Memorandum submitted by the Local Government
Information Unit
1. INTRODUCTION
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:
— 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. STRUCTURE
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.
3. Consumer-focused carbon trading.
6. Benefits of participation in trading schemes.
8. Supporting climate change adaptation through
trading.
9. Wider lessons of virtual carbon trading.
10. Community Carbon Trading.
3. CARBON TRADING
COUNCILS
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. CARBON TRADING
YORKSHIRE
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. CONSUMER-FOCUSED
CARBON TRADING
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. CAP SETTING
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. PRICE EVOLUTION
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. BENEFITS OF
PARTICIPATION IN
TRADING SCHEMES
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. PILOT AUCTIONS
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. SUPPORTING
CLIMATE CHANGE
ADAPTATION THROUGH
TRADING
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. WIDER LESSONS
THROUGH TRADING
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. COMMUNITY
CARBON TRADING
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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