journalists would have assumed that this
meant it would reduce the UK's actual carbon emissions by 8 million
tonnes a year. They would surely not have imagined that this same
8MtC was in practice worth less, in terms of real reductions in
emissions, than only three months before! This underlines the
need to set reductions from an absolute level of emissions, rather
than a baseline of BAU projections which may vary significantly
according to the differing assumptions that are fed into them.
(Paragraph 68)
The emission projections for Phase II were subject
to a full public consultation and to scrutiny from an independent
projections panel (which was comprised of experts from industry,
academia and NGO's) before being published alongside the UK's
National Allocation Plan in August 2006.
The total cap on emissions from EU ETS sectors was
set in relation to these projections and stands at 246.2MtCO2
per year. This cap was accepted by the European Commission and
is fixed. This means that while the required level of effort
to meet the cap may change (e.g., if BAU emissions are higher
than expected then the required cut to meet the cap is larger),
the absolute cap on emissions from ETS sectors in the UK cannot
change.
In terms of emission trading, BAU projections play
an important role in indicating the level of scarcity that there
will be in the scheme, which in turn helps give important indications
as to the level of the carbon price. This is fundamental to understanding
how effective the scheme will be. It is acknowledged that projections
are subject to uncertainties and changes, especially those related
to fossil fuel price assumptions, however, they are key to understanding
effectiveness.
Phase II will not reduce UK CO2
emissions by the amount stated
20. Because this is an emissions trading
scheme, it is impossible to be sure that reducing the
allocation of allowances given to UK installations will translate
into emissions reductions within the UK. If all those UK installations
which exceed their allocations in Phase II buy surplus ETS allowances
on the market in order to make up their shortfall in allowances,
it is theoretically possible the EU ETS might not be responsible
for any emissions reductions within the UK at all. (Paragraph
69)
The Committee's theoretical observation is correct,
but this is not likely. It should be noted that it is also theoretically
possible that twice the level of emissions reductions could take
place in the UK, but this is also unlikely. What is important
is the level of emissions reductions caused by UK firms,
either through their own emissions reductions or by paying for
emissions reductions elsewhere.
21. A natural concern which arises from this relates
to the transparency of Government reporting of progress against
its 2010 target. By automatically ascribing all the savings projected
to be generated by the UK's Phase II NAP as though they were being
made within the UK, it is quite possible the Government might
help to give a falsely reassuring picture of progress against
its domestic CO2 target within the UK. (Paragraph 70)
Emission reductions purchased overseas may be counted
towards the UK's targets, provided this is consistent with the
UK's international obligations. This ensures emission reductions
can be achieved in the most cost effective way, recognising the
potential for investing in low carbon technologies abroad as well
as action to reduce emissions within the UK and encouraging countries
to work together—as they must—to tackle climate change.
The draft Climate Change Bill proposes that the UK's
targets should be put into statute to reduce carbon dioxide emissions
through domestic and international action by 60% by 2050
and 26-32% by 2020, against a 1990 baseline. In a similar way
to the Kyoto Protocol, proposals in the draft Climate Change Bill
will also allow credits secured abroad - funded by the UK - to
count towards domestic targets. There will be five-year carbon
budgets, which will require the Government to set, in secondary
legislation, binding limits on aggregate carbon dioxide emissions
over five year budget periods, beginning with the period 2008-12.
Three successive carbon budgets (representing 15 years) will always
be set in legislation. The budgets will limit the total carbon
dioxide emissions allowed within a five-year period and therefore
every tonne of carbon dioxide emitted will count.
22. Yet another concern here is that it is not
just that the Government is prepared to count CO2 reductions that
take place in other countries against its domestic target for
CO2 reductions in the UK, but that it is prepared to count reductions
of other greenhouse gases, the global warming potential of which
can be converted by mathematical formula into CO2-equivalent,
against its target for reducing emissions
of carbon dioxide. Our concern here is not just
regarding transparency, but that many of the projects to reduce
exotic gases may be more dubious in terms of their transparency
and impact on Business As Usual investment decisions and industrial
processes. (Paragraph 71)
The flexibility mechanisms, including emissions trading,
are provided for under the Kyoto Protocol and emission reductions
achieved by them (often abroad) are, by the nature of the trading
mechanisms, eligible for consideration in a country's emission
reductions. The mechanisms provide flexibility by allowing reductions
where it is most economically efficient—environmental integrity
is assured by using global warming potentials to express the emissions
in terms of the equivalent amount of carbon dioxide. Without this
flexibility internationally negotiable targets would be less ambitious.
Because greenhouse gases are well mixed in the atmosphere it does
not matter whether an emission reduction takes place in the UK
or elsewhere.
The linking of the EU ETS with the Protocol's project
mechanisms, inevitably provides for use of credits originating
from abatement of any of the 6 Kyoto gases; however use of any
of these credits (CO2 and other) in Phase II is only
allowed up to a limit , reflecting the Kyoto principle that use
should be supplemental to domestic action to reduce emissions.
The operation of the project mechanisms (CDM & JI) is subject
to agreed international processes and oversight of UN-appointed
bodies.
Whilst it is true that some projects will be cheaper
than others to carry out and some will produce greater volumes
of credits (and one would expect the market to seek out the cheapest
abatement options first), they all contribute to global emission
reductions and are all subject to the same procedures—this
includes the requirement for stakeholder consultation, assessment
of environmental impacts, and demonstration of additionality (showing
that emission reductions are greater than would have occurred
in the absence of the project).
23. The Minister was keen to point out that the
Government was limiting the use of CDM and JI credits within the
UK NAP. Indeed, their use will be limited, to 8% of the UK's total
cap. However, this is still a significant amount, representing
some 5.3MtC; and this figure has been worked out by the Government
specifically because it corresponds to two-thirds of what it describes
as "the effort in Phase II", or in other words the cutback
of 8MtC from BAU projections. To be clear, then, the Government
is allowing for, and expecting, two-thirds of the headline carbon
savings it has announced as resulting from Phase II to take place,
not just outside the UK, but outside the EU and probably in the
form, not of carbon dioxide, but of carbon equivalent greenhouse
gases. (Paragraph 73)
Government believes it is important that
EU firms have the opportunity to invest in emissions reductions
in developing countries by expanding and scaling up the use of
instruments such as the Clean Development Mechanism. The large
growth in the CDM market in the past year will benefit developing
countries, the EU and the world by driving financial flows and
transfer of low carbon technology to developing economies, and
at the same time facilitating broader and deeper global emission
reductions at least cost.
