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

Memorandum submitted by the Local Government Information Unit


  1.1 This response to the Environmental Audit Committee Inquiry will attempt to discuss the role of emissions trading in delivering climate change objectives by drawing on the experience of the LGiU's virtual carbon trading schemes. In particular it will address:

    — The overemphasis in current trading schemes on the producers of energy rather than the consumers.— Experience of cap setting and price settling in virtual schemes.

    — Benefits of participation by private and public sector organisations.

    — Experience of piloting auction methodologies.

    — Use of auction or trading to support climate change adaptation.

  1.2 In addition, this submission will explain the virtual trading schemes currently in operation and the learning from them. Finally, the submission will suggest a new model of Community Carbon Trading.


  2.1 The submission will start by explaining the virtual trading schemes that the LGiU has been running for the past year, then attempt to address the specific questions followed by other learning that should be relevant. The LGiU has taken over responsibility for the RSA's Carbon Limited website and is developing it into a platform for community carbon trading, the submission will end by explaining how this new idea could work.

    1. Carbon Trading Councils.

    2. Carbon Trading Yorkshire.

    3. Consumer-focused carbon trading.

    4. Cap setting.

    5. Price evolution.

    6. Benefits of participation in trading schemes.

    7. Pilot auctions.

    8. Supporting climate change adaptation through trading.

    9. Wider lessons of virtual carbon trading.

    10. Community Carbon Trading.


  3.1 There is increasing support to tackle climate change through carbon trading. As well as providing a financial incentive, by putting a price on emitting carbon it is possible for decision makers to better understand the routes to a low-carbon economy. The LGiU has been developing a series of projects that looks at the role of carbon trading in the public and private sector.

3.2  Carbon Trading Councils is designed to build the capacity of organisations that will have to take part in the Carbon Reduction Commitment. However, we have also been working with local authorities that will not have to comply with this legislation but believe it is a useful mechanism to manage carbon budgets within their organisation.

  3.3  Carbon Trading Councils is a simulation of carbon trading to give local authorities the opportunity to learn about what trading involves—the skills and the strategies they might need with the Carbon Reduction Commitment on the horizon.

  3.4  The project started in April 2008 and we have 34 local authorities that have joined and are trading with us in this first year. These headline figures show what local authorities have been doing to date:

    — The total baseline of carbon emissions for the local authorities taking part was 533385.7 tonnes CO2.

    — The initial cap was set 5% lower than this baseline, leaving 506,715 tonnes of carbon allowances on the market.

    — These carbon allowances were distributed to all the local authorities taking part at £12 per tonne, overall the market value was £6,201,050.

    — In August 2008 additional carbon credits were released onto the market through an auction. 10,161 allowances were available and the price fell to £8 per tonne. This changed the overall cap on the market to 3% lower than the original baseline.

    — On the secondary market there have been 175 tonnes of allowances traded and the price has been sticking around £11-12.


  4.1 LGiU is also working with Carbon Action Yorkshire on the first regional carbon trading scheme for the public and private sector. Starting in January 2009 this project mirrors the work done with Carbon Trading Councils. It allows large organisations from across Yorkshire to take part in a market simulation which will prepare them for the government's Carbon Reduction Commitment. There are currently 37 organisations taking part.


  5.1 To date international carbon trading has focussed on energy producers rather than consumers. There is huge potential to develop mandatory cap and trade to other sectors to control demand for consumption.

5.2 Consumer-focused trading reconnects organisations with the benefits and disbenefits of energy consumption. It also helps people to clearly see how they can contribute and helps government to focus on what matters and forget technical and unhelpful debates about double counting. In short, Consumer-focused trading is much more likely to bring about the behaviour change needed to achieve 80% by 2050.


  6.1 In Carbon Trading Councils we decided to set the cap at 5% but with an option to buy an extra 2% later, effectively making the cap 3%. This seemed a reasonable reduction and was broadly in line with a 50% reduction in emissions by 2050. If anything it was on the soft side, but we didn't want to demotivate participants by making the cap too challenging. We received few complaints about the cap from participants. In reality, the cap was too soft. Despite the fact that many of the participants will probably not achieve the required reduction, they have not been stimulated to act by the 3% cap.

6.2 In Carbon Trading Yorkshire we have set the cap at 5% for the whole year. There has been a response from some participants that this is too stiff. It will be interesting to see if that reaction at the start helps stimulate a more proactive approach to carbon management and trading.


