Supplementary memorandum submitted by
the Department of Energy and Climate Change (DECC)
DECC RESPONSE TO
EAC QUESTIONS ON
THE LOW
CARBON TRANSITION
PLAN[8]
1. Why is the carbon budget for 2008-12 of
3018 MtCO2e (Table 1, p39) higher than the "emissions before
policies" baseline of 2964 MtCO2e for the period 2018-22
(Chart 3, p43)?
The "emissions before policies" baseline
does not represent business as usual. It reflects a projection
of UK emissions before any estimated emission savings from Low
Carbon Transition Plan policies, but does include emission savings
from previously existing firm and funded policies—such as
those in the 2006 Climate Change Programme (see Tables A1 and
A5). Due to these pre-existing measures, UK emissions are projected
to be falling across the carbon budget periods in the baseline,
albeit at a much lower rate than when the Transition Plan policies
are included, and so "emissions before policies" are
lower in 2018-22 than our carbon budget for 2008-12. Chart 1 (p6)
allows a comparison of both baseline (top line, before sectoral
reductions) and Transition Plan (bottom line, after sectoral reductions)
emissions projections.
2. How can the 248 MtCO2e total emissions
savings for the traded sector (EU ETS) in 2018-22 reported in
Table A4 (p202) be reconciled with the data in Tables A5 and A6?
Table A4 presents the projected emission savings
from policies in the Transition Plan by carbon budget period on
a net UK carbon account basis. The total savings in the sectors
covered by the EU ETS (the traded sector) are reported to be 248
MtCO2e in 2018-22—based on the UK's share of the EU ETS
cap given compliance with the EU ETS ensures that this is equal
to the level of UK domestic emissions net of any sales and purchases
of carbon units.
Table A6 lists the UK domestic emissions savings
from Transition Plan policies in the traded sector, disaggregated
by the economic sector in which the measures are implemented.
The total traded domestic savings amount to 267.2MtCO2e in 2018-22.
This is higher than the savings assigned on a net UK carbon account
basis (the EU ETS cap), and the difference of 19 MtCO2e represents
the number of allowances that would be available for sale by UK
operators. The second to last row in Table A9 (p213) presents
the annual projection of net sales or purchases through the EU
ETS. (Any difference between the figures in Table A9, and the
inferred purchase and sale figures from tables A4 and A6 are due
to the rounding of figures.) Chart A3 (p214) provides a graphical
illustration of the expected levels of net sales or purchases
through the EU ETS by plotting projections of the net UK carbon
account and actual domestic emissions against each other.
Table A5 reflects policies that are already included
in the baseline, and does not relate to the reported savings in
Table A4. The reference to Table A5 in Table A4 is therefore an
error and should be ignored.
3. Why are all savings from the traded sector
ascribed in Chart Al (p196) to Power & Heavy Industry, when
according to Table A6 (p202) savings will also arise in Homes
& Communities and Workplaces & Jobs?
The Transition Plan policies implemented in
the Homes & Communities and Workplaces & Job sectors that
are listed in Table A6 generate savings by reducing electricity
demand, resulting in lower emissions from power generation. These
savings are therefore assigned, for the purposes of Chart A1,
to the Power and Heavy Industry sectors (the traded sector). The
savings in Power & Heavy Industry are then corrected so that
they correspond to the level of the UK's share of the EU ETS cap.
4. Why are the projected ("central scenario")
emissions for the Budget 3 period in Table A7 (p212) calculated
more optimistically within the possible range than in the preceding
budget periods?
The central projection is based on central assumptions
of fossil fuel prices, economic and population growth and is estimated
in a consistent way for each budget period. Uncertainty ranges
around the central projection are then built up from individual
components of uncertainty. These include the uncertainty in the
assumptions of fundamentals such as energy prices and growth,
as well as other uncertainty associated with modelling and policy
delivery.
The uncertainty ranges around the central projection
increase as the projections look further into the future (207
MtCO2 in budget 1, 249 MtCO2 in Budget 2 and 297 MtCO2 Budget
3). The asymmetry, in the third budget period, in the position
of the central projection within the uncertainty range reflects
the increasing uncertainty associated with policy delivery, which
has a greater effect in the upper bound of the uncertainty as
policy under-delivery will result in higher than expected emissions.
5. According to Table A8 (p212), there is
a large expected reduction in emission in the first year of the
second budget period (2013). Table A9 (p213) on sales and purchases
through EU ETS suggests that the cause is an expected shift from
sales of carbon units by UK operators of 16 MtC02e in 2012 to
purchases of carbon units by UK operators of 6 MtC02e in 2013.
Can you explain why this significant change in the UK's use of
EU ETS will occur between 2012 and 2013, and what impact there
will be on the achievement of carbon budgets if a smaller than
expected shift occurs?
