Examination of Witnesses (Questions 1-27)
MS BRYONY
WORTHINGTON, MR
JEREMY BURKE,
DR KEITH
ALLOTT AND
MS KIRSTY
CLOUGH
31 MARCH 2009
Q1 Chairman: Good morning and welcome.
Sorry we are running a few minutes late. I am also sorry that
we are quite tight for time today so we are going to try and get
through by 1 o'clock. We will try and keep our questions concise
and how far we get will then depend on how concise you can be
with the answers. WWF are obviously very old friends of this Committee
and we have seen you before, but Sandbag is a relatively new organisation,
so could I just ask you to kick off by saying what Sandbag is
trying to do and what progress and impact you think you have had
so far.
Ms Worthington: Thank you. We
were set up to focus on trying to create a link between civil
society and emissions trading because we felt that emissions trading
was a really central policy but very little understood by the
general public. Our aim is to educate people about emissions trading,
to lobby for improvements around emissions trading, and to create
links between civil society and the market so that people can
use the market to create more impetus for change on climate change.
We were set up in September, we are grant-funded by a number of
leading environmental foundations, and we are starting to recruit
staff and buildings, so we are a small organisation but growing.
Q2 Chairman: That is certainly a
very important but quite challenging task, I guess, and I wish
you every success with that. Looking now at the EU ETS, and in
particular at the proposed cap for Phase III, do you think that
is compatible with what we know we have to do by 2020? The Government
is quite ambitious for that and it has been reinforced by the
Committee on Climate Change as well. Looking at what Phase III
might imply, in particular if we are allowed to use our full quota
of project credits, do you think that it is going to be sufficiently
ambitious?
Ms Worthington: No, in a word.
Obviously there are many things that have changed since the proposals
that the Commission put forward. The target of a 20% reduction
by 2020 is inadequate. If you look at the recent suggestions from
the IPCC that developed countries should be reducing by between
25 and 40%, we are not even at the bottom end of that scale with
that target, and then you consider that Europe is now going to
find it easier to meet its targets thanks to the current economic
climate, and we have this influx of cheap permits from overseas
projects, the total effect of the scheme is going to be almost
negligible, and for a so-called central policy it should have
a lot more ambition within it and the targets should be significantly
improved post a Copenhagen deal being reached.
Dr Allott: I think we would agree
with that. I would highlight particularly the use of offset credits
not just in the ETS but across the economy as a whole. When you
allow for the projected influx of credits, Europe's own emissions
from the EU27 may fall by as little as 5-6% from current levels
by 2020, which does not exactly look like strong climate leadership
from where we are sitting.
Ms Clough: At the same time you
have the power sector which it is clearly recognised needs to
be almost decarbonised by 2030, it was acknowledged in the Climate
Change Committee Report, so just to re-emphasise what has been
said, the EU ETS current targets are nowhere near significant
enough to have an impact on investment decisions that need to
be made.
Chairman: If the EU commits to a 30%
target at Copenhagen, if other countries do as well, what effect
will that have on Phase III? Will that mean that we will have
to have a much tougher cap in Phase III? If that is the only way
that the ETS can be made compatible with this more ambitious target,
how can Britain influence that?
Ms Worthington: It is absolutely
clear that a deal at Copenhagen should then lead to a tightening
of the EU cap. We would argue that, irrespective of what happens
at Copenhagen, the EU must tighten its cap and that the UK should
be pushing for that. The way that the Directive is now set up,
there was a deal reached at the end of December last year and
it will be opened up again post-Copenhagen. I think it is important
that all Member States send the message that for our own EU purposes
and to decarbonise our economy and to help support our own adaptation
to industrial policy and decarbonisation of Europe's industries,
we need tighter caps. If a deal is not reached and we have another
period of time with a hiatus, Europe should nevertheless tighten
those caps because otherwise the scheme ceases to have a purpose.
Ms Clough: It is also in the UK's
interest to be seeking to tighten the caps. Given that we have
an 80% cut in place in the Climate Change Act by 2050, we should
be seeking much greater cuts by 2020 to make sure that Europe
is in line with what we want to do in the UK.
Q3 Chairman: Phase III runs for a
longer period than Phases I and II, if the science goes on getting
more and more worrying, is there also scope for a mid-term tightening
of the cap during Phase III to reflect what will then be the latest
scientific evidence?
