Memorandum submitted by the Shell UK
SUMMARY
— Carbon markets, such as the EU ETS, are
efficient mechanisms for incentivising CO2 reductions in the power
and large industrial sectors.— Emissions trading schemes
deliver an environmental outcome at lowest cost to the economy;
the cap ensures that overall level of CO2 is restricted while
trading allows the market to find the least-cost pathway to delivering
the cap.
THE ENERGY
CHALLENGE
1. Last year, Shell published its Energy
Scenarios which looked at two possible futures for energy out
to 2050. In the first scenario—called Scramble—policy
makers focus on security of supply and not enough on energy efficiency
until supplies are tight nor on climate policy until there are
major climate shocks. In the second scenario—Blueprints—growing
local action along with the widespread introduction of carbon
pricing leads to the development of clean energy technologies
and energy efficiency measures. Blueprints leads to lower-carbon
emissions than Scramble. Shell's view is that the Blueprints approach
provides a better framework for moving towards a sustainable future.
Copies of the "Shell energy scenarios to 2050" booklet
accompany this submission.
2. To meet the energy challenge and address climate
change a range of policies will be required, including:
— cap-and-trade systems like the EU ETS
building to a global carbon market;
— clear incentives for carbon dioxide capture
and storage (CCS);
— targets for renewable energies;
— measured targeted at all sections of
the transport sector, eg vehicle standards; consumer education
and incentives for fuels based on their ability to deliver reductions
in CO2 measured on a well to wheels basis (WTW); and,
— robust energy efficiency standards for
buildings and appliances.
3. The remainder of this submission focuses
on the role that carbon markets should play in addressing climate
change. Carbon markets are a key tool to address climate change,
along with other the other measures outlined above.
EMISSIONS TRADING
OR A
CARBON TAX
4. The essential element of an emissions
trading scheme is the cap which limits the overall amount of CO2
which can be emitted by the sectors covered by the scheme. A cap-and-trade
scheme is designed to deliver an environmental outcome, in that
the cap must be met. This is certainty that is critical for the
environment. Whilst a carbon tax delivers some level of fiscal
certainty in the short term, it does not necessarily deliver any
particular environmental outcome. Under a carbon tax, emissions
could fall, but equally they may continue to rise requiring an
adjustment to the tax. It may take some years for policy makers
to establish the level of tax necessary to deliver a given emissions
reduction pathway. A tax does not offer long-term fiscal certainty,
in that it may have to be varied substantially over time to meet
the desired emissions pathway. It will only deliver price certainty
in the short term.
5. Recently, the EU allowance price has decreased
in line with reduction in prices of other commodities. This change
in price reflects the marginal cost of CO2 reductions in today's
market conditions. If a carbon tax had been introduced, this adjustment
would not have been automatic and it is possible that there would
have been calls to reduce or remove the tax in light of economic
circumstances. The relatively low price does not mean that the
EU ETS is not effective: the cap will be delivered at the lowest
cost to the economy which is particularly critical during a recession.
6. A cap-and-trade scheme delivers its environmental
objective at lowest cost to the economy. By combining trading
with a price for emitting CO2, the approach seeks out the most
attractive reduction projects within the market, delivering a
lowest cost outcome. Emissions trading as applied to the problem
of sulphur emissions from power stations in the United States
has led to the overall cost of the meeting this environmental
goal being much lower than expected.
7. National or regional trading systems
can be linked with other such systems, delivering over time a
global carbon market. Developing countries initially be connected
through project based crediting, such as the Clean Development
Mechanism (CDM). Certified Emission Reduction (CER) unit available
under the CDM which some countries use to meet their own Kyoto
targets and are traded in the EU ETS. The CERs effectively links
mitigation opportunities in the EU with those in other developed
countries. The CER is acting as a surrogate currency, providing
a bridge between different national approaches. As new emissions
trading schemes are developed, it will be important that they
use the same project mechanism to enhance the bridging role of
the CDM. For further detail on this, and how trading systems can
be linked, please see the World Business Council on Sustainable
Development's "Establishing a Global Carbon Market"
leaflet which we have attached to this submission.
ALLOCATION AND
INCENTIVES TO
INVEST IN
LOW-CARBON
TECHNOLOGIES
8. A trading system offers both compliance
and policy flexibility that is important for business. Compliance
flexibility is delivered through the ability to "make or
buy", ie to implement a project and make reductions (including
selling allowances), or to buy allowances from other the market.
