Select Committee on Environmental Audit Eighth Report

 
 

 
Appendix 2—Correspondence


Letter from Committee to the Secretary of State


Last month the Environmental Audit Committee received the Government Response to our report, published in February, on The EU Emissions Trading Scheme: Lessons for the Future (Second Report of Session 2006-07, HC 70).

We welcome this Government Response for its thoroughness, openness and constructive nature. At the same time, there are one or two points which we would like to clarify, and which I detail below. Accordingly, while we have so far reported the Response to Parliament, and made it publicly available by uploading it to the Committee website, we have not yet published it. When we do so, we would like to include your reply to our points within the covers.

Impacts of Phase I

The Response to Recommendation 25 (p 19 of the Government Response) is, it must be said, very confusing. Notably, it refers to two different figures (5.2MtCO2 and 4.6MtCO2) as representing carbon savings from the UK's participation in Phase I of the EU ETS. The 5.2MtCO2 figure appears to be the actual difference in recorded emissions of UK installations in 2005 versus 2003. The 4.6MtCO2 figure appears to be a notional reduction from Business As Usual (BAU) projections.

Perhaps most confusing, in answer to our query as to why the 4.6MtCO2 figure does not feature anywhere in Government calculations of carbon savings that are contributing to the 2010 target to reduce UK CO2 by 20%, the Response states: "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 4.6MtCO2 lower than they would have been without the contribution of the UK cap on ETS installations".

We would thus like to ask:

1.  What evidence does the Government have to show that the saving of 5.2MtCO2 is caused by the EU ETS, and not merely coincidental with it?

2.  Why is the 4.6MtCO2 figure not included within calculations of the contributions made by policy measures under the UK Climate Change Programme towards the 2010 target? What precisely does it mean to say that it does not apply to the year 2010; especially when, for instance, the Fuel Duty Escalator is still included in these calculations, despite the fact it was abolished in 1999?

EU ETS and transparency of UK carbon reduction targets

We welcome the sentiments in the Government Response to Recommendation 17 (pp 13-14), which express the Government's strong agreement that "Government publications should be transparent about the level of emissions reductions taking place in the UK, and the net inflow (or outflow) of emissions reductions from elsewhere", leading to the specific assurance, in response to Recommendation 24 (p 18), that:

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

i) UK CO2 reductions within the UK

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

However, we are concerned that the Government must make these differences truly explicit and obvious to any observer. We draw attention to Defra's press release of 31 January 2007, "Greenhouse gas statistic show UK on track to double Kyoto target" (Ref 25/01). Rather than clarifying that emissions allowances purchased through the EU ETS (and thus also, from 2008, the CDM) may translate to reductions taking place abroad, the press release incorporates projected EU ETS savings into UK emissions figures with the use of such rather bland phrases as: "Adjusted for emissions trading", "when the effect of the EU Emissions Trading Scheme is taken into account", and "CO2 incl ETS".

We further draw attention to Budget Report 2007, which in one graphic incorporated these estimated savings arising from the EU ETS in 2005 into its sole presentation of UK emissions:

[Same graph as in Figure 2, page 11 in the body of the text]

As the note at the bottom of the chart explains, "figures take into account the effect of the EU ETS)." This is an example of something which our Report specifically recommended should never be done:

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

The issue of where emissions reductions take place is, of course, quite aside from that as to whether the purchase of ETS allowances translates into actual emissions reductions, wherever they may take place. The aforementioned Defra press release explains that the stated difference (some 27MtCO2) between actual UK emissions in 2005 and UK emissions "incl ETS" represents the net number of ETS allowances (27 million) that UK participants purchased to cover their emissions in 2005. We would argue, following the conclusions of our Report, that purchasing ETS allowances in Phase I, which most observers agree to have been over-allocated as a whole, does not necessarily mean funding emissions reductions.

We would thus like to ask:

3.  What is the Government's response to our specific recommendation that it should never, when publishing graphs that depict historic and projected annual emissions within the UK, include in the same line the effects of estimated emissions reductions funded by the UK but taking place abroad?

4.  Does the Government have—or will it develop—a code of practice governing the transparency with which it reports UK carbon and GHG emissions, especially covering how it reports the contributions of the EU ETS and other uses of international emissions trading?

5.  Will the proposed Committee on Climate Change have the role of auditing Government emission figures for robustness and transparency?

Aviation

On aviation, the Response contains the following interesting information (Recommendation 42, p 31) regarding the sectoral cap to be set for aviation within the EU ETS:

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.

6.  Could the Government supply us with some more information on this proposal?

Streamlining of climate change regulations

We welcome the Government's detailed and informative response to our concerns as to the potential for certain UK firms to become subject to multiple trading regimes and other climate change instruments (Recommendation 35, pp 25-7). As we suggested, we may investigate these issues in further detail in a forthcoming inquiry into the Climate Change Levy, and may also decide to look further at the proposed Energy Performance Commitment. However, one point in the Government Response was new to us:

7.  The Response refers to the "Climate Change Simplification Project". Could the Government provide us with some more details of this project?