Ms Worthington: There is an opportunity
for reviewing the annual rate of reduction within five years,
so there is a built-in mechanism for tightening and absolutely,
yes, there should be an expectation that caps are only ever going
to tighten in those review periods.
Ms Clough: Combined with that,
clearly, the access to offsets acts to inflate the cap anyway,
so we should be looking to dramatically reduce our access to offsets
now really. There is a provision—this does not apply to
the EU ETS—within the Climate Change Act which allows you
to tighten the budget within a budget period if something significant
happens, so you could also argue that the same provision should
be made within the EU ETS Directive.
Dr Allott: Perhaps I could just
say something about the overall ambition. I think this needs to
be viewed in the context of a global carbon budget. We are now
used to the idea of a UK carbon budget, thanks to the Climate
Change Act, but we need to be looking at a global carbon budget
and how it is apportioned. One of the difficulties that we have
now got structurally is that we are used to a concept where we
have a cap for developed countries along with an offset mechanism
which allows emission reductions in developing countries to count
towards that developed country cap. Even if you believe that the
offset mechanism is 100% perfect, which we do not think it is,
it is a zero sum game. Beyond 2012 we need to be moving to a world
where we are having very aggressive emissions reductions from
developed countries and also very substantial decarbonisanation
in developing countries. In that context, the whole idea that
an offset mechanism is somehow helping developing countries is
not the case. The offset mechanism is a cheap way of us meeting
our developed country targets. We need also to be finding ways
of helping developing countries decarbonise in addition to the
offset mechanism. The current way that the policy has been constructed
confuses the debate.
Q4 Dr Turner: As a mechanism for
reducing CO2 emissions, so far the ETS does not seem to have had
an impressive track record. There does not seem to be any very
clear evidence that it has reduced carbon dioxide emissions to
any extent whatsoever. Nonetheless, governments, including our
own, have set great store by this process as one of the principal
instruments of achieving our carbon reduction targets. Yet it
seems to have some very perverse elements in its mechanisms because
if we actually succeed in beginning to decarbonise our economy
by increased energy efficiency and greater deployment of renewable
energy, we leave more space under the cap, as it exists, for polluting
industries to take up those carbon credits. Do you think that
this is a fatal flaw in the mechanism and can you see any way
round it?
Mr Burke: I think the comments
you make there are right in terms of the cap and the floor. It
is one that is not being much debated in the EU. Germany has started
to take notice and Australia is having a hot debate on that at
the moment. There are mechanisms around that but before we get
to that I would like to briefly outline that where you talk about
effort in sectoral changes allowing carbon emissions in other
sectors, to an extent, that is not a bad thing if you are going
to get higher and better use (and that is what the market can
lead you to) but if individuals and local governments and national
governments want to take action over and above the caps, or if
they deem that the Copenhagen targets are not aggressive enough,
then their efforts will also not lead to any reduction, so individuals
engaging in energy efficiency in the UK can simply be leading
to increased carbon offshore within the EU. In terms of the mechanisms
that we have investigated as to how you could alleviate the issue,
it is the terminology of cap and slice, so the cap is deemed to
be a worst-case target and then you use the ability to slice off
the cap through structural mechanisms and set aside permits. This
is something that is already being used in the US RGGI scheme,
so within the states they set aside, depending on the different
legislation, a certain number of permits capped at 1 or 2% where
consumers or businesses who purchase green power have additional
abatement opportunities there and they cancel those caps from
the allocations. We can see steps where you could use that cap
and slice methodology to incentivise civil society as well as
business and local government to engage in actions that are not
mandatory, and through that set aside that would be reducing the
emissions, if you structure them properly, by reducing credits
in the market and AAUs so you tighten the overall EU and UK cut.
Q5 Dr Turner: But at the moment as
it stands the ETS does not have any such provisions?
Mr Burke: It does not.
Q6 Dr Turner: Can you see any evidence
either on the part of the Commission or European governments to
appreciate that problem and to seek to introduce such mechanisms
at an early stage of the ETS or not? If not, how do you suggest
we start to go about it because without it, it seems to me, at
any rate, the ETS is never going to deliver anything except failure?