From 2012 to 2013, there is a change in the
EU ETS period from Phase II (2008-12) to Phase III (2013-20).
Importantly, there is a move to a more stringent Phase III EU
ETS cap in line with UK and EU climate objectives. From 2013,
there is a downward linear trajectory for the EU ETS cap of 1.74%
per year. This is in contrast to a relatively flat emissions cap
across Phase II. This can be seen clearly in the projected contribution
to the net UK carbon account from power and heavy industry for
2014-22, in Table A8. However, there is a significant expected
reduction in net UK emissions from 248 MtCO2 in 2012 to 224 MtCO2
in 2013. The main reason for this is that the downward linear
trajectory for the EU ETS cap of 1.74% per year is taken from
a 2010 starting point. So to calculate the 2013 cap level, the
1.74% line is drawn through 2011 and 2012 before actually appearing
in the lower emissions figures for 2013. In effect, three years
of emission reductions are appearing in 2013, hence the significant
step down in that year.
The projected sales or purchase of carbon units by
UK operators in the EU ETS is presented in Table A9 (p213). These
are calculated as the difference between the projected UK domestic
emissions in the traded sector and the UK's share of the EU ETS
cap. The change from being a net seller of carbon units in 2012
to a net purchaser is in part a result of the change in the UK's
share of the EU ETS cap (as shown in Table A8), and not the cause
of the step change in figures in Table A8.
The projected shift in "traded" share
of the carbon budget, effectively the UK's share of the EU ETS
cap, is "locked in" under the EU 2020 package. If UK
domestic emissions in the traded sector exceed the level of allowances,
then UK operators are required to purchase a corresponding number
of carbon units to offset this increase. As a result there is
no impact on the traded share of the net UK carbon account, and
the UK should not under-perform on its traded sector share of
the carbon budgets.
DECC RESPONSE TO
ADDITIONAL QUESTIONS
FROM THE
EAC ON CARBON
BUDGETS FOLLOWING
ED MILIBAND'S
EVIDENCE SESSION
ON 27 OCTOBER
1. During the session on 27 October, Members
asked a question based on a "2%" cut in emissions on
2008 levels by 2020 for the power and heavy industry sector, reported
in the Low Carbon Transition Plan. We now understand from officials
that this was a typographical error in some of the print run,
which was later corrected to "22%". To ease the confusion,
the Committee now wishes to ask: to what extent is a cut of 22%
of emissions on 2008 levels by 2020 for the power and heavy industry
sector, reported in the Low Carbon Transition Plan, consistent
with the Committee on Climate Change's vision for almost complete
decarbonisation of power generation by 2030?
The EU ETS drives a 22% cut in emissions in
the power and heavy industry sector. Power generation (ie the
major power producers) are within this sector. DECC's most recent
emissions projections, which accompanied the Low Carbon Transition
Plan, show that carbon emissions from major power producers will
decline by 47% on 2007 levels by 2020, given our current policies.
To be on course to achieve the required level of decarbonisation
in 2030, the CCC have said that emissions from power generation
need to decline by 50% on 2008 levels. DECC's projections are
therefore reasonably consistent with the decarbonisation trajectory
required by the CCC.
The expected emissions reduction is less significant
for heavy industry (such as refineries, steel mills or cement
plants) because it is likely to decarbonise at a slower pace than
the power sector. Options to decarbonise electricity, such as
increased renewables, carbon capture and storage and nuclear are
not likely to be so readily available for heavy industry by 2020.
However, there are policies in place to ensure heavy industry
emissions will reduce—including their inclusion in the EU
Emissions Trading System, and through the Climate Change Agreements
and Climate Change Levy package.
2. Why does the Low Carbon Transition Plan
make reference to 2008 as a base year, rather than other years
which are already used in other emissions performance reporting?
It was felt in producing the Low Carbon Transition
Plan that it would be useful in some cases to describe emissions
reductions against 2008 levels because this gives a clearer indication
of the reductions that need to be achieved from current emissions.
The legally binding base year for our targets under the Climate
Change Act 2008 remains 1900,[9]
and the Transition Plan makes this clear when referring specifically
to the Act and carbon budgets as, for example, in Chapter 2. In
many cases, where it aids understanding, the plan refers to both
2008 and 1990 baselines (see, for example, the first bullet point
of the Executive Summary on p4).
3. You told us that the current carbon price
was lower than you would wish. What level of carbon price do the
Government consider is needed to drive investment in low-carbon
technologies and infrastructure?
The Government do not take the view that any particular
price of carbon is the "right" price. Even with the
current price of around €14, the EU and the UK can still
be expected to deliver the required emission reductions by 2020.
