Memorandum submitted by Friends of the
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.
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,
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 offsettingat
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 reductionsand 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 impactssuch 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"
gameemissions 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.
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.
UK CARBON BUDGETS:
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
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
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
CDMit 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 firmsthe
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 effectthe 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 sectora
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".
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
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
Here we will just use CDM as short-hand for all off-set credits Back
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.http://ec.europa.eu/environment/climat/pdf/aviation/sec-2006-1684-en.pdf Back
International Finance Corporation. Tata Ultra Mega, summary of
proposed investment. www.ifc.org Back
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