Ms Worthington: I would just say
more generally that a mechanism like this is important but it
is only important if your caps are set at the point where it is
marginal as to whether they are really enabling tough action on
climate change. The tighter the caps the less likely it is that
you are disempowering civil society because then voluntary action
helps to reduce the price. It really is all about the targets
and where they are set. There is a lot of evidence that says that
in setting up a scheme like this you should err on the side of
precaution towards the environment, ie you go for quite tough
caps initially because you know that the likelihood is there is
a lot of cheap abatement out there, that is yet to be found. The
fundamental failure of the ETS is that it has taken too cautious
an approach to the setting of the caps. That is because of the
sectors to which it has been applied and the fact that we have
had a very vociferous and vocal lobby from heavy industry in Europe
that has basically watered down the effect of the whole cap. If
it had been on power alone you would see that the caps were very
tight. There is some evidence that there has been some marginal
fuel switching within the power sector because many of the big
players are substantially short in their allocations. You see
in Germany the switch between brown and black coal, which is probably
the cheapest form of abatement that is possible in Europe. Until
we get through that, we are not going to see investment in any
more expensive alternatives, so it is all about where the cap
is set, and it has been set too leniently.
Q7 Dr Turner: The caps are simply
not challenging and they seem to bear no relation certainly to
our own carbon budgets or even to the EU's carbon reduction targets.
This link somehow has to be made, so would you agree we need to
start now to tighten not only the Phase III caps but we need to
do something about the existing caps on an interim basis. Can
you detect any signs of such urgency within the EU at all?
Ms Clough: Not at the moment,
but I think the framing of this type of approach is extremely
problematic because it takes the ETS as an end in itself rather
than a means to an end and it also takes quite a narrow view of
how EU climate policy will hopefully develop in the next few years.
So, placing it within context, the carbon market is perhaps one
part of the solution but there are other mechanisms like the Renewable
Energy Obligation we now have. There are debates coming forward
on emissions performance standards for the power sector which
are gaining weight within Europe, particularly within the European
Parliament, and also within the UK potentially. So whilst it is
a very kind of specific argument to say if we make additional
reductions here that just leaves Germany or other countries allowing
them to increase their pollution further, we have to take a stand
at some point. Someone has to take the lead in this. Why should
the UK not take the lead? The UK has a Climate Change Act with
targets set out to 2050. Surely we should be seen to be taking
a lead in putting in place national policies and measures that
really start driving down emissions, and that will hopefully lead
on and influence other European states to follow suit.
Q8 Dr Turner: Given the unreliability
of the carbon price resulting from the operation of the ETS so
there is only a very, very weak investment incentive being created
by that, do you think that perhaps rather than going through the
very complicated and difficult process of trying to change the
structure and mechanism of the ETS to tighten caps on a short-term
basis, it might be simpler and more effective to introduce some
floor mechanism for the carbon to create a reliable carbon price
or, put in other words, a carbon tax, to underpin effectively
the ETS to make sure that there is in fact effective emissions
reduction?
Dr Allott: I think we need to
look first of all at the level of the caps, that is a fundamental
issue, but then also the fact is that there are other policies
and measures which already exist and many other policies and measures
which we need to be introducing to support the carbon price, as
Adair Turner suggested. Renewables policy is what is really driving
investment around Europe. The Renewables Directive and policies
on energy efficiency are all things that are happening anyhow,
and we believe that a policy such as emissions performance standards
would also drive investment in clean power, over and above whatever
the carbon price happens to be in the ETS. A more ambitious cap
could help as well but there are also issues to do with the auction
which Kirsty could perhaps raise.
Ms Clough: I think there is already
a price floor set in the UK auctions. The UK had its second auction
last week. I do not know what that price floor is or whether it
is anywhere near sufficient. The risk of setting a price floor
across the whole market is that you re-open the debate on price
ceilings, which happened in the negotiations on the energy package
last year. It is a judgment as to whether you want to do that
and who would win and if you did have a price floor whether it
would be set sufficiently high enough anyway. Clearly there will
be political negotiations to try and keep it as low as possible.
Q9 Chairman: Is not the central question
though to get people to face up to the fact that the only way
that we are going to have a serious reduction in emissions is
by making sure that energy is much more expensive? High-carbon
energy has got to be priced out of the market. Until people face
up to that fact, whatever mechanisms you use, whether it is EU
trading or worldwide trading or carbon taxes, if half the effort
is devoted to how to reduce the impact that has then we are barking
up the wrong tree. Should you not be saying very clearly that
the future is really expensive energy?
