Putting the EU ETS into perspective
127. 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.
128. 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.
129. 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.
130. 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.
131. 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;
emissions trading cannot be thought of as an excuse for any one
sector not to start reducing its actual level of emissions, with
the thought that it can simply buy spare allowances from another
sector. In order for there to be any spare allowances, all sectors
are going to have to make strenuous efforts to push the decarbonisation
of their processes as far as possible.
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.
132. 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. Certainly, it has the potential
to do this more efficiently and ultimately at lower overall costs
than alternative mechanisms such as a tax on carbon, but still
in terms of helping to achieve emissions reductions its primary
role is to put a price on 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.
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