Memorandum submitted by The Confederation
of UK Coal Producers (CoalPro)
The Confederation of UK Coal Producers (CoalPro)
represents member companies who produce over 90% of UK coal output.
CoalPro thanks the EAC for the opportunity to provide views on
the prospects for the remainder of Phase I and the lessons that
should be applied to Phase II.
This response, first, addresses the specific
issues on which the committee would welcome comment, where appropriate,
but then sets out certain other issues which CoalPro believes
the Committee should consider, particularly in relation to Phase
II.
A. COALPRO'S
COMMENTS ON
THE SPECIFIC
ISSUES ARE
AS FOLLOWS
1. What are the key lessons to learn from
Phase I of the Scheme?
A liberal supply of allowances will do nothing
to reduce carbon emissions or stimulate investment in higher efficiency
plant. More particularly, a disproportionate distribution of allowances
in individual member states will merely result in business meeting
their needs by purchasing allowances from companies in other member
states. Because the UK is one of very few member states where
the issue of allowances has been less than need, this has done
nothing to reduce emissions in the UK or elsewhere but will result
in a transfer of resources in Phase I amounting to several hundreds
of millions of pounds out of the UK. This is a perverse outcome
and illustrates the pointlessness of the UK adopting a "hair
shirt" approach on its own.
2. How likely is it that UK firms would successfully
reduce emissions by at least 7MtC by 2012, in line with the proposed
Phase II NAP?
UK firms may well reduce carbon emissions by
7MtC by 2012, but that does not mean to say that carbon emissions
will be lower than either the 245 million allowances for Phase
I or the 238 million allowances for Phase II. If there continues
to be a liberal supply of allowances across Europe, they will
merely purchase what they need. Indeed, the electricity generation
sector may have no alternative but to do so if the lights are
to stay on.
3. What have been the effects of the method
chosen for allocating allowances in Phase I?
Because every sector other than the electricity
generating sector has been given the allowances they need, there
has been no incentive to invest in lower carbon processes. The
generating sector is short of allowances and has purchased/is
purchasing their needs from elsewhere. The only alternative to
this is a massive switch to gas, with all the other problems and
issues that that raises, or to allow the lights to go out. At
no time was this more clearly demonstrated than last winter. Because
of a shortage of gas, and because gas was very much more expensive
than coal, coal burn increased by 20% compared with the previous
winter with the coal-fired power stations providing 50% of electricity
demand. The consequence will have been a significant increase
in carbon emission with the generators complying with the Scheme
by means of a large-scale purchase of allowances involving a huge
transfer of resources to companies in other Member States. It
is no use moralising about this; the only alternative would have
been to allow the lights to go out in every morning and evening
peak demand period on every cold day last winter.
4. Has the Government identified the correct
proportion of allowances to be auctioned in Phase II? Should these
be drawn solely from the power sector's allocation? What will
the effect of this auctioning be on industry and the price of
carbon?
Whilst the approach to be adopted by other Member
States is not yet clear, it would appear that the Government has
set a relatively high percentage of allowances to be auctioned.
UK industry generally will be disadvantaged by this approach.
It is quite wrong for the allowances to be auctioned to be drawn
solely from the power sector but this merely masks the much bigger
question of the correct overall allocation of allowances. Other
sectors will be given what they need. Only the power sector will
be short. Depending upon the overall approach adopted by other
Member States, this will lead to a continuation of the situation
under Phase I with a major transfer of resources from the UK to
companies elsewhere in the EU and/or a large-scale switch to gas
with all the issues and problems that raises, including the potential
for much higher gas and electricity prices than would otherwise
be the case. The effect on industry other than the power sector
will be minimal because it has been allocated the allowances that
it needs. Other things being equal, however, the price of carbon
will be higher than it would otherwise have been, leading in turn
to higher gas and electricity prices.
The issue the Committee needs to consider is
not whether the allowances to be auctioned should be drawn from
the power sector, but the overall, tight, allowances allocated
to that sector. The Government argues that the power sector's
allowances can be restricted because it is largely immune from
international competition. However, the need for the power sector
to make large-scale purchases of allowances will make UK electricity
costs higher than in Europe, as has been the case in Phase I.
There will be a knock-on effect on gas prices to the extent that
fuel-switching takes place. Both of these will have an effect
on industry as a whole.
5. What have been the effects of Phase I
so far on the competitiveness of (1) business in the UK, and (2)
businesses across the EU?
As explained above, the Government's tight restriction
of carbon allowances in Phase I compared to other Member States,
and the fact that this was imposed wholly on the power sector,
has led to higher energy prices for UK businesses. Businesses
in the rest of the EU will have been relatively unaffected.
6. What are the key issues for Phase II in
terms of ensuring that emissions reductions from EU states are
not cancelled out by the transferring of industry to developing
economies?
It is already apparent from Phase I that for
the UK to try and "go it alone" within Europe is both
pointless and damaging for UK plc. It follows that for Europe
to adopt a similar approach in Phase II will be similarly pointless
and damaging for the EU. Phase II therefore needs to be taken
forward in conjunction with international action which promotes
a carbon reduction programme internationally. It does not follow
that the only route to this is via a global extension of an emissions
trading regime. Indeed it is already obvious that that will not
succeed. Other approaches are possible, for example the "technology
route". Perhaps these other approaches should also be given
greater emphasis in Europe rather than relying wholly on emissions
trading.
7. How well are the EU ETS and the Clean
Development Mechanism working together? What needs to be done
to better integrate these markets? Is the CDM funding the right
project?
CoalPro is not competent to comment.
8. How should aviation be included within
the ETS? What are the latest indications of when it will be included?
CoalPro cannot comment directly on these questions.
