4 Setting a price for carbon
The impact of the EU ETS
51. The level of the cap determines the carbon price.
As we have described above, the allowances in the EU ETS have
been over-allocated. As a result, the carbon price has been lower
than hoped. It is a simple market response to a lack of demand
for allowances. Figure 2 shows the movements in the carbon price
from April 2005 to December 2009. It shows a degree of volatility
and a decline in the price in both Phase I and a decline in the
early stages of Phase II, before stabilising in recent months
(it has reduced slightly since the Copenhagen conference). In
December 2008, the Committee on Climate Change had projected a
carbon price for the EU ETS that would increase to €56/tCO2
(in 2008 prices) in 2020.[92]
The carbon price subsequently fell to a low of €8/tCO2
[93] and has generally
remained below €15/tCO2 since.
Figure 2: EU ETS emissions allowance prices: April
2005 - December 2009
Data source: European Climate Exchange
This figure updates a similar graph in the October
2009 Committee on Climate Change report, Meeting Carbon Budgets:
the need for a step change (p 68), by extending the analysis
to December 2009.
ENCOURAGING LOW-CARBON INVESTMENT
52. A high carbon price is needed to encourage investment
in low-carbon infrastructure and processes. The Committee on Climate
Change in its October 2009 'progress report' expressed its concern
about the traded sector cap and the resulting carbon price, particularly
given lower emissions from energy intensive sectors as a result
of the recession: "There is a risk that the carbon price
will not be sufficiently high to incentivise investments in low-carbon
technologies".[94]
It concluded that:
Output in energy-intensive sectors has fallen
as a result of the recession and is expected to remain lower than
previously projected. This means less abatement is required to
meet the EU ETS cap which is reflected in a lower carbon price.[95]
The carbon price is likely to be significantly
lower to 2020 than we previously projected. This will have consequences
for investments in low-carbon power generation. A range of measures
including tightening the EU ETS cap and a UK carbon price underpin
should be seriously considered to strengthen incentives for low-carbon
investments in the energy-intensive sectors.[96]
Our new analysis produces a central projection
for the carbon price in 2020 of around €22/tCO2 compared
to our previous projection of €56/tCO2; most market
commentators now project a price around or below €30. The
fact that these projections are not in line with the carbon prices
we expect in the 2020s and beyond (e.g. in excess of €100
by 2030, based on our previous modelling of global emissions trajectories
and abatement opportunities) reflects a disconnect between current
and future prices (i.e. post 2020) due to uncertainty over longer-term
emissions reduction trajectories.[97]
53. Professor Sir David King told us that the carbon
price needed to be around €100 a tonne to "decarbonise
the economy".[98]
Professor Ekins thought tight caps within the EU ETS, which saw
a price of €200, might be needed in order to drive the right
investments.[99] He said
the carbon price must be high enough to make investments in renewables
economic.[100] Bryony
Worthington of Sandbag stressed the need for the carbon price
to be high enough to drive investment in step-change technologies;
while there were many cheap abatement opportunities throughout
the EU, if the carbon price remained low these were all that would
be realised.[101] James
Cameron of Climate Change Capital argued for a steeply reducing
cap, and thus increasing carbon price: "You really want emissions
trading to confront you right away with a significant challenge
to make you face up to the obligation to reduce—the imperative
to reduce—and get cracking with the investment decisions
that are necessary as a result."[102]
54. In its October 2009 report, the Committee on
Climate Change raised the question of whether expectations of
low future carbon prices in the EU ETS could incentivise investment
in low-carbon technology, particularly when combined with uncertainty
over future fossil fuel prices.[103]
The Committee on Climate Change concluded that it could not be
confident that the EU ETS will deliver the required low-carbon
investments for decarbonisation of the traded sector through the
2020s.[104] As a result,
it recommended consideration be given to a range of options for
intervention in carbon and electricity markets. [105]
55. The Government did not think that any particular
carbon price was right and argued that the EU ETS would deliver
the required level of emissions reductions regardless of the carbon
price.[106] The Department
for Energy and Climate Change accepted however that the carbon
price looked too low to encourage greater take up of low-carbon
technologies.[107]
In its response earlier this month to the Committee on Climate
Change's October 2009 progress report, the Government stated that:
We believe the best approach to providing certainty
to investors is to set the right, long-term regulatory framework
with a reducing cap on emissions (as we have done with the EU
ETS), and allow the market to help achieve these reductions cost-effectively.