Impacts on competitiveness

On managing the economic impacts of mitigation, we recommended that the Government should consult on whether and how the economy requires greater support and guidance in terms of R&D investment, skills training, and potentially trade agreements. The Government Response stops short of agreeing to such an overarching approach, but does say that the Government will carry out further research on the competitiveness implications of the EU ETS (Recommendation 15, pp 11-12).

8.  Can the Government supply more details on the further research it has stated it will carry out on the competitiveness implications of the EU ETS, including any details on the nature and deadlines of any studies that are commissioned?

We may also follow up other these and other issues touched on in the Government Response in future inquiries.

We appreciate your appearing before the Committee at our session on June 4, and look forward to receiving your written reply in due course.

Tim Yeo MP

Chairman, Environmental Audit Committee

June 2007

Response from the Secretary of State to the Committee

Supplementary Memorandum from the Department for Environment, Food and Rural Affairs

Thank you for your letter to David Miliband of 13th June regarding the Government response to the Environmental Audit Committee's report on The EU Emissions Trading Scheme: Lessons for the Future. I have set out below the answers to your further questions.

1. What evidence does the Government have to show that the saving of 5.2MtC02 is caused by the EU ETS, and not merely coincidental with it?

The Government's response did not state that the 5.2MtC02 saving was caused by the EU; ETS; it simply explained that in 2005 the emissions from the UK installations covered by the EU ETS were 5.2MtC02 lower than the estimate for 2003. We have used the comparison between 2003 and 2005 emissions because this was the most straightforward overall comparison of data available at the time. Since Government submitted its response to the EAC report, 2006 EU ETS emissions data has been checked and published. The comparison between 2003, 2005 and 2006 shows the following picture for emissions (figures in MtC02), and in terms of the allowances issued by the UK. Where emissions are greater than the quantity of allowances issued, operators will have been obliged to buy additional allowances from other Member States in order to cover their shortfall. The impact of the UK's EU ETS allocation decisions on carbon concentrations in the atmosphere is therefore the comparison between our estimate of what would have happened under a business as usual scenario, and the allocations.


  2003 emissions  2005 emissions  2005 allocation  2006 emissions  2006 allocation 
 247.5 MtCO2   242.3 MtCO2  245.4 MtCO2  251.1 MtCO2  245.4 MtCO2  
Compared to 2003 emissions    -5.2 MtCO2  -2.1 MtCO2  +3.6 MtCO2  -2.1 MtCO2 
Project Business as Usual emissions    267.3 MtCO2    267.3 MtCO2   
Saving against Business as usual      21.67 MtCO2    21.67 MtCO2 (=5.9MtC) 

It is important to distinguish between figures expressed in terms of CO2 and those expressed in terms of carbon. A tonne of carbon is equivalent to 3 2/3 tonnes of MtCO2. The figure of 4.6 million tonnes of carbon a year (not MtCO2 as printed in your letter) therefore equates to 16.9m tonnes of CO2. It represents a Treasury estimate of phase 1 EU ETS implementation in the UK on greenhouse gas emissions to the atmosphere. The Government's current estimate of the impact is, as shown, 5.9 MtC a year (21.67MtCO2). This is an estimate of a real impact on greenhouse gas concentrations in the atmosphere, not (as suggested in the Committee's report) 'entirely notional".

Defra will be producing further analysis of the 2006 emissions data in due course.

2. Why is the 4.6MtCO2 figure not included within calculations of the contributions made by policy measures under the UK Climate Change Programme towards the 2010 target? What precisely does it mean to say that it does not apply to the year 2010; especially when, for instance the Fuel Duty Escalator is still included in these calculations, despite the fact it was abolished in 1999?

There are two different issues here, the 2010 target and the impact of the EU ETS during Phase 1 (2005-2007). The 2010 target relates to UK emissions in 2010. It is also important, however, to ensure that our emissions in the years leading up to that target are reduced, so as to ensure that the UK's impact on greenhouse gas concentrations in the atmosphere is reduced. The UK's cap for phase 1 of the EU ETS therefore has a real and valuable impact on emissions in 2006, 2006, and 2007 (estimated at 21.67MtCO2 a year), and therefore on concentrations of greenhouse gases in the atmosphere. It will not have an impact on our emissions of greenhouse gases in 2010; but it will have had an impact on our contribution to existing concentrations of greenhouse gases in 2010 and beyond.

The UK's cap for Phase II of the EU ETS (2008-2012) is the figure which will have an impact on emissions in 2010; that is why it is shown in the Climate Change Programme and in the Energy White Paper as contributing towards the 2010 target. The reason for the fuel duty escalator being shown to have a continuing impact emissions is that the level of fuel duty achieved by the escalator is expected to remain in place, an therefore to have a real influence on emissions in 2010.

