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


Memorandum submitted by the Lloyd's Register Quality Assurance Ltd

1.  EXECUTIVE SUMMARY

    — Emissions trading schemes are rapidly developing and growing, however the present schemes are not considered sufficient to meet the desired climate change targets.

    — To achieve the climate change targets a global framework of linked and mixed mechanisms is considered necessary.

    — Emissions trading is one of many tools which should be considered to achieve emissions reductions.

    — Phase II of the EU ETS has shown improvements from phase I relating to cap setting and resultant carbon prices, this has provided greater financial incentive to reduce emissions. The proposals for Phase III further improve on this in relation to harmonisation, reduction of issues relating to windfall profits and competitiveness.

    — A more certain carbon price is one means of driving low-carbon investment.

    — From our experience the impact of the EU ETS on participant UK firms, in the main, has resulted in improved efficiencies and/or increased use of non fossil fuels.

    — Introduction of the aviation sector will increase the size of the scheme, extending it to organisations beyond the EU and will therefore further encourage the global trade of carbon.

    — The linking of different greenhouse gas (GHG) schemes, whether cap and trade or offset mechanisms, is considered necessary to achieve truly global free trade of GHG emissions.

    — To facilitate the linking of such schemes, comparable mechanisms would be required to ensure that any unit of emissions traded is independently and credibly assured via third party validation and verification to be as real, measurable, permanent, additional and conservative as any other. These schemes must also provide equal levels of transparency to ensure units are not double-counted.

2.  INTRODUCTION TO LRQA AND LLOYD'S REGISTER

  2.1  LRQA, a member of the Lloyd's Register Group, is a leading independent provider of Business Assurance services. Our climate change services include validation and verification of carbon inventories, footprint and project emissions, as well as corporate social responsibility (CSR) report assurance. Voluntary and regulated carbon market schemes we cover include ISO14064, Voluntary Carbon Standard (VCS 2007), regional schemes, and Kyoto Protocol mechanisms, Clean Development Mechanism (CDM), Joint Implementation (JI) and the EU Emissions Trading Scheme.

  We have over 25 years experience in assessment and certification of quality, environmental and health and safety management systems. Our clients include large global organisations, bringing transparency and recognised assurance to their business processes and systems.

  2.2  Lloyd's Register provides independent assurance to companies operating high-risk capital-intensive assets in energy and transportation to enhance the safety of life, property, and the environment, thereby helping our clients ensure safe, responsible, and sustainable supply chains. The Group comprises charities and noncharitable companies, with the latter supporting the charities in their main goal.

3.  OVERVIEW

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

  3.1  Emission trading schemes have been rapidly emerging and growing in recent years. Globally there are now a variety of international schemes such as the Kyoto Protocol's Clean Development Mechanism (CDM) and Joint Implementation (JI), regional schemes such as the European Union's Emissions Trading Scheme (EU ETS), the US North Eastern States' Regional Greenhouse Gas Initiative (RGGI), the US, Canadian and Mexican scheme of The Climate Registry (TCR), together with National schemes such as the Japanese Voluntary Emissions Trading Scheme (JVETS) and the UK Emissions Trading Scheme (UK ETS). The sum of the contribution of each of the existing schemes is however, not considered sufficient to meet the targets desired.

  3.2  To achieve a global greenhouse gas stabilisation target, we consider that a truly global framework of mixed mechanisms is required post 2012, that will enable linked carbon markets. We support the international discussions planned for Copenhagen this December and hope that agreements to achieve this can be reached. This is further expanded upon in our response to the development of global carbon markets.

Whether, and under what circumstances, emissions trading ought to be supplemented or replaced by tax or regulation

  3.3  Emissions trading is already supplemented with carbon taxes and levies, for example the Renewables Obligation in the UK and taxes placed on fossil fuels. Such taxes and levies are seen to have a positive contribution towards incentives for the reduction of GHG emissions and encourage the consumption of renewable energy sources. We consider emissions trading to be one of many tools which should be considered to achieve emissions reductions. Emissions trading, and taxes and levies however must be considered within the global market and this is further expanded upon in our response to the development of global carbon markets.

The record of Phase II of the EU ETS, and prospects for the success of Phase III.

  3.4  Phase II of the EU ETS remains within its first year and the results of this first monitoring and reporting year, which will be confirmed in April, will give a clear indication of the impact that this phase may achieve on emissions reductions. However, learning from phase I, the European Commission (EC) required Member States to tighten their caps from those in the first phase. This has already created increased scarcity in the market and so far established a higher carbon price than that achieved in phase I, thereby creating greater financial advantage to reducing emissions.

