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Memorandum submitted by the Cambridge Centre for Climate Change Mitigation Research (4CMR) (PBR08009)
This submission refers to one specific subject on which the EAC welcomes comments: "The Treasury's approach to the use of revenues from auctioning carbon allowances (or from prospective international carbon taxes) for dedicated environmental ends".
SUMMARY
· The fate of auctioning revenues from introducing aviation into the European Union Emissions Trading Scheme (EU ETS) is critical to the overall outcome of this climate change policy, in terms of its likelihood of reducing greenhouse gas emissions from the European economy.
· If auctioning revenues are added to general Government budgets (non-hypothecated), our model suggests that they will have the effect of a slight increase in overall European greenhouse gas emissions at lower allowance prices.
· If auctioning revenues can be directed towards new abatement technologies, or can be used to support the airline industry in other ways while it invests, there is more likely to be an overall reduction in carbon emissions.
ABOUT 4CMR
4CMR is an interdisciplinary research centre within the Department of Land Economy at the University of Cambridge.
Our objective is to foresee strategies, policies and processes that are effective in mitigating human-induced climate change. We combine computer modelling with expert knowledge from economics, energy systems, engineering, applied mathematics and environmental science to understand how the transition to a low carbon economy can happen quickly, efficiently and equitably. www.4cmr.org.
Response
1. 4CMR carried out a research project on the economic and environmental impacts of introducing aviation into the EU ETS, in association with Cranfield University and the University of Maine (USA).
2. The project 'Air Transport in the European Emissions Trading Scheme' is due to be completed and reported on in February 2009. The results are already compiled and were presented at an Omega workshop on December 11th 2008[1]. They have not yet been published in a final report or in peer-reviewed literature. The study was carried out by Annela Anger of 4CMR, Peter Allen of Cranfield University, and Jonathan Rubin of the University of Maine.
3. The study used the energy-environment-economy model E3ME to predict the likely impacts of introducing aviation into the EU ETS. This model describes the European economy as 42 industry sectors, one of which is air transport. It uses real historical data from 1970-2004 to estimate the interactions between different sectors of the economy. Taking these interactions into account, it estimates the impacts of short and medium term greenhouse gas mitigation policies and predicts future economic changes to 2020. More information about the model can be found at: http://www.camecon.com/suite_economic_models/e3mg.htm.
4. E3ME treats emissions trading as a tax on fossil fuel use. It adds a cost to fuel, based on the carbon content of that fuel. The model has been run with and without aviation being included in the EU ETS, so the economic and environmental effects of including aviation can be analysed.
5. The study assumes that aviation is included in the EU ETS with 85% of allowances allocated free and 15% auctioned. It assumes that up to 15% of allowances for each airline can be bought from the Kyoto Clean Development Mechanism (CDM). It is also assumed that there are no emissions reduction targets for non-ETS sectors. Finally, it assumes that the allowances for aviation are capped at 97% of 2004-2006 levels in the first year, 95% in the second year, and then diminish at around 2% per year until 2020, as proposed for Phase 3 (2013-2020) of the EU ETS for other sectors[2]. For this study, E3ME was run with three allowance price scenarios - allowance prices of €5, €20 and €40 per tonne of CO2.
6. The results showed that with emissions trading, actual CO2 emissions from air transport will be reduced compared to the reference scenario with no aviation emissions trading. However, the reductions will be small. Carbon emissions will be less than 1% lower with an allowance price of €5/tonne. At €20/tonne, CO2 emissions will be reduced by 3.4% in 2020, and by around 7.4% at €40/tonne.
7. Similar reductions in emissions from aviation can be achieved by running the model with moderately high oil price scenarios and no emissions trading.
8. The model predicts a very small drop in demand for air travel - less than 1% reduction in 2020 even at the high allowance price. The air transport sector is able to continue to grow, because it becomes a net purchaser of allowances, buying allowances largely from the power sector.
9. However, contrary to expectation, the model does not show a reduction in CO2 emissions from the entire economy (including the power sector), reflecting an increased demand for emission allowances created by the aviation industry.
10. In fact, CO2 emissions from the wider European economy are predicted to increase slightly when aviation is included in the EU ETS, at lower allowance prices - by 0.2% at €20 per tonne and 0.1% at €5 per tonne. This effect is a result of auctioning revenues being recycled into the general economy and increasing other economic activities. At the highest allowance price, emissions from the wider economy are reduced, although only by 0.2%.
11. In other words, when the entire economy is taken into account, introducing aviation into the EU ETS may not be very effective at cutting carbon emissions, because of the counter effect of allowing auctioning revenues to enhance other economic activity. If auctioning revenues were earmarked for spending on carbon reduction technologies, or used to support air transport companies through the tax system, this effect may not happen.
12. More research is needed to analyse how sensitive overall CO2 emissions might be to different treatments of auctioning revenues in this context.
13 January 2009
[1] http://www.omega.mmu.ac.uk/EU-ETS-presentations/Annela_Anger_11Dec%20short.pdf [2] We believe it has now been agreed that for aviation, the cap will remain at 95% of 2004-2006 levels until 2020 |