3. What is the Government's response to our specific recommendation that it should never, when publishing graphs that depict historic and projected annual emissions within the UK, include in the same line and effects of estimated emission reductions funded by the UK but taking place abroad?

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

i) total emissions, and removals by sinks, within the UK

ii) total emissions and reductions, including those funded by the UK's participation in emissions trading but taking place abroad, but excluding reductions taking place in the UK but funded from emissions trading participants abroad.

The government will continue to publish data showing total emissions and projections of annual emissions within the UK. This data will be presented in a way that does not include the impact of emissions trading. Additional data, showing the impact of emissions trading, will also be presented. In this way it will be clear that emissions reductions are occurring in the UK, and what emissions trading is achieving elsewhere.

4. Does the government have—or will it develop—a code of practice concerning the transparency with which it reports UK carbon and GHG emissions, especially covering how it reports the contributions of the EU ETS and other uses of international emissions trading?

The UK greenhouse gas emissions inventory follows internationally agreed guidelines which require transparency in the way the estimates are made. The estimates are subject to quality assurance and quality control procedures, are reviewed annually, and the underlying data achieved. Information on the holding and transfer of emissions credits will be available in the UK National Inventory Report from 2008 onwards. This information will make it possible to identify credits transferred from overseas that may be used to meet Domestic or International emissions reductions targets.

Similarly the EU ETS data is drawn from the national registry covered by the EU Registry Regulations which cover both form the content of data.

The overall emissions figures are National Statistics, and are produced and published following the National Statistics Code of Practice and its associated set of Protocols. The estimates are subject to quality control procedures, are reviewed annually, and the underlying data archived. The Government does not therefore see the need for a new code of practice in addition to the National Statistics Code and the international agreed procedures.

5. Will the proposed Committee on Climate Change have the role of auditing Government emissions figures for robustness and transparency?

It is vital that the Committee retains the ability to scrutinise the work it receives, and challenge as necessary. We intend the Committee to be an 'intelligent customer', rather than a passive recipient of emissions figures (among other data). The Committee will, of course be able to view the results of the Government modelling (e.g. projections etc) in the light of other information available to the Committee and draw its own conclusions regarding robustness and transparency.

We would see the role of the Committee as availing itself of these projections while at the same, its £2m approximate annual budget will allow it to commission any further analysis from independent sources in order that it can have different inputs. This will ensure that it can give an independent view. There is also no reasons why the Committee could not publish its own advice which in essence, would add another layer of transparency to the process.

6. (Aviation) Could the Government supply us with some more information on this proposal?

Negotiations are continued in the Council and in the European Parliament. The German Presidency presented a Progress Report on the proposal at Environment Council on 28 June 2007. This updated the Council on the status of the proposal, highlighting that the majority of the design details, including geographical scope, starting date and emissions cap, require further work before agreement can be reached. The Portuguese Presidency is intending to reach a Council Common Position at Environment Council in December 2007. The European Parliament has also held an initial discussion of the proposal in the committee on Environment, Public Health and Food Safety, with committee and plenary votes scheduled for Autumn 2007.

7. The Response refers to the "Climate Change Simplification Project". Could the Government provide us with some more details of this project?

A scoping note for the simplifications project is attached[28]. The project is being carried out by the Economics Central Analytical Directorate in Defra, and is expected to report to Ministers in the autumn.

8. Can the Government supply more details on the further research it has stated it will carry out on the competitiveness implications of the EU ETS, including any details on the nature and deadlines of any studies that are commissioned?

The Government has provided funding for a project carried out by the Climate Strategies grouping of researchers, looking at the competitiveness implications of the EU ETS. The study is entitled 'Differentiation and dynamics of EU ETS competitiveness impacts'. The study is intended to provide robust and objective evidence on competitiveness for the Commission and Member States during the review of the EU ETS directive. It explores the competitiveness implications of different levels of free allocations at both the intra EU level and with non-EU countries. The study also uses UK data to investigate the impacts at both sectoral and sub-sectoral levels.

An interim report was received at the end of March 2007 an is now published on the Climate Strategies website. The project is expected to be completed in mid-September and will also be published on the Climate Strategies website.

http://www.climate-strategies.org/item_list.php?item=document&id=76#76

The Government has also commissioned Oxford Economics to undertake a study looking at the impacts of various carbon prices on the EU economy. The study will attempt to estimate the short-run transition costs, including the impact of carbon prices on leakage (i.e., output that relocates to countries that do not impose carbon constraints).

The Study is still inn progress and is anticipated to finish in July. The intention is to publish the report in the summer of 2007.

I hope the Committee finds this clarification of our earlier response helpful.

Rt Hon Hilary Benn MP

July 2007


28   http://www.parliament.uk/parliamentary_committees/environmental_audit_committee/ eac_EU_ETS_Gov_response.cfm Back


 

 
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