Memorandum submitted by Centrica Plc
Potential contribution of international emissions
trading to delivering a global greenhouse gas stabilisation target,
consistent with the UK's goal of limiting global warming to 2°C
1. We believe that the EU ETS has a major
part to play in stabilising global greenhouse gases. The UK is
playing an integral position in the battle against climate change
and the EU ETS, alongside other initiatives such as the Renewables
Obligation and the Climate Change Levy are an important and significant
part of this. However, we believe it is also important for all
other sectors, not necessarily included in the above initiatives,
to play a part in reducing carbon emissions and improving energy
efficiency across the UK. This should be encouraged by the Government
at all levels.
The record of Phase II of the EU ETS, and prospects
for the success of Phase III
2. We are happy with our experience of the scheme
to date. There have been a few issues during the first phase,
and lessons have been taken on board in the design of Phase II,
such that we feel the EU ETS is now a robust working market. We
are keen that this is maintained and it is therefore essential
that when changes are introduced, ie full scale auctioning, these
are brought about with the working market in mind. For example,
the introduction of high-volume auctions may have a large impact
on the market price and trading volumes leading up to the auction
date. In our view, it is therefore preferable to auction allowances
little and often.
3. We are pleased that auctioning has been adopted
as the main method of allocation in Phase III, as we suggest that
this will provide a strong signal for all participants to both
reduce their current carbon usage and to invest to low-carbon
technologies, as appropriate. We are disappointed that not all
industries will be subject to 100% auctioning from 2013, as we
can see no reason why all sectors, not subject to carbon leakage,
should not have 100% auctioning from the beginning of Phase III.
4. We continue to be concerned that the
auctions that are taking place during Phase II are only open to
Primary Participants rather than being directly open to all. We
believe that direct participation in these auctions going forward
is beneficial to the operation of the market as well as vital
in Phase III when a far greater number of allowances will be purchased
in this way. The information potentially gleaned by the Primary
Participants during this phase could give them a significant commercial
5. In addition, we would like to see more
information published on the results of each auction. Ideally
this would take a similar form to the information released following
the RGGI auctions in the US, which includes aggregate information
on the number and type of bidders as well as bid prices.
6. One of the scheme's strengths is that
the proposed tight cap delivers a meaningful price signal to participants.
This, in addition to the information set out on how the cap should
be set post 2020 is both reassuring to participants and assists
in maintaining a robust emission market.
Extent to which the carbon price will be sufficient
to drive low-carbon investment, in particular decarbonisation
7. The removal of the current free allocation
process, ensuring that the cost of carbon is reflected in all
future planning, investment and operations decisions will ultimately
encourage lower-carbon technologies and processes. It is essential
that the higher polluter is given this signal, by having to purchase
their allowances, to drive down carbon emissions.
8. To a certain extent, the scheme (Phase III
in particular) will encourage technological development, however,
in order to make some large step changes it is important that
the very high cost and risks of achieving this does not rest solely
within the business community and, we suggest, some Government
assistance should be forthcoming. This is especially the case
where the commercial adoption of new technologies is required
ahead of the usual speed needed for investment decisions to apply.
Impacts on economic recession on the workings
of the EU ETS
9. The EU ETS is a working market. The allocation
of EUAs happens over a year in advance of sectors needing in surrender
them under compliance. The current economic recession has resulted
in several industries cutting back on their production and making
the decision to sell their surplus EUAs. This has subsequently
led, due to the usual supply-demand economics, to a fall in the
price of EUAs, further evidence that that the market is working
Implications of the EU ETS for business competitiveness,
and how to address them
10. We do not consider that the EU ETS has had
an adverse effect on business competitiveness. We suggest that
the EU ETS impacts businesses in three distinct ways, through
the price of electricity, the current process of giving the mast
majority of allowances for free and the future benchmarking of
industries for free allowances in phase III.
11. The impact of the price of electricity should
be a similar impact throughout the whole of EU. We suggest that
giving allowances for free benefits those industries that pollute
more, but that the benchmarking activity to be adopted during
phase III should be using the most efficient plant as a basis
for free allowances in any given sector, thus penalising the heaviest
polluters and encouraging more efficient plant.
12. We do not consider this to be against
business competitiveness, as within the EU all businesses within
a competitive sector are being treated in the same manner and
outside of the EU there are procedures in place to assist those
sectors significantly at risk of carbon leakage (via the receipt
of free allowances). In time, with the hopeful adoption of an
International Climate Agreement, and the introduction of equivalent
carbon abatement schemes, the risk of carbon leakage should decrease.
Effects of the expansion of the EU ETS to encompass
13. We support the expansion of the scheme
to include other sectors and gases as this inevitably increases
efficiency. However, we believe that any expansion must not compromise
the existing scheme, and this must only be achieved where the
baseline for expansion sectors is accurately known. If there is
any doubt, any expansion should be run in parallel to the EU ETS
for at least a year to gain knowledge in this area and a robust
monitoring and verification regime must be used to ensure the
continued efficient working of the emissions market. We are therefore
pleased and support the process that has been adopted to include
aviation in the EU ETS.
Allocation or auctioning of EU ETS credits, and
the use of auctioning revenues
14. We suggest that the proceeds from auctioning
EU ETS allowances should be used for low carbon and fuel poverty
Progress of cap and trade schemes in other countries
(notably, the United States), and the prospects for, and practicalities
of, linking between them
15. Ideally, directly linking the EU ETS with
other emission schemes outside the EU will help to deliver emission
reductions at the lowest cost to the global economy, and will
aid development of a more liquid market. This should only happen,
however, when other schemes are established, and when the principles
behind those schemes as well as their operation allow a direct
16. It is vital that any linked schemes operate
with similar underlying processes to ensure the robust nature
of the EU ETS is maintained. Areas to consider would include:
(a) Mandatory caps on emissions.
(b) Equivalent monitoring, reporting and verification
(c) Similar access to limited external credits.
(d) Absence of market interventions ie price
caps, buy outs.
The robustness and effectiveness of "offset"
schemes (ie those without a cap), such as the Clean Development
Mechanism (CDM), and the issues around linking them to cap and
17. We understand and accept that a balance
needs to be struck between effort at home and abroad, and that
the UK needs to show some leadership in finding real carbon cuts
at home. Given this balance will depend on a number of factors
including the speed of development of new technology and the availability
of good-quality projects, we do not believe that identifying a
precise balance is helpful.
18. Project credits have an important role to
play in delivering global emission cuts which should be recognised.
We believe that projects developed under the Clean Development
Mechanism deliver real and enduring carbon emission reductions
in developing countries which currently do not have any emission
reduction targets and, in the absence of legally-binding targets,
open a pathway to global agreements for many developing countries.
19. There is also substantial potential
for technology transfer from these projects to other countries
whether directly covered by the EU ETS or not. Allowing the use
of credits for compliance under the EU ETS supports these project
streams, supports innovation in UK business, and allows reductions
to be made at lowest cost.
20. The UK is emerging as a market leader
in the financing of these kinds of projects. Imposing low limits
on the use of credits within the UK damages the ability of UK
companies to invest in emission-reducing projects in the developing
world, and might check the development of this important new market.
21. To protect the credibility of the EU
ETS and other international emissions trading, it is imperative
that projects are subject to rigorous accreditation to ensure
minimum quality standards are met. Within the CDM this role is
carried out by the UNFCCC's CDM Executive Board and we are confident
that this system is providing the necessary robust and rigorous
assessments of proposed projects.