The EU ETS Directive requires Member
States' use of the CDM to be consistent with the principle of
"supplementarity", whereby domestic action must constitute
a significant element of the effort made to reduce greenhouse
gases. In the second phase Government has set an 8% limit on the
use of project credits per installation; this represents around
two-thirds of the difference between business as usual emissions
and the total cap (i.e. the level of effort in the UK), thereby
balancing the need for domestic action with the benefits of investing
in overseas projects. Within those limits, it is up to operators
how they meet their commitments, whether by abatement, buying
EU allowances or Kyoto credits. Given that the 8% limit applies
per installation, it is highly unlikely that as much as 8% across
the scheme will be delivered through CDM credits; many installations
will choose simply to retire their own allowances to meet their
emissions.
When it comes to the CDM, it is true that the greater
proportion of the market is currently made up of non-CO2
credits. However, all credits are generated by reductions in
emissions of Kyoto gases, verified by the official UN procedures,
and all equally eligible for use in the EU ETS. In any case it
is worth noting, that non-CO2 projects only account
for roughly 25% of the total number of registered CDM projects:
non-CO2 credits are only in such high relative supply
due to the high global warming potential of these gases and the
corresponding large number of credits generated. In fact, numerically
CO2 projects constitute a large share of the market
which is expected to grow in relation to non-CO2 projects
as projects currently in the pipeline come online[23].
24. It is essential, for transparency's sake,
that in all its communications the Government from now on differentiates
between reductions in emissions taking place within the
UK, and reductions in emissions funded by the UK. Moreover,
where it is referring specifically to reductions in carbon dioxide,
it must differentiate between reductions in CO2 and reductions
in CO2-equivalent. Where it refers to progress towards UK carbon
reduction targets, it ought to give two separate figures: one
referring to reductions solely of carbon dioxide and solely within
the UK, and one including also the estimated reductions of GHG
emissions financed abroad. Above all, it 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)
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.
The first shows the effect of actions within the
UK itself and the second provides a measure of the UK's overall
contribution to reducing emissions, which the impact to the global
climate does not depend on the geographical location.
25. Another reason to treat the Government's statements
as to the carbon savings to come from Phase II with caution is
its record on reporting the savings to come from Phase I. Despite
the lack of evidence that Phase I is driving any actual reductions
in carbon emissions, the Government continues to make high profile
statements that it
is reducing emissions in the UK by some 4.6MtC
a year. Given his personal and explicit endorsement of this figure
before the Committee, the Minister must urgently tell us why,
if this is the case, these "savings" of 4.6MtC do not
feature anywhere in Government calculations of contributions to
the 20% reduction target by 2010. If it is indeed the case that
these "savings" are entirely notional—in other
words, that they simply reflect a cutback from Business As Usual
projections, and have not actually made any impact on UK emissions
in reality—the Minister must explain why he failed to make
this clear in his evidence to us; and the Government should immediately
stop using this figure, and issue corrections to all official
uses of it. (Paragraph 79)
The reference to the Minister's oral evidence given
before the Committee is related to Q310. In 2003 verified emissions
from EU ETS incumbent installations in the UK were 247.5MtCO2
, in 2005 verified emissions from EU ETS installations were
242.3MtCO2. In this 2005 figure we have included emissions
from new entrants that commenced in both 2004 and 2005. This
represents a reduction in CO2 emissions in the UK
of 5.2MtCO2.
The pre-budget report quoted in Paragraph 77 of the
EAC report should have provided more clarity in making clear that
the 4.6MtC reduction in Phase I would count towards UK targets
but the reductions may not necessarily take place within the UK.
The Phase I reduction is not quoted in Government
statements relating to the 2010 target for the good reason that
they do not relate to emissions in 2010. Government is, however,
clear that Phase I intends to deliver emission reductions over
the period 2005-2007 of 4.6 MtC lower than they would have been
without the contribution of the UK cap on ETS installations, with
consequent benefits for the level of greenhouse gas concentrations
in the atmosphere.
Implications for the UK's CO2
targets
26. Given
how instrumental the Government's projections of savings from
the EU ETS are to its target for reducing CO2
emissions by 2010, and given the profound
lack of certainty surrounding these projections, the Government's
record in meeting or even getting close to its 2010 target must
surely be in severe doubt. The Government must provide an updated
assessment of progress towards the 2010 target at the earliest
opportunity, and look to revise its climate change policies in
this light. This experience also highlights the need for the forthcoming
Climate Change Bill to set out statutory arrangements for the
Government to report to Parliament at least annually on national
progress in reducing UK CO2 emissions.
(Paragraph 81)
27. Furthermore, considering the political capital
that the Government has made out of its 2010 target, and the fact
that it has featured as a repeated manifesto commitment, the Government
has a democratic duty to be more transparent in its reporting
of progress against this and future targets. As it stands, presentation
of the UK's progress towards its carbon reduction targets is apt
to mislead. (Paragraph 82)
The 2010 goal was always designed to be stretching.
We are making definite progress towards it and do not accept that
our presentation of progress is apt to mislead. The projected
16.2% reduction shown in the data released in January 2007 is
testimony to that progress. We will continue to show transparency
in the presentation and reporting of progress towards our targets
through the independent Committee on Climate Change as proposed
in the draft Climate Change Bill.
The draft Bill will require that the independent
Committee on Climate Change should produce an annual report to
Parliament on the UK's progress towards meeting its legislated
targets and carbon budgets. The Government will be required to
respond to this report each year. This will provide a regular,
transparent framework for the reporting of progress towards reducing
carbon dioxide emissions.
28. While it is undoubtedly true that the carbon-intensity
of economic growth in the UK has declined markedly in recent years,
this is not on its own a guarantee of the success of the Government's
Climate Change Programme, nor should it be a cause for complacency.
It does not matter to atmospheric concentrations of carbon dioxide
whether there has been a reduction in the carbon-intensity of
economic production, but only whether absolute levels of carbon
emissions are continuing to grow. The fact is that carbon emissions
in the UK are higher now than they were in 1997, and while they
are projected to be reduced by 2010, this reduction is set to
fall some way short of the UK target. The Government must acknowledge
that the UK Climate Change Programme is in some important respects
failing to cut emissions in the UK
as originally planned, implement the lessons as
soon as possible, and share them widely with other governments.
(Paragraph 84)
The Government agrees that regular and transparent
reporting against its targets on greenhouse gas emissions is essential.