Longer term, we agree with the CCC that the most effective way
of ensuring the carbon price is high enough is to limit the supply
of allowances by tightening the cap.[108]
The Government was looking to new EU targets following
the Copenhagen conference to drive up the price of carbon.[109]
In its response to the Committee on Climate Change's progress
report, it reported that it was "ready to scale up [the 20%]
reduction to as much as 30% under a new global agreement when
other developed countries make comparable efforts. The EU ETS
cap would be tightened as a key part of delivering any tighter
EU target."[110]
56. According to Government projections, in 2020
the UK would be a net purchaser of between 14 and 25 million EU
ETS credits—on which the Government would be partly relying
to meet the UK's domestic carbon budgets. To the extent that the
UK buys allowances from other countries, it will be paying for
low-carbon investment taking place elsewhere. When we asked David
Kennedy, the chief executive of the Committee on Climate Change,
what the UK's purchase of these credits would most likely actually
be buying in terms of emissions reductions elsewhere in the EU,
he suggested:
What we will be doing is paying other countries
who have a lot of coal-fired generation, Germany, for example,
to burn gas rather than coal [… Currently] they are actually
less efficient than us in the power sector and we will pay them
to become as efficient as we currently are.[111]
While this would indeed result in emissions savings,
it would in no way represent a step-change in technology that
would shift the EU onto a decisively lower emissions trajectory.
We put this point to the Minister, who said:
The overall aim is to reduce emissions and […]
the move from coal to gas will contribute towards doing that,
but the objective is to move more effectively towards low-carbon
generation rather than moving simply to gas—which of course
has quite significant emissions in any event.[112]
57. The NAO's survey found 56% of firms said they
included EU ETS allowance prices in their core business decisions.[113]
Overall, the NAO survey identified 21 specific examples of fuel
switching or energy efficiency projects which had been in part
encouraged by the EU ETS carbon price. In a survey carried out
by the trading analysts Point Carbon, published in March 2008,
over 70% of responding companies within the EU ETS said the price
of carbon allowances had influenced their investment decisions.[114]
Professor Grubb told us:
[…] first and foremost, the system has seized
the attention of top management and one hears very much climate
change discussed at board level compared with previously when
it was largely ignored. […] In terms of the operational behaviour
of the companies, I think there is compelling evidence that in
a number of areas—for example, some elements of fuel switching,
power generation, certainly cement, plant operation, mixing—there
have been quite significant and associated emissions reductions.[115]
58. It is difficult, however, to disaggregate the
effect of the EU-ETS from other factors. The NAO noted, for example,
that "the large rise in energy prices from 2004 to 2008 has
had a major impact on the economy, and in that context it is difficult
to assess to what extent the EU ETS has influenced such investments."[116]
59. Carbon 'leakage' remains a concern. More research
is needed to analyse the risk that some businesses may choose
to meet their emissions reduction obligations by transferring
activity to countries with looser emissions control regimes, and
any impact of this on the competitiveness of British industry.
The Government should ensure that such a programme of research
is undertaken, to inform this issue.
60. Bryony Worthington highlighted that, in the absence
of a strong price signal, carbon trading would not drive investment
in low-carbon technology, especially as fuel switching was an
easy alternative given the established energy infrastructure in
the EU. She argued that this indicated a need for a much tighter
cap on emissions.[117]
WWF considered that there was as yet no indication that the EU
ETS was influencing longer-term investment decisions.[118]
Professor Grubb made a similar point.[119]
61. EEF worried that "the keenly anticipated
expansion in low-carbon energy generating capacity, most notably
from nuclear, that is vital over the next decade, may be derailed
by a low-carbon price".[120]
The Committee on Climate Change, similarly, argued that:
Whilst inclusion of the power sector in the EU
ETS will deliver the emissions cuts required in the sector to
2020, it will not automatically bring forward the low-carbon investment
to deliver required emissions cuts in the 2020s and beyond. This
is because the EU ETS cap to 2020 could be met through coal to
gas switching without any significant new investment in low-carbon
plant, and because the cap beyond 2020 is highly uncertain.[121]
The NAO concluded that:
The current level for EU allowances is considerably
below the levels anticipated for Phase II, and significantly lower
than the level required to incentivise major investments in low-carbon
technologies. In 2008 a study by McKinsey found that demonstration
carbon capture and storage projects would cost in the region of
€60 and €90 per tonne CO2 abated between
