Memorandum submitted by the CBI
1. The CBI is the UK's leading business
organisation, speaking for some 240,000 businesses that together
employ around a third of the private sector workforce.
SUMMARY
2. The CBI believes that businesses which will
succeed in the twenty-first century will be those that seize the
opportunity to adapt to a low-carbon future. A low-carbon economy
will offer significant opportunities, stimulating competition
to produce low-carbon products and services, and rewarding those
businesses that take the lead. The EU-Emissions Trading System
(EU-ETS) is a core driver of this transition.
3. Business recognises that unabated climate
change could pose an unacceptable risk to the stability of ecosystems
and the economy, and that action to stabilise atmospheric greenhouse
gas concentrations at acceptable levels can be achieved at a manageable
economic cost.
4. To move towards a low-carbon economy
the CBI argues:
— Emissions trading has unique benefits
as a carbon abatement policy.
— A floor price for carbon is unlikely
to be the best way to reinforce the long-term low-carbon investment
signals.
— The Phase 3 EU-ETS agreement is a
workable approach to addressing business competitiveness concerns.
— Whilst emissions trading must be
broadly defined, it is not applicable to the whole economy.
— The EU-ETS needs to be carefully
integrated into the global framework and improvements should be
made to the international carbon market.
EMISSIONS TRADING
HAS UNIQUE
BENEFITS AS
A CARBON
ABATEMENT POLICY
5. The EU-ETS ensures that emission reduction
targets are achieved. Tackling climate change requires specific
levels of emissions cuts to be achieved. The ability of governments
in the EU to set a legally binding cap means that emission reductions
can be "locked in". Recent research[1]
shows that ETS prices had more of an impact than the reduced economic
output in causing emissions to be reduced by 3% in 2008.
6. While emissions are being reduced, issues
that arose in the learning stage (2005-07) have been learnt from—an
over-allocation of Phase 1 allowances and a steep reduction in
EU-ETS prices in May 2006, which were caused by several factors.
The allowance cap was only designed to be modestly constraining
and it is understandable that the EU-ETS became over-allocated
due to pre-2005 emissions data uncertainty; delays and uncertainty
in approval of National Allocation Plans; variation in emissions,
weather, and economic growth; and obvious pressures to increase
allocations. These issues have been resolved by using verified
emissions data, stricter Phase 2 caps regulated by the Commission,
the Commission setting the EU-wide Phase 3 allocation, and an
indication that the cap will continue post-2020.
7. The ETS has advantages over a carbon
tax. It would take time for policy-makers to establish the level
of tax necessary to deliver a specific emissions reduction pathway.
A tax may give certainty of the price that companies must pay
and the incentive to reduce emissions but there is no certainty
that the emission reduction target will be met. The objective
of emissions trading is not to deliver a particular carbon price
but to ensure that the emission reduction goals are achieved.
8. The ETS allows business flexibility in
response to the cost of carbon. The carbon price reacts to changes
in supply and demand for European Union Allowances (EUAs), which
is more flexible than a tax which does not vary based on economic
activity. Businesses are able to balance reducing emissions, or
buying allowances from other companies in the EU-ETS or buying
credits from projects in the developing world that have been rigorously
assessed through the United Nations Executive Board. Companies
are rightly able to sell allowances due to lower economic output
(and pollution) but will have to buy allowances when the economic
recovery occurs, potentially at a higher price.
9. The ETS ensures that the environmental
goal will be achieved at the lowest cost to the economy. This
is ensured as companies who are able to reduce emissions at a
lower cost are able to sell their emissions to companies for whom
it is more expensive to reduce emissions. The success of lowest
cost has been proved by the research of the Stern Report and the
experience of the US in reducing sulphur emissions from power
stations.
10. Emissions trading provides the best
basis for building international cooperation on climate change.
Many countries are opposed to efforts to harmonise taxation as
infringing on national sovereignty and this is a barrier to using
carbon taxes as the basis for international climate policy. The
Clean Development Mechanism (CDM) already creates links between
many national carbon markets and these links should continue.
11. ETS does help stimulate low-carbon investment.
The cap on emissions is a powerful signal to business to reduce
emissions as the number of allowances available decline over time.
The carbon price created by the EU-ETS is also a signal to invest
in low-carbon technologies that are currently commercial.
12. Price volatility and uncertainty is
no greater than that regularly dealt with in natural gas and electricity
markets. Price volatility can be hedged with available financial
instruments.