There are a number of reporting
requirements under which the Government sets out progress against
its 2010 CO2 emissions reduction target. These include
publication of the annual greenhouse gas emissions inventory,
and the commitment, under the Sustainable Energy Act 2003, to
report annually to Parliament on progress made towards the Government's
four goals for energy policy. This includes data on emissions
reductions. The 4th annual report will be published
alongside the Energy White Paper 2007. The Climate Change and
Sustainable Energy Act 2006 also requires the Government to report
annually on progress towards achieving its greenhouse gas emissions
reduction targets. The first report under this Act will include
emissions data for individual gases including CO2. This
is due to be published in the summer.
In addition, the Government has
produced projections of CO2 emissions to 2010 and beyond
through its Updated Energy Projections (UEP) exercise. This began
in April 2003 to inform the National Allocation Plan of the European
Union Emissions Trading Scheme. UEP projections were updated twice
in 2006 and published alongside the Climate Change Programme (CCP06)
and the Energy Review. The next set of projections will be published
alongside the forthcoming Energy White Paper.
The draft Climate Change Bill which
was published on 13 March includes the proposal that the Committee
on Climate Change report annually on UK progress towards meeting
long term targets and carbon budgets. These reports would include
projections as well as reported emissions. The Government would
be required to respond to this report.
The Government keeps its emissions targets under
constant review, and proposed new measures in the Climate Change
Programme and Energy Review that will help to close the gap between
the targets and current emissions levels. Further measures will
be set out in the forthcoming Energy White Paper. But higher
than anticipated levels of economic growth and the recent rise
in global oil and gas prices (for example causing electricity
generation to switch to coal) have led to increases in our carbon
dioxide emissions in recent years. As a result, achieving our
domestic goal, to reduce carbon dioxide emissions by 20% below
1990 levels by 2010, has become more challenging.
The EU ETS is an essential part of our strategy to
reduce carbon dioxide emissions. 50% of the UK's emissions are
within the EU ETS. When the effects of the EU ETS are taken into
account the 2005 results in the UK show that CO2 emissions[24]
in that year were 527.2MtCO2 ,compared with
547.9MtCO2 in 1997. This is a reduction in emissions
of 3.8% from 1997 levels.
The decline in the carbon-intensity of economic growth
has been the result of a decline in the energy-intensity of the
economy, coupled with a decline in the carbon-intensity of energy.
In recent years the latter trend has reversed, due to mainly in
shifting price relativities between coal and gas. We continue
to reassess the situation, and this is one reason for the revisions
in the energy projections and will continue take action accordingly.
Proposals in the draft Climate Change Bill would
provide a legal framework to manage future emissions, and form
a fundamental part of the UK's strategy to address the challenge
of climate change. The Climate Change Strategic Framework[25],
published by Defra alongside the Bill, sets out the broader context
for the Bill, including the international context, where the UK
will continue to press for action through the EU, the G8 and the
UNFCCC—recognising that only collective action can ultimately
solve the global challenge of reducing greenhouse gas emissions,
and the value of sharing the UK experience in combating climate
change. More information will be contained in the Energy White
Paper.
29. The
difficulties experienced in meeting the 2010 target, and the complications
caused by allowing equivalent reductions in other greenhouse gases
in other parts of the world to count against a domestic target
for reducing CO2, raise further concerns about the Government's
target for reducing UK CO2 by 60% by 2050. It is vital that the
Government does not rely on buying emissions reductions abroad
to make up anything more than an insignificant amount of its 2050
target. In putting this target into statute as part of the Climate
Change Bill, the Government must specify the minimum proportion
of reductions that are to come in the form of CO2 and take place
within the UK. (Paragraph 85)
We can unconditionally say as the Bill stands we
are committing to action here and abroad that will deliver a 60%
reduction in emissions relative to our 1990 baseline. To do so
only through action at home or in Europe would not necessarily
make sense. The UK will continue to press for an internationally
binding agreement and the extent to which all countries are committed
to making binding emissions reductions will provide the context
for future decisions about the balance between domestic and international
action.
Emissions trading sets a cap on overall emissions
but within that cap it allows companies the flexibility on how
they meet their targets. This ensures that emission reductions
are achieved at least cost. The current Government framework adopts
this approach and is entirely consistent, and supportive of the
principles underlying the Kyoto Protocol. Emission reductions
purchased overseas may be counted towards the UK's targets, provided
this is consistent with the UK's international obligations. This
ensures emission reductions can be achieved in the most cost effective
way, recognising the potential for investing in low carbon technologies
abroad as well as action to reduce emissions within the UK and
encouraging countries to work together - as they must - to tackle
climate change.
Recommendations for Phase III and the European
Commission Review
Increasing the effectiveness of emissions caps
30. In the interests of making the EU ETS more
effective post-2012, the Government should argue for the introduction
of a single EU-wide cap to replace the current system of National
Allocation Plans. To complement this, it is vital that the EU
adopts a series of future carbon-reduction targets. Future ETS
caps should be reduced in line with these targets, according to
a robust and transparent formula which should be specified in
an amended ETS Directive. The Government should also evaluate
a range of proposed mechanisms for effectively modifying caps
and allowance prices within phases, in order to ensure that the
Scheme is able to respond promptly to new circumstances, and to
give further certainty as to the long term level and trend of
carbon prices. (Paragraph 93)
The overall cap that limits EU emissions is fundamental
to the success of the trading scheme. It is vitally important
that caps are set at a level that delivers emission targets and
ensures sufficient scarcity in the market.
The Government is currently analysing issues relating
to the European Commission's review of the EU ETS. One strand
of that analysis will consider the costs and benefits of setting
a single EU wide cap, the form that this cap might take and how
it might evolve over time.
The Government agrees that giving greater certainty
to long term carbon prices is important. Businesses and investors
need clarity not just on the carbon constraints they will face
in the next five years, but across the time-horizon relevant to
investment decisions. The European Council's announcements of
targets for emissions reductions by 2020 are therefore particularly
welcome.
31. The Government should be commended for pressing
the case for such EU-wide emissions targets for 2020 and 2050.
However, given that it has described these as targets for "greenhouse
gases" as a whole, and has explicitly referred to the use
of Clean Development Mechanism credits as a means of meeting them,
we are unsure as to the stringency and effectiveness of these
proposals. In particular, we note that
the proposed target for 2050 would appear much
weaker than the Government's own target for the UK, which refers
solely to carbon dioxide. The Government should rephrase these
proposals, specifying the minimum amounts by which carbon dioxide
should be reduced from within the EU itself. (Paragraph 94)
Government notes the Committee's views. It is unlikely
that other Member States will want to engage now in a process
of reformulating the targets set out by the European Council subsequent
to publication of the Committee's report.
