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Memorandum submitted by the WWF (PBR08011) Main SummaryWWF's response to the EAC inquiry has focussed on:1. The use of revenues from auctioning carbon allowances; 2. The reform to the Air Passenger Duty (APD); and 3. The increased role for the Export Credit Guarantee Department (ECGD) as part of the stimulus package.
1. WWF's views on "the Treasury's approach to the use of revenues from auctioning carbon allowances (or from prospective carbon taxes) for dedicated environmental ends"
Summary
1. WWF believes that the UK should commit to use a sum equivalent to the full revenues from auctioning of allowances under the EU Emissions Trading Scheme (ETS) for climate protection measures. In our view, half of this sum should be used to aid the transition to a low carbon economy in the UK. Equally importantly, the other half should be set aside to help meet the adaptation and mitigation needs of developing countries (including stopping deforestation) - this second purpose will be critical to ensure a successful global climate deal in Copenhagen this year. WWF notes that the Government is opposed to hypothecation as a budgetary principle but this does not prevent it from committing to spending the equivalent amount accrued from the auctioning revenues. Whilst the use of revenues from auctioning carbon allowances may provide a significant contribution (depending on the carbon price) the UK should also consider other additional measures to finance mitigation and adaptation in developing countries.
Background
2. 2009 is a crucial year for tackling climate change and governments, such as the UK, will be looking to agree a successful global deal at Copenhagen. Crucially the level of climate protection finance provided by developed countries to developing countries will be the foundation upon which any deal will be based.
3. As the UK Government acknowledges in the Pre-Budget Report "Climate change represents a significant economic and environmental threat for all countries. Unchecked climate change could increase global temperatures by more than 5oC, causing hundreds of millions of people to suffer hunger, drought, and flooding and having serious impacts on world output. Strong action is required to put the world economy on a low-carbon path - both through co-ordinated global efforts and the leadership of individual countries and regions." In addition the report states that "Action to achieve environmental goals remains a high priority for the Government in the current economic circumstances."
4. This a welcome recognition of the scale and threat of climate change but the PBR fails to commit the UK to any level of funding to help finance a global deal on climate change, or to support any mechanisms which would potentially leverage the significant funds required. This has caused concern amongst NGOs (see attachment) that the UK has not paid sufficient attention to this crucial aspect of achieving a global deal and may instead rely excessively on the ability of the fledgling carbon market to generate the level of financial flows needed. A major problem with this approach, however, is that the current project-based Clean Development Mechanism is unwieldy and is not a sufficiently robust mechanism to deliver genuine, additional emission reductions - certainly not on the transformational scale required. Moreover, a conceptual model in which the financial transfer is driven by an offsetting mechanism will fail to deliver a safe climate unless the carbon market is driven by very much more ambitious caps on industrialised countries than currently seems politically feasible, even in Europe.
5. Finance is an essential building block in the international negotiations and without an adequate financial package on the table from developed countries, there will very likely be no global climate deal. Developing countries require support, including financial support, to adapt to the impacts of climate change and to contribute to the global effort to reduce emissions (including efforts to reduce rates of deforestation). Furthermore, a commitment by developed countries to provide new and additional support to developing countries for these purposes is already written into the Bali Action Plan agreed by countries at the UN climate change conference at the end of 2007. Estimates of the financing required for a global deal are shown in the box on the next page.
6. At the climate negotiations in Poznan, Poland in December 2008, the UK Government and EU did not come forward with any substantive financing proposals. The European Commission is set to publish a Communication on the post-2012 framework by the end of January - this will include global deal financing proposals and these measures are expected to be debated by the UK and other countries at the Environment Council on 3rd March. It is unclear, however, to what extent this EU agreement will provide sufficient funding for a successful global deal. WWF, therefore, believes that the UK should be planning to use a proportion of the auction revenues for this purpose and seeking to take a leadership role in convincing other Member States to back an ambitious and coherent financing package.
7. Finally, the sources of finance to developing countries must be sustainable, predictable and adequate and be focused on the most vulnerable countries and communities, with priority access for Least Developed Countries, Small Island Developing States and drought, and flood-prone areas of Africa. A mix of policies and funding mechanisms will be necessary, and while the carbon markets will continue to play an important role, they are unlikely to be able to deliver the totality of finance required. Therefore, the UK and other developed countries should look at other funding mechanisms, and be prepared to think boldly and creatively.
EU ETS auction revenues
8. The UK held its first auction of phase II allowances on 19 November which raised over £54 million from the sale of four million EU allowances (EUAs). These revenues will continue to accrue throughout phase II of the scheme which runs until 2012. In phase III (2013 to 2020) the revenues will increase significantly with the Carbon Trust estimating, prior to the conclusion of the EU's Climate and Energy package last year, that between €4 billion and €8 billion per year could accrue to the UK government[1].