This is because the EU Emissions Trading System cap determines
the level of emission reductions achieved, and not the carbon
price.
However, looking beyond 2020, we will need to meet
even more demanding carbon reduction targets. For these, we will
need the carbon price to be incentivising greater take-up of low-carbon
technologies before 2020. In this context, the current carbon
price does appear low. The most effective way of strengthening
the carbon price is by limiting the supply of allowances by tightening
the cap. The EU ETS cap will be reviewed following an international
climate change agreement at Copenhagen.
4. What assessment have the Government made
of the impact of the credit crunch on availability of low-cost
long-term financing for low-carbon and renewable generation projects?
The credit crunch is having an impact. The number
of banks in the project finance markets open to energy developers
has reduced. The remaining banks have shortened the tenor of debt
available to projects and focused more on major core clients rather
than independent developers. The cost of debt has increased and
deals can take longer to close.
Funding constraints have been a particular problem
for smaller and mid-sized, independent renewables developers.
In order to mitigate this, the European Investment bank (EIB)
and three UK-based banks (RBS, Lloyds and BNP Paribas Fortis)
have launched a new lending scheme for small and mid-sized onshore
wind farm development. The scheme should improve liquidity in
the project finance market. We expect the scheme to facilitate
lending of over £1bn over the next couple of years and, based
on the experience it draws from this scheme, we hope the EIB will
examine the financing of other forms of renewable energy in the
future.
5. DECC officials recently gave a briefing
to the Committee on proposals for carbon valuation which would
now reflect the costs of mitigating emissions. How will DECC ensure
that the new proposals on carbon valuation are applied in policy
decision-making across Whitehall?
All Government Departments must carry out carbon
impact assessments for those policy options that will have a significant
impact on emissions. This requires analysts to quantify the carbon
impacts of their policies, and to value these impacts using the
new target consistent carbon values. Alongside the PSA indicator
(see below) on the cost-effectiveness of climate change policies,
this requirement ensures strong monitoring of the use of the new
carbon values, leading to greater enforceability of its use.
Under PSA 27 Indicator 6, Government Departments
conducting Impact Assessments are required to report on the proportion
of abatement for which the cost falls below the new target consistent
carbon price. This is intended to provide an indicator of the
cost-effectiveness of emissions reductions policies across Government.
This requirement applies to projects that meet a de minimis threshold:
— for policies with a lifetime of less
than 20 years, the carbon impact test is required if the stream
of C02e savings exceeds 0.1 MtCO2e average per year.
— if the policy lifetime is above 20 years,
the carbon impact test is required if the stream of C02e savings
exceeds 2.0MtCO2e over the lifetime and an average per year of
0.05 MtCO2e.
Practical guidance on how to apply the new carbon
values in policy appraisal was published alongside the revised
approach for carbon valuation in UK policy appraisal.[10]
We are currently developing more comprehensive guidance on how
to value energy usage and greenhouse gases for appraisal and evaluation
to supplement current Green Book Guidance. This guidance will
explain in more detail how the new carbon values should be used
in economic appraisal across Government along with revised guidance
on other factors including fossil fuel price assumptions and carbon
emissions factors. It will be updated annually.
6. In the Traded Sector, why is progress against
the UK carbon budget judged solely by the allocation of emissions
permits within the EU ETS, rather than actual emissions? To what
extent would counting actual emissions be more consistent with
the UK's annual reporting of greenhouse gas inventories to the
UNFCCC?
The Carbon Accounting Regulations 2009, which
set the rules for calculating the net UK carbon account and determining
compliance with carbon budgets, were approved by both Houses of
Parliament in April 2009, following a public consultation on the
proposed accounting system in October 2008. The starting point
in the traded sector is actual emissions as reported in the UK
greenhouse gas inventory. To take account of trading under the
EU Emissions Trading System, a credit is then subtracted (if the
UK is a net buyer of carbon units under the ETS), or a debit added
(if the UK is a net seller). This has the overall effect of counting
the UK's EU ETS allocation against the budget.
This approach—which was agreed by a significant
majority of consultation respondents—has been taken because
the EU ETS is the primary policy tool for delivering emissions
reductions in the traded sector and decarbonising power generation.
We believe that it would be misleading to count actual UK emissions
against carbon budgets, without taking account of EU ETS trading.
Doing so could mean, for example, that we could report reduced
emissions in the UK, when these might actually be displaced by
increased emissions elsewhere in the EU (or vice versa). Access
to offsetting within the EU ETS is strictly limited, and the Low
Carbon Transition Plan shows our expectation that the UK will
vary over the three budget periods between being a net seller
and a net buyer of carbon units from abroad (Chart A3, p211 and
214).
