Memorandum submitted by RWE npower
ABOUT RWE NPOWER
1. RWE npower, part of the RWE Group, is
one of the UK's largest energy suppliers, with around six million
customers and a diverse portfolio of over 9,000MW of generation
capacity in the UK including coal, oil and gas-fired power stations.
We are also one of the UK's leading renewable energy developers
and operators in the wind, hydro and biofuel generating sectors
and one of the foremost developers and operators of industrial
combined heat and power (CHP) in the UK.
2. We have participated in the European
Union Emissions Trading Scheme (EUETS) since it entered into force
in January 2005 and we welcome the opportunity to contribute to
the Environmental Audit Committee's inquiry into the lessons learned
from Phase I.
INTRODUCTION
3. The EUETS is a key element of the policy
framework for achieving the UK's and Europe's climate change policy
objectives and it is important that the development of Phases
II and III strengthen the scheme such that it is capable of underpinning
long-term investment by industry in low carbon technologies. However,
given that the UK Phase II National Allocation Plan (NAP) has
already been submitted to the European Commission, we would recommend
that the inquiry should be focused primarily on what is required
to put the EUETS on a sound footing post-2012.
EXPERIENCE OF
EUETS PHASE I
4. We fully support market mechanisms and
believe that an efficiently functioning EUETS is the most effective
means of delivering cost-effective reductions in greenhouse gas
emissions. Despite the many inconsistencies and deficiencies in
Member State Phase I NAPs and the delays in getting appropriate
systems and registries in place, the carbon market is up and running
and functioning well for those who are participating in it. This
is a significant achievement in itself. While it is important
that the Phase II NAPs make progress on harmonising the approach
to allocation and are seen to deliver emission reductions consistent
with Member States' Kyoto commitments, we need to recognise that
it will only be possible to address some of the key deficiencies
through the forthcoming revision of the Directive. It will be
important that the UK Government is proactive in working with
other Member State Governments and the European Institutions over
the next 12 months to ensure that the resultant legislative proposal
addresses the issues discussed below.
5. Phase I of the EUETS was always intended
as an initial learning phase and it is important that the lessons
learned during this period are taken into account, both in the
development of NAPs for Phase II and in the review of the scheme
post-2012. Although 2005 may not be fully representative of
the whole of the first compliance period, it is clear that the
majority of Member States (including the UK) allocated more allowances
than were needed to sectors other than the electricity sector.
In the UK and elsewhere, Governments took the view that because
of national competitiveness issues all sectors other than the
electricity sector should be allocated allowances in line with
business as usual (BAU). The difficulty in assessing what represents
business as usual emissions resulted in the apparent widespread
over allocation of allowances to other sectors. This has resulted
in the failure of the majority of sectors to actively participate
in the market and as a consequence the allowance price has primarily
been determined by the balance between supply and demand for those
willing to participate in the market, rather than being related
to real market fundamentals.
EUETS PHASE II AND
III
6. The proposed UK NAP for Phase II continues
the approach of protecting the non-electricity sectors on competitiveness
grounds. Even though there may have been improvements in the projections
of likely emissions from the other sectors covered by the trading
scheme (which we would hope will result in allocation closer to
BAU) there is no real incentive for many of these sectors to actively
participate in the market. It is important that Phase III addresses
this fundamental market failure.
7. All sectors in the EUETS must share the
burden of reducing emissions and competitiveness issues must be
fully understood and addressed at an EU level in Phase 3. This
will be fundamental to establishing an efficient and transparent
market capable of underpinning a robust carbon price to support
investment. If competitiveness issues are considered to be of
such significance for any one sector, the appropriateness of their
continued participation in the EUETS should be reviewed.
8. Government needs to strengthen the resolve
of the European Commission in its review of the Phase II National
Allocation Plans to ensure that these are sufficiently stretching
to deliver the EU's Kyoto commitments and go as far as possible
(within the limitations of Annex 3 of the EUETS Directive) to
developing an efficient and transparent market which engages all
participants. Without this it is unlikely that it will be possible
put the scheme on a sound footing in Phase III.
9. More effort is needed to ensure the market
operates efficiently especially in the area of transparency around
release of emissions data. Whilst it is important that there is
data in the market around emissions from participants this must
be balanced against avoiding increased bureaucracy and costs to
participants.
10. Following on from agreement on Phase
II NAPs, we believe the Government should focus on ensuring that
agreement is reached on the changes needed to the Directive to
ensure a long-term future for the EUETS. Securing international
agreement on climate change policy post-2012 is fundamental to
putting the EUETS on a sound long-term footing. The Government
needs to define a trajectory for UK CO2 emissions reductions
within a wider EU and international context for at least a 15-20-year
period. This clear indication of the path for future emissions
reductions will provide the long-term price signals required to
incentivise investment in low carbon energy technologies.
11. We support the Government in its endeavours
to play a leadership role both within the EU and in international
negotiations. However, it may take some time for international
negotiations to get to a position where the extent of the EU's
long-term climate change commitments are clear. Consequently,
Member States need to start working now on the burden sharing
arrangements post-2012, as these will be critical in underpinning
the EUETS. Failure to achieve agreement on these could thwart
any efforts to secure an early move to longer-term commitment
periods within the scheme, which are seen by Government and industry
as critical in underpinning large-scale investment by industry.
Alternative approaches to burden sharing, for example setting
sector level rather than Member State level targets should be
considered.
RECOMMENDATIONS FOR
KEY PRIORITIES
GOING FORWARD
12. There are a number of key priorities
for the future design of the scheme.
— The efficiency and transparency of
the scheme is fundamental to the delivery of a robust CO2
allowance price that can support large-scale investment in low
carbon technologies.
— To build investor confidence, future
commitment periods need to be aligned to the timeframe associated
with large-scale investments by industry. Ideally, a minimum period
of 15 years is required.
— Harmonisation to the greatest possible
extent of rules relating to allocation, the treatment of new entrants
and closure is essential to limit market distortions and minimise
competition impacts within the EU. One way of achieving this would
be through adopting a sectoral approach at EU level. There may
be a need for a regional level approach in the interim, dependent
on progress towards securing full market liberalisation.
— The threat of EUETS to EU competitiveness
has resulted in Phase I and II NAPs which fail to engage many
sectors in the market. A number of studies have shown that the
competitiveness argument has been overplayed and, while some element
of differential allocation may be justified, all sectors should
share the burden of delivering emission reductions. It is essential
that competitiveness issues are properly understood and addressed
in the design of Phase 3, as this will be fundamental to securing
an efficient and transparent market which delivers emission reductions
at least cost.
— Activity in Joint Implementation
(JI) and Clean Development Mechanism (CDM) projects is expected
to fall off steeply within the next few years due to the absence
of any agreement on the use of these mechanisms post-2012. An
early commitment by the EU to the continued use of these or similar
mechanisms is critical to maintaining company activity at current
levels and also to securing international agreement on climate
change policy. Any decision must also inform companies of the
extent to which JI and CDM credits can be used within the EUETS
in the longer term.
— Expansion of the scheme to include
new sectors or gases should not put at risk the early establishment
of an efficient and transparent scheme that provides the necessary
confidence for current participants in EUETS to invest at scale
in low carbon technologies. Emissions trading may not necessarily
be the most appropriate instrument for delivering emissions reductions
in potential new sectors and it will be important to establish
that other measures are not more appropriate.
October 2006
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