Examination of Witnesses (Questions 320-339)
IAN PEARSON
AND MR
NIALL MACKENZIE
12 DECEMBER 2006
Q320 Chairman: The impression we
had in the discussions we had with the Commission last week was
that that is also the Commission's likely starting point, taking
off and landing. It will of course run into significant resistance,
not only in the United States but certainly in other countries
as well. Given that that is the case, is this going to cause a
delay in getting agreement? When is the earliest date we are likely
to get aviation into the ETS?
Ian Pearson: As you know, there
are a number of things that have to happen before we can get agreement
overall on this. It will be a matter for all Member States to
express views on and to come up with an overall position. That
will go through the normal process. I gather the Commission have
been saying that they think 2011 is a feasible date. In the UK
we have always been wanting to press for aviation to come into
the ETS as soon as possible and I do not think there are insuperable
logistical problems for aviation coming into the Emissions Trading
Scheme. I would like to think that the Member States can agree
to taking appropriate action. I would be very disappointed if
the United States decided that it wanted to challenge any decision
that the European Union took on this.
Q321 Chairman: I am sure there are
not insuperable logistical problems but the negotiations are still
going to be very difficult. You have referred already to the fact
that we want the United States to agree. Absolutely critical to
the success of including aviation are the baseline figures. We
learned that from Phase I when the baselines were set too high.
Would you support baseline figures which were, say, based on the
actual emissions in 2005?
Ian Pearson: That would probably
be a realistic approach to take. I would like to look at what
the other options are. You cannot have historical baselines that
go back a long period of time because aviation has been growing
strongly. Talking of 1990 baselines would fly in the face of common
sense.
Q322 Chairman: Even if aviation does
come in in 2011, the growth of aviation would mean that a 2005
baseline would involve matters right from the outset.
Ian Pearson: We have to look at
what the design of the scheme is. It seems clear to me that aviation
is already a significant and set to be a substantially growing
problem when it comes to CO2 emissions and indeed other
greenhouse gases emissions as well. That is why we think that
it should come into the Emissions Trading Scheme. The level of
effort that we should require of aviation is a matter for debate
within the European Union and other Member States. In the UK,
we reckon that aviation accounts for around about 5% of CO2
emissions at the moment and rising. The Aviation White Paper suggested
that aviation could account for 25% of our CO2 emissions
by 2030 so it is clearly an area where we need to take action.
It is best to take action at an EU level. Whether that action
involves setting reasonable baselines and requiring reductions
from them or whether it requires high levels of auctioning, for
instance, as one way of moving forward, there is a range of different
options that we need to discuss. We look forward to seeing the
Commission's proposals which I gather are pretty imminent.
Q323 Chairman: It is not quite good
enough to say that we are going to look at their proposals or
that there is a debate to be had. You referred earlier on to the
pioneering role that Britain has played in addressing the whole
issue of climate change and in particular in relation to emissions
trading. Surely it is for us to be now trying to influence the
shape of those proposals very proactively? It would be helpful
if we could have a clear statement saying, "Yes, there needs
to be a very tight baseline figure". If it could be earlier
than 2005 so much the better. Yes, a substantial proportion of
these allocations should be options rather than handed out free
to the airlines. There is an opportunity here for the British
government to give a very strong lead and to have a big influence
over the outcome of how aviation comes into the scheme.
Ian Pearson: I certainly agree
that there is a good opportunity for the UK to express early opinions.
That is why we have pushed very strongly to get aviation into
the EU ETS in the first place. It is why we have pushed the Commission
strongly on an all flights departing model rather than just flights
within the European Union. There is a big difference between those
two approaches in terms of coverage of CO2 emissions.
It is why we will be pushing strongly on auctioning and on baseline
data as well.
Q324 Chairman: When did talks start
with the aviation industry?
Ian Pearson: Probably soon after
the Wright brothers.
Q325 Chairman: In relation to entry
into the EU ETS?
Ian Pearson: We have had regular,
ongoing discussions with the aviation industry on a range of matters,
including the EU ETS and it has been encouraging that the aviation
industry in the UK has been supportive of aviation's entry into
the EU ETS for a considerable time.
Q326 Chairman: What is not quite
so encouraging is the evidence we had from the aviation industry
in May when they said they had not even begun to talk with the
government about the basis on which they would go into the ETS.
