The role of carbon markets in preventing dangerous climate change - Environmental Audit Committee Contents

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 advantage.

  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 of energy

  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 properly.

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 aviation

  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 programmes.

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 linking.

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 standards.

    (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 trade schemes

  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.

March 2009

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