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

Memorandum submitted by Friends of the Earth


  We believe that other respondents will be making similar points to us on the overall performance of carbon markets, and so the majority of our evidence below will focus on the issue of whether emissions credits should be counted in the forthcoming UK carbon budgets.

    — Trading and offsetting is a major issue for the UK carbon budgets. The Committee on Climate Change (CCC)'s recommendation on including offsetting has the practical effect of reducing the total required effort in the UK to significantly below the stated 29% (interim budget) and 40% (intended budget). As investment decisions during these budget periods will have impacts for decades, this low effort is in direct conflict with the CCC's view that by 2050 over 90% of cuts are highly likely to be most cost-effectively achieved domestically. The issue of whether to include offsetting or EUETS traded emissions is therefore crucial to the level of effort required in the short-term, and to the expense of meeting future budgets[36].

    — Trading and offsetting should not be included in accounting for the UK carbon budgets for two reasons:

    — First, the low quality and high volume of offset credits,[37] negates the argument that a 1 tonne cut of carbon purchased from EUETS (whether CER or EUA) is the same as a 1 tonne cut in emissions within the UK.

    — Second, the use of trading for accounting purposes means that in practice the Climate Act will be no driver for emissions reductions in the traded sector. The CCC advises that decarbonising electricity generation in the UK is essential to reducing emissions in the UK, yet under these accounting arrangements it will make no difference to the UK carbon budget whatever happens, positive or negative, in that sector. This is not in keeping with the intention of the Act.

  Our main evidence (see page 3) covers the above points in more detail. We would also like to make the following points about carbon markets in general, in summary form:

    — Carbon trading within and between developed countries has a role to play in cutting carbon emissions. The EU ETS however is not effective, particularly due to weak overall caps and major flaws with offsetting mechanisms such as CDM.

    — Emissions trading must be complemented by a range of other policy mechanisms, such as tax, regulation and spending, as recommended in the Stern Review.

    — Phase 2 and 3 of EUETS are not adequate:

    — They have too high a cap, not consistent with cuts required in the EU to keep temperature increases below 2 degrees C.

    — This is both a problem in 2008-20, as not enough cuts are made;

    — And it is problem for 2020+ as the low carbon price resulting from the high cap means there is little incentive for low-carbon infrastructure investment decisions which will last well beyond 2020.

    — They allow too much offsetting—at 50% of the overall emissions reduction required within the EUETS:

    — This high volume of credits creates "lock-in" to high-carbon infrastructure in the EU.

    — The quality of the credits can often be low or dubious

          —  They are often not "additional"—ie would have happened anyway.

          —  They often do not guarantee emissions reductions—and in some cases can deliver emissions increases (eg the building of new coal fired power stations, just of better efficiency than might otherwise have been built)

          —  They often come with major negative environmental and social impacts—such as displacement of communities for new hydro-power projects or plantations.

    — Even if the quality and volume issues are sorted, offsetting would still only be a "zero sum" game—emissions cuts in developing countries rather than cuts in developed countries, when the science is clear that cuts in developed countries are needed as well as reductions from business-as-usual growth assumptions in developing countries.

    — Although incorporation of aviation in the EUETS is a welcome first step it will not send a significant price signal or drive technology improvements to materially affect the forecast future growth in aviation emissions.[38] This is partly due to the inadequate cap and high levels of offsetting but also reflects low levels of auctioning and the over-generous baseline set for the aviation sector. We welcome the Government's intention to retain Air Passenger Duty alongside the EUETS as an additional mechanism to control aviation emissions.

    — The issue of offsetting is not merely an issue in the traded-sector. In the EU package agreed in December 2008, there is potential for more than 72% of the total reduction effort under the Effort-sharing directive to be off-set outside the EU through the CDM from 2013-2020.


1. Off-set credits

  The CCC report argues (p160) that there are three arguments against "too great a reliance" on carbon markets and buying in offset credits. These are i) showing leadership, ii) danger of lock-in and increased cost, iii) unreliable quality of offset credits. They go on to say that these are arguments relating "primarily or entirely to offset credits, and not to the purchase of EUAs and thus to reliance on reductions elsewhere within the EU". They say "as long as the EU ETS total emissions target is adequately tight (and with appropriate limits on offset credit purchase into the EUETS) emission reductions will be achieved within Europe, and new technologies for energy efficiency and renewable energy will be developed."

  First, the EU climate package agreed since the CCC's report (agreed 12th Dec, voted on 17th Dec) allows for a huge amount of off-set credit purchase, which in practice would exceed 50% were it not for a provision in the legislation to limit the off-sets to that amount. Either way, it will be very difficult to argue convincingly that half of the emissions reductions constitutes the CCC's definition of an "appropriate limit" or that as a result "emission reductions will be achieved within Europe".

  This issue of the very high volume of allowed credits is compounded by major concerns over their quality and additionality. Simply, a new, CDM-compliant coal fired power station in India, built to cope with extra demand for electricity, but built to a better energy efficiency than the previous generation of Indian power stations, is still emitting more carbon into the atmosphere.[39] As the CCC put it: "any system of credits for reduction against a hypothetical business as usual scenario is inherently less robust than a cap and trade system where reductions are required in the certifiable total of all emissions". It is not accurate therefore to say that a tonne of emissions reduction in the UK or Italy is equivalent to a tonne of reductions in countries without caps.

