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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