Ms Worthington: I do not know
that is necessarily true because the only thing we have seen so
far is that it is really quite easy to hit targets, and the problem
has been that there are so many sources of cheap abatement that
it is hard to hold a price that is positive. I do not think necessarily
NGOs have a very strong view about what the price should be except
that the targets should be tough and that we should let the markets
tell us what the price is of getting to those targets. In a sense,
yes, that might well send quite a strong price signal, but it
might be that we do all sorts of other things in terms of regulation
that choice edit which mean that prices do not ever need to spike
in the way that people are anticipating and there is enough abatement
and enough will, to try and solve this problem that we will be
able to keep a moderate price. I think it is determined by the
ambition that we need to set.
Q10 Chairman: If you want to incentivise
energy efficiency, it is quite clear that historically the only
effective way of doing that is by increasing higher prices. There
has been no period where people have said, "Oh gosh, yes,
let's invest in energy efficiency," without a price signal.
That is number one. Number two: if there were lots of cheap sources
of low-carbon electricity we would be using them now but there
are not, they are all more expensive than burning coal. I think
there is something dishonest about saying we will have this mechanism
and that mechanism to solve the problem. Yes, of course you need
much tighter caps but the consequence of much tighter caps is
much higher prices.
Dr Allott: If you think that the
carbon price of the ETS is going to drive forward energy efficiency
across the economy, then I do not think that is the most appropriate
mechanism to do that. There are much smarter packages of measures,
not just a price signal, which you need to discover all the huge
energy efficiency options that are out there. In terms of energy
bills rising, if you talk about the price per unit rising, that
is one question, and perhaps the price per unit will have to rise
because there will be transitional costs of moving to a lower-carbon
system for renewables, and all the emerging technologies will
be more expensive, but if you have a smart package of policies
also designed to reduce demand and improve efficiency then the
overall impact on bills, which is what matters, will be less.
There will be transitional costs, everybody knows that, but those
costs are fully justified compared to the costs of doing nothing.
Q11 Joan Walley: I think the common
thread that runs through both of your evidence contributions to
us is that there should be a greater political will to bring about
tighter and more challenging targets. That is very easily said,
but what actually needs to happen for that political will to be
there and for that political will to give replies to some of the
stronger vested interests that are making the heavy lobbying to
which you have just referred?
Ms Worthington: I think a number
of things need to happen. Some of them are happening. One is that
emissions trading needs to be better understood and better appreciated.
Q12 Joan Walley: By whom?
Ms Worthington: By the public,
and in the last few months we have seen (because of the effect
of the Heathrow decision and Kingsnorth) that the lobby is now
much more aware of the impact that emissions trading is having
on policy, so people are joining the dots and realising that individual
decisions that are being made that are deemed to be highly political
are being linked to emissions trading, and that has not happened
before. People are starting to realise that emissions trading
is an important policy. The more we can get people's attention
focused on this policy so that they can start demanding tighter
caps and improvements, the better. There is another point which
is that we need more scrutiny. Opposition parties need to be really
getting into the detail. This Committee has done fabulous work
in making this a policy that is scrutinised, but we are going
to see a big release of data tomorrow from the European Union.
That data will show how emissions trading is working on the ground.
We want the numbers to be better understood and people to see
what has happened and what has gone wrong in the past to avoid
future problems and make the decisions easier. The final thing
is you have to disaggregate the very vocal and obviously defensive
lobby in Brussels, which is centred around the industrial industries,
from the broader industrial lobby, which is representing renewables,
energy efficiency and clean technologies, who do want tighter
caps and are employers and increasingly important employers in
Europe, and listen to their voices and try to set that off against
the inevitable defensive positions of the incumbents within the
heavy industry sectors.
Q13 Joan Walley: Is there not a difference
between what governments might say and what politicians might
say here as to the difference between that and that actually being
understood by civil society out there? How do you actually get
this message across?
Ms Clough: I think there is increasing
concern from civil society in tackling climate change. Whether
you can directly relate that to emissions trading schemes, I am
not sure, but there will be a lot of marches this week. There
was a march on Saturday clearly linking jobs with tackling climate
change, to incentivise new green, clean jobs for the future. WWF
held an event on Saturday night, Earth Hour, which was a global
event, where the lights of Big Ben and the Wheel were turned off.
We had participation from about 4,000 cities around the world
in 88 countries. There is action. You can say these are symbolic
actions and are they going to be followed up, but I think they
show a growing concern that we want governments to take action
and take responsibility.