  3.5  The prospects for the third phase of the EU ETS from current proposals appear good. Increased harmonisation of both cap setting and the issuance of free allocations across the EU Member States will improve previous sectoral competitive disadvantages. Increased auctioning, particularly for sectors able to pass on the costs to the consumer (such as electricity generators) will improve the issue of the windfall profits made by some operators in the first phase. In addition, proposals currently under discussion such as the issue of free allowances for sectors, potentially subject to movement of production outside the EU and controls on imports will hopefully impact the present competitive disadvantages between EU Member States and those countries outside of the EU that do not have binding targets.

Extent to which the carbon price will be sufficient to drive low-carbon investment, in particular decarbonisation of energy

  3.6  The uncertainties and variation of the carbon price, caused largely by the lack of certainty of future scheme design, such as phase length in the EU ETS and post 2012 international agreements, has a large impact upon low-carbon investment. Greater certainty in the carbon price has been sought by the extension of phase length in the EU ETS third phase and is being further sought by investigations into the introduction of price caps and price floors into emissions trading schemes in general. Price caps and floors in the carbon market would enable greater predictability of returns made on low-carbon investment and decarbonisation of energy and should therefore be further considered. A more certain carbon price is one means of driving low-carbon investment.

Impacts on and responses by UK firms covered by the EU ETS, Implications of the EU ETS for business competitiveness, and how to address them, Impacts of economic recession on the workings of the EU ETS

3.7  In the first phase, from our direct experience in verifying UK firms within the scheme, the majority took action to improve fuel efficiencies and thereby reduce emissions. A smaller proportion undertook fuel switching to less carbon intensive fuels, including coal mine methane and biofuels. The majority therefore profited from their participation in the scheme as their emissions were less than their free allocation. The implications for the scheme for business competitiveness within the EU from this perspective could therefore be considered to be good. The scheme encourages installations to become more energy efficient, which in turn reduces costs and enhances competitiveness. The implications on business competitiveness in a global market are however addressed in our response to the development of global carbon markets below.

  3.8  The impacts of the downturn in the economy were started to be seen during phase I and more so into phase II. As a result, many installations are reducing their operating week which results in reduced emissions and therefore may reduce costs and/or increase the profitability of scheme participation. Alternatively, for sectors whose production has not yet been hit by the downturn, any increased costs, such as purchasing of extra allowances under a reduced cap, will impact on profitability, which will have more serious implications during an economic recession.

Effects of the expansion of the EU ETS to encompass aviation

  3.9  The effects of the inclusion of aviation within the scheme firstly will increase the scheme from approximately 12,000 installations to approximately 15,000 installations/operators. Many of these aircraft operators will not be based in an EU Member State and hence their inclusion will result in increased global carbon trade. In addition, their inclusion will also result in an increase in trade of Certified Emission Reductions (CER's) from CDM and Emission Reduction Units (ERU's) from JI, as aircraft operators, like other participants in the scheme, are permitted to surrender a proportion of their annual emissions from CER's and ERU's.

  The legalities of the inclusion of aviation within the EU ETS still remain under debate, particularly with regard to the Chicago Convention on International Civil Aviation of 1944. The inclusion of the sector may therefore still be subject to legal challenges. The trade of aviation specific EU allowances has therefore been designed with this in mind and stationary installations are not permitted to surrender allowances issued to the aviation sector, thereby managing a situation where non EU aircraft operators do not participate resulting in an excess of allowances in the market.

4.  DEVELOPMENT OF A GLOBAL CARBON MARKET

Progress of cap and trade schemes in other countries (notably, the United States), and the prospects for, and practicalities of, linking between them

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

  The emergence of cap and trade schemes in other countries such as the US is increasing. The US has a number of schemes of different design and scope and discussions continue regarding the introduction of a federal scheme under the new presidency. Offset schemes are active in both the regulated markets of CDM and JI, and the voluntary markets such as the Voluntary Carbon Standard (VCS) or the Gold Standard. These schemes encourage sustainable development in developing countries and assist in technology transfer from developed countries.

  The linking of any different GHG schemes, whether cap and trade or offset mechanisms is considered necessary to achieve truly global free trade of GHG emissions. This would also address the competitive disadvantages faced by many organisations obliged by emission caps but competing with organisations that are not. This is not something that can be achieved quickly or easily and will require considerable co-ordination. To facilitate the linking of such schemes, comparable mechanisms would be required to ensure that any unit of emissions traded is independently and credibly assured via third party validation and verification to be equally as real, measurable, permanent, additional and conservative as any other. These schemes must also provide equal levels of transparency to ensure units are not double-counted.

March 2009





 
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