2012 and 2015. The […] current EU ETS allowance price […]
will not provide a sufficient financial incentive to invest in
renewable technologies, though it may still influence decisions
in combination with other policy instruments and economic drivers.[122]
62. Some economists are concerned that cap and trade
schemes intrinsically lead to price uncertainty and volatility,[123]
and that this inevitably raises the costs of, and indeed discourages,
investment in low-carbon technologies.[124]
The Carbon Trust told us: "The series of booms and busts
in the cost of carbon are a problem in achieving the scheme's
goals because it creates uncertainty for firms' investment decisions."[125]
On this theme, Lord Turner, the Chairman of the Committee on Climate
Change, told the Energy and Climate Change Committee in March
2009 that the experience of the EU ETS so far "[…] does
raise questions about […] whether an oscillating price of
carbon […] will send powerful enough signals to make sure
that people are doing the investments that are required for the
future".[126]
63. The NAO note that medium- and longer-term secondary
markets in allowances have not developed, with future trades mainly
confined to the next one to two years indicating low confidence
in carbon trading.[127]
EDF told us they were especially concerned by the lack of certainty
post-Phase III, because understanding the value of carbon in this
period was critical for investment decisions. The result of such
uncertainty, EDF argued, was to increase the risks—and thus
costs—of investing in low-carbon power.[128]
Intervening to affect the carbon
price
64. As discussed above, a lower emissions cap could
sustain the carbon price. In our recent report on carbon budgets
we recommended that the Government, using the full range of fiscal
and policy instruments, should drive up the price of carbon steadily
to a level where renewable and low-carbon investments become economically
viable.[129]
65. Restricting the use of offset credits could help
support the carbon price. In allowing the use of up to 1.6 billion
offset credits to 2020 the EU ETS already has a mechanism
that depresses prices. As the NAO reported:
The extensive use of project credits in Phase
III would reduce the price of EU allowances and reduce the impact
of the price on investment decisions. The Commission estimated
prior to ratification of the Directive that extensive use of project
credits in Phase III might result in allowance prices of €30
per tonne compared to €39 under other scenarios.[130]
But there are also other ways of supporting the carbon
price—taxes, reserve auction prices, subsidies and emissions
regulation—which we discuss below.
A PRICE FLOOR
66. Several witnesses called for the creation of
a floor price, below which the carbon price would not be allowed
to fall, to help to reduce the risks, and thus costs, of investing
in low-carbon projects.[131]
Perhaps Professor Dieter Helm (chairman of the Academic Panel
of economists at the Department for Environment, Food and Rural
Affairs) has put the case most strongly:
[…] it is hard to think why one would not
have a floor: what could the downside risk possibly be? For, if
policy-makers genuinely thought that the carbon price might fall
below the floor, there would be a credibility question about the
scheme as a whole. Either the Commission believes that the EU
ETS price will always be above the floor (in which case, there
is no problem putting a floor in place), or it believes that the
price could fall below (in which case, there is a good case for
having a floor).[132]
Giving evidence to the Energy and Climate Change
Committee in March 2009, Lord Turner said a mechanism to set a
floor price within the EU ETS should be considered but, he stressed,
at European level.[133]
67. One way a floor price might be implemented is
that governments could guarantee to buy any permits offered for
sale at a specific price; another is that they would set a carbon
tax at the level of the desired floor price. Professor Ekins supported
the use of a carbon tax to set a minimum carbon price within the
EU ETS, but stressed that this would have to be done across the
EU in order to be effective, and that given a previous unsuccessful
attempt in the 1990s to set an EU carbon tax this might be politically
difficult.[134]
68. Professor Grubb told us he agreed with the objective
of setting a floor price, but cautioned that government buying
back allowances raises "questions of who is going to dig
out the cash to buy allowances at certain times".[135]
We note that France has imposed a carbon tax; it will be imposed
from January 2010 and will be set at €17, a little less than
Denmark's and about six times lower than Sweden's carbon tax.[136]
69. As we began this inquiry, there was an active
debate in the United States about the merits of introducing a
carbon tax rather than an emissions trading scheme, as advocated
for example by economist Professor William Nordhaus at Yale.[137]
In December 2008, NASA climatologist Dr James Hansen wrote an
open letter to then President-elect Obama, urging him to introduce
a carbon tax instead of a cap and trade scheme.[138]
70. Paul Ekins, Professor of Energy and Environment
Policy at King's College, explained that emissions trading fixes
the quantity of emissions, allowing the price of carbon to vary
in response to the pressure on emitters to stay within the limits,