The EU has adopted robust goals for reducing emissions
and noted its intention to go further as part of an international
agreement. These goals are framed in terms of greenhouse gas emission
reductions, consistent with the nature of international commitments.
The UK Government has decided to adopt even more ambitious goals,
aiming to reduce emissions of not just greenhouse gases but specifically
carbon dioxide. The Government will be considering the appropriate
balance of domestic and international action, in both the traded
and non-traded sectors, in meeting these goals.
Improving the allocation of allowances
32. The Government should be commended for auctioning
a higher percentage of allowances in Phase II than any other Member
State. Moreover, it is right to press for full auctioning of allowances
throughout the Scheme in the future. In Phase III it should auction
100% of the power sector's allocation, as such firms should be
able to pass these costs through without fear of international
competition; indeed, this will stop them from making windfall
profits. For exactly the same reasons, it should also press hard
for the aviation sector to be subject to a 100% auction across
the EU from the time it enters the Scheme. For all other sectors,
the Government should introduce at least a significant proportion
of auctioning, with a commitment to increasing this proportion
in successive phases; and with the remainder of their allocations
being made on the basis of best available benchmarks. (Paragraph
98)
The Government is currently considering its auctioning
policy for the Review of the Directive and for Phase III and will
take account of the Committee's views on this matter.
Where free allocation continues, at whatever level,
sectoral or sub sectoral benchmarking would help to remove perverse
incentives and would provide a more transparent and standardised
allocation methodology.
For aviation the Government supports a mix of
auctioning and benchmarking. Auctioning allowances that would
otherwise have been allocated for free reduces the potential for
airlines to make windfall profits.
33. The Government should carry out and publish
detailed reviews of the best uses of auction revenue, based around
the principle of speeding the development and takeup of new low
carbon technologies, but also around the benefits gained by recycling
revenues to businesses and individuals in the form of reductions
in other taxes- especially where this is with the explicit design
of shifting consumption patterns to a
more sustainable basis, for instance by reducing
VAT and VED on low carbon cars. More specifically, with only a
year to its scheduled commencement, the Government should urgently
clarify the funding and objectives of the new Environmental Transformation
Fund. Among other matters, this should feature detailed evaluations
both of where its funding will be most effective, and of what
the impacts of incurring these costs will be to contributing firms
(including to their potential investment in new low carbon technology)
and how this might best be mitigated. (Paragraph 99)
Decisions on UK investment from the Environmental
Transformation Fund will be taken as part of the Comprehensive
Spending Review, as was made clear when the fund was announced
in June 2006.
Streamlining and harmonising the running of
the Scheme
34. It is imperative that the Government presses
not only for a single EU-wide cap, but for harmonisation of the
way in which this is broken down into national and sectoral allocations.
Chief amongst these priorities should be harmonisation of: i)
the proportions of allocations to be auctioned; and ii) to be
made up by CDM and JI credits. The Government should also engage
stakeholders, within the UK and abroad, as to the potential benefits
and practicalities of introducing EU-wide sectoral
caps, which might automatically harmonise such
aspects across the Scheme. (Paragraph 101)
The Government is considering various means for harmonising
sectoral allocations. These include: harmonising benchmarks, and
harmonising maximum levels of free allowance allocation / minimum
levels of auctioning by sector.
The Government is committed to engaging stakeholders
in the UK and abroad to discuss all aspects of the Review including
working closely with interlocutors in other Member States and
the European Commission. This will include consideration of how
best to set limits on use of CDM and JI credits.
35. We welcome the Government's leadership on
lessening the burdens faced by smaller emitters, not least because
the Government is consulting on introducing the Energy Performance
Commitment (EPC), a separate regime into which they will presumably
be transferred; this suggests to us that they will not fully escape
an emissions reduction regime, but that its administrative demands
will be made proportionate to their capacity and impact on emissions.
In addition, we sympathise with the concerns expressed as to the
possible complications and administrative burdens experienced
by firms which may find themselves subject to both the EU ETS
and EPC, as well as the Climate Change Levy regime. Calls for
such firms to be exempted from all but one regime, however, must
be treated with a great deal of caution, considering the potential
impact on both the finances and emissions not just of those firms
in question, but of their competitors. We will investigate these
issues in detail in a future consideration of the Climate Change
Levy, and may also look in further detail at some point at the
EPC. (Paragraph 104)
Government feels that the EU ETS can improve its
efficiency by ensuring it meets better regulation principles:
for example, by removing small emitters from the scheme could
substantially reduce overall administrative burdens and improve
scheme cost-effectiveness, with minimal impact on overall emissions
coverage.
The EU ETS does not operate in isolation. Other
European legislation, such as the Energy Performance from Buildings
Directive, the EU Energy End Use Efficiency and Energy Services
Directive, and overall EU emissions reduction targets place an
imperative on operators outside the EU ETS to become more energy
efficient and to reduce emissions. Therefore if, through the Commission's
review of the EU ETS, small emitters are excluded from the EU
ETS, operators will still be covered by measures to reduce emissions,
and by an overall framework to deliver overall EU economy wide
emissions targets.
The Government has consulted on proposals for new
national mechanisms to tackle emissions from the Large Non-Energy
Intensive (LNEI) sector—that part of the economy characterised
by business and public sector organisations whose energy use typically
accounts for between 1% and 3% of total operating costs. The
Energy Performance Commitment (EPC) is one of these proposals.
The EPC proposal is for a mandatory, auction-based
emissions trading scheme which will deliver emissions reductions
of 1.2MtC per year by 2020 from the LNEI sector. Under the proposal
outlined in the November consultation, large organisations from
both the public and private sectors would be covered by the proposed
scheme if their mandatory half-hourly metered electricity consumption
is over 3,000MWh per year. Organisations likely to be covered
include large retailers and supermarkets, hotel chains, large
office based service organisations, light industry and manufacturing,
water companies, Government departments, hospital, universities
and large local authorities. Analysis shows that these sectors
can achieve significant cost-effective emissions reductions, and
that the EPC would enable those savings to be delivered.
It is important to emphasise that many EU ETS "small
emitter" installations belong to large non-energy intensive
organisations (such as airports and universities, who will have
boilers over the capacity threshold and hence be in EU ETS for
the direct emissions from those boilers).
It is likely that small emitter installations dropping
out of the EU ETS would be covered by the EPC if the proposal
goes ahead. However, Government is conscious of the potential
overlaps between domestic climate change policies. Therefore,
the EPC proposal includes a complete exemption for firms with
more than 25% of their emissions in a Climate Change Agreement
to help reduce administrative burden. The EPC proposal also excludes
any Climate Change Agreement emissions and any direct emissions
that are already covered by the EU ETS. Electricity and other
non-EU ETS emissions would be covered in the EPC. Government
estimates that only around 5% of the 5,000 potential EPC organisations
would be covered by both EPC and the EU ETS. Government is not
excluding these organisations as they account for a significant
quantity of emissions coverage and, moreover, analysis indicates
that EPC could deliver net financial benefits to such organisations.