Mr Burke: Linking some of the
comments we have had about emissions trading to policy, one of
the things over the last few months is there has been discussion
around Heathrow and we are going to have emissions trading so
we are going to do more in one sector which means that we can
build Heathrow. The general view in society is hang on, that is
very hypocritical, and just because you have got emissions trading
does not mean that all your other policies should fall away. In
actual fact, our view is that all the other policies should be
analysed in the context of reducing emissions and the impact that
that has under an ETS. If the Government were to go for a great
new deal and put a lot of money into energy efficiency because
of the cap on energy consumption, you would not actually reduce
emissions within the EU. It would just be a funding exercise from
the taxpayer to other high-polluting industries, which may be
cement or other capped sectors. The Australian example is that
they are spending billions of dollars on insulation. The Prime
Minister has said that that will reduce Australia's emissions,
but because energy is a capped sector in Australia it will not
reduce emissions under an ETS. As we have these policy discussions
and we talk about scrappage charges for cars, we need to bring
emissions trading and the perverse impacts that it can have into
the debate. Society will start to demand that now, as Bryony said,
as they become more aware of the issues.
Dr Allott: One thing I would say
is that I think we are seeing an interesting debate in the US
emerging now about the role of cap-and-trade legislation versus
other mechanisms. We have seen proposals coming from the US CAP
initiative for instance, which is a coalition of NGOs and large
corporations with recommendations to the Obama Administration.
What is interesting about that is they talk about cap-and-trade
but also having regulatory standards for power plants plus a technology
development and deployment mechanism. In a way they are overtaking
our conceptual framework here. We are hiding behind the ETS too
much in Europe to stop real action on the ground. Real action
on the ground matters.
Q14 Joan Walley: When you say real
action on the ground, what do you mean?
Dr Allott: Real action on the
ground does matter; decisions like Kingsnorth do matter; decarbonising
our power sector does matter. You cannot just hide behind an emissions
cap. The actual investment strategy matters in terms of where
we are taking the country and Europe in terms of a low-carbon
pathway. The Californian delegation which was in London the other
week had a very interesting way of putting it. They expressed
it in terms of fridges where nobody objects to the idea of having
a basic standard of performance that you require with all new
fridges, in terms of efficiency and in terms of safety, before
you are allowed to put them on the market. Once they are on the
market then there may be a role for market instruments to try
and incentivise the best, but the danger is that we currently
have a system which does not allow you to have a basic standard.
Ms Worthington: Can I say a word
in defence of trading because it is something that is incredibly
empowering if you use it correctly because it is a regulated cap.
It is not like a tax where you have to try to estimate the level
of cost that you need to put in to society and then hope that
the price signals deliver change. There is a regulated cap that
is enforceable and in that sense the permits that are created
are a finite number. If you find mechanisms for removing them
from that cap then you are absolutely making an additional impact
in terms of buying the cap down. The Government has been up until
now only half engaging with trading. It has been using it as a
convenient fig leaf to allow decisions to be taken that it would
like to see go ahead, but it is not properly setting about understanding
the impact of trading and how they can use it to empower people
to make a difference. I think the set aside idea of putting permits
to one side for civil society to claim so that we can have a role
in buying that cap down is a really important principle. It is
amazing that it has already been dealt with and implemented in
the States in the RGGI system. Australia is actively debating
it. There has not a word been spoken about it in the European
Union. We have got to change that. I think the other practical
policy that we are putting forward that would perhaps engage people
in trading is creating tax incentives for individuals and companies
who want to take action by taking permits out of the system, so
very clear, easily audited, additional action anyone can take,
you simply take the permits and you destroy them. There is no
incentive at all for anyone to do this. There is a tragedy of
the commons because why would you do it when nobody else is. The
Government could intervene and create incentives for people to
do that and that will engage people in a much broader sense with
trading in a more positive sense.
Q15 Joan Walley: There has got to
be that political will and engagement by governments in order
to be able to move on this. I just wonder how much of a difference
you think that the creation of a new Department of Energy and
Climate Change is making to the political will to tackle climate
change?
Dr Allott: I think the jury is
still out. There have been some positive shifts. It is hard to
disentangle how much of the shift is to do with the shifting of
personnel at the top of the Department versus the creation of
a new Department. I think it is fair to say that we have some
of the same fundamental mind-set problems that have held back
progress on energy policy in particular in the former DTI and
BERR and we have some of those problems still now within DECC.