while a carbon tax fixes the price of carbon but allows the level
of emissions to vary in response to the price signals.[139]
While in theory cap and trade schemes and carbon taxes could be
designed to deliver the same intended level of emissions reductions
for the same cost,[140]
in the real world it is impossible to know in advance either what
level of emissions reductions will occur at a given carbon price,
or what level of carbon price will be generated by a given cap
on emissions—"in any market, attempts to fix both the
price and the quantity will fail".[141]
71. In the UK, Professor Dieter Helm noted that "much
academic discussion favours carbon taxes".[142]
He highlighted a concern that if an emissions cap came down (or
a carbon price went up) very rapidly, companies might be forced
prematurely to scrap carbon-intensive infrastructure, thereby
writing off their investment. If emissions limits tightened even
more rapidly—before an economy could develop low-carbon
alternatives—then companies might have to respond to the
cost of compliance by cutting production or moving overseas to
escape the reach of the emissions trading scheme.[143]
He said that the main case for a carbon tax is that:
[…] a carbon price can be established over
time without much volatility: energy producers and consumers can
have some reassurance that the carbon price will not drop below
the carbon tax level, and those most affected by the transition
to a low-carbon economy can plan, without the exposure to shocks
in carbon prices. Carbon taxes have the additional advantage that
they can be tailored towards (an estimate of the optimal) cost
of carbon, thereby avoiding inefficiency at prices below or above
the (optimal) carbon price.[144]
72. Two submissions to our inquiry, from EEF and
Carbon Trade Watch, suggested that the option of carbon taxes
might be explored as an alternative to emissions trading.[145]
73. On the other hand, we heard a strong defence
of cap and trade from a number of sources. And DECC favours cap
and trade over carbon taxes because it imposes an absolute cap
on emissions, and thus certainty about the level of emissions.[146]
The CBI argued that while a tax might provide certainty as to
the carbon price, it would not provide certainty as to the amount
of carbon abatement this would lead to; in practice, it would
take time for governments to work out, through experience, the
level of tax necessary to deliver required emissions reductions.[147]
The CBI also argued that the level of carbon tax would be vulnerable
to political lobbying; for example, given the current recession,
if the EU had a carbon tax instead of an emissions trading scheme
there might be pressure immediately to lower the tax.[148]
The Carbon Trust told us that "it is more difficult to get
agreement on the right level(s) for the tax than it is to agree
the right path for emissions reductions under a cap and trade
scheme".[149]
74. In the context of the EU ETS, Professor Michael
Grubb, chief economist of the Carbon Trust, highlighted the importance
of politics in choosing between taxes and emissions trading schemes:
It seems to me that the most fundamental reason
[why the EU chose an emissions trading scheme over a carbon tax]
is the one of the political economy. We spent the first half of
the 1990s trying [unsuccessfully] to develop a European carbon
tax. […] It is not hard to see why this happened, with a
carbon tax you are actually doing two very difficult things at
the same time. You are both trying to set a price and extract
very large amounts of money out of very powerful industries and
give it over to the government. That is going to raise very strong
political objections, which is what happened. I think the fundamental
reason why we have made progress with emissions trading where
we could not with the carbon tax is because it gives you an additional
degree of freedom, namely how much re-allocation you have to give
away to buy off the powerful lobbies so you can at least set a
price or a target somewhere in the region you are trying to get
to […][150]
75. James Cameron of Climate Change Capital[151]
and Dr Cameron Hepburn, an environmental economist at Oxford University,
highlighted the significance of us already having an operational
emissions trading system. As Dr Hepburn put it, "practical
recommendations need to start from where we find ourselves, rather
than where we might like to be. […] [Emissions trading] has
hard-won momentum, and a degree of institutional lock-in".[152]
76. Carbon taxes have an advantage over emissions
trading schemes in being able to set a stable and predictable
carbon price. But carbon taxes are vulnerable to political lobbying,
aimed at weakening the carbon price. Whatever its complications,
emissions trading has a number of strengths, notably its ability
specifically to limit emissions. Above all, emissions trading
has already established itself as the preferred international
mechanism for tackling greenhouse gas emissions. The Government
is right to support emissions trading, and is to be commended
for promoting it internationally. The focus ought to be on how
to bolster the carbon price when it is particularly low, through
setting auction reserve prices, incentives for low-carbon electricity
generation and emissions regulation, as we discuss below.
