Memorandum submitted by E.ON UK (CCB 12)
KEY POINTS
— E.ON UK supports the proposed
CO2 reduction targets, although it would be helpful
if the Government clarified the basis for the proposed 2020 target.
These statutory targets will help the development of a stable,
long-term policy framework for low carbon investment and strengthen
the UK's leadership position on climate change. The Government
must put in place the right long term policies to deliver the
targets.
— Sufficient flexibility in target
setting is required to take account of both natural and economic
variables and to avoid disruptive short term Government interventions
which might be required to deliver more rigid targets. However,
excessive flexibility could adversely affect environmental integrity
and regulatory certainty. We believe the proposed five-year budgets
and associated rules for banking and borrowing provide broadly
the right balance.
— The legal duty to meet the UK
targets and the consequent threat of Judicial Review, combined
with enhanced monitoring and analysis provided by the Climate
Change Committee, should provide an appropriate incentive for
the Government to comply.
— The burden of carbon reductions
should be spread equitably across the economy. There needs to
be clarification and transparency concerning the effort expected
from both the traded (ie those activities covered by the EU emissions
trading scheme (EU ETS)) and the non-traded sectors.
— Some overseas emissions reductions
should be permitted to contribute toward the UK targets, given
that climate change is a global problem and emission reductions
may be achievable more cost-effectively outside the UK. This would
also help ensure consistency with the EU ETS which is a primary
mechanism for driving emission reductions.
— If unnecessary instability within
the EU ETS is to be avoided, the Government should signal the
extent to which they intend to use overseas emissions reduction
to deliver national targets and purchases must be made in a predictable
manner.
— We support the Government's
consideration of broad ranging traded mechanisms and the commitment
to consult fully on any measures to be introduced under new "enabling"
powers.
INTRODUCTION
1. E.ON UK is the UKs second largest retailer
of electricity and gas, selling to residential and small business
customers as Powergen and to larger industrial and commercial
customers as E.ON Energy. We are also one of the UK's largest
electricity generators by output and operate Central Networks,
the distribution business covering the East and West Midlands.
We are also a leading developer of renewable plant, including
biomass generation. By 2012 we aim to achieve a 10% reduction
in carbon intensity—the amount of carbon emitted per unit
of electricity we produce—compared to 2005 levels.
2. We welcome the opportunity to contribute
to this Committee inquiry. E.ON UK firmly believes that by establishing
a legal framework to ensure the delivery of the UKs' greenhouse
gas reduction targets, the draft Climate Change Bill is a necessary,
timely and highly significant piece of legislation.
TARGETS
(i) The validity of the Government's domestic
targets to:
— reduce CO2 emissions by
60% below 1990 baseline levels by 2050, and
— reduce CO2 emissions by
26-32% below 1990 baseline levels by 2020.
3. E.ON UK supports the Government's proposed
CO2 reduction targets. These statutory targets will
facilitate the development of a stable and long term policy framework
to support the necessary investment. It would be helpful if the
Government clarified the basis for the proposed 2020 target but
it is clear that reductions of this order will be required if
the 2050 target is to be met. The adequacy of these targets needs
to be kept under review in the light of changes in scientific
evidence and the level of international co-operation.
4. The adoption of robust targets will also
strengthen the UK's leadership position on climate change. The
ongoing international negotiations to develop an enduring and
global greenhouse gas reduction agreement are crucial if the worst
effects of climate change are to be avoided. In addition, if the
UK economy is to deliver the necessary CO2 emissions
reductions efficiently, it is vital that the Government has the
right long-term policies in place to deliver the targets. This
means:
— effective and equitable burden
sharing across all sectors in the UK;
— a robust EU Emissions Trading
Scheme (EU ETS) which delivers a substantive carbon price from
2012, with a more harmonised approach across the EU;
— incorporation of new trading
schemes (where compatible with efficiency and environmental integrity
of the EU ETS);
— continued co-operation with
and technology transfer to developing nations;
— the development of new policy
measures to achieve energy efficiency improvements;
— ensuring the availability of
a wide range of low carbon investment to the UK power sector;
and
— a planning framework which supports
timely and efficient investment while allowing proper public scrutiny.
(ii) Why the carbon budget for the period
including the year 2020 cannot exceed 32%
5. Whilst the draft Bill does not permit
the carbon budget containing the year 2020 to exceed CO2
emissions reductions of more than 32%, this is not to suggest
that actual emissions reductions across the economy will not be
able to go beyond this level. The current proposals allow for
an over achievement to be taken into consideration through the
banking arrangements, enabling excess emissions rights to be carried
forward to future years.