We will have to wait and see how the dice land. We are now at
a very interesting stage in the debate. Over the past two months
we have had a new department created. We have had some positive
signals from Ed Miliband in terms of shifting the balance of the
debate about driving forward government regulation. We have had
the Turner Report, the Climate Change Committee Report, which
begins to talks very clearly about the need for decarbonising
the power sector in particular. Meanwhile, the view of market
mechanisms in the outside world has had a bit of an interesting
time generally recently, over and above carbon trading. I think
the whole debate is now very live but whether DECC is going to
come down on the right side of the debate, we will have to wait
and see.
Q16 Joan Walley: How much do you
think that the different policy issues are between different departments,
so for example the analysis that goes on with the Treasury in
terms of the Green Book, how much of that is linked to the planning
considerations that come under the new agency that is going to
be established and how does that all fit in with DECC, in terms
of fitting all of that to get the political understanding about
these decisions when it comes to reducing emissions?
Ms Worthington: In a sense that
is the purpose of having a carbon budget, that suddenly the whole
economy has a price attached to every tonne that is emitted, and
it ought to be a centrally organising idea within government to
which each department adheres. I believe that it is true that
in terms of thinking about how they are going to meet their carbon
budgets, each department will have a strategy that acknowledges
that there is a finite amount of emissions that can come from
the sector that it looks after, so this will be a radical shift.
Until recently, transport policy was about encouraging and facilitating
transport, not managing a carbon budget, so this will be quite
a big step forward. It is interesting, I do not know yet where
responsibility lies within government for the pulling together
of the carbon budget and measuring out who has done what and the
accounting side of it. Is it the Treasury? It would be good if
it were. Traditionally, they have tried to focus on pure fiscal
systems but in this sense it would be good to have their analytical
brains applied to this problem. Every tonne now has a price attached
and therefore Treasury should be interested. It needs some co-ordination
within government. I do not know if it sits within DECC or within
the Treasury but we need to know who is accountable and how it
is being organised.
Dr Allott: There is an important
point to understand as well about the carbon budgets. One concern
we have, and I know that we flagged it up in our written evidence,
is that it is not clear how the Government intends to apply the
carbon budgets after 2012. At the moment in the current first
carbon budget we have a UK cap under the EU ETS because we had
a National Allocation Plan. After 2012 we will no longer have
a UK cap because the cap will be set centrally. The Government's
recent consultation on how it is going to account in future for
carbon budgets failed to answer that question.
Q17 Joan Walley: On that point, should
the UK Government or European Commission intervene on Phase II
to tighten the cap and raise the carbon price?
Dr Allott: Our view is that the
carbon budgets need to be expressed in terms of the UK's actual
emissions, with an envelope around those emissions to allow for
some flexibility with trading rather than setting a cap. The problem
with having a cap is that it means the UK carbon budgets may be
much less of a powerful tool than we thought, for obvious reasons,
because once you have a cap you could have complete decarbonisation
of our industry and you would not be accounting the benefits under
our carbon budgets. Equally, if you build lots of Kingsnorths
that would still appear as the same number. We have not got an
accounting process for doing it after 2012. Our view is that the
Climate Change Act needs to be focusing on the real emissions
from the UK with an envelope for trading.
Q18 Chairman: Is not the central
problem the fact that the caps are still much too loose and the
danger is that trading, which I agree with Bryony has the advantage
that it sets an absolute limit and therefore, unlike the carbon
tax where you do know what the effect is, we do what the limit
is and the limits on it are so hopelessly loose that we are in
danger of getting the concept, which is rather a good concept
in terms of mechanisms to address climate change, a bad name because
it is so patently ineffective?
Ms Worthington: I could not agree
more. In response to the comment is it just too complicated to
tighten the cap; not at all, we have a perfect opportunity. The
Directive itself is being re-opened post-Copenhagen. Let us hope
that we get a deal at Copenhagen but even if we do not, let us
make sure that that re-opening tightens the cap. The effect of
that will be to push prices up in this phase because if there
is an expectation of shortage in the next phase that will affect
the price in this phase. They are linked by banking, so we have
got the prize and we can go for it. It is going to be decided
next year. Unlike the round of negotiations we just had in December,
let us hope that civil society is engaged and calling for tighter
caps, not simply being excluded from the debate. We have got to
hope that this year the focus on Copenhagen delivers us the right
political conditions going into the next discussion where we can
significantly tighten that cap, and not just in terms of the overall
number but in terms of the number of offsets that come in. I think
we have got everything to play for. It will require civil society
and commentators getting involved in the numbers and calling for
change.