However, CoalPro supports as wide an extension of the ETS as possible
at as early a date as possible to avoid the perverse and discriminatory
effects observed to date. It is apparent that this should include
not only aviation by road transport as well.
9. The Environment Secretary has said: "we
will support the Commission in its efforts to enforce tough caps".
What exactly should the Government be doing to influence this?
The Government should insist both directly and
through the Commission that each Member State meets its legally-binding
obligations under the Kyoto burden-sharing agreement, and insist
that appropriate enforcement action, or the imposition of appropriate
penalties, is taken by the Commission to ensure these obligations
are met.
However, Member States have no obligation to
go beyond this. If the Environment Secretary's definition of "tough
caps" is intended to take the EU and individual Member States
beyond this obligation, then this is mere rhetoric. Enforcement
would not be possible. Any attempt by the UK to enforce individual
Member States through the Commission to go beyond Kyoto is unlikely
to be acceptable. It would be an exercise in pure self-indulgence.
It may make Ministers feel good but it would be utterly ineffective.
10. How well integrated are the ETS and other
EU climate change policies?
This is a huge question. Complete across the
board integration is probably unachievable. It is also early days
in the life of the ETS. It is difficult to comprehensively answer
this question at this stage. However, CoalPro believes that certain
of the UK's proposals in the draft NAP for Phase II will impede
other climate change policies. This is discussed further below.
11. What work needs to be done now to help
design a third phase of the EU ETS? How can the experience of
the EU ETS be used to help the design of a post-2012 Kyoto mechanism?
The most important requirement of the third
phase is that it should afford certainty to investors if the large-scale
investment in abatement technology that is required is to be forthcoming.
Certainty is required both as to the longevity of Phase III, with
a time horizon of at least 15 years being required, and as to
the volume of carbon allowances that will be made available.
It is apparent that deep cuts in carbon emissions
will not be achieved in a reasonable time frame without carbon
capture and storage (CCS) from large point-sources of emissions
from the consumption of fossil fuels. The ETS rules must therefore
be changed to accommodate CCS as an acceptable abatement technology.
Preferably, these changes should also apply in Phase II and agreement
on them should be reached as soon as possible.
The EU ETS experience to date indicates that
it is not a perfect mechanism, nor will it ever be. It may be
a necessary, but is not a sufficient, tool in itself for Europe
to achieve deep cuts in emissions. These can only be achieved
by the large-scale adoption of abatement technology globally.
Both other advanced economies, led by the United States, and the
developing economies, led by China, have thus far not adopted
Kyoto and have chosen to follow the technology route as opposed
to emissions trading. Any post-2012 Kyoto mechanism that does
not address the concerns of these two enormous constituencies
is doomed to fail. If they continue to eschew emissions trading,
then alternatives must be pursued. Large-scale research and development
into abatement technology, and technology transfer, will be essential,
with or without emissions trading.
B. COALPRO
WOULD LIKE
TO EXPRESS
VIEWS ON
OTHER ASPECTS
OF EU ETS AND,
IN PARTICULAR,
ON THE
APPROACH ADOPTED
BY THE
GOVERNMENT IN
THE DRAFT
NAP FOR PHASE
II TOWARDS NEW
ENTRANTS
The Phase II allocations for incumbents in the
draft NAP are based on need for sectors other than the power sector,
and on fuel and technology specific benchmarks for the latter,
albeit with a severe overall cap. No one fuel or technology is
discriminated against.
The proposed new entrant regime for the power
sector, however, is benchmarked to the parameters for gas-fired
power plant. A new entrant, higher-efficiency, lower emissions
coal plant under this proposal will need to purchase 60% or more
of the carbon allowances that it will need to operate at an economic
load factor. By contract, an existing, lower-efficiency, higher
emissions coal-fired plant will only need to purchase some 30%
of the allowances it requires.
There is a real risk that this proposal will
result in all new power plant investment being gas-fired by default.
This would not matter so much if all new fossil-fuel
power plant encompassed CCS (provided the ETS rules are changed—see
above). However, adoption of CCS requires legal, regulatory and
infrastructure issues to be resolved, as well as major investment.
Large-scale commercial deployment of CCS is unlikely until 2020
onwards.
In the meantime, there will be a need for new,
carbon capture ready fossil fuel plant to replace generating capacity
likely to close over the next 15 years in the UK. Under the proposed
new entrant regime, it is likely that this will all be gas-fired.
If the only objective of Government policy was
a political imperative to maximise short-term reductions in carbon
emissions, this might be acceptable. However, such a development
will compromise all of the Government's longer term energy policy
objectives for clean, secure, competitive and affordable energy.
First, deep cuts in carbon emissions will require CCS at all fossil
fuel plant, gas as well as coal. CCS from coal-fired plant may
well be cheaper than from gas-fired plant as the process is more
efficient and the fuel input cost is likely to be lower. The proposal
will not therefore achieve deep cuts in emissions.
Second, it will lead to an over-reliance on
gas in future leading to much greater security of supply risks.
Third, it will reduce competition and finally it will lead to
more expensive electricity and compromise affordability.
The proposed approach contrasts sharply with
that adopted by Germany where long-term (up to 18 years) carbon
allowances have been awarded which are fuel and technology specific.
This has brought forward significant new investment in both new,
higher efficiency, low emissions coal and gas-fired plant. It
also contrasts with the massive investment now taking place in
new coal-fired plant in China, which is highly efficient and relatively
low emission. No such investment is taking place in the UK.
CoalPro urges the EAC to recommend to the Government
that the proposed Phase II new entrant regime be changed to one
in which the issue of allowances reflects fuel and technology
factors, thus avoiding an over-reliance on gas and other energy
policy objectives being compromised.
David Brewer
Director General
October 2006
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