77. The Carbon Trust reiterated their support, articulated
previously in our March 2007 inquiry,[153]
for government setting a minimum reserve price for its auctions
of allowances.[154]
Professor Grubb favoured a mechanism to sustain the carbon price
by keeping some allowances off the market.[155]
He proposed doing this by setting a reserve price when auctioning
allowances: this would deter some businesses from buying as many
allowances as they might otherwise have acquired and thereby reduce
the number of allowances within the EU ETS if some remained unsold
as a result. The Committee on Climate Change favoured a floor
price within the EU ETS,[156]
and Lord Turner thought that this could best be achieved through
a reserve price in auctions provided there was a high enough level
of auctioning.[157]
The Committee on Climate Change recently concluded that the move
to full auctioning of EU ETS allowances for the power sector would
"transfer windfall profits away from energy companies".[158]
Ravi Baga of EDF Energy, who supported the use of reserve prices,
considered that, like a carbon tax, it might rely on getting agreement
across all EU member states.[159]
We note, however, that EDF's major shareholder—the French
government—has recently announced its intention to introduce
a carbon tax. We consider that, as experience elsewhere has shown,
carbon taxes are not incompatible with carbon trading schemes,
and their use to address an insufficiently high carbon price should
be explored urgently.
78. We also believe the idea of a reserve auction
price should be further examined. We recommend that the Government
establish what conditions must be met for a reserve auction price
to be effective as a floor price within the EU ETS (for example
what proportion of allowances would need to be auctioned to set
the price across the entire System, and what level the reserve
price should be set at). If all the practicalities can be addressed,
we recommend that the Government work with the European Commission
and other member states towards implementation of this proposal
in Phase III.
79. RWE npower thought it would help investment in
low-carbon technologies if "investors are confident that
the Scheme will not be subject to further political interference",
and that "the threat of further intervention in EU ETS, for
example price floors and ceilings, will only serve to undermine
confidence in the scheme".[160]
The Carbon Markets and Investors Association argued that "concerns
over whether a volatile ETS price leading to lower investments
than would otherwise be the case are unfounded; the long run market
signals within the EU ETS are sufficiently stable".[161]
Their conclusion was that "any market intervention should
be used as a last resort", but that some potential measures
might be considered—including introducing a reserve price
for auctioning—so long as they were signposted far in advance
so as to give long-term certainty over their effects on the carbon
price.[162] Barclays
Capital, meanwhile, argued against any price interventions on
the basis that they "can only be maintained by ignoring the
environmental goals defined by the cap, thereby introducing inefficiencies
into the market."[163]
80. DECC argued that "introducing price caps
or floors could make emissions trading more uncertain by in effect
generating speculation on the next possible Government intervention
in the market".[164]
Mike O'Brien MP added that a floor price might:
[…] prevent a market from delivering what
it is supposed to do, which is essentially to reduce emissions
at the lowest cost. If you are intervening at a certain price
and you are saying, "This is it, it won't fall below this
level," there is the issue of whether we are then doing some
of these technologies at the lowest possible price.[165]
81. However, the carbon price generated by the EU
ETS has so far suffered from being too low and too volatile to
bring forward large-scale investment in long-term emissions cuts.
We believe that this type of intervention should be explored to
see if it could be used, with a floor price level that was agreed
and publicised in advance and for a set period. We recommend that
the Government explore with the European Commission and other
member states the creation of a floor price for the EU ETS, which
could increase progressively as the market carbon price rises.
Any such scheme should only be rolled out after participants have
received ample notice of how it will operate.