9. Policy flexibility comes through the mechanism
for distribution of allowances. For example, in Phase III of the
EU Emissions Trading System some allowances will be distributed
for free to deal with competitiveness concerns. This should be
seen as an interim measure until a global climate deal is implemented
and countries outside the EU start to have carbon prices established
for their industries.
10. Despite this, the incentive to reduce
emissions remains in that the allowances have a value. Whether
or not an installation needs to buy all of its allowances in the
market or gets some of them for free does not affect the incentive
to reduce emissions. The decision on whether to reduce emissions
will be based on the marginal cost of an allowances; ie whether
the cost of investment in reducing carbon results is less than
either the cost of buying extra allowances or the value of selling
allowances the installation already holds.
11. To date, the EU ETS has delivered reductions
in emissions as the cap has been met. Recent analysis by New Carbon
Finance shows that emissions in the EU ETS sectors were down 3%
overall in 2008. Even taking into account the recent economic
downturn, its analysis demonstrates that the most significant
reductions were made by the electricity generators switching to
nuclear, renewables etc. While overall electricity generation
was up, the total amount of CO2 emitted reduced. So far, many
of the emissions reductions achieved by the EU ETS have been made
in the power sectors. It should be noted that investment to make
further reductions can only be made with greater long-term certainty
about the emissions trading scheme. The agreement to the Directive
for Phase III in December now provides that certainty as the cap
is known to 2020 and mechanisms are in place to ensure that the
EU ETS continues beyond 2020.
12. The Phase III cap will be lower than
that in place today and will reduce by 1.74% per annum to meet
a 20% reduction by 2020 (or a reduction of approximately 3.3%
in the event of a global agreement to meet 30% reduction target).
The decreasing cap means that reductions will need to be made
amongst the sectors covered by the EU ETS. It is not the case
that installations will be able to carry on much as normal; the
reductions in allowances will necessitate that at least some make
actual reductions; the trading mechanism helps to find which sector
or installation can make these reductions at least cost to the
economy.
13. The CDM provides a mechanism for developed
countries to finance low-carbon technologies in developing countries.
While it is recognised that there have been issues with the CDM
in its early phases, this mechanism is delivering real reductions
versus what would have happened and improvements in its operations
are being made. It is not only cash that flows through the CDM,
the projects also transfer technology, can improve local employment,
and improve local environmental conditions. Most important of
all is the fact that all CDM and JI project information is completely
transparent and in the public domain. Not only the project design
documents but all third party validation and verification reports
are open for scrutiny. In addition, as discussed above, the CDM
also provides a mechanism that connects different emissions trading
systems, in advance of more formal linking mechanisms being put
in place.
LOW-CARBON
TECHNOLOGY INVESTMENT
14. The carbon price delivered through emissions
trading provides incentives for companies to invest in low-carbon
technologies that are commercially available and deployed in the
market. However many important technologies, such as Carbon Capture
and Storage (CCS), are not yet commercially viable and will need
further support.
15. This figure illustrates a typical technology
pathway consisting of three phases, Discover & Develop, Demonstrate
and Deploy. The three phases are required to allow technology
to progress down the cost curve. The long-term deployment of low-CO2
technologies is driven by the CO2 price in the ETS (yellow band).
But for the important early stages, the cost of new technologies
is typically out of reach of the CO2 market (pink band). This
means that additional incentive must be found to augment the CO2
price and allow early pilot work then large scale demonstration
to proceed. Shell supports the approach of the EU Parliament which
has created a fund of 300 million bonus allowances for CCS (and
novel renewable technologies) demonstration projects, to help
bridge the cost during the demonstration phase of CCS. Once industry
learns large scale demonstration projects, it is expected that
the costs of CCS will decrease to the point that its deployment
can be supported by the carbon price.
CONCLUSION
16. Shell views cap-and-trade schemes such
as the EU ETS, as a key tool to delivering targets to reduce CO2.
The establishment of a cap ensures that environmental goals are
met while trading ensures that these reductions can be done at
least cost to the economy. The agreement to the Phase III framework
provides the long-term certainty required to drive investment
in established low-carbon technologies, with future support required
to demonstrate new technologies so that they can be deployed later
once their cost is covered by the carbon price.
March 2009
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