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

Memorandum submitted by the Royal Academy of Engineering

  The Royal Academy of Engineering is pleased to submit evidence to the Environmental Audit Committee's inquiry into "The role of international carbon markets in preventing dangerous climate change". This response is based on contributions from the Academy's President and Fellows. The Academy is content for its input into this inquiry to be made public and would be pleased to provide supplementary evidence if required.

We have chosen to submit comments that are not specifically related to topics outlined in the inquiry.

  1.  International carbon markets are an important part of the policy response to climate change. There are currently only a few mandatory schemes in operation, most prominently in Europe and in some American states, but their impact is growing.

  2.  The scientific evidence suggests that limiting global warming to 2°C will require a 50% reduction of today's annual greenhouse gas emissions by 2050.[44]

  3.  All carbon trading and limiting schemes create a market which is essentially artificial; the cost of damage caused by carbon emissions is impossible to calculate therefore the price of carbon is artificial. It is only possible to have an administered value/penalty cost of carbon which will vary depending upon the nature of a particular scheme.

  4.  As carbon markets are built, concerns about industrial competitiveness are emerging. This emerged as one of the main obstacles to last year's negotiations on extending the EU Emissions Trading Scheme. Proposed policy changes often cause fears about competitiveness but such concerns are short-sighted. The development of an international carbon market should alleviate such concerns.

  5.  Currently, relatively few firms have trading partners outside their geographical region. The more exceptions that governments allow to carbon market frameworks, the less those schemes can contribute towards carbon reduction.

  6.  Mitigating climate change, like financial stability, is a public good which only proper regulation can squeeze out from the market. Fully functioning carbon markets should provide businesses with a regulatory incentive to factor carbon costs into their investment decisions. As more businesses become regulated under carbon market frameworks and fewer free permits are given out, markets should become more efficient in establishing a long-term carbon price.

  7.  The benefit of a strengthened carbon market is that regulation conditions the growth of the market to accord with established climate change goals. The recent banking crisis illustrates the importance of striking the right balance between government regulation and unrestricted markets.

March 2009

44   Building a low carbon economy-the UK's contribution to tackling climate change, Committee on Climate Change, December 2008, Back

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