Q19 Chairman: So if there is one
single thing you would like this Committee to say it would be
that we need a much tighter cap and much greater control over
the use of credits?
Ms Worthington: Yes, Phase III,
and that Phase III tightening will have an impact on this phase.
Q20 Mr Chaytor: Could I ask Keith
about the price of carbon. Recently it has dropped to about €10.
What should the price of carbon be if it is going to work effectively
to generate new renewables and, specifically, what should it be
if nuclear is going to become economically viable?
Dr Allott: I do not think we have
a particular view on what the right price of carbon needs to be.
Our concern is having a package of measures which will drive forward
the outcome that we need to see if we are going to avoid dangerous
climate change. The whole point about the carbon market, if it
is working properly, if you believe the theory of the carbon market,
is that the price will go to the level that is necessary. Our
view is that you need to have a whole package of supporting policies
and measures to deliver the transformation in our energy systems.
Let us face it, we are talking about the need for an urgent transformation
in the way that we run our economies. That cannot be done purely
by a price signal alone. You could take an economic view that
there is an implicit price in regulation and other measures, and
those all need to be brought together. We do not have a particular
view as to what the right price needs to be. I can tell you that
the price it is at the moment is not going to deliver that transformation.
Q21 Mr Chaytor: What is your understanding
of the assumption by wind companies or nuclear companies as to
the price they need for wind and nuclear specifically to be economically
viable, because that surely is the key issue, is it not?
Dr Allott: I have no understanding
of what nuclear power companies are up to and we do not support
nuclear power. In terms of wind and other renewables, wind and
renewables are being driven forward not by the emissions trading
scheme, or by other policies but by the Renewables Obligation.
It is not just us saying this. There was a recent presentation
from a guy from Deutsche Bank saying that the only thing that
is driving real clean investment in Europe is the renewables target.
It is not being driven by the carbon price. I think it is really
important to distinguish that. The real driver for investment
is the renewables legislation, not the carbon price. There is
an implicit carbon price within that legislation but it is not
set by the ETS.
Q22 Mr Chaytor: Secondly, could I
ask Bryony about emissions standards for power stations. How important
do you think this is in the package of measures that we need and
what is the attitude of the major power companies towards this,
from your experience?
Ms Worthington: This is one of
the suites of packages of policies that you need underneath the
cap. I think Keith's analogy of fridges makes it easy to understand.
Essentially, there are some things that are just too risky to
allow to happen. I think unabated coal falls squarely into that
category. It can perfectly well co-exist underneath the cap. You
just adjust the targets downwards to compensate for the fact that
you are going to be bringing up the standard of power station
emissions across the piece with legislation. I would say that
you need to be careful how it is implemented. A perverse effect
might be that you prevent new build and allow old build to carry
on running. Coal stations have an amazing capacity to keep living
well beyond their sell-by date so you just have to be careful
how it is implemented. Fundamentally, it is a good policy to bring
the floor up for everybody. In terms of my experiences in the
power sector, they are at the moment waiting to find a clear signal
from government as to what to build. Their natural tendency at
the moment would be to choose gas. There is an interesting build
in CCS but it would need a supplementary policy and something
much more substantial than the current competition, which I think
most people think is ineffective. The Government has got an opportunity
to get them to build the right things, either through introducing
dedicated policies to bring on CCS or through performance standards,
but it is just that the devil will be in the detail. There is
no fundamental reason why they cannot do that as well as having
the EU ETS functioning. It is wrong to say we just put the cap
in and then sit back. You always still do need a dedicated energy
policy and that is what that would do.
Q23 Dr Turner: Bryony, just on that
point, given that DECC is the licensing authority for power plants,
would it not actually be quite simple and give an absolute direction
towards investment if DECC were to set a maximum emission level
per megawatt over the whole life cycle, including construction
et cetera, of a generator, at such a level that nothing emitting
more than a carbon capture-equipped station would qualify? That
would cover the question of new build very clearly and as to existing
time-expired power stations, it could put a time limit on their
licence. That way, by simple regulation, we could achieve far
more than years of negotiation over trading price mechanisms.