9. The final amended EU ETS Directive which was agreed as part of the EU's Climate and Energy, however, contains only a non-binding suggestion that Member States should use at least half of the auction revenues to invest in climate protection (including contributions to the Adaptation fund, tackling deforestation, CCS and other low carbon technologies). WWF, therefore, is calling on the UK to commit to meet and exceed this resolution.
10. It is not just environmental and development groups that have called for the revenues to be spent on the climate change mitigation and adaption. The Confederation of British Industry (CBI) in a joint letter with WWF to the Prime Minister, stated that: "While we accept there may be some technical difficulties in ring-fencing the revenue, it should be perfectly possible to announce a similar investment in low carbon technologies and adaptation equivalent to the revenue raised by auctioning."[2]
11. This was echoed by the UK Corporate Leaders Group on climate change in a letter to the Prime Minister last September: "Additional funding is needed to deliver climate change mitigation and adaptation strategies, including the needed capacity and technology support for developing countries to change their emission pathways. The UK should be looking to invest what is needed and we anticipate that this will be at least the equivalent of the income generated from auctioning allowances under ETS, if not more"[3].
12. Germany also has plans to spend €400 million of the revenues from auctioning allowances in the second phase of the EU ETS on a climate change programme to fund emission reductions - with €280 million funding projects within Germany and the remaining €120 million going to projects in developing countries[4].
Examples of earmarking in the UK
13. Despite the Government's stated opposition to ring-fencing revenue streams, there are several examples of schemes in which a proportion of the funds raised are earmarked for specific uses. For example:
· The Climate Change Levy - This was introduced in 2001 to encourage business to reduce energy demand by placing a levy on their energy use. In order to make this palatable to energy intensive businesses it was intended that the levy should be broadly revenue neutral via a cut in employers National Insurance contributions of 0.3%. In addition a proportion of the revenues raised from the levy have also been used to fund the Carbon Trust with the Trust receiving £150 million in the first three years. · Landfill Tax - This was established to encourage recycling and reduce the amount of refuse going to landfill and is due to yield around £900 million in 2007/8. Up to 6.6% of the tax liability can be offset by contributing to approved environmental projects and companies subject to the tax also benefit from a cut in National Insurance contributions of 0.2%[5].
14. Several other examples are given in a new report from the Oxford Institute for Energy Studies[6] and suggest that earmarking revenues from the auction of pollution allowances is a feasible option for the UK.
15. WWF, therefore, is calling for the UK to spend half of the revenues from auctioning (or the equivalent amount) on low carbon development in the UK and the other half in financing a global deal.
Additional financial options which the UK should consider
16. The use of revenues from auctioning carbon allowances may provide a significant contribution (depending on the carbon price) but the UK should also consider other additional measures to finance mitigation and adaptation in developing countries. These should include:
1. International transport - several proposals have been advanced to raise revenue from international shipping and aviation and the UK Government should clarify its position on these. In our view, proposals for trading schemes or levies on international shipping are particularly promising: as shipping is a truly international sector, it would be appropriate for an international body such as the International Maritime Organisation to collect revenues and transfer them to a multilateral climate fund, thus short-cutting concerns over hypothecation from national coffers. In addition, shipping is an untouched area in terms of greenhouse gas regulation, so there is greater freedom to design optimal policies. The picture is more complicated for aviation, given the existing provisions of the ETS, which will come into force for aviation from 2012. Revenues from auctioning allowances currently accrue to Member States in the same way as for other sectors. In Poznan, Least Developed Countries tabled a new proposal for an Air Passenger Adaptation Levy - a universal ticket tax of $6 per passenger ($60 for premium seats) with the proceeds ring-fenced for adaptation. This has the advantage of being a simple and predictable source of finance, which its authors suggest will raise $12-$15 billion a year. The UK Government could implement this tax with an equal reduction in Air Passenger Duty. 2. Norway's proposal that a portion of developed countries' emissions reduction targets (assigned amount units - AAUs) established through the post 2012 global climate deal are auctioned and that the revenues are used to support developing countries' climate actions, is also a compelling option and should be further explored. In effect the UN would auction part of a country's right to pollute and use this revenue. Ed Miliband MP, Secretary of State for Energy and Climate Change (DECC) expressed broad interest in this proposal in his Ministerial speech in Poznan - it is to be hoped that the Government follow on swiftly with more concrete proposals and analysis.
Conclusion
17. We have less than one year to transform the global financial architecture to provide a sustainable future for people and wildlife. The UK Government has the opportunity now to take the lead on finance in the post-2012 deal and to use its influence to ensure the EU supports bold, ambitious and adequate financing for climate change adaptation and mitigation (including tackling deforestation) in the developing world. If the Government is unwilling to use the EU ETS auction revenues - a relatively politically pain-free option, which to a large degree simply corrects the massive windfall profits enjoyed by power generators in the first two phases of the scheme - then it must urgently make clear how it intends to raise the finance to fund the much needed global transition to a low-carbon future.
