8 Trading schemes
114. The Bill contains enabling powers to introduce
new trading schemes through secondary legislation. These powers
are broad and could be used to set up schemes to limit greenhouse
gas emissions in particular economic sectors. They could also
be used to implement schemes to encourage particular types of
activity (for example, renewable energy generation). A number
of additional trading schemes are currently being considered.
One is the Carbon Reduction Commitment which would apply to large,
non energy-intensive businesses and public sector organisations.
Another is personal carbon allowances (PCAs) under which individual
citizens would be allocated tradable quotas of emissions permits.[128]
The Secretary of State has expressed particular enthusiasm for
PCAs. In his speech to the Audit Commission in July 2006, he described
them as "a compelling thought experiment", and argued
that it could be "more equitable" than a system of tax
or regulation because:
instead of tax increases which hit all consumers
of products, personal carbon allowances provide free entitlements
and only offer financial penalties for those who go above their
entitlement. People on higher incomes tend to have higher carbon
emissions due to higher car ownership and usage, air travel and
tourism, and larger homes. People on low incomes are likely to
benefit as they will be able to sell their excess allowances.[129]
115. Much of the written evidence is supportive of
the inclusion of these enabling powers, but some responses have
questioned whether they go far enough. Climate Change Capital
points out that "long term signals on the price of carbon
will enable investors to make informed decisions about whether
to invest in high or low carbon infrastructure in line with carbon
budgets set by Government".[130]
Furthermore, the enabling powers to set up emissions trading schemes
that will put a price on carbon or other greenhouse gas emissions
"will form a key pillar to the success of the proposed legislation".[131]
116. The Better Regulation Commission questions whether
there may be "[…] a danger that the draft Bill could
encourage the use of trading regardless of whether it is the most
appropriate approach",[132]
a view also held by the CBI, which noted that it may "skew
the balance of effort unfairly away from the whole of society
in delivering emissions reduction and put it unfairly on one part
of society which is the business community."[133]
EEF notes that "the administrative burden associated with
emissions trading may render such an approach counterproductive
in relation to emissions from individuals, households and small
businesses" and highlights that a variety of policy instruments
such as regulation and taxation will be needed.[134]
This argument is supported by the RSPB, which noted that "the
focus seems to be entirely on trading schemes and there are some
situations in which some very straightforward simple environmental
regulation would be more acceptable, it would be cheaper, it would
be clear for everybody to understand and it would get you some
carbon emission reductions faster."[135]
117. The EU Emissions Trading Scheme already covers
a large proportion of heavy emitters and represents around half
of the UK's emissions. It is proposed to introduce the new Carbon
Reduction Commitment scheme using the enabling powers within the
Bill, although this raises issues in itself. The Secretary of
State admitted that Personal Carbon Allowances would be introduced
"with a big song and dance […] with full debate and
engagement", implying introduction through primary legislation.
We question what sectors are remaining that might be suitable
for an emissions trading scheme established through secondary
legislation, and therefore the validity of including such enabling
powers within the Bill. We
recommend that the Government explains more clearly—prior
to the final version of the Bill being produced—which trading
schemes will be introduced using the enabling powers within the
legislation.
Allocation of allowances
118. According to the Energy White Paper, the Carbon
Reduction Commitment—a trading scheme incorporating large
commercial and public sector organisations—would involve
the auctioning of allowances to emit CO2 to participating
organisations.[136]
The revenue would then be recycled back to these organisations,
and would therefore be revenue neutral for the Treasury. However,
Schedule 2 to the draft Bill says that new trading schemes set
up using the powers within the Bill "must provide for the
allowances to be allocated free of charge". There is considerable
debate about the merits of free allocation of allowances or of
alternative methods of allocation such as auctioning. The advantage
of auctioning allowances to trading scheme participants is that
it raises revenue for Government which could be used to support
"low carbon" activities. Auctioning also provides information
about the costs of greenhouse gas emissions abatement to industry.
The Energy White Paper explicitly states that "We will seek
enabling powers under the draft Climate Change Bill to introduce
these new trading arrangements."[137]
119. The proposal in the draft Bill is strongly supported
by EEF which told us that "[…] we are glad to see that
the trading schemes that can be introduced through this route
would have to involve free allocation because we think that there
are potentially more serious financial consequences for emissions
trading schemes with, say, auctioning and we think it would be
appropriate for those to come forward via separate legislation."[138]
The recent experience of free allocation within phase 2 of the
EU emissions trading scheme has led others to take the contrary
view. For example, the Environmental Audit Committee recently
argued that free allocation in this case had led to 'windfall
profits' in the power sector, and recommended auctioning for this
sector and for aviation in the future.[139]
This has also been the case in other EU Member States.[140]
The Carbon Trust supports 100% auctioning of allowances in this
sector.[141]
120. The Secretary of State stated that the Finance
Bill makes provision for the auctioning of allowances, and that—although
"all other aspects" of a trading scheme would be provided
for by the Climate Change Bill—the financial issues such
as auctioning would be addressed through the Finance Bill. According
to Mr Miliband, the enabling powers within the Climate Change
Bill could not be used to implement any auctioning provisions
and that if this were the intention, the Finance Bill would be
used.[142]
121. There appears to be some discrepancy between
the draft Climate Change Bill, which provides for free allocation
of allowances, and the recent Energy White Paper which clearly
states that allowances under the new Carbon Reduction Commitment
(a cap-and-trade scheme from large commercial and public sector
organisations) are to be auctioned. It seems unwise for the Government
to close off the option of auctioning allowances in the draft
Bill. Accordingly, we recommend
that the requirement for allowances to be allocated free (Schedule
2, Section 5 (3)) be removed from the Bill so as to avoid any
unnecessary confusion, particularly for those industries and sectors
that will be subject to these schemes.
128 We examine this further as part of our inquiry
into Climate change: the "citizen's agenda". Back
129
Environment, Food and Rural Affairs Committee, Climate Change:
the "citizen's agenda", written evidence from Defra
(Cit 30) Back
130
Ev 44 Back
131
Ev 44 Back
132
Ev 197 Back
133
Q 228 Back
134
Ev 60 Back
135
Q 124 Back
136
Department for Environment, Food and Rural Affairs, Consultation
on measures to reduce carbon emissions in the large non-energy
intensive business and public sectors, November 2006 Back
137
Department of Trade and Industry, Meeting the Energy Challenge:
A White Paper on Energy, Cm 7124, May 2007 Back
138
Q 253 Back
139
House of Commons Environmental Audit Committee Second Report of
Session 2006-07, The EU Emissions Trading Scheme: Lessons for
the future, HC 70 Back
140
Regina Betz and Misato Sato "Emissions trading: lessons learnt
from the 1st phase of the EU ETS and prospects for the 2nd phase"
Climate Policy 6, 351-359, 2006 Back
141
Q 186 Back
142
Qq 598-600 Back
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