Conclusions and recommendations
The impact of the EU Emissions Trading System
1. We
recommend that, when describing estimates of reductions in emissions,
the Government always makes it clear whether they are absolute
reductions in emissions or notional reductions against a business-as-usual
scenario. (Paragraph 18)
2. Taken together,
the recession and the over-allocation of allowances could greatly
reduce the effectiveness of Phase II of the EU ETS. (Paragraph
26)
3. We believe that
it is imperative that there are mechanisms for reducing the EU
ETS cap, whether in response to recession-driven reductions in
demand for allowances, the success of complementary policies in
cutting emissions, or the efforts of the public in reducing their
carbon footprint. We recommend the Government press the EU to
consider periodically whether to tighten the EU ETS cap. We further
recommend that the Government investigate what financial incentives
can be given to companies within the EU ETS to encourage them
to cancel allowances they own voluntarily. (Paragraph 33)
4. We recommend the
Government consult on other mechanisms to remove EU ETS allowances
from the market, especially where the threat of being forced to
buy and retire allowances could drive other environmentally beneficial
actions. (Paragraph 34)
5. We recommend that
the Government commits the UK to cancelling any surplus allowances
in its New Entrants Reserve at the end of Phase II, and presses
other member states to do the same. (Paragraph 35)
6. The EU needs a
much tougher 2020 cap. (Paragraph 38)
7. We recommend that
the Government press for a reform to CDM rules, in particular
to exclude the construction of fossil fuel infrastructure, and
more widely to embed sustainable development at the heart of project
eligibility criteria. (Paragraph 44)
8. Because of the
unique nature of the revenues raised by auctioning allowances,
further consideration should be given to hypothecating the revenues
for use on projects directly related to climate change. We urge
the Government to consider on a cross-departmental basis how this
might be done. (Paragraph 47)
9. The EU ought to
commit itself to make more significant cuts in its emissions by
2020, commensurate with the IPCC's recommendations of 25-40% for
developed economies (paragraph 15), with any purchases of offset
credits coming on top of that. In any future negotiations on Phase
III, we recommend that the Government presses both for a significant
tightening of the cap, and for as high a proportion of auctioning
as possible. (Paragraph 50)
Setting a price for carbon
10. 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. (Paragraph 59)
11. 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. (Paragraph 76)
12. 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. (Paragraph 77)
13. 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. (Paragraph 78)
14. 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. (Paragraph 81)
15. 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. (Paragraph 88)
16. 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. (Paragraph 92)
Global carbon markets
17. We
recommend that the Government encourages the EU to prepare for
linking the EU ETS and other emissions trading systems together,
whilst ensuring that the effectiveness of the EU ETS and the price
signal it provides is not weakened as a result. (Paragraph 101)
18. The Government
needs to set out how the global carbon market can expand, when
it may contract, and to what extent emissions trading will deliver
the emissions reductions that will meet the world's needs. (Paragraph
103)
19. If the EU ETS
is merged with other emissions trading systems with more generous
allowances and greater access to offset credits from other countries,
or more generous subsidies for low-carbon emitters, then terms
of trade—some sort of carbon 'exchange rate'—will
be needed to put all participants of the wider trading system
on a level playing field. This would not be a requirement simply
of fairness; without it, the greater efficiencies of the expanded
system would be jeopardised. The Government, with its European
partners, should ensure that schemes are not merged without a
well-founded 'exchange rate' in place. (Paragraph 104)
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