Ian Pearson: My understanding
is that the aviation industry has been supportive of going into
the ETS. Whether they feel as if they have been consulted in terms
of the detail, about how that would operate as opposed to the
principle of including in the ETS is something we might disagree
on. From reading the paperwork prior to my taking over responsibility
as Minister for Climate Change, it seems clear to me that the
aviation industry have accepted the principle of being in the
ETS and have been talked to about that certainly prior to our
presidency of the European Union last year.
Q327 Chairman: That is not at issue.
They have certainly made many public statements saying that they
want to get aviation into the ETS. What I am trying to establish
is, given the hideous complexity of the negotiations that will
take place, the very optimistic target of achieving this by 2011
and the urgent need to achieve that target, either the industry
has started talks with the government about the detail of the
allocations or it has not. It does not seem to be clear whether
you think they have started or they have not started.
Ian Pearson: I have met representatives
from the aviation industry and talked to them about an all flights
departing model and other options. I am sure that meetings have
taken place at official level as well about more of the detail.
Mr Mackenzie: The Department for
Transport which we work very closely with on this are in regular
contact with the industry as indeed are we. The last meeting we
had with the industry as a whole which covered this issue was
only a matter of a few weeks ago where we were discussing speculation,
at that stage, as to what might be in the Commission proposal.
I do not think it is quite fair to say that we have not had any
contact with the industry if that is what they said to you earlier.
I do not know what they aspire to in the level of detail. We cannot
discuss the detail of a Commission proposal which we have not
yet received. We can certainly discuss some of the issues such
as all departing flights. Some of this is covered in the Aviation
White Paper 2003 so the issues have been discussed between different
parts of the aviation industry. We have not discussed the scheme
as a whole as yet in any detail because we have not reached any
detail.
Chairman: The statement they made to
us was in May so that would be quite consistent with meetings
in the last few weeks. I just wanted to try to establish how far
this process had gone.
Q328 Mr Chaytor: The Government has
written to the Commission recently suggesting that surface transport
should be included in the trading scheme. Is the concept that
that will be in addition to road pricing, congestion charging,
any changes in fuel duty and the use of variable vehicle excise
duty? You are not considering inclusion in the scheme as an alternative
to the existing policies we have in place?
Ian Pearson: A lot of this relates
to the Department for Transport and their areas of responsibility.
Q329 Mr Chaytor: The letter was signed
by the Secretary of State for the Environment as well.
Ian Pearson: What we have said
is that we would like the Commission to consider options for including
surface transport in the EU ETS. It is sensible to consider what
options might be available. We need to look at what is the appropriate
mix of policy instruments that is going to achieve our overall
objectives when it comes to surface transport. Inclusion in the
EU ETS could be one of them but it might be decided that that
is not the best way forward and that other policy instruments
would be more appropriate.
Q330 Mr Chaytor: What are the obstacles
that you could see and has there been some discussion with the
oil industry, the motor industry, to date?
Ian Pearson: There are a number
of key issues about how you might design a scheme which would
include surface transport, whether those would be something that
would be done through vehicle manufacturers or through the petroleum
retailers. There are a number of key questions that need to be
considered before we assess whether it would be feasible to include
surface transport in the EU ETS. Personally, I think it is unlikely
that you would have a personal transport allowance as part of
the EU ETS because it is not designed for that. It is about larger
installations. We need to think through what large installations
relate to the surface transport industry could be realistically
asked to do here that would have a positive CO2 benefit.
Looking at these issues as part of the review would be a good
thing to do.
Q331 Mr Chaytor: What is your judgment
about the likely reaction of the motor manufacturing companies?
Ian Pearson: I do not think they
are necessarily going to like it in particular. I can foresee
difficulties in getting surface transport included. We are in
a situation at the moment whereby at an EU level, as you know,
there has been this voluntary agreement on reducing emissions
from vehicles, where sufficient progress has not been made and
where we have been encouraging the Commission to consider looking
at all available options, including legislating for standards.
Looking at other options through emissions trading might be one
way forward as well. When you look at the carbon footprint of
the transport industry in Europe, it seems clear to me that we
have to be doing something about this if we are serious about
tackling climate change. What is the best way of doing it? Is
it through voluntary standards? Is it through regulation? Is it
through emissions trading? I do not think we have thought through
this in Europe yet. I do not think we have thought it through
in the United Kingdom yet, though I think we are leading a lot
of the thinking.
Q332 Mr Chaytor: In terms of the
voluntary agreement, this is the target that all new vehicles
should emit an average of 175 grams per kilometre by 2007. Is
there a further stage to that voluntary agreement? Is there a
more stringent target in place for 2010 or the period after that,
or is the 175 grams by 2007 the end?
