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

Memorandum submitted by the Economic and Social Research Council


  1.1  The Economic and Social Research Council (ESRC) funds research and training in social and economic issues. We are an independent organisation, established by Royal Charter, but receive most of our funding through the Department for Innovation, Universities and Skills. Our budget of £181 million (2007/2008) funds over 2,500 researchers in academic institutions and policy research institutes throughout the UK. We also support more than 2,000 postgraduate students.

  1.2 The quality of life in and economic well-being of the UK and beyond is significantly affected by issues associated with and affected by environmental change and energy. As such these are particular areas of challenge for some of the social scientists we fund. This submission reflects some of the work funded to date and we hope the Committee find the evidence of value.


  2.1 The EU Emissions Trading Scheme (ETS) has opened up potential for exporters and producers of renewable energy technology. However, these opportunities may not be realised given capital is not guaranteed to distribute in a rationale fashion. As such work to help further encourage the better flow of investment and capital, including consideration of regulation by a variety of stakeholders is required. We would argue robust insights to these issues can only be gain through research, which is as yet to be fully supported.

  2.2 Some ESRC funded research has indicated that the price of carbon can play a fundamental role in the effectiveness of international climate change, helping encourage transition to a low-carbon economy. However, this can only be one element of a comprehensive carbon management policy, which must also include policy interventions on a broad front that encompass a full range of economic and social considerations including behaviour, practices and habits.

  2.3 Research on carbon markets suggests they require underpinning with bespoke mechanisms to facilitate maximum effectiveness. This should include guidance and support in terms of encouraging the take up of the most appropriate technologies. Such interventions should include consideration of new regulatory support in areas such as planning and market design.

  2.4 Organisations responses to ETS vary according to their strategic objectives, scale and long-term targets. Large-scale long-term investors appear to have adapted to the scheme in response to perceived returns, driven by perceptions of those organisations by third parties. Additional work to understand these complex relationships and how other organisations do, or may, in the future respond, would provide greater understanding allowing policy to evolve such that the benefits of carbon trading are maximised. Early indicators suggest beneficial steps may include the extent to which the trading system is easily understood and engaged with; importantly, that prices accurately reflect what is appropriate to meet future emissions targets and that the price is adjusted as appropriate as better information about the impact of global warming develops; and, that these are reflected in joined up EU and member state policy. In addition, maintaining a high price for carbon will help maximise support for socially profitable low-carbon investments.

  2.5  An expected direct outcome of the development and working of the ETS is a scale back in the role for CDM project mechanisms. Although CDM provides scope for stakeholders, as individuals, to directly benefit from project credits, further action is less likely to be pursued. Secondly, support normally flows to energy intensive `carbon rich' sectors which mitigates against movements towards lower-carbon activities.

  2.6 The global competitiveness of EU business and industry will be affected by carbon trading and as such questions arise regarding state aid issues in what is currently a highly sensitive global market. These raise significant legal and ethical questions which are being addressed by the ESRC funded Electricity Policy Research Group at the University of Cambridge The Group's work suggests that careful implementation of such responses may ensure against breeching WTO regulation. In addition interventions have the ability to bring a secondary benefit to bear in the form of reduced administrative complexity, an additional constraint on the effectiveness of carbon markets.

  2.6  The longer-term challenge of developing a global carbon market or linked markets has also been subject to research which indicates considerable barriers remain to its successful implementation, not least the lack of an accurate or acceptable base line for emissions on a country by country basis. Further research on this challenge from both the natural and social sciences could contribute to a resolution of this challenge.

  2.8 Finally, research indicates preferential support for renewables and their development which exceeds that received for avoiding emissions via ETS would be beneficial. Similar measures adopted with regard to nuclear generation led to efficient, commercially attractive opportunities of benefit internationally. Appropriate investment in the renewables sector has the potential to have significant impact on climate change mitigation and as such should be born in mind as carbon markets develop.

February 2009

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