Memorandum submitted by the Environment
Trading schemes allow greenhouse gas
emissions reductions to be made in a cost effective way. We believe
a broader and deeper carbon market is at the core of a global
solution to climate change. The changes proposed in the
draft revised EU Emissions Trading Scheme (ETS) Directive, which
will apply from phase III, will result in a stronger scheme with
a more robust carbon price. The proposed 2020 target of
a 20% or a 30% (if a post Kyoto international agreement is reached)
reduction in emissions from 2005 levels set out in the draft revision
of the EU ETS Directive will ensure that the EU ETS sectors play
their part in meeting the UK carbon budgets.
We welcome the future linking of the
European Union Emissions Trading Scheme (EU ETS) to other trading
We support the need for more analysis
on the expansion of the scheme to further sectors such as shipping,
surface transport and over the longer term the farming and land
We have serious concerns over the impact
of aviation expansion on climate change. Whilst we welcome its
inclusion in the EU ETS we do not think this is a sufficient response
to the problem of growing emissions from the aviation sector.
Emissions other than carbon dioxide (CO2) from aviation that have
a climate change impact are not covered and the ETS cap for aviation
implies only a modest curb on CO2 emissions at EU level.
The Carbon Reduction Commitment (CRC)
is a pioneering emission trading scheme aimed at organisations
in the services, public administration and non-energy intensive
industry sectors. Future caps for the CRC scheme should reflect
the level of cost effective abatement available for those sectors
1.1 The Environment Agency welcomes the opportunity
to submit evidence to the Environment Audit Committee's inquiry
into the role of carbon markets in preventing dangerous climate
1.2 We are the Competent Authority for the EU ETS
in England and Wales. We manage the Emissions Trading Registry
and the new entrant reserve (NER) on behalf of the other UK regulators.
1.3 Along with the Scottish Environmental Protection
Agency (SEPA) and the Northern Ireland Environment Agency (NIEA)
we will administer the CRC which is aimed at organisations in
the services, public administration and non-energy intensive industry
sectors. We will also participate in the scheme.
2. KEY INQUIRY
The role of international emissions trading in
delivering a global greenhouse gas stabilisation target
2.1 Avoiding dangerous climate change means
making deep cuts in greenhouse gas emissions. Trading allows these
cuts to be made in a cost effective way and ensures that the burden
does not fall disproportionately on individual countries or sectors.
We believe a carbon market that incorporates more sectors and
more countries is at the core of a global solution to climate
2.2 We welcome the future linking of the EU ETS to
other developing schemes. Equivalent standards of monitoring,
reporting and verification, with associated enforcement must be
maintained so that the carbon market stays credible and is an
effective policy instrument in addressing climate change.
2.3 In addition to linking the EU ETS to other trading
schemes we support the need for more analysis on the expansion
of the scheme to further sectors such as shipping, surface transport
and over the longer term the farming and land use sector. Any
analysis should weigh the administrative cost (both absolute and
per tonne of CO2) of including these sectors in EU ETS against
the benefits. The inclusion of new sectors in emissions trading
could be complementary to other measures, for example the EU agreement
to reduce average CO2 emissions per km from new cars.
2.4 The Carbon Reduction Commitment (CRC) will
come into force in April 2010 with a three year introductory phase
in which there will be no cap on emissions from the scheme. From
April 2013, total emissions from the CRC will be limited through
a cap on the number of allowances sold to participants.
2.5 We are currently reviewing CRC coverage
and abatement potential for this important sector. Future caps
for the CRC scheme should reflect what is achievable in these
sectors. We will publish the results of our study in full shortly.
Whether, and under what circumstances, emissions
trading ought to be supplemented or replaced by tax or regulation
2.6 We support the analysis in the Stern Review
which concludes that an effective framework for reducing greenhouse
gas (GHG) emissions includes both carbon pricing through tax,
trading or regulation but also downstream policies to remove barriers
to behavioural change and policies to encourage innovation. Trading
is an important part of the solution but will work more effectively
when combined with other instruments.
2.7 For example, there is an overlap between the
EU ETS and the Carbon Reduction Commitment (CRC)/ Climate Change
Agreements (CCAs). This occurs as all organisations will be exposed
to an electricity price increase as a result of the EU ETS even
if they do not directly have their emissions capped by the scheme.