However we recognise the Committee's concerns about
the interface between policy measures such as the EPC and Climate
Change Levy / Climate Change Agreements package.
Government will continue to review implementation
of our overall package of policy measures to ensure the best fit
of emissions coverage to administrative requirements, within the
context and framework of the Climate Change Simplification Project.
Protecting firms subject to the EU ETS from
International Competition
36. The Government should consult widely in the
UK and abroad as to the benefits and practicality of the Carbon
Trust's three proposals for protecting vulnerable industries against
international competition from firms not subject to the EU ETS
or equivalent carbon constraints. In view of the potential difficulties
of two of these options, it appears that the use of a border tax
adjustment might have the most potential; however, the Government
must urgently clarify whether this would indeed pass WTO criteria.
(Paragraph 107)
Please see response to 16.
Expanding the Scheme and linking it with others
37. While we would broadly welcome the Government's
efforts to expand the EU ETS towards forming a global carbon market,
we do so with some caution given the potential to weaken the Scheme
by changing its terms. Our first concern is with the use within
the Scheme of CDM and JI credits. Limits on the use of such credits
should not just be harmonised across the EU ETS, but the Government
should also press for a qualitative limit to be imposed on the
use of these credits, to ensure that they are funding genuinely
additional emissions reductions, and that they make a contribution
towards sustainable development. (Paragraph 109)
In expanding the EU ETS to form part of a global
carbon market, it will be important to ensure we maintain the
environmental and economic effectiveness of the market. As noted
above, the Government will be considering future refinements to
the Scheme, including different aspects of cap-setting and possible
means of harmonisation, in consultation with stakeholders. We
will look at a range of options, to assess how the EU ETS can
best support the development of a robust and effective CDM and
JI market.
More broadly, we rely on the international institutions
and processes to ensure emission reductions achieved from the
project mechanisms are genuinely additional and contribute to
sustainable development. The UK will continue to work internationally
for strong and effective processes, both now and in the context
of a future climate regime. It is unlikely that we shall achieve
deep cuts in emissions without an emissions trading market with
broad, deep coverage.
38. We are not sure about the Government's argument
that expanding the EU ETS will necessarily "bring about emissions
reductions at lower cost". The Government should clarify
its own understanding of the range of carbon prices required to
stimulate the necessary level of investments in carbon abatement
within the EU ETS, and seek to form a consensus on this across
the EU. Considerations of the terms on which other sectors, gases,
and trading schemes could be linked or encompassed by the EU ETS
could then be made with reference to the projected impacts on
this model price. (Paragraph 111)
As set out in the Stern Review, "in general,
the deeper and more liquid a market, the harder it is for any
individual trade to affect the overall price level, and hence
the less volatile the market will tend to be. Introducing different
economic sectors or countries to a market can also reduce the
impact of a shock in any one sector on the scheme as a whole.
In addition, the greater the degree of flexibility about what
type of emissions reductions are made and where they are made,
the lower the cost will be."
As explained in the response to recommendation 17
Government has estimated that 3MtC (11MtCO2) of cost
effective abatement could be achieved annually in the UK with
an allowance price of €20.
The European Commission is funding a major study
(Sectoral Emission Reduction Potentials and Economic Costs for
Climate Change— SERPEC-CC) to identify the least-cost contribution
of different sectors and gases for meeting post 2012 GHG reduction
targets. The outputs of the study should provide some useful information
on the range of carbon prices that would be needed to stimulate
investment in abatement technologies.
A principal motivation for setting quantity limits
through emissions trading caps is to reveal abatement technologies
and opportunities. Whilst it is important for the Government to
understand the relative costs differences of various abatement
technologies it is also important to recognise that Ministers
and civil servants are not best placed to make judgement regarding
the relative merits of abatement technologies. The effectiveness
of emissions trading is, in part, because it does not require
judgements to be made by policy makers on abatement opportunities,
but induces the market to reveal the best abatement options through
the market forces of cost and effectiveness.
39. While we support the principle of including
aviation in the EU ETS, this will only be effective if the terms
of its inclusion are such to constrain and ultimately reverse
the rise in aviation emissions. However, we have severe doubts
as to its effectiveness under current proposals. Notably, the
impact on airfares, and hence demand for flying, is projected
to be relatively minor. Meanwhile, a proportion of what increase
in prices there will be is expected to lead to windfall profits
for airlines, given that their initial allocation of allowances
will be given to them almost entirely for free, and as they, like
power companies, will be able to pass on the market value of their
allowances to customers. Moreover, there are still no concrete
proposals for reflecting the total contributions of aviation to
global warming, considered in most estimates to be between two
and four times that from CO2 alone.
(Paragraph 115)
Under the European Commission's proposal aviation
will be allocated allowances by reference to the sector's average
emissions between 2004-2006. Aviation will not therefore receive
allowances for its total emissions on the proposed date of inclusion
in 2011. Consequently, emissions trading will provide an incentive
to reduce emissions since it creates a market for reductions in
carbon. Companies that innovate to reduce emissions more quickly
than expected, will benefit financially from their progress, while
those that make less progress will be required to contribute to
reducing emissions by funding reductions made elsewhere.
Whatever the final cap level, the UK Government recognises
that there may be limits to the extent to which aviation will
be able to invest in abatement equipment to reduce emissions in
the medium term; but the Government believes that it is right
that the costs of flying should reflect the environmental impact
as measured in the carbon price. The benefit of the EU ETS therefore
is that fixed arbitrary limits in the aviation sector do not need
to be set, but instead focuses on the emissions performance of
the overall economy. This provides a cost-effective way of reducing
CO2 emissions whilst responding to the strong demand
for air travel.
The Government recognises the potential for windfall
profits for the aviation sector if allowances are to be allocated
for free. We are conducting further work on the potential for
cost pass through, as in a competitive industry such as aviation
the extent of cost pass through is uncertain, in order to determine
the optimum level of auctioning for aviation. We have invited
comments on this issue in our consultation.
While the Commission's proposal covers CO2
emissions only, it has made a commitment to bring forward a proposal
to address the impacts of non-CO2 emissions from aviation
by the end of 2008.