SUBSIDIES AND REGULATION
82. We heard several arguments for the introduction
of extra subsidies and regulations to supplement the effect of
the carbon price to accelerate decarbonisation within those sectors
covered by the EU ETS. Subsidies could reduce the net cost of
low-carbon investments, and regulations on emissions could effectively
increase the cost of high carbon processes. EEF said the Government
should ensure that other policies, such as the Renewables Obligation,
are used to complement the EU ETS in the delivery of the UK's
climate change and renewable energy targets.[166]
Karsten Neuhoff argued that carbon pricing needed to be supplemented
by regulation and targeted subsidies in order to bring forward
large-scale deployment of renewables.[167]
83. EDF put forward a number of suggestions for new
or additional financial incentives for low-carbon power: reform
of the Renewables Obligation, to turn it into a 'carbon obligation'
(thereby covering all sources of low-carbon power, including nuclear),
or government offering carbon contracts to power generators (in
effect guaranteeing to pay them the difference between the EU
ETS carbon price and the costs of low-carbon technologies).[168]
84. There was broad agreement among power companies
and business groups that offshore wind and carbon capture and
storage (CCS) required additional, dedicated subsidies. Sara Vaughan
of E.ON, for instance, told us that relying on the EU ETS alone
to encourage investment in CCS would take too long.[169]
The CBI argued that even a fairly modest carbon price would encourage
investment in nuclear and onshore wind.[170]
85. Mike O'Brien, the then DECC minister, accepted
that "you cannot put all the burden on ETS"[171]
and that "we need to intervene in particular ways to encourage
[…] the development of certain kinds of renewables".[172]
During our inquiry the Government made two major funding announcements—a
reform of the Renewables Obligation, to offer greater subsidies
for offshore wind-power generation, and plans for a new funding
mechanism to support carbon capture and storage.[173]
We have been urging the Government to make these very announcements
for a number of years.[174]
In November 2009, the Government published a draft National Policy
Statement for Energy, to guide the decisions of the Infrastructure
Planning Commission.[175]
When such NPSs are finalised, they should reduce the uncertainty
(and cost) for securing planning approval for new power stations
and energy infrastructure. As such, they would effectively represent
a subsidy for the renewable and nuclear energy infrastructure
covered by the NPSs.
86. A contrary view is that there might be a risk
that extra subsidies might work against the cap and price mechanism
of the EU ETS, unnecessarily raising the costs of reducing emissions.
Louis Redshaw of Barclays Capital told us:
[…] if you are looking to reduce emissions
of the economy, putting in an extra subsidy for a pet technology
will distort the market [… Y]ou will be crowding out other
investments if you subsidise renewables over and above the benefit
they are going to get from the carbon price. […] The bottom
line is, if you are looking to reduce emissions and there is a
cheaper way to do it [… such as] via energy efficiency in
industry [or] in the home […] then it should be done elsewhere.
There is no point in causing that extra cost to everybody.[176]
Similarly, EDF argued that policies such as the Renewables
Obligation were "subsidising technologies to deliver a reduction
that otherwise could have been achieved within the trading scheme
itself, and […] undermining the price signal that is emerging
from the Emissions Trading Scheme".[177]
87. The Minister argued however that subsidising
low-carbon technologies should not undermine the carbon price
so long as the cap becomes sufficiently tight, sufficiently fast.[178]
DECC argued that "if you are complementing an existing price
in order to effectively encourage the use of technologies that
would not be picked up at that carbon price, then they do not
work against each other, they complement each other".[179]
88. The EU ETS needs to be supplemented by additional
incentives and subsidies in order to bring forward low-carbon
investment, especially in the power sector. It is particularly
important to influence the construction of new electricity generating
infrastructure in the short-term, as any new fossil fuel power
plants will operate for decades. We welcome the Government's recent
announcements on funding offshore wind and carbon capture and
storage. Such funding must be large enough, and aimed widely enough,
to accelerate the provision of low-carbon electricity in the UK.
We recommend that the Government establish carbon contracts to
encourage more low-carbon electricity generation, or otherwise
reform and extend the Renewables Obligation to the same effect.
This should be designed to encourage the construction of innovative
as well as more advanced low-carbon technologies, rather than
of new fossil fuel power stations.
89. If the carbon price or subsidies are too low
to persuade power generators to build low-carbon power stations,
then directly regulating emissions levels could provide that incentive.
Such regulation might help to avoid the 'lock-in' of high emissions
arising from the construction of high-carbon infrastructure, which
might remain in operation for decades. Without such regulation,
a new generation of gas and coal-fired power stations may be built
in the meantime. EDF Energy illustrated the problems this would
impose:
[…] once you have built a gas plant its
economics are for it to run for 30, 40 years. So if you build
now you are going to have those gas plants still running in 2050,
and if you want to turn them off you are going to have to turn
them off before the end of their economic life, which makes decarbonising
our economy even more expensive. That is why we need to focus
on making the right decision right now. [… W]ith the reductions
in output on coal plant, with nuclear plant being taken out of
commission over the next years, we have a moment of renewal of
the energy delivery investments, and we need to make the right
decisions now, and not pay for correcting whatever decisions we
make at a later date.[180]
90. WWF called for the introduction of an emissions
performance standard (EPS) for the power sector. By setting a
maximum amount of CO2 that could be emitted per unit
of electricity generated (they favoured 350g CO2/kWh),
an EPS would constrain the ability of generators to build or operate
more carbon-intensive power stations, regardless of the level
of the carbon price.[181]
We had made a similar recommendation in our 2008 report on Carbon
capture and storage. At that time, we noted that an
EPS set at 350g CO2/kWh would be achievable for an
efficient gas-fired power station making some use of waste heat.