Ian Pearson: I cannot remember
all the detail on this. I think you will find that the situation
is that the targets that were set in the voluntary agreement do
not look as if they are going to be met at the moment. That is
why the Commission is looking at what steps to take next. It might
be helpful if I gave the Committee a note.
Q333 Chairman: Supposing those steps
were to replace the voluntary target with a stringent, mandatory
target. Would that have Britain's full support?
Ian Pearson: We are at the stage
where we have been encouraging the Commission to consider all
options. I do not think we have expressed a view about what is
the most appropriate thing to do.
Q334 Chairman: If a voluntary target
fails, what other option apart from a mandatory target exists?
Ian Pearson: You make a perfectly
valid point about this. Having a mandatory target would have some
merits but so might including surface transport in emissions trading
as an alternative.
Q335 Dr Turner: There is one sector
of industry which is not particularly exposed to international
competition, which shows no sign of having suffered under the
first round of ETS in any shape or form and the estimates vary
between 670 million and 800 million of the windfall profits that
the power companies have made as a result of being able to pass
on any costs they have incurred directly plus an extra profit
margin. Do you think this is acceptable?
Ian Pearson: We must treat all
figures in this area with some degree of caution for a variety
of reasons. You will be aware that these are not likely to be
necessarily entirely accurate. It is fair to say that when you
look at the large energy producers by and large these are insulated
from international competition and have the ability to pass through
into prices. I accept that windfall profits have been made by
the sector. However, this has helped to develop the EU ETS overall
as a scheme and I am keen that we move towards 100% auctioning
when it comes to this particular sector. In Phase II, as you know,
all the effort at reduction is focused on the larger electricity
producers. The auctioning proposals are focused on the sector
as well so it is an area that is being addressed.
Q336 Dr Turner: Is there any intention
in organising the auctioning that will be used as a way of pulling
back some of these windfall profits to the Treasury?
Ian Pearson: It is obviously a
matter for the Treasury as to what happens with the proceeds from
the auctioning process. As I said earlier, when the announcement
was made on Phase II and the level of auctioning in Phase II,
it was clearly said that an environmental transformation fund
would be set up. I do not think I have anything further to add
on that. One of the key messages here is that the large energy
producers have been instrumental in ensuring that we have a successful
EU ETS and we should want to bear that in mind for the future.
Q337 Dr Turner: In Defra's own memo
it says that auctioning the allowances will reduce the power companies'
profits but then it says that it will not have any additional
impact on electricity prices. What makes you so confident that
the power companies will not just pass it on again?
Ian Pearson: We have done various
modelling exercises looking at the price impacts of the different
options which we consulted on and they have led us to making a
decision on eight million tonnes of carbon reduction and 29 million
tonnes of CO2. Our estimate is that the effect on industrial
prices would be 1% with a range of nought to 3%. Modelling suggests
the estimate on domestic prices will be about half of that, so
half of 1%. Those are the best figures that we have. That is building
into the model the figures on auctioning and we think it is the
best information we have on what the likely price effects are
going to be.
Q338 Dr Turner: But it is only a
model.
Ian Pearson: Exactly. It is only
a model. The fact that industry overall has welcomed the NAPs
and the process indicates that I do not think the industry has
substantial concerns that there will be major damage on price
effects as a result of this.
Q339 Dr Turner: The Carbon Trust
said to us last week that the power companies are tending to sit
on their profits at the moment and that they are certainly not
competitive in low carbon electricity generation technologies,
possibly because they are waiting for more certainty in the carbon
price or whatever. Can you think of anything more that you could
be doing to encourage or force the electricity companies to recycle
those profits into low carbon investment?
Ian Pearson: There is already
investment in the pipeline from the large energy producers. There
have been some recent announcements of proposals on a coal gasification
plan with carbon capture and storage which is very interesting.
I personally think that carbon capture and storage is a key technology
for the future that needs to be rapidly deployed throughout Europe
and internationally. It is fair to say that we are going to see
significant levels of investment in capacity over the next 10
years when it comes to the energy generators. The key question
will be ensuring that that is low carbon investment. There is
a range of big decisions that are ready to be taken at the moment.
The more clarity there is with the EU ETS, the more clarity that
we are able to give through the Energy White Paper, that will
help bring forward this investment and low carbon investment.
| 