2. WWF's views on the "Treasury's announcements on Air Passenger Duty, Vehicle Excise Duty, and fuel duty"
18. WWF-UK had hoped that the Government would implement the proposed switch to a per-plane, instead of a per-passenger tax, for reasons elaborated in our submission to the Committee's inquiry into PBR 07.
19. WWF-UK is disappointed that this opportunity has not been taken, and concerned that the Government appears to have yielded to pressure from scheduled airlines and cargo operators, who wanted to preserve anomalous exemptions on transit passengers and air freight respectively. Certain sections of the airline industry, notably low-cost carriers, actually supported the switch. WWF has not seen convincing evidence that there would be a substantial switch of freight from aircraft to road; even if there were this would represent a saving in carbon terms. The benefits of any modal shift to rail or water-borne transport would be even greater.[7]
20. As well as excluding these two categories, the structural advantage of a per-plane tax - that it discourages operators from flying empty planes - has also been lost.
21. That said, the Government has taken the opportunity to restructure Air Passenger Duty (APD) in some useful ways - by increasing the number of distance bands, and by grading the tax more steeply on longer distances. Both these have been applied sensibly, and it is particularly welcome that after the two-year phase-in period, tax on the longest flights will be just over double its current level. This brings the ratio between taxes on longest and shortest flights from 4:1 to 7:1 - a necessary correction to a widespread public perception that short-haul flying is the greater evil. A flight to Australia generates nearly 20 times as much carbon as a flight to Austria.
22. Finally, it is also welcome that the lowest rate of APD is set to rise by £1 in 2009 and again in 2010. This hopefully signals an end to the practice of the past decade, where the tax was frozen and therefore steadily eroded by aviation, until the time came to double it, triggering vociferous opposition from the industry and sections of the media. WWF encourages the Government to signal that this modest escalator will continue further into the future.
3. WWF's views on the size and nature of the "green stimulus" package announced in the PBR
23. WWF's comments on this section relate specifically to the Export Credit Guarantee Department (ECGD) and the additional finance announced in the PBR.
24. WWF notes the following announcement:
"the Export Credits Guarantee Department, in conjunction with the banks, will introduce a temporary guarantee scheme to support a £1 billion facility providing smaller exporters with better access to short-term working capital."[8]
25. WWF further notes the following recommendations made by the EAC in the autumn concerning the ECGD:
"We recommend that the ECGD commissions an independent study into how its environmental and sustainable development standards could be tightened, including an assessment of how UK Sustainable Development objectives could be effectively reflected in the ECGD's assessment standards. Such a study should be used to help the ECGD raise international standards"
26. And later:
"the ECGD should bring all aerospace-related applications within the Case Impact Assessment Process"[9]
27. It is vital that assurances are received from the ECGD that the new enhanced underwriting facility will be subject to the highest standards of environmental impact assessment, and will not be seen as exempt from the enhanced process that we trust they will be putting into place.
January 2009 - If you would like further information please contact Russell Cooper, Deputy Head of Public Affairs, on 01483 412382 or at rcooper@wwf.org.uk
Please find enclosed with this response the following documents which support our submission:· "Cash to tackle climate change - the role of revenues from EU Emissions Trading Scheme auctions" November 2008, an Oxfam and WWF briefing paper. - November 2008 · "NGO Statement on Climate Finance - an opportunity for UK leadership" signed by 9 development and environment NGOs. - December 2008
January 2009
[1] Cutting Carbon in Europe - the 2020 plans and the future of the EU ETS, Carbon Trust, June 2008. [2] http://www.cbi.org.uk/ndbs/Press.nsf/38e2a44440c22db6802567300067301b/0b8e47289c37df4a8025743b00364155/$FILE/Joint%20letter%20on%20ETS%20to%20PM.pdf 7 May, 2008 [3] http://www.cpi.cam.ac.uk/pdf/UK%20CLG%20letter%20to%20Party%20Leaders%20PM.pdf 19 September 2008 [4] "Germany to invest €400 million in climate-change programme" Point Carbon, 19 June 2008 [5] "WG5/6 Sub-Working EU Emissions Trading Scheme - Auctioning Proceeds" ETG, April 2008 http://www.etg.uk.com/documents/Auctioning%20Proceeds%20WG%20paper%2007042008%20final1.pdf [6] "To Earmark or Not to Earmark? A far-reaching debate on the use of auction revenue from (EU) Emissions Trading" Benito Muller, Oxford Institute for Energy Studies, November 2008 [7] INFRAS give the following emission figures for freight modes (gCO2/tkm): Air 673, HGV 91, Rail (diesel) 38, Rail (Electric )19, Waterways 31. See External Costs of Transport, Update Study 2004. Figures for seaborne shipping are lower still. [8] Pre-Budget Report, Chapter 4 Supporting Business, Box 4.1, p69, 24 November 2008, [9] EAC Report/HC929 |