In contrast, even a newer, more efficient coal plant would emit
around 700kg CO2/Mwh if built without carbon capture
and storage.[182] WWF's
proposal would thus effectively rule out the building of any new
coal-fired power stations, unless they were fitted with CCS from
the outset. In its response to our report on CCS the Government
said it would investigate what role emissions performance standards
might play.[183] Ed
Miliband MP told us that emissions performance standards could
have a role 'in giving expression to the conditions' the Government
has laid out.[184]
91. Sara Vaughan of E.ON UK argued against the use
of an emissions performance standard.[185]
In its written evidence, E.ON said:
In general we are concerned that […] plant
emission standards will be seen as substituting for the EU ETS
and will thus ultimately render it irrelevant. The impact would
also be to raise the cost of compliance to UK plc without any
demonstrable environmental benefits and send a message that the
UK does not believe that a carbon market can deliver the necessary
[greenhouse gas] reductions.[186]
92. We recommend that the Government introduce emissions
performance standards for new and existing power stations. These
should be set at a level which precludes the construction of new
coal-fired power stations without carbon capture and storage.
The Government should also set out a timetable for the retrofitting
of CCS technology to gas-fired power stations. We further recommend
that the Government work with European partners to set common
minimum emissions performance standards across the EU.
92 Ibid. p 67 Back
93
Ibid. Back
94
Ibid. p 34 Back
95
Ibid. p 67 Back
96
Ibid. p 59 Back
97
Ibid. p 68 Back
98
Third Report of Session 2009-10, Carbon budgets, HC 228-II,
Q 165 Back
99
Ibid. Q 193 Back
100
Ibid. Q 196 Back
101
Q 26 Back
102
Q 231 Back
103
Committee on Climate Change, Meeting Carbon Budgets-the need
for a step change, October 2009, p 70 Back
104
Ibid. pp 70-71 Back
105
Ibid. Back
106
Carbon budgets, HC 228-II, Ev 119 [para 3] Back
107
Ibid. Back
108
Government Response to the first annual Progress Report of
the Committee on Climate Change, January 2010, para 226 Back
109
Carbon budgets, HC 228-II, Ev 119, Qq 31, 284 and 285 Back
110
Government Response to the first annual Progress Report of
the Committee on Climate Change, January 2010, para 226 Back
111
Oral evidence taken before the Environmental Audit Committee,
4 February 2009, HC 234, Q 34 Back
112
Q 282 Back
113
National Audit Office, European Union Emissions Trading Scheme,
para 3.20 Back
114
Point Carbon, Carbon 2008: Post-2012 is now, March 2008,
p 14 Back
115
Q 85 Back
116
National Audit Office, European Union Emissions Trading Scheme,
para 3.20 Back
117
Q 26 Back
118
Ev 7 Back
119
Q 85 Back
120
Ev 50-51 Back
121
Committee on Climate Change, Meeting Carbon Budgets-the need
for a step change, October 2009, p 112 Back
122
National Audit Office, European Union Emissions Trading Scheme,
para 3.26 Back
123
Dieter Helm, Professor of Energy Policy, New College Oxford, Caps
and Floors for the EU ETS: a practical carbon price, October
2008, pp 4-5; William D. Nordhaus, Sterling Professor of Economics
at Yale University, To Tax or Not to Tax: Alternative Approaches
to Slowing Global Warming, Review of Environmental Economics
and Policy, volume 1, issue 1, winter 2007, pp 37-39 Back
124
Prof Paul Ekins, Carbon Taxes and Emissions Trading: Issues
and Interactions, in Journal of Economic Surveys, 2001, section
3.5 Back
125
Ev 64 Back
126
Oral evidence taken before the Energy and Climate Change Committee
on 4 March 2009, HC (2008-09) 309-i, Q 21 Back