The service, public administration and non-energy intensive industry
sectors above 6,000 MWh also fall within the CRC and many of the
organisations in energy intensive sectors that are too small to
fall within the EU ETS directly are subject to CCAs. We agree
with the Government's analysis that this overlap is justified
as these measures are designed to target other barriers to emissions
reductions such as ensuring energy efficiency measures gain greater
profile within an organisation.
2.8 Methane emissions from active landfill sites
could be suitable for inclusion in the EU ETS or another trading
scheme such as the Carbon Reduction Commitment. Active sites are
not numerous and are relatively large point sources of greenhouse
gas. However, emissions from these sites need to be regulated
closely to minimise any risks they pose and inclusion in a trading
system should not be considered an alternative to regulation for
safety and environmental hazard.
The record of Phase II of the EU ETS, and prospects
for the success of Phase III
2.9 The strengthening of the Phase II National
Allocation Plans by the European Commission has already resulted
in a stronger, more effective EU ETS. Phase II of the EU ETS is
expected to produce an annual reduction of 29.3 MtCO2 against
business as usual projections in the UK. A recent study by New
Carbon Finance suggests that across the EU emissions fell by 3%
in EU ETS sectors in 2008. This study estimates the carbon price
was responsible for 40% of this decrease, with the recession accounting
for a further 30%.
2.10 Currently, market commentary indicates that
there will be a surplus of allowances in Phase II as a result
of the downturn in the economy. It has also been suggested that
the carbon price has fallen further still as struggling companies
are selling their surplus allowances in order to generate an additional
income (although this effect will be more temporary in nature).
However, given that Phase II allowances can be carried across
into Phase III we would expect the allowance price to rise again
2.11 We support many of the changes set out
in the draft revised EU ETS Directive that will come into force
in Phase III of the scheme. In particular, the introduction of
a central cap with a long-term trajectory, greater levels of auctioning,
a wider scope covering more emissions, and a more harmonised system
will all improve the scheme. All of these changes taken together
should deliver a much more credible carbon price and start stimulating
greater levels of investment.
2.12 The move to central EU cap setting from
Phase III of the EU ETS will help to ensure a greater level of
ambition for the scheme. The long-term 2020 targets of 20% or
a 30% (if a post Kyoto international agreement is reached) reduction
in emissions against 2005 levels set out in the draft revision
of the EU ETS Directive will ensure that the EU ETS sectors play
their part in meeting the UK carbon budgets. The EU ETS target
post 2020 will need to be revised in the light of the necessary
contribution from the EU and UK to meeting global greenhouse gas
Effects of the expansion of the EU ETS to encompass
2.13 By 2050, the Department for Transport (DfT)
predicts that emissions of carbon dioxide (CO2) from the aviation
sector will grow from 37.9 megatonnes (Mt) CO2 in 2006 to 59.9
MtCO2, within the range 53.0 MtCO2 to 65.0 MtCO2.This figure does
not include the impact on the climate of non-CO2 aviation emissions
at high altitude.
2.14 In percentage terms, aviation's share of the
UK's GHG budget rises from just over 5% in 2006 to between 38
and 72% in 2050 depending on whether a radiative forcing factor
of 1.9 is included (which attempts to account for the impact of
emissions at high altitude). Increases at these levels would in
effect require a reduction in GHG emissions by the rest of the
economy of between 85 and 93% to meet the UK's overall targets
of cutting GHG emissions by at least 80%.
2.15 Our concern is that increases in emissions
from the aviation sector will leave little or no headroom for
GHG emissions from other sectors. This in turn suggests that either
very costly abatement measures will be needed in these other sectors
or that there is a risk that the overall target will not be met.
2.16 All civil aviation, both international
and domestic, will be included in the EU Emissions Trading Scheme
(EU ETS) from 2012. While we welcome this development we do not
feel that it is a sufficient response to the problem of growing
emissions from the aviation sector for three reasons.
2.17 First, the ETS does not cover the effects
of non-CO2 emissions on the climate, such as water vapour and
nitrogen oxides at high altitude. There is therefore a risk of
increasing damage to the climate system from these emissions unless
other policies are also pursued.
2.18 Second, the ETS cap for aviation implies
only a modest curb on CO2 emissions at EU level. Emissions are
capped at 97% of the average annual emissions for the 2004-06
period between 2008 and 2012 and 95% between 2013 and 2020.
2.19 Third, no cap has yet been determined for
total emissions beyond 2020, so there is no carbon price signal
for the longer term. However, decisions are being taken now to
put in place infrastructure that will facilitate growth in GHG
emissions from aviation over the 2020 to 2050 period.
