Conclusions and recommendations
Introduction
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)
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)
An assessment of the Scheme's impacts to 2012
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)
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)
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)
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 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)
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)
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)
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)
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)
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)
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)
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)
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)
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)
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)
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)
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)
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)
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)
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)
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)
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)
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)
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)
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)
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)
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)
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)
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)
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 take-up 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)
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)
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)
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)
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)
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)
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)
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)
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)
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)
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)
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)
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)
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)
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)
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)
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)
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)
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)
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)
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)
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