6. In addition the ability for the statutory
targets to be reviewed and revised with Parliamentary approval,
subject to new scientific knowledge or international law and policy,
provides sufficient flexibility to create a new 2020 target should
specific circumstances demand such a change.
(iii) The rationale for a five year budgetary
period
7. It is not the CO2 emissions
from a specific year that will determine the effects of climate
change, but rather the level of emissions over time. With this
in mind, we believe that the carbon budgetary periods strike the
right balance between ensuring progress towards the reduction
goal and measuring the effectiveness of long-term Government policies
to achieve CO2 emission reductions, whilst permitting
reasonable flexibility in delivery.
8. The flexibility provided by banking and
borrowing provisions within budgetary periods along with limited
banking and borrowing between budgetary periods will ensure that
variables such as weather, global fuel prices and other global
economic factors can be taken into account and will avoid the
need for short-term disruptive intervention to achieve more rigid
targets.
9. We consider a methodology incorporating
carbon budgetary periods to be superior to one which adopts annual
targets.
(iv) Monitoring and early warning systems
to ensure achievement of targets is on track
10. We support the proposed approach. A
five year carbon budget provides a meaningful measure of the UK's
progress towards the statutory emissions reduction targets without
incurring the bureaucracy or costly short term policy interventions
which could result from an annual carbon target.
(v) Accountability and enforcement mechanisms
to ensure compliance with targets, and sanctions in cases of non-compliance
11. The legal duty to meet the UK targets
and the subsequent threat of Judicial Review, combined with enhanced
monitoring and analysis provided by the Climate Change Committee,
should provide an appropriate incentive for the Government to
comply.
CARBON BUDGETING
(vi) The facility—in any given budgetary
period—to "borrow" emissions rights from a subsequent
period, or to "bank" any "surplus" emissions
reductions for use in the next budgetary period
12. E.ON UK supports this approach. In order
to reach the desired CO2 reduction target in the most
economically efficient manner we believe it to be sensible to
permit the banking of emissions rights both within and between
budgetary periods. We recognise that the ability to bank emissions
rights may exacerbate a situation where an unnecessarily high
budget has been set in an early period, thus smearing an over
allocation across a number of years or carbon periods. However,
as the Government have proposed the revision of the budgets in
the event that there is a significant change of circumstances,
we do not believe that this is a major concern. We would therefore
support unlimited banking within and between carbon budget periods.
13. We also believe that borrowing within
budgetary periods should be permitted provided that this is limited.
Future years within a period must not be left so depleted as to
make the need for further borrowing a certainty. As for borrowing
from future budgetary periods, this concept requires a great deal
of caution. If the approach is to retain environmental integrity,
it is essential that the interim budgets are seen to deliver progress
en route to meeting the statutory CO2 emission
reductions.
14. Nevertheless we can foresee a circumstance
where an unexpected occurrence, such as unusually cold weather,
could result in the release of excess CO2 emissions
in the final year of a budget period. We therefore consider that
a limited level of borrowing should be permitted between periods.
(vii) The facility to purchase carbon credits
from outside the UK to meet domestic targets, in terms of their
overall quantity and sources
15. As a developed nation wishing to show
leadership in tackling climate change, it is important that a
high proportion of emissions reductions take place within the
UK. This is a moral obligation as well as a reflection of the
global reduction effort which is required to mitigate the worst
effects of climate change. We do agree, however, that some overseas
emissions reductions should be permitted to count against the
UK targets. This provides additional flexibility to ensure that
overall global reductions are achieved in the most efficient manner
possible, whilst contributing a fair share to the reduction effort.
The use of Kyoto's flexible mechanisms would also be consistent
with the EU ETS and should encourage technology transfer to developing
nations.
16. There needs to be recognition that the
purchase by Government of project credits to deliver the targets
specified in the Climate Change Bill could have a significant
impact on the stability of the carbon market and could affect
its reliability as a trading mechanism. We therefore believe that
the decision to purchase project credits should be transparent
and signalled well in advance. In addition, to avoid the creation
of instability within the EU ETS, the purchase of overseas reductions
must be undertaken in a predictable manner.