The contribution of non-CO2
emissions from aircraft to climate change, especially at high
altitudes, are less well understood than those of CO2
and consequently are more difficult to address. Our view is that
this would best be done through an ancillary instrument that addresses
directly the emission or emissions targeted. We therefore welcome
the Commission's commitment to look at this.
Expansion of the ETS to other greenhouse gases is
also being analysed within the general review of the scheme.
40. It is essential, therefore, that the terms
of aviation's inclusion are considerably strengthened in Phase
III. Notably, lessons should be learned from the way in which
the power sector has earned windfall profits in Phase I; as airlines
similarly should be able to pass these costs through without fear
of international competition, so their allocations should be 100%
auctioned. Not only will this lead to a more efficient allocation
process and prevent them making windfall profits from the Scheme,
it should also focus their attention more on the costs of carbon,
and raise valuable revenue. The proportion of auction revenue
corresponding to flights within the EU could be earmarked for
spending on rail alternatives to short haul flying within Europe.
As for the remaining revenues, relating to long haul journeys,
the Government and the Commission should make comparative studies
of the benefits of the different ways in which these can be used,
including using them to fund reductions in other taxes. Equally,
the Commission must not waver in pressing for all arrivals and
departures, not just intra-EU flights, to be included in the Scheme.
The Government must maintain its voluble campaign in support of
this principle. (Paragraph 116)
The Government is fully aware of the need to learn
from early experiences of the EU ETS, and careful consideration
will be given to scheme design.
The Commission proposal states that the proceeds
from auctioning must be used to mitigate and adapt to the impacts
of climate change. As made clear in response to 12, Centrally
dictated hypothecation in this way is not acceptable to the UK
Government.
The UK Government will continue to press for the
most environmentally ambitious scheme achievable. It is our view
that an all departing and arriving flight option would provide
the most environmental benefit as it would cover a relatively
high proportion of flights and so include more of the aviation
sector within the scope of the EU ETS. An all arriving/departing
scheme is expected to lead to an annual reduction by 2020 of 183MtCO2
as opposed to 44MtCO2 for an intra-EU option. An all departing
model would lead to a reduction of 115MtCO2 on the same basis.
41. Even if the terms on which aviation is included
under the Scheme are toughened in Phase III, we still have severe
doubts that the Scheme itself will be responsible for any significant
improvements in the carbon efficiency of the overall fleets of
aircraft affected, given the costs and technological difficulties
in doing so. Rather, the chief potential contributions of the
EU ETS regarding aviation would appear to lie more in simply increasing
the costs of emitting carbon within the Scheme. But this depends
on there being a strong cap on aviation emissions. If the cap
is too weak, then its impacts—on airfares and demand for
flights, and on the wider price of allowances— may be equally
undermined. (Paragraph 117)
Our stated objective is for an environmentally challenging
scheme with a suitably challenging but realistic cap.
The main contribution of aviation to emissions reductions
efforts under the EU ETS will be to cover its emissions above
the cap through the purchase of reductions that can be produced
more cheaply by other sectors. Most importantly inclusion of aviation
in the EU ETS will mean that the costs of flying will reflect
the environmental impact to a greater extent, both in the UK and
in other EU Member States.
The Commission proposes that the total number of
allowances to be allocated to the aviation sector would be 100%
of emissions from aviation on an average of the years 2004-2006.
The initial estimate is that based on these years this cap would
be 25-40% below actual emissions if the sector joined the scheme
in 2011. Aviation is therefore likely to be a significant net
buyer in the EU ETS market.
42. Under current proposals, the allocation given
to the aviation sector will be capped at its average level of
emissions in 2004-06. In discussions regarding the level of the
cap set for aviation emissions in Phase III, it would not be a
surprise if airlines argued strongly that the initial allocation
should be updated, and set at a baseline taken from years closer
to 2012. It is vital for the integrity of the cap on aviation,
and with it the integrity of the Scheme as a whole, that the Commission
resists such calls. Furthermore, the Commission should put in
place a clear commitment to reducing—even if gradually—the
allocation set aside for aviation from its initial level. It would
risk fatally undermining the effectiveness of the EU ETS—both
directly, and indirectly through provoking opposition from other
sectors—if the overall cap set by the Scheme was reduced
in each phase, but the sectoral cap given to
aviation was allowed to rise or even simply stay
the same. (Paragraph 118)
The Government recognises the potential for airlines
to argue for a later baseline year and the possible impacts of
this on the effectiveness of the scheme.
We will consider any representations made to us but
as stated at Q41 our objective is to achieve a challenging but
realistic cap.
The Government would like to see a provision added
to the Directive enabling the cap to be revised. This review would
provide a mechanism to ensure that the environmental effectiveness
of the scheme is maintained, particularly as more challenging
targets are achieved through international negotiations. The date
of revision would depend on the actual start date of the scheme
and should be reviewed in context of the general review of the
EU ETS.
43. However the terms of aviation's inclusion
in the Scheme are reformed and strengthened, complementary measures
will be needed and must be introduced or intensified, aimed at
constraining the growth in air travel and reflecting its full
external costs, including all its non-CO2 contributions to global
warming. In addition to the "upstream" focus of the
EU ETS—that is, directly affecting the airlines—the
Government, and other Member States, should continue and increase
their focus on "downstream" measures, designed to affect
private and business decisions as whether or not to fly. Moreover,
the Government must work to progress the development of an EU-wide
measure to tackle NOx emissions, and should also lead the way
in developing measures that reflect the remaining non-CO2 effects.
(Paragraph 119)
The UK government has always clearly stated that
although the EU ETS is our preferred approach to addressing aviation's
growing climate change impact, it may not be a total solution.
We are therefore continuing to explore the use of other measures
to tackle this issue. For example, the recent APD rise in recognition
of the climate change impact of aviation. APD will continue to
be reviewed, as are other taxes.
In addition we welcome the Commission's intention
to publish a proposal at the end of 2008 detailing measures for
dealing with the non-CO2 impacts of aviation, and hope
that rapid progress can be made at the EU level in developing
and agreeing effective instruments.
44. Finally, now the Commission has published
its proposal on aviation, there is no excuse not to include the
greenhouse gas emissions of EU flights within the proposed targets
for EU emissions reductions to 2020 and 2050. The Government must
clarify that its proposed EU targets include aviation emissions,
and should also revisit its UK target for 2050 to include the
emissions of all flights arriving at and departing UK airports.
