Expanding the Scheme and linking
it with others
108. The Government has expressed a very strong and
high profile commitment to pushing for the EU ETS to be expanded.
Expansion in this sense means covering more economic sectors and
greenhouse gases, and linking or merging with other emissions
trading mechanisms, including CDM/JI and other emissions trading
schemes emerging in other countries. Notably, the Government has
been in the vanguard of moves to include aviation within the Scheme;
and has also taken the prominent step of calling, in a letter
sent jointly in February 2006 by the then Secretaries of State
for Transport, Environment, and Trade and Industry, for the Commission
to consider the addition of "surface transport" (or
in other words, road transport) in the ECCP review. The Government
sums up the case for such expansion in its "Emissions Trading
Vision":
The more we can trade emissions reductions across
international borders, and the more emissions that are covered,
the more cost effective for all it will be to achieve challenging
emissions reduction targets. [
] Making the carbon market
deeper, wider and more liquid will increase its effectiveness
in delivering greater emission reductions, and do so at least
cost.[123]
109. 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. As
discussed in a previous section, there is plenty of evidence that
much CDM investment is currently going into projects of dubious
merit, concentrating on the abatement of exotic gases; not only
will such investment do nothing to forestall the growth of carbon-intensive
infrastructure in developing prosperity, but it will do little
to improve their people's prosperity and quality of life. For
this reason, WWF argued that the UK should only allow credits
to be used within its Phase II NAP where these meet the Gold Standard,
an "internationally recognised benchmark which sets important
sustainable development criteria for emission reduction projects".
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.
110. A further point here concerns the impact, on
the carbon price within the EU ETS, of expanding its terms to
take in credits from other schemes such as the CDM. There is a
potential contradiction here in the Government's ambitions for
emissions trading. This was well expressed by the Environment
Agency, when they told us that they wanted
to see greater clarity over the UK and EU objectives
for the EU ETS. In the Government's recent Green Paper, The
Energy Challenge, it reaffirmed its commitment to using the
EU ETS to provide UK industry with a long term price signal to
drive domestic investment in low carbon technology. At the same
time, we are likely to see greater integration of global markets
to improve their efficiency and bring down costs. It is difficult
to see that both are possible without careful analysis of the
supply of CDM credits relative to the EU cap. A scheme that allows
unrestricted access to the CDM market will drive down allowance
prices making it more attractive to buy allowances rather than
achieve domestic emission reductions.[124]
111. We
are not sure about the Government's argument that expanding the
EU ETS will necessarily "bring about emissions reductions
at lower cost",[125]
especially given that Climate Change Capital told us that including
the USA and Australia, for instance, would by driving up demand
for allowances be the best way of ensuring a robust carbon price
for the long term.[126]
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.
112. The most significant expansion in the scope
of the Scheme already scheduled to take place in the short to
medium term is the inclusion of aviation. In December 2006 the
European Commission issued a proposal to include CO2
emissions from all intra-EU flights in the Scheme from 1 January
2011, to be expanded to encompass all flights arriving at or departing
from EU airports from 1 January 2012. The Commission has announced
that the total number of allowances allocated to the aviation
sector will be set at the EU level (rather than by individual
Member States), and capped at its average level of emissions in
the years 2004-2006. In the initial period of 2011-12, a small
proportion of airlines' allocations will be auctioned by Member
States, but, as the Commission puts it, "the overwhelming
majority will be issued for free on the basis of a harmonised
efficiency benchmark reflecting each operator's historical share
of traffic."[127]
As for the terms under which aviation is included post-2012, including
its allocations and the extent to which they are auctioned, the
Commission says that this will be reviewed in the light of the
current overall review of the Scheme. Regarding the non-CO2
effects of aviation to global warming, the Commission has said
it will put forward a proposal to address nitrogen oxide emissions
by the end of 2008, although it has not given a date by which
a resulting mechanism would take effect; nor has it proposed any
measures to reflect the other non-CO2 effects of aviation.
113. The Commission's
proposal came too late in our inquiry for us to make a detailed
assessment of its strengths or weaknesses, and its impact on aviation
emissions and the EU ETS overall. However, we have extensively
discussed aviation and its inclusion in the EU ETS in previous
reports, most recently our study into Reducing Carbon Emissions
from Transport, published in August 2006, and we draw on that
work here.
114. In this inquiry we
received only one memo from an airline, Virgin Atlantic. This
stated that Virgin was lobbying hard for the inclusion of aviation
to be on the basis of all flights arriving and leaving the EU,
not just intra-EU flights. While on the hand this seems impressively
disinterested (given that it would pull Virgin, a transatlantic
carrier, into the Scheme), we note that the memo also talks of
"the need to reach agreement with international partners
on this" which may mean that restricting the scope to intra-EU
flights in the interim "may present the most practicable
solution."[128]
The memo was bullish as to the potential for aviation to make
fuel efficiency improvements, drawing our attention to Sir Richard
Branson's pledge to invest around $3 billion in schemes to develop
new renewable energy technologies, and stating in this context:
"Whilst alternative aviation fuels remain some way off, their
potential should not be overlooked."[129]
We would certainly warmly support such investment in R&D,
and would be interested in any breakthroughs. However, as we concluded
in our recent report, we have profound doubts over the ultimate
scope for the aviation industry radically to improve its carbon
efficiency through technological advance, at the very least within
the timescale meaningful in terms of averting dangerous climate
change.