  This problem with offsets is not confined to CDM—it also affects the validity of counting purchased EUAs towards the UK carbon budgets. For example, European firms allocated EUAs can purchase CERs up to allowed (high) limits, and sell the EUAs to the UK. This makes economic sense to those European firms—the average price of a CER is less than the price of an EUA. The high volume of cheap CDM permits will also affect (and lower) the overall EUA price. EUAs are not therefore a guarantee of emissions reductions within Europe. This is not a minor effect—the CCC proposes that purchase of EUAs should count towards meeting the budgets in the traded and non-traded sector to an unlimited extent.

2. Climate Change Act and the traded sector—a driver or not?

  For the above reasons, we believe that the high volume and low quality of offset credits means that the UK should count neither offset credits nor EUAs in the UK carbon budgets. There is an additional reason. At present, the Government intends that, for accounting purposes, the carbon budgets will simply count the UK's "allocated" emissions in the traded-sector as the traded sector's contribution to the carbon budgets. This means that nothing that happens in the traded sector has any effect on the UK carbon account. It means that the Act would create no driver whatsoever for either stronger policies (for example on the Climate Change Levy) or have any influence over whether building a new generation of coal-fired power stations was a good thing from a climate perspective. There would be no point having anything at all in the "policies and proposals" section of the Act for the traded sector.

  There is a simple solution to this, which is to count actual emissions in the traded-sector, rather than allocated emissions. Of course, the UK would still be in the EUETS, and UK firms would still need to purchase credits to cover emissions above their allocations. But under this arrangement, the UK government would then have a driver, through the Act, to implement policies which helped firms reduce emissions in the traded sector. The Government clearly believes that other policies are needed (eg, there is a Climate Change Levy and other climate policy in the climate sector), in part because it believes that the EUETS is not an infallible or the only policy tool to be used. The CCC report also states at page 198 that "given the uncertainties of the political processes which determine EUETS caps, and given uncertain and fluctuating carbon price expectations beyond the next few years" additional policy action to prevent new unabated coal-fired power stations is needed in addition to the carbon price established by the market. So the Act, as the overarching policy document for Government on climate change, must be able to act as a driver for the development of those other policies.

  There is a counter argument, that there is no point the UK doing more in the traded-sector, because it will simply mean that other countries in the EUETS will do less. We disagree with this, on five grounds.

    — First, there is the practical issue that, because of the CDM, doing less in the UK means more will be done outside of the EUETS, in uncapped countries, ie less guarantee of lower carbon concentrations in the atmosphere: this goes against the Act's basic purpose.

    — Second, it undermines both of DECC's key aims for the Climate Act: "to help the transition towards a low-carbon economy in the UK"; and to "demonstrate UK leadership internationally".[40]

    — Third, even if we did do more and the Poles and French could then do less, this is not necessarily a bad thing. For example, it would mean that through stronger UK Govt policy, French and Polish firms would be paying UK firms more for permits; it would mean that the UK would be less likely to be locked into high-carbon infrastructure, and it would have made a head start in making the much larger long-term cuts, 90% of which the CCC say are going to be made most cost-effectively domestically.[41]

    —  Fourth, the overall cap in the EUETS in future periods is critical. If countries do not make effort to cut their own emissions, but instead use the existence of the EUETS to justify carbon-intensive policies (as happened here in the UK over Heathrow expansion) on the grounds that it doesn't matter as increases here will simply be met by cuts elsewhere in the EU, then the political reality is that those individuals countries will find it harder to negotiate for tougher caps in future years, because of inevitable lobbying pressure from locked-in industry. Countries with active and strong additional policies in the traded sectors will find it easier to negotiate for stronger caps. If the UK wants to continue to play a strong leadership role for stronger caps in the EU and internationally, its ability to do so is dependent on strong policies.

    —  A final argument for using actual rather than allocated emissions is that the UK will not have an actual national "allocation" beyond the end of phase 2. It is as yet uncertain how allocations and auctions will be arranged in phase 3, and no doubt it will be theoretically possible to construct a notional "UK allocation" from whatever is decided, but in reality this will be an accounting nicety rather than any real indication of what is going on. For purposes of clarity, simply recording actual emissions from the start makes more sense than relying on some abstruse calculation of some notional "allocation".

March 2009

36, p31 Back

37   Here we will just use CDM as short-hand for all off-set credits Back

38   EC impact assessment of aviation ETS proposal, found under the Commission's proposal, aviation emissions will grow by 78% between 2005 and 2020, instead of 83% under a "do-nothing" (business-as-usual) approach, a reduction equivalent to less than one year's growth in emissions. Back

39   International Finance Corporation. Tata Ultra Mega, summary of proposed investment. Back

40 Back

41   Page 35: "while international trading of emissions credits can usefully reduce the cost of mitigation, over the long term it is highly likely that the vast majority of the UK emissions reduction will need to be achieved domestically (eg a UK commitment to an 80% reduction may well require a UK domestic reduction of over 75%)". Back

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