(Paragraph 120)
International aviation emissions are not included
in the 2050 target since there is currently no agreed international
agreement on how to allocate such emissions to countries. The
UK is active in lobbying for support within the international
community for the inclusion of international aviation in future
agreements. Until international aviation is included in the Kyoto
Protocol or considerable global progress is made in the International
Civil Aviation Organisation, it would be inappropriate to define
the UK's international emissions to include aviation in the proposed
targets for 2050 which might well be inconsistent with international
agreement when it is reached. We will continue to work through
ICAO to make the progress necessary for the development of international
measures to tackle climate change.
45. As yet we have not been convinced by the case
for the inclusion of surface transport within future phases of
the Scheme. The emissions from this sector can more effectively
be tackled through other measures, such as motoring taxes, road
charging, and mandatory fuel efficiency agreements with car manufacturers.
Moreover, in view of the practical difficulties involved, we believe
that it is not just less preferable that surface transport is
covered by the EU ETS but conceivably quite unlikely that it ever
would be. There is a danger, then, in the Government's mooting
it as a possibility, that it may function as a red herring, and
confuse or retard debate on other means of reducing emissions
from road transport. At the very least, the Government must finally
publish some details of its proposal, and show how it might deal
with these reservations. (Paragraph 122)
Given that transport emissions
contribute a quarter of total UK carbon dioxide emissions, and
it is the only sector where emissions are projected to increase
in the future it is important that the Government fully considers
the full range of policy options available to help the transport
sector to reduce its climate change impact.
The EU ETS Directive lists transport
as one of the sectors that should be considered when assessing
whether to expand the scheme in its current review. The Government
therefore made a commitment in the Energy Review Report to engage
with key organisations, the European Commission and other EU member
states to ensure that the potential for future inclusion of emissions
from surface transport in the EU Emissions Trading Scheme (ETS)
is given serious consideration.
Emissions trading in the surface
transport sector could potentially be a cost-effective way for
the transport sector to reduce its climate change impact. However,
emissions trading is only one of a number of tools to reduce transport
emissions, and is therefore being considered as a complementary
measure rather than in isolation or in place of other measures.
It will be important to take account
of how emissions trading in the surface transport sector might
work alongside other important policy measures at our disposal
for reducing greenhouse gas emissions from the transport sector,
such as biofuels obligations, EU tailpipe emissions targets for
new cars and consumer information.
It will also be necessary to look
at the potential impact of including surface transport in the
EU ETS on carbon price, fuel price and industrial competitiveness
as well as the potential impact on other EU ETS sectors, before
we come to a definitive view.
Defra published an issues paper on the EU ETS Review
in March 2007 to seek stakeholders views on a range of issues,
including the possible inclusion of other sectors in the EU ETS.
Stakeholders have been asked to comment by 11 May. The comments
received, along with ongoing DfT analysis will help to inform
the UK's negotiating position for the EU ETS Review. The Government
intends to publish a formal consultation later this year. The
Government intends to publish a formal consultation later this
year.
46. The maritime sector is responsible for 4%
of the EU's CO2 emissions.
Despite this, there is little discussion regarding the inclusion
of European shipping, in stark contrast to other transport sectors.
We now urge the Government to explore with European partners the
potential of including the maritime sector within a future phase
of the EU ETS. As a first step, the Government should press the
European Commission to commission a detailed study to quantify
the emissions and assess the
practicalities involved. (Paragraph 123)
Shipping is a global industry and climate change
a global problem. Therefore the UK has been pressing the International
Maritime Organisation (IMO) to address seriously the contribution
of the maritime sector to climate change. To date we have tabled
two papers at the IMO's Marine Environmental Protection Committee
(MEPC) outlining our support for cost-effective measures to deal
with these emissions, such as through an emissions trading scheme.
We will continue to use our influence to impress upon the committee
the urgent need for the international community to take effective
measures to deal with the climate impacts of shipping.
No decision has yet been taken on whether
to include emissions from international shipping within the EU
ETS, however we are investigating the options that might exist
regarding this, as well as the obstacles to progress. The Department
for Transport intends to commission detailed research on this
issue shortly. We welcome the recent research from the Commission
examining potential European level measures. One of these, the
incorporation of shipping into the EU ETS, was deemed worthy of
further consideration. The Government supports the judicious expansion
of the EU ETS to new sectors - bearing in mind the Committee's
observations (recommendation 37) on the risk of inadvertently
undermining the scheme—and we intend to press the Commission
to build a robust evidence of the economic impacts and practicalities
involved in pursuing its expansion to shipping.
Increasing the transparency and accountability
of the Scheme
47. To aid public understanding of the workings
and progress of the Scheme, accountability of individual firms,
and parliamentary scrutiny of the roles of national governments
and European institutions, there ought to be published a high-profile
annual report of the EU ETS. This report should set out the allocations
and actual verified emissions in that year, broken down both by
Member States and by individual installations. In addition, and
in much the same way as a departmental or commercial annual report,
it should feature a commentary on important aspects of the Scheme's
operation in that year. (Paragraph 126)
Individual installation allocations and verified
emissions are available on Community Independent Transaction Log
(CITL). Under the Commission's proposed Registry Regulation Amendments
the data available on the CITL will increase to show information
on new entrant allocations. It is possible to obtain installation
level data for every Member State on the CITL.
For the 2005 data Defra produced a comprehensive
series of reports[26]
on the operation of the scheme in the UK. These were produced
in close cooperation with industry. The main UK summary report
includes analysis of the data across the EU.
Putting the EU ETS into perspective
48. The EU ETS is already a hugely significant
development in the global effort to tackle climate change. Although
its record so far in actually driving carbon reductions is unproven,
it is far and away the largest and most sophisticated mechanism
potentially capable of capping international emissions; and, as
the Commission's decisions on the Phase II NAPs show, it is moving
slowly in the right direction. As such it is providing the inspiration
and template for the construction of emissions trading schemes
in other countries, and, as the Stern Review notes, has the potential
to become the nucleus of a single global carbon market. In this
respect, it must aim to become the "gold standard" for
all other emissions trading schemes to emulate and be brought
through market forces to comply with. (Paragraph 127)
The Government welcomes the Committee's view of the
potential that the EU ETS has. We have further expressed this
in the UK Government Vision on Emissions Trading[27]
published alongside the Stern Review.
49. From pioneering the early UK Emissions Trading
Scheme, to setting tougher National Allocation Plans than other
Member States in the EU ETS, to leading the debate on expansion
of the Scheme to take in other sectors and countries, the Government
has consistently showed international leadership in helping to
establish the Scheme and see it fulfil its potential. In its commissioning
of the Stern Review, we also hope that it has played an ultimately
significant role in persuading other countries, notably the United
States, Canada, and Australia, to link to or join the Scheme as
soon as practically possible. (Paragraph 128)
The Government shares the Committee's
view. Emissions trading schemes are emerging around the world
and we welcome the development of these schemes. We will continue
to engage in dialogue with other countries and regions that are
developing emissions trading schemes in order to share information
- including on some of the lessons from phase 1 identified by
the Committee - and to support the development of these schemes
and to actively encourage the development of effective links with
the EU ETS.