Allocation or auctioning of EU ETS credits, and
the use of auctioning revenues
2.20 The revised Directive will result in much
greater levels of auctioning of 60% for Phase III as opposed to
3% in Phase II. This will help to simplify the scheme and avoid
windfall profits. We welcome this increase and would like to see
full auctioning within the EU ETS as soon as possible. However,
we accept that some sectors are subject to international competitiveness
concerns which need to be addressed in any allocation methodology.
We see this as a transitional measure until all of Europe's major
competitors are part of a global carbon market, when there will
be no need for free allocation.
Progress of cap and trade schemes in other countries
(notably, the United States), and the prospects for, and practicalities
of, linking between them
2.21 The scheme must link to other trading schemes
in order to establish a global carbon market. We support the Commission's
criteria for linking in the revised draft Directive.
2.22 State schemes in the USA and national schemes
being developed in Australia, New Zealand and Japan all have the
potential to link to the EU ETS and strengthen the scheme.
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
2.23 A carbon offset is a financial instrument
representing a reduction in greenhouse gas emissions. There are
two main markets for carbon offsets. The majority of carbon offsets
are purchased by companies or governments in order to comply with
caps on the total amount of carbon dioxide they are allowed to
emit. The voluntary market is much smaller. Individuals, companies,
or governments purchase carbon offsets to mitigate their own greenhouse
gas emissions from transportation, electricity use, and other
sources. Common offset projects include renewable energy and energy
efficiency projects, methane flaring projects and afforestation
2.24 We support the UK Government scheme for regulating
carbon offset products with the aim of informing and safeguarding
business and household consumers purchasing Carbon Offsets. The
scheme sets standards for best practice in offsetting. Approved
offsets have to demonstrate the following criteria:
Accurate calculation of emissions to
Use of good quality carbon credits ie
initially those that are Kyoto compliant.
Cancellation of carbon credits within
a year of the consumer's purchase of the offset.
Clear and transparent pricing of the
Provision of information about the role
of offsetting in tackling climate change and advice on how a consumer
can reduce his or her carbon footprint.
2.25 The Clean Development Mechanism (CDM) is
an arrangement under the Kyoto Protocol allowing industrialised
countries with a greenhouse gas reduction commitment to invest
in projects that reduce emissions in developing countries as an
alternative to more expensive emission reductions in their own
countries. A crucial feature of an approved CDM carbon project
is that it has established that the planned reductions would not
occur without the additional incentive provided by emission reduction
credits. The project must be validated by a third party agency
(a Designated Operational Entity) to ensure that it results in
real, measurable and long-term emission reductions.
2.26 There are restrictions on the type
of CDM project credits that can be used by operators for compliance
purposes under the EU ETS. Credits from Land Use, Land Use Change
and Forestry (LULUCF) activities and nuclear projects cannot be
used. In addition there are thresholds for CDM projects which
therefore currently exclude small scale renewables.
The relationship between emissions credits and
the UK carbon budgets set up under the Climate Change Act
2.27 The number of Kyoto Certified Emissions
Reductions (CERs) (generated through CDM or Joint Implementation
projects (JI)) which can be surrendered by operators in the EU
ETS is capped at half of emissions reductions required over the
period 2008-20. If there is a move to a 30% overall EU emissions
reduction target, additional CERs may be used for up to half of
the additional reduction. So, if the target increases by 10%,
CERs may be used for 5% of this reduction.
2.28 We support the provisions in the Climate Change
Act to set a legally binding limit to the amount of overseas credits
that can count towards the UK budget and the role of the Committee
for Climate Change to advise on the legal contribution allowed.
However, we are concerned that allowing 50% of the effort for
the EU ETS sector to come from overseas could lock the UK into
high-carbon infrastructure, such as unabated coal fired power
stations, unless other measures are in place to avoid this.
Transparency of and justification for counting
the purchase of emissions credits (especially from "offset"
schemes) as decreasing emissions from the UK
2.29 With regard to carbon units brought from,
or sold to, other countries, only EU ETS recognised allowances
and Kyoto Certified Emissions Reductions (CERs) should contribute
to meeting the UK carbon account.
2.30 Carbon units generated from outside the UK and
used to meet the UK carbon budgets should be cancelled or retired,
and not sold or transferred. If these units are not retired or
cancelled than they could potentially be used again, resulting
in double counting of emissions reductions. We also consider that
the use of free credits should be avoided to reflect the true
carbon price in investment decisions.
10 March 2009