115. 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. WWF,
for instance, has pointed to reports which suggest that under
current proposals the Scheme would, by 2020, and depending on
the distance covered, raise ticket prices by only 4.6 (£3.10)
for a return short haul flight, ranging to only 39 (£26.25)
for a long haul return.[130]
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. The IPPR, for
example, has estimated that giving airlines free allocations could
lead to their enjoying windfall profits of up to 4 billion
(£2.7 billion), while WWF estimates it at 3.5 billion
(£2.4 billion).[131]
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.
116. 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.
117. 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. This could have
a direct effect on the aviation sector by increasing the costs
to airlines and hence to passengers and freight distributors,
thereby helping to dampen demand for flights. It could also have
an effect on the rest of the Scheme through raising demand for
and thus increasing the scarcity of allowances, thereby helping
to maintain a predictably strong carbon price; this would help
to incentivise long term low carbon investment in sectors where
abatement is more feasible.
But this depends on there being a strong cap on aviation emissions.
If the cap is too weak, then its impactson airfares and
demand for flights, and on the wider price of allowancesmay
be equally undermined.
118. 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 graduallythe allocation set aside for aviation
from its initial level. It would risk fatally undermining the
effectiveness of the EU ETSboth directly, and indirectly
through provoking opposition from other sectorsif 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.
119. 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 ETSthat is, directly affecting the airlinesthe
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.
120. 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.
121. Regarding surface transport, although the Government
has taken a very high profile stand within Europe on its inclusion,
it has not revealed anything in the way of a concrete proposal.
Neither the letter sent by the three Secretaries of State to the
European Commission last February, nor the Minister for Climate
Change when he appeared before us in December, offered any details
as to the proposed basis on which surface transport might be included.[132]
From our considerations, however, and the evidence we received,
it would appear most likely that it would be included on an "upstream"
basis, meaning that the cap would be placed on fuel suppliers,
rather than a "downstream" basis which, by placing emissions
caps on individual car owners, might simply prove impractical.
The consensus of evidence we considered was against such a move.
One concern was over the ownership of emissions in such a scenario,
it being wholly unclear how upstream fuel companies would be able
to influence the behaviour of the downstream users. Another was
over the impact it would have on allowance prices, given the likelihood
that, in the short term at least, road transport would function
as a large net buyer of emissions credits from other sectors,
possibly raising prices considerably. Not only might this have
adverse consequences for those industrial sectors within the Scheme
and subject to international competition but, as WWF suggested,
the fear of such a prospect might lead to fuel companies being
given a weak cap.[133]
Third, we heard concerns that the inclusion of road transport
might lead to greater opposition from road transport industry
and users against all other existing and mooted measures, such
as fuel duty rises.
122. 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.
123. The final area of transport to which the EU
ETS could be extended is shipping. The
maritime sector is responsible for 4% of the EU's CO2
emissions.[134]
Despite this, there is little discussion regarding the inclusion
of European shipping, in stark contrast to other transport sectors.
This is in keeping with the findings of our
recent study on transport emissions, which observed:
There is no international agreement on how these
emissions should be allocated to individual states. Thus they
do not form part of any country's national inventories of emissions,
and no Kyoto targets exist for them. This means that sometimes
very significant sources of carbon emissions are being effectively
ignored [
. O]ur impression is that there may be insufficient
attention, from both governments and NGOs, on this issue to generate
the kind of pressure on the negotiating process overseen by the
International Maritime Organization required to generate a timely
solution.[135]
We have previously urged the Government to take the
international lead in drawing attention to the problem of international
maritime emissions, and, in advance of global agreements through
the International Maritime Organization, to press the European
Union to pursue an effective EU-wide strategy to tackle emissions
from shipping using European ports. 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.
Increasing transparency and accountability
of the Scheme
124. To date, public reporting on the operation of
the Scheme and its effects has been disjointed, and lacking in
both parliamentary scrutiny and wider publicity. Notably, it is
down to individual Member States to publish details of the annual
allocations and verified emissions of their individual installations.
While the European Commission does publish aggregate figures of
allocations and actual emissions for each country, this is in
the form of occasional press releases rather than an official
and high-profile annual report. Regarding the more detailed figures
for individual installations, the Commission website merely publishes
18 separate links to the national websites of 18 Member States,
each of which provides this information solely in respect of its
own installations.[136]
Not only does this make it cumbersome to obtain detailed information
from each country, not all Member States are included.