127
National Audit Office, European Union Emissions Trading Scheme,
para 3.27 Back
128
Ev 80 Back
129
Carbon budgets, HC 228, para 66 Back
130
National Audit Office, European Union Emissions Trading Scheme,
para 4.18 Back
131
For example: Ev 158 [Aldersgate Group]; Ev 169 [4CMR]; Ev 209
[Karsten Neuhoff, Electric Policy Research Group]; Ev 240 [David
Newbery, Electric Policy Research Group] Back
132
Prof Dieter Helm, Caps and Floors for the EU ETS: a practical
carbon price, October 2008, p 5 Back
133
Uncorrected oral evidence taken before the Energy and Climate
Change Committee, 4 March 2009 Back
134
Prof Paul Ekins, Carbon Taxes and Emissions Trading: Issues
and Interactions, in Carbon-Energy Taxation: Lessons from
Europe, December 2009, section 3.5-3.6 Back
135
Q 102 Back
136
The Economist, 17 Sept 2009 Back
137
Prof William D. Nordhaus, To Tax or Not to Tax: Alternative
Approaches to Slowing Global Warming Back
138
Eg The Guardian website, Climate change policies failing, NASA
scientist warns Obama, January 2009 Back
139
Prof Paul Ekins, Carbon Taxes and Emissions Trading: Issues
and Interactions, para 3.4 Back
140
Ibid. Carbon Taxes and Emissions Trading: Issues and Interactions,
para 3.4, states: "As discussed in Ekins & Barker (2001),
it has been shown, under a precise set of restrictive assumptions,
that there is broad equivalence between an emissions trading scheme,
where emission permits are auctioned by the government, and levying
a carbon tax at the auction price (Pezzey 1992, Farrow 1995)." Back
141
Prof Paul Ekins, Carbon Taxes and Emissions Trading: Issues
and Interactions, para 3.4 Back
142
Prof Dieter Helm, Caps and Floors for the EU ETS: a practical
carbon price, October 2008, p 1 Back
143
Ibid. p 6 Back
144
Ibid. p 1 Back
145
Ev 50 [EEF]; Ev 29 [Carbon Trade Watch] Back
146
Ev 125 Back
147
Ev 44 Back
148
Ev 45 Back
149
Ev 64 Back
150
Q 107 Back
151
Q 241 Back
152
Cameron Hepburn, Environmental Change Institute, University of
Oxford, Regulation by prices, quantities or both: A review
of instrument choice, in Oxford Review of Economic Policy,
vol 22, no 2, 2006, p 238 Back
153
The EU Emissions Trading Scheme: Lessons for the future,
HC 70, Q 219 Back
154
Q 102 Back
155
Q 101 Back
156
Carbon budgets, HC 228-II, Q 230; Committee on Climate
Change, Building a low carbon economy-the UK's contribution
to tackling climate change, December 2008 Back
157
Carbon budgets, HC 228-II, Q 232 Back
158
Committee on Climate Change, Meeting Carbon Budgets-the need
for a step change, October 2009, p 34 Back
159
Q 129 Back
160
Ev 220 Back
161
Ev 104 Back
162
Ibid. Back
163
Ev 107 Back
164
Ev 126 Back
165
Q 274 Back
166
Ev 50 Back
167
Ev 209 Back
168
Ev 82 Back
169
Q 129 Back
170
Q 57 Back
171
Q 299 Back
172
Q 298 Back
173
HM Treasury, Budget 2009: Building Britain's future, HC
407, pp 122, 142, 150 Back
174
E.g. Sixth Report of Session 2005-06, Keeping the lights on:
Nuclear, Renewables and Climate Change, HC 584; Third Report
of Session 2007-08, The 2007 Pre-Budget Report and Comprehensive
Spending Review: An environmental analysis, HC 149 Back
175
DECC, Draft overarching National Policy Statement for Energy
(EN-1), November 2009 Back
176
Qq 222-3 Back
177
Q 125 Back
178
Q 303 Back
179
Q 304 Back
180
Q 147 [Mr Cadoux Hudson] Back
181
Ev 7 Back
182
Ninth Report of 2007-08, Carbon capture and storage, HC
654, paras 31-32 Back
183
DECC, Government Response to the Environmental Audit Committee
Report: Carbon Capture and Storage, Cm 7605, August 2009 Back
184
Carbon budgets, HC 228-II, Q 274 Back
185
Q 172 Back
186
Ev 78 Back
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