What is your reaction to that?
Ms Worthington: I agree, as I
said, in principle, I think the performance standard is a good
idea. I am not legally aware of what you can do to alter the licences
of existing stations. I just counsel that you have two issues:
one is the cleaning up of existing stations; and one is the cleaning
of the new build, and you need a policy that works to do both.
It is not either/or. You should tighten caps because the caps
act as your insurance policy against fuel switching because of
price differentials that you cannot control. If coal becomes incredibly
cheap and gas spikes, which it is likely as it becomes more scarce,
you will see people switching back to coal. They will find ways
so you need an insurance policy basically.
Q24 Dr Turner: They would not be
able to find ways if they had an absolute limit under the licences.
Ms Worthington: As long as it
applies retrospectively to existing plant, yes.
Mr Burke: It depends if you want
the policy to be differentiating at the margin or whether you
want it to be long-sighted and to make this transition quite rapidly.
Q25 Dr Turner: Obviously we do. Keith,
could I take you up on your point that investment in renewables
is being driven by renewables targets rather than fiscal incentives.
The fiscal incentives of either feed-in tariff mechanisms in other
countries or the ROC in this country can hardly be discounted,
can they, because they have been a vital factor in their economics?
Dr Allott: Sorry, I meant targets
as a shorthand for fiscal mechanisms and policy mechanisms are
what drive investment incentives. The clear outcome and clear
framework is what is driving forward investment. Still it is not
fast enough and there is real concern about the lack of investment
in renewables that is taking place at the moment and the slowdown
in that because of the wider economic climate. The sectors which
are not covered by renewables, and I draw the analogy with coal
in particular, there are 70 gigawatts of new coal stations being
planned around Europe, as we speak, many of them in the UK. There
is a need for a clear mechanism to prevent that happening. Once
that capacity is built we have a lock-in problem.
Q26 Dr Turner: I am totally in agreement
about the need to deal with that problem, but just to change the
subject a bit, the Chairman and Chief Executive of the Committee
on Climate Change have been before us giving evidence on this
inquiry and the Chief Executive suggested that as a result of
the way that Phase III would operate under the ETS, what the UK
would effectively be doing is paying the power sector in countries
like Germany to switch from coal to gas, which would clearly not
provide as great a carbon saving as if we were actually using
our money to drive investment into proper low-carbon technologies.
Would you agree with that? Do you think there is any way of stopping
that?
Ms Clough: I think that just goes
to show that currently how the market is structured would possibly
incentivise a bit of fuel switching in Phase III, which comes
back to the point of why you need supplementary policies like
an emissions performance standard. There is growing political
support within the UK and within Europe. The Conservatives and
the Lib Dems, as you probably know, back an emissions performance
standard. Charles Kennedy has brought forward a private Member's
bill on the issue and we also have an early day motion, so there
is support to bring these other measures forward.
Ms Worthington: I would just say
it all comes down to MAC curves, unfortunately. They are horrible,
complex technical things, but essentially the European MAC curve
has got a long tail of very cheap abatement, and that is largely
because we have an established infrastructure for energy where
there is quite a high degree of capacity for fuel switching, not
just in the UK but in other key countries like Germany. Until
we get a price signal that is consistently strong enough to get
that out of the system, trading will not be used to be the driver
of investment. That will need supplementary policies. We have
talked about the Renewables Obligation and how important that
is, and the performance standard, similarly, could avoid the lock-in
while we work through this long tail of emissions. You only slow
the process down the more you allow foreign credits in. We have
a double problem, there is lots of cheap abatement in Europe,
lots of cheap abatement in the world, and we have an almost meaningless
target so how do we expect that mechanism then to drive investment.
You do need supplementary policies and we do have them, that is
the thing, they are compatible. We would like to see much more
ambition in the caps to drive additional effort from that.
Q27 Dr Turner: So, we are in agreement
then, I guess, that we need strong, clear price signals and the
ETS has not delivered?
Ms Worthington: Without tighter
caps it will not.
Chairman: Unfortunately, we are out of
time as we have some more witnesses waiting to come on. Thank
you very much for coming in. This is a very helpful start to this
particular inquiry. I am sure that we are going to be able to
reflect quite of lot of what you have said in our conclusions.
Thank you.
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