(viii) The range and validity of changes in
circumstances in which budgets can be subject to review and revision
17. A robust and stable regulatory framework
is essential. On this basis we are pleased that the carbon trajectory
will be set for 15 years into the future. Otherwise the regulatory
framework could be significantly undermined by repeated revisions
to the carbon budgets. Conversely it would be inappropriate to
commit the UK to an unchangeable set of targets prior to the conclusion
of international negotiations aimed at reaching a climate change
agreement. It therefore seems sensible to leave a level of flexibility
in the interim period by enabling a revision of the carbon budgets
"should significant developments in relevant circumstances"
arise.
18. The requirement for advice from the
Committee on Climate Change along with the agreement of Parliament
prior to amending carbon budgets, should ensure that revisions
are only undertaken where clearly necessary.
(ix) The reporting procedure and Parliamentary
accountability
19. We note the inclusion of the Committee
on Climate Change in the annual reporting process (subsequent
to the Climate Change and Sustainable Energy Act 2006) and believe
that this arrangement should improve the annual report on progress.
The independent nature of the Committee should enhance confidence
in the findings and the recommendations of the assessment.
20. The annual report and the five yearly
Compliance Statement by the Government, should serve not only
to provide business with an updated carbon trajectory, but also
to increase the public profile of the UK's carbon budget.
ADAPTATION
(x) Whether adequate provision is made within
the Bill to address adaptation to climate change
21. Given that CO2 can persist
in the earth's atmosphere for hundreds of years, some effects
from higher CO2 emissions are inevitable. On this basis,
it is important that the UK Government supports co-ordinated and
prioritised investment in adaptation measures. The proposal in
the Draft Bill will provide a discipline on Government to report
on action it has taken and we are not aware of any further legal
measures which are required.
COMMITTEE ON
CLIMATE CHANGE
(xi) Its composition and appointment, including
length of tenure and degree of independence
22. The appointment of a Non-Departmental
Public Body to consider and advise the UK Government on the appropriate
carbon trajectory is an important development. The Climate Change
Committee will need to provide a coherent, comprehensive and independent
analysis of the UK's approach and progress towards meeting its
targets.
23. The ability of the Committee to deliver
successfully the stated functions will be dependent upon the composition
of the panel. A balance of practical and academic experience is
required, covering economics, business management, environmental
and social science.
(xii) Its function and responsibilities
24. We understand that the Committee will
be required to advise the Government on the level of reduction
effort to be achieved by overseas emission reductions, the traded
sector and the non-traded sector. We very much support the clarity
that this would provide for each sector. The challenge of climate
change necessitates equitable burden sharing across all sectors
of the economy.
(xiii) Its powers in determining carbon budgets
and the provisions within each budget
25. We believe that the proposed technical
advisory role will enable the Committee to inform Government policy
sufficiently and that it is for Government to determine actual
carbon budgets as this is fundamentally a political decision involving
a number of trade offs. The CO2 emissions trajectory,
as developed by the Committee, should be used by Government to
create a long term carbon policy framework to facilitate emissions
reductions in the most economically efficient fashion.
(xiv) The adequacy of its range of functions
in overseeing the targets
26. We agree with the range of functions
ascribed to the Committee which will focus the Committee on the
most important issue, that of the carbon trajectory.
(xv) The resources available to the Committee
27. We have no comments on the resources
available to the Committee.
ENABLING POWERS
(xvi) The adequacy and implications of the
proposed enabling powers allowing the Secretary of State to establish
greenhouse gas emission trading schemes by means of secondary
legislation
28. Market based mechanisms offer the most
efficient methodology for reducing greenhouse gases in that they
deliver the required outcomes while providing flexibility of delivery
and encouraging innovation. We support the proposed enabling powers
to facilitate the creation of new greenhouse gas emission or related
trading schemes on the basis that they are likely to have common
design features. However there must be full public consultation
on the design of schemes the Government wishes to propose and
continued Parliamentary oversight of this process.
INTERNATIONAL IMPLICATIONS
(xvii) The validity of the Government's view
that the Bill will act as an effective example to drive international
climate change policy post-2012
29. The Draft Bill seeks to establish the
first national legal framework to deliver specific reductions
in CO2 emissions. On this basis, the Bill should help
the UK demonstrate leadership and have some positive effect on
the UK's ability to influence international climate change policy
post 2012. However, the ability of the UK to drive international
climate change policy will be dependent in the longer term on
its ability to demonstrate that it can deliver the targets while
maintaining economic growth and a competitive economy.
GENERAL
(xviii) Whether there are other domestic climate
change issues which it would be appropriate to include in the
Bill
30. We do not think so.
E.ON UK
May 2007
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