125. There are some mandatory requirements
to produce annual reports under the Scheme, both for individual
Member States and for the Commission itself. Under Article 21
of the ETS Directive each Member State is required to submit an
annual report to the Commission on its "application of the
Directive", paying "particular attention to the arrangements
for the allocation of allowances, the operation of registries,
the application of the monitoring and reporting guidelines, verification
and issues relating to compliance with the Directive and on the
fiscal treatment of allowances, if any."[137]
Article 21 then requires the Commission to publish a compendium
report on the application of the Directive, based on these national
reports. The first of these was published in 2006 by the European
Environment Agency,[138]
and contains some interesting information comparing and summarising
the approaches and challenges faced by different Member States
on a number of issues, for instance, methods of verifying emissions
records, and public access to monitoring reports. However, this
report does not contain figures for allocations or emissions;
and might otherwise be described as being limited by its being
based exclusively on a questionnaire sent to Member States.
126. 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. This might conceivably build
on and be added to the more limited annual report, required under
Article 21 of the ETS Directive, and currently published by the
European Environment Agency. It would offer a much enhanced opportunity
for national parliaments, as well as the European Parliament,
to scrutinise the performance of the Scheme, and to identify areas
of weakness to be addressed. Above all, however, the most important
thing is that detailed allocations and emissions figures for all
participating states and installations should be published in
the same, transparent and accessible, document.
102 Ev 98 Back
103
"Emissions Trading: UK Government Vision", Defra, DTI,
& HM Treasury, 30 October 2006, http://www.hm-treasury.gov.uk/media/98D/4B/environment_emissionstrading301006.pdf,
p 2 Back
104
Ev 17 Back
105
Ev 4 Back
106
COM(2006)676 Back
107
Ev 68 Back
108
Ev 149 Back
109
Q219 Back
110
Ev 52, Ev 164 Back
111
EEF's argument was that international competition would not allow
manufacturing and heavy industry to pass on the costs of allowances
as could power companies, and that auctioning allowances would
be unrelated to the carbon abatement potential of these firms. Back
112
Ev 163-4 Back
113
Ev 94 Back
114
Q259, Qq261-3 Back
115
Purely on the economic benefits of revenue recycling, we note
with interest the conclusions of an extensive literature review
by Professor Paul Ekins, in Economic Growth and Environmental
Sustainability (London, 2000, pp 234-7), which found that
recycling revenues in the form of reductions in other taxes had
significant economic benefits over returning them in the form
of lump-sum rebates. Back
116
For instance, Environmental Audit Committee, Sixth Report of Session
2005-06, Keeping the Lights On: Nuclear, Renewables and Climate
Change, HC 584, para 141 Back
117
Ev 126 Back
118
Ev 156 Back
119
Ev 92 Back
120
Defra is currently consulting on this proposal. As Defra defines
this idea, the Energy Performance Commitment (EPC) is "a
mandatory cap-and-trade proposal covering energy use emissions
from large, non-energy-intensive organisations [
.]The proposal
is for an auction-based "cap-and-trade" programme, in
which participants would be required to purchase allowances corresponding
to their emissions from energy use (either at the auction or from
each other) and then surrender them to a coordinator. Government
would cap total energy use emissions by deciding on the number
of allowances issued for auction." Consultation on measures
to reduce carbon emissions in the large non-energy intensive business
and public sectors, Defra, November 2006, pp 8-9, www.defra.gov.uk
Back
121
Ev 148 Back
122
Q234 Back
123
Emissions Trading: UK Government Vision, p 2 Back
124
Ev 4 Back
125
Emissions Trading: UK Government Vision, p 3 Back
126
Ev 68 Back
127
"Climate change: Commission proposes bringing air transport
into EU Emissions Trading Scheme", European Commission press
release, IP/06/1862, 20 December 2006 Back
128
Ev 169 Back
129
Ev 169 Back
130
"Including aviation in the EU Emissions Trading Scheme -
an estimate of the potential windfall profit", WWF, December
2006. Based on an exchange rate, as of 5 January 2007, of £0.673
to 1 Euro. http://www.sussex.ac.uk/Units/currency/ Back
131
Trading Up: Reforming the European Union's Emissions Trading
Scheme, IPPR, December 2006; http://www.wwf.org.uk/news/n_0000003311.asp.
Based on an exchange rate, as of 5 January 2007, of £0.673
to 1 Euro. http://www.sussex.ac.uk/Units/currency/ Back
132
Qq 328-34 Back
133
Ev 25 Back
134
Trading Up: Reforming the European Union's Emissions Trading
Scheme, IPPR, December 2006, p 28 Back
135
Environmental Audit Committee, Ninth Report of Session 2005-06,
Reducing Carbon Emissions from Transport, HC 981-I, para
111 Back
136
"National reports on verified emission and surrendered allowances",
European Commission, http://ec.europa.eu/environment/climat/emission/citl_en.htm
Back
137
Council Directive 2003/87/EC, Article 21.1 Back
138
European Environment Agency, Application of the Emissions Trading
Directive by EU Member States, 2006, http://reports.eea.europa.eu/technical_report_2006_2/en/technicalreport_2_2006.pdf
Back