  7.1 There have been concerns about price in Carbon Trading Councils. To date carbon trading has been slow; there has been some activity as participants test the water.

7.2 There does not seem to be a lot of negotiation around price, but that could be due to small amount of bids at the moment. There always was a risk that lack of liquidity would hamper the creation of a true market. This appears to be borne out so far and thought needs to be given to mechanisms that increase liquidity especially at stages in the carbon trading cycle where interest is low.


  8.1 The prime benefit cited by participants in the LGiU's virtual trading schemes is that it prepares them for the mandatory Carbon Reduction Commitment. Digging beneath, partners have suggested that trading gives the stimulus to get data right, it puts carbon management into the finance directors sphere, it is a useful communication tool and it helps the council to achieve other objectives such as display energy certificates or Audit Commission targets NI 185 and 186 (though alignment could be much better). Private sector participants have suggested that good performance should make them more efficient and have the PR benefits that help them to win contracts.


  9.1 For both Carbon Trading Councils and Carbon Trading Yorkshire we held an auction of carbon allowances.

9.2 As part of Carbon Trading Councils additional carbon allowances were released onto the market through an auction, 10,161 allowances were available and the price fell to £8 per tonne. This changed the overall cap on the market to 3% lower than the original baseline.

  9.3 The auction provided an opportunity to understand a new way of bidding for more credits. Although the price fell, there was an extremely high demand for credits at this amount and the credits had to be allocated according to a proportion of each participant's bid.

  9.4 Some local authorities used the auction to buy a large number of credits, which they hope to sell on at a future time.

  9.5 In Carbon Trading Yorkshire there was specific training in the use of the marginal abatement cost curve to help develop auction strategies. Most organisations grasped the concept and put together well thought through bidding strategies. Some however did not understand the principles and had to be helped by the team at the LGiU.

  9.6 The resulting price was £12 per tonne and as is almost inevitable with uniform price auctions there was oversubscription. So the shrewder participants overbid and ended up with about the right number of permits.


  10.1 We would support development of an adaptation fund through the Clean Development Mechanism proposed at the Climate Change talks in Poznan.

10.2 Furthermore, this model should be developed for all carbon trading schemes to balance the emphasis on climate change between mitigation and adaptation.

  10.3 The LGiU forms the secretariat for the Local Government Flood Forum. As part of our work two important facts keep returning centre stage. First, there is not enough money to build the infrastructure required to protect people and property from existing flood risk; secondly, the flood risk is increasing as a result of climate change.

  10.4 Carbon trading has neatly delivered a long-term mechanism to tackle climate change mitigation with funding built in. No such mechanism exists for adaptation to climate change, but could if a percentage of the revenue generated by carbon trading was channelled into adaptation schemes.


  11.1 After data quality the big issue is governance. Few local authorities have given enough consideration to how decisions to trade are made and who has responsibility. In councils we recommend that a team should be built that includes the Energy Manager, the Finance Director and an Executive level Councillor.

11.2 Political leadership will become an important consideration as councils begin to realise that the most efficient use of taxpayers' money is to buy permits rather than press on with reduction schemes.


  12.1 The LGiU is taking forward carbon trading as a way for everyone to take control of reducing their carbon emissions. The RSA have been researching models of personal carbon trading through CarbonDAQ and the LGiU has taken over this project to explore models for community carbon trading.

12.2 Community carbon trading is an evolution of the way personal carbon trading would work. Taking the transparency and engagement of a personal trading scheme, it brings the support and knowledge of community groups and local authorities to deliver change. People will be in a supportive network, while also experiencing the peer pressure and incentive to manage their carbon footprint.

  12.3 The project will work by creating a carbon market for groups in a local or regional area. The local market would be managed by a local authority and groups, such as schools, tennis clubs or social enterprises would be able to join this local market. Alternatively an organisation may manage the market and the groups would be different departments or services. These groups would bid for permits on their local carbon market to create their carbon budget. Their carbon budget would cover carbon emissions from their own estate and a number (say 10%) of individual carbon footprints from their membership. The groups would be able to buy and sell carbon allowances on the market to make sure they meet their carbon budget. Each year the cap on the market would reduce to make sure everyone was reducing their carbon emissions. Any rewards from trading would go back to the group and might include an environmental prize or influencing climate change projects in their area.

  12.4 There will be a number of pilot community carbon trading projects that should test the potential of community trading to incentivise carbon savings in a fair and supportive way.

March 2009

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