50. At the same time, the contribution to be made
by the EU ETS on its own ought to be kept in perspective. A strong
theme to emerge from our inquiry was of the need to supplement
the market mechanism of the EU ETS with other measures in order
to ensure it delivers desired outcomes. Appeals for such extra
measures came from a wide variety of groups: investors, economists,
power companies, industrial lobbies, trade unions, and environmental
NGOs. What united these appeals was the concern for certainty
and security—over the long term price of carbon, over the
fit between the EU ETS and energy policy, over protection from
international competition not subject to similar carbon constraints,
and over the R&D required to deliver step changes in low carbon
technology. Uncertainty over all these issues is clearly impeding
investment and the transition to a low carbon economy. The Government
must look again at what it can do on its own, and what it can
do to influence action at the EU level, to provide the certainty,
assistance, and protection required to complement the bare workings
of the Scheme itself. (Paragraph 129)
The Government agrees that a carbon
price is a necessary—but not sufficient—element in
securing emissions reductions. While emissions trading is at the
heart of Government policy, it is accompanied by a wide range
of the sort of further measures the Committee describes, as set
out in the 2006 Climate Change Programme, and in the Energy White
Paper.
51. Overall, there are perhaps two main and related
weaknesses in the Government's statements on emissions trading
which it needs to recognise and resolve. The first is the contradiction
between the Government's reliance on the EU ETS all by itself
to set a price on carbon high enough to incentivise investment
in low carbon infrastructure, and its enthusiasm for expanding
the Scheme in order to lower the price (and resulting cost impacts
on business and consumers), and thus make it more politically
and economically acceptable. (Paragraph 130)
There is no logical contradiction. Without the efficiency
of the market we will never get international agreements deep
enough to deliver the carbon price.
As concluded by the Stern Review, carbon pricing
alone may not be sufficient to incentivise desirable levels of
investment in low carbon technology and other policies may be
needed to complement carbon pricing in order to achieve a transition
to a low carbon economy. In terms of expansion, trading emissions
reductions globally and increasing the coverage of trading schemes
will improve the cost-effectiveness for all in achieving challenging
emission reduction targets. The Government believes firmly that
maximising the cost-effectiveness of our delivery of ambitious
targets is important both in its own right, and in order to encourage
the wider international action which is needed.
52. The second concerns the Government's ambition
for relatively tough carbon reduction targets for the UK and EU,
which themselves depend on global targets in which the whole of
the developed world makes steep cuts, while the whole of the developing
world has to meet challenging caps on its growth. The contradiction
here lies in the Government's endorsement of and reliance on making
up shortfalls in such national targets by buying carbon credits
from other countries: if everyone thinks like this, then nobody
will reduce any emissions, and nor will there be any surplus credits
to buy. Exactly the same applies between different economic sectors.
The Government must face up to the fact—and start challenging
the British population, other governments, and global businesses
to do likewise—that ultimately neither the UK, nor any country,
nor any industry, can simply buy its way out of meeting its carbon
commitments. (Paragraph 131)
There is no contradiction. Government
seeks maximum participation by developed and developing countries
towards stabilizing atmospheric concentrations at safe levels
in the atmosphere. It is far more likely that we will secure
the necessary commitments with emission trading than without it.
The UK, and the EU, have already
made commitments to reduce emissions as a sign of our commitment
to addressing climate change. But this is with a view to agreeing
a global climate change regime, as we recognise that we will need
strong international action to tackle the problem. The Government
believes that carbon markets will continue to play an important
role in the future. However, we believe that a future international
climate change framework will need a number of different elements,
covering a range of commitments and mechanisms to drive the needed
level of global emission reductions. We will continue to press
for this internationally.
The Government recognises the need
to balance domestic and international action: we should not, and
indeed cannot, be using the mechanisms to avoid taking action
ourselves to reduce emissions. The Government is committed to
ensuring all sectors of the economy reduce their carbon emissions.
As mentioned in the response to recommendation 50 the draft Climate
Change Bill represents our determination to address both the causes
and consequences of climate change.
53. Above all, the Government must ensure that
it is not investing a magical belief in emissions trading as a
miracle cure for global warming - something which will, all by
itself, necessarily reduce carbon emissions, necessarily lead
to a step change in technology, and necessarily achieve this at
low cost and without harming productivity. The most important
role for emissions trading is to add a cost to carbon. This can
help to incentivise low carbon technological development and market
transformation, but in doing so it is likely to raise costs and
impinge on economic activities in some areas, even if the trading
element will help to constrain these costs. Moreover, it cannot
guarantee sufficient progress in the timescale
required; and if new technologies cannot deliver enough reductions
in time, then ultimately we will have to reduce the volume of
our carbon-related activities. Emissions trading will not spare
us from making difficult decisions and personal or collective
sacrifices on the road towards meeting our global carbon reduction
targets.
(Paragraph 132)
The Government shares the Committee's view that emissions
trading should be seen, neither as the ultimate solution to tackling
climate change, nor as the way to avoid difficult choices about
reducing emissions. It is a way to increase efficiency and thereby
greatly increase the chance of achieving the emissions reductions
we need globally.
The Stern review of the economics of climate change
confirms that the costs of global action to mitigate the most
dangerous effects of climate change are significant but manageable,
as long as action is taken multilaterally and urgently. The EU
ETS should be seen as a building block for an effective global
response to the problem of climate change. The challenge is how
to build from these foundations and work internationally to ensure
that dangerous climate change is avoided.
May 2007
19 http://ec.europa.eu/environment/climat/emission/review_en.htm Back
20
http://ec.europa.eu/environment/climat/emission/pdf/etsreview/results.pdf Back
21
http://ec.europa.eu/environment/climat/emission/review_en.htm
Back
22 [1]
P486-487, The Stern Review Back
23
According to data from the UNEP-Risoe Pipeline database (http://www.cd4cdm.org/Publications/CDMpipeline.xls) Back
24
Figures don't include land use change and forestry Back
25
http://www.defra.gov.uk/corporate/consult/climatechange-bill/index.htm
Back
26
http://www.defra.gov.uk/environment/climatechange/trading/eu/results/index.htm
Back
27
http://www.hm-treasury.gov.uk/documents/international_issues/global_challenges/int_globalchallenges_index.cfm
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