13. In a survey, more than 70% of businesses[2]
said that the price of carbon has influenced their investment
decisions. However, EU-ETS needs to be part of an integrated policy
framework of complementary policies to encourage the development
and demonstration of new technologies and technologies that are
not yet commercial.
A FLOOR PRICE
FOR CARBON
IS UNLIKELY
TO BE
THE BEST
WAY TO
REINFORCE THE
LONG-TERM
LOW-CARBON
INVESTMENT SIGNALS
14. The CBI is not convinced that the benefits
of a floor price for carbon outweigh the risks. Setting a floor
price could increase uncertainty, create an expectation of further
political intervention, and could make it more likely that a price
ceiling is developed at a later date. Additionally a floor price
and/or ceiling could make it more difficult to link to any future
US emissions trading market.
15. Instead of a floor price, policy makers must
address the remaining uncertainties about the Phase 3 rules. Commencing
the auctioning of Phase 3 allowances by 2011 will improve the
liquidity of the post-2012 market and provide greater certainty
for low-carbon technology investors.
16. The recent reduction in carbon prices
is a rational market response to the recession. Declining industrial
production means fewer emissions and the EU-ETS gives companies
the flexibility to sell allowances. If Europe had a carbon tax
there would doubtless be calls to reduce the tax which would undermine
climate targets, while the EU-ETS ensures the overall cap on emissions
is achieved. When the economic recovery occurs companies may have
to buy allowances, potentially at a higher price. Economic activity
is always uncertain but it was only six months ago that some analysts
were predicting a price spike.[3]
This is the market risk that companies take if they sell allowances
today.
17. It is not clear that current low carbon
prices are undermining low-carbon investment. Untangling the impacts
on investment decisions of the recession—the freezing of
credit in the financial sector, the steep reduction in energy
prices and the fall in carbon prices—is difficult. Despite
the decline in carbon prices, the reduction in oil prices has
more of an impact on investment: US$140/barrel of oil is equivalent
to US$350/tCO2 while US$40/ barrel is equivalent to US$100/tCO2
(Stern Review). The fact that future carbon prices are higher
provides a stronger incentive to reduce emissions than if the
spot price is low for a period of time.
18. Analysis and debate should focus on
how sufficient post-2020 climate policy certainty can be developed
instead of focusing on the short-term effects of the recession
on carbon prices. Investors in long capital life technologies
(nuclear, Carbon Capture and Storage) need greater certainty of
the post-2020 value of their low-carbon investments. One way to
create this certainty would be to extend the declining trajectory
of the EU-ETS cap to 2050.
THE PHASE
3 EU-ETS AGREEMENT IS
A WORKABLE
APPROACH TO
ADDRESS BUSINESS
COMPETITIVENESS CONCERNS
19. Phase 3 of the EU-ETS is ambitious and
workable. For Phase 3 it has been agreed that sectors will be
deemed exposed to significant risk of carbon leakage if:
— their production costs increase by
at least 30% of GVA; and
— their non-EU trade intensity is above
30%.
20. Sectors at risk will receive 100% free
allowances in 2013 but allowances will be distributed based on
benchmarks of the 10% most efficient installations in a sector
so that not all installations will receive 100% free allowances.
In addition, the declining cap means that a sector could only
receive a maximum of 75% free allowances in 2020. This will create
a significant incentive to reduce emissions and is not a "free-lunch".
21. Some electricity-intensive sectors like
aluminium and chlor-alkali production could be particularly impacted
by the cost pass-through of auctioning in the power sector. As
free allocation only addresses direct emissions, the Phase 3 agreement
allows member states to provide State Aid to partially compensate
these sectors while maintaining an incentive for energy efficiency.
The CBI calls for the State Aid rules to be applied uniformly
across Europe to avoid a distortion of competition between member
states.
22. Implementation of the Phase 3 agreement
must be swift but with proper assessment and interaction with
business technical experts. There are many important and complex
decisions that must be made through the European Comitology procedure
as illustrated in the following diagram. Important Comitology
procedures include ensuring that forward auctioning of Phase 3
allowances begins by 2011, setting out which sectors are at risk
of carbon leakage, defining benchmarks and CDM limits, and how
provisions for new entrants and incentives for Carbon Capture
and Storage will operate.
