6 Conclusions
105. Emissions trading has important potential benefits
in terms of promoting action to tackle climate change. The EU
ETS has imperfections, not least that it has included emissions
caps which were set too high to force emitters to make the often
costly investment decisions which would reduce emissions. The
recession has only served to loosen what little constraint the
cap provided. The cap mechanism therefore needs to be significantly
tightened, and supported by cancelling new entrant reserve allowances
and auctioning as many allowances as possible (rather than giving
them away for free).
106. The Copenhagen conference failed to set binding
global emissions reduction targets. Whatever the progress of continuing
international negotiations following the conference, the Government
should push for the EU to adopt a target which more closely reflects
the climate science, and to adopt a revised cap for the EU ETS
which might act as a genuinely effective lever to achieve those
targets.
107. The carbon price, mainly derived from the hitherto
lack of tautness in the EU ETS, has been too low to encourage
the necessary investment in low-carbon processes and infrastructure.
The Government should consider the scope for a carbon tax. It
should also encourage its European partners to increase the use
of allowances auctions with reserve prices, make more use of subsidies
for low-carbon power and tighter regulation on high carbon power.
If necessary, the Government should be prepared to act in these
areas unilaterally, to demonstrate the UK's continuing leadership
role on tackling climate change.
108. The emphasis, nevertheless, should be on harmonising
the approach internationally, and making effective emissions trading
systems as extensive as possible. There is likely to be a need
for emissions trading for decades to come, however optimistic
we might wish to be on the rate of global progress on emissions
reductions. There are other emissions trading systems in prospect
elsewhere in the world, and the Government should argue within
the EU to seek to link the EU ETS with other schemes. Because
differences in the parameters of the schemes, for example in terms
of the use permitted of offset credits, could make that difficult,
the EU should take care that linking schemes should not undermine
the environmental effectiveness of the EU ETS or significantly
weakened the carbon price.
109. While such caution would be justified, a certain
degree of variation in different schemes would not be an insurmountable
hurdle. If the EU ETS is merged with other schemes with a more
generous allocation of allowances and greater access to offset
credits from non-scheme countries, or more generous subsidies
for low-carbon emitters, then terms of trade—some sort of
carbon 'exchange rate'—could ensure a level playing field.
The Government, with its European partners, would need to ensure
that schemes are not merged without such an 'exchange rate' being
carefully calibrated.
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