It is entirely consistent with the UK's annual
reporting of greenhouse gas inventories to the UNFCCC, and with
the international rules for monitoring progress against Kyoto
targets, under which the impact of trading under the EU ETS is
taken into account. The annual statements of emissions required
by the Climate Change Act—the first of which will be published
by 31 March 2010 for the year 2008—must be completely transparent
in setting out actual emissions, as well as details of the number
and types of credits and debits to the net UK carbon account.
7. The Committee on Climate Change concludes
in its progress report that a mechanism for allowing access to
the transmission network for wind power generation should be in
place by mid-2010 (page 121). What are the Government doing to
ensure that such a mechanism is put in place?
The Government recognise that improved access
for new renewable generation such as wind power is essential in
helping to tackle climate change. As the Committee on Climate
Change has recognised in their recent report, Ofgem has already
taken the decision to have in place an interim access arrangement
to ensure that renewable generation is able to gain access to
the transmission network even where it is capacity constrained.
However, we agree with the Committee's view of the importance
of putting in place an enduring regime for grid access by mid-2010.
That is why Government are intervening using Energy Act Powers
to see the grid access reform process started by industry through
to a timely and successful conclusion. We are working to get this
in place by June 2010.
8. In its progress report, the Committee on
Climate Change has set out a series of milestones and indicators
by which progress in delivering emissions reductions might be
monitored. What is the Department's assessment of the utility
of these milestones and indicators? Are there areas where other
measures might also be needed? Do the Government already collect
all the data that would be needed for these milestones and indicators,
should they all be adopted?
The Government will respond formally to the CCC's
progress report, including the indicators, by 15 January 2010.
However, we agree with the need identified by the CCC for a comprehensive
framework that will enable future progress on key policies for
reducing emissions and underlying drivers to be tracked. Monitoring
progress on the basis of historic emissions data alone will not
be sufficient due to time lags in receiving data and long project
lead times.
The Government are developing a similar indicator-based
framework for monitoring progress in reducing greenhouse gas emissions
that will complement emissions data and allow us to identify at
an early stage where risks to meeting our carbon budgets may lie.
The indicators for monitoring progress in different sectors will
form part of the Carbon Reduction Delivery Plans all Government
Departments are to publish in spring 2009, in which they will
set out how they aim to meet their shares of the carbon budgets.
We support the pragmatic and flexible approach
that the CCC makes clear it will take when assessing progress
against its indicators. It is important to preserve flexibility
about where emissions reductions are delivered to meet the carbon
budgets if we are to ensure that they are met in the most cost-effective
way.
9. What is being done to ensure that individual
decisions taken by the Infrastructure Planning Commission are,
when taken together, compatible, with the carbon budgets (for
example, that gas-fired power stations meeting NPS guidance individually
might lock the UK into high emissions if many such power stations
were approved)? What is being done to ensure that National Policy
Statements reflect emissions reductions targets following Copenhagen?
The Government policies that underlie energy
National Policy Statements have been set in accordance with the
carbon budgets and targets in the Climate Change Act. The UK Low
Carbon Transition Plan describes the contribution to be made by
policies in different sectors of the economy, including the power
sector, to meeting the first three carbon budgets. The draft NPSs,
published on 9 November, set out how the IPC should apply these
policies in planning decisions and are therefore fully compatible
with the Transition Plan and with carbon budgets. Given this,
the IPC will not be required to assess individual applications
against the carbon budgets. The draft NPSs instead set out very
clearly the terms on which new carbon-emitting energy infrastructure
can be approved by the IPC in accordance with the relevant Government
policies.
The carbon budgets are legally binding and it is
the responsibility of Government to meet them, drawing on the
advice of the Committee on Climate Change. Government have committed
to tightening the carbon budgets following a satisfactory global
deal at Copenhagen. If, after doing this, policies are changed
or new policies introduced to ensure that the new budgets can
be met, consideration will be given as to whether energy NPSs
should be amended to reflect the new policy environment.
11 November 2009
8 Note: some typographical errors in the Low Carbon
Transition Plan as laid before Parliament on 15 July 2009 have
been corrected in the version available on the DECC website at
http://www.decc.gov.uk/en/content/cms/publications/ic_trans_plan/lc_trans_plan.aspx.
The corrections are listed at the front of the revised document. Back
9
The "1990 baseline" is defined in the Act as 1990 net
UK emissions of carbon dioxide, methane and nitrous oxide and
1995 net UK emissions of the fluorinated gases (hydrofluorocarbons,
perfluorocarbons and sulphur hexafluoride). Back
10
See "A brief guide to the new carbon values and their use
in economic appraisal" available at http://www.decc.gov.uk/en/content/cms/what_we_do/lc_uk/valuation/valuation.aspx Back
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