23. Carbon leakage concerns are real. Carbon
leakage is the movement of industrial production and/or investment
outside of the EU resulting in increased imports and/or reduced
exports. The risk comes from the enforced internalisation of carbon
costs, irrespective of the ability to pass those costs through
to customers, and is a threat regardless of whether the costs
relate to emissions on site, or from carbon cost pass through
from electricity prices. The risk applies to industries which
are exposed to international trade and are carbon intensive.
24. Sectors are affected differently. Research
from the Carbon Trust and others has shown that the competitiveness
impacts of the EU-ETS have differing impacts on different sectors.
While industry continues to have some concerns about some of the
detail of this research, it does show that different sectors have
varying carbon cost intensity, international trade intensity,
and different abilities to pass on the cost of buying emission
allowances. It is for this reason that the CBI firmly supports
an evidence based approach to assessing which sectors are at risk
from carbon leakage, which the Phase 3 agreement creates.
THE EU-ETS MUST
BE BROADLY
DEFINED BUT
IS NOT
APPLICABLE TO
THE WHOLE
ECONOMY
25. A broadly defined ETS will improve the
economic efficiency of climate policy. The wider the EU-ETS is
defined, the more potential emission reductions can be made. This
allows carbon costs to be made explicit throughout supply chains
and will make the trade-offs clearer as it becomes more likely
that business will invest in carbon cutting options, which give
the best environmental and financial returns.
26. However small or mobile emitters are problematic
to include in the EU-ETS.
27. The CBI supports the decision to include
aviation in the EU-ETS by 2012. However, the inclusion of flights
from outside the EU could raise concerns as European airlines
would have all of their flights covered by the EU-ETS while competing
international airlines flying into Europe would only have some
of their flights subject to a carbon cost. As well, on long-haul
flights from EU hubs, passengers could decide to switch to a non-EU
hub airport and airline as soon as possible to avoid paying the
carbon cost on part of their flight. Inclusion of aviation as
part of the international climate agreement is a priority.
28. The CBI supports the development of
an emissions trading system for shipping that ideally covers the
entire shipping industry. We support the Committee on Climate
Change conclusion that "Shipping is a clear example of a
sector where unilateral, national or even regional action is problematic,
and where achieving a global sectoral deal is therefore a priority".[4]
As part of the Phase 3 agreement on the EU-ETS, if an international
agreement including shipping has not been approved by Member States
in the EU, the Commission must make a proposal to include shipping
emissions in the EU-ETS with the aim of its entry into force by
2013.
29. The CBI is not convinced by calls to
include the transport sector in the EU-ETS. There would be high
monitoring and transaction costs if the EU-ETS were to apply to
road transport. Road transport is already subject to a number
of measures designed to encourage lower use or the use of lower-CO2-emitting
vehicles. The CBI will be setting out views on further policy
measures required in the transport sector later this year.
30. Emissions trading is best suited for
large emitters. The largest 7% of installations represent 60%
of total emissions, while the smallest 14% of installations only
account for 0.14% of emissions.[5]
While the Phase 3 agreement will exclude installations with emissions
less than 25,000 tonnes/year, the CBI believes that a higher threshold
(50,000 tonnes/year) was warranted. This would exclude about 5%
of the emissions covered by the ETS, while reducing the number
of installations by 70-75%. However small emitters must still
be subject to equivalent carbon regulations such as Climate Change
Agreements.
31. The lower threshold will cause some
sectors to be split with some installations subject to the ETS
and others to Climate Change Agreements. This creates distortions
and extra costs.
32. It is likely that the transaction costs
of the EU-ETS have been underestimated and this unbalances the
official cost-benefit ratio for including small emitters. The
UK Emissions Trading Group undertook a survey[6]
which estimated that the administrative costs to UK industry of
Phase 1 of the EU-ETS was £68 million while the Government
estimate was £175,000. Any opportunity to reduce administration
costs should be taken. The CBI calls on policy-makers to keep
the issue of small emitters under review.
33. Emissions trading must be part of a
broad policy framework. Emissions trading is a "pull"
policy that is mostly focused on existing technologies, with policies
like the Renewables Obligation and extra incentives for Carbon
Capture and Storage creating a "push" to new technologies.
The Stern Report states that climate policy must include carbon
pricing and greater investment in low-carbon innovation. The UK
should strive to increase expenditure on low-carbon technologies
to around 30% of the Government's total Research Development and
Demonstration (RD&D) budget, roughly equivalent to £2.6
billion of purchasing power. That would bring energy RD&D
in line with the proportion currently being spent on defence.[7]
European production of the components of energy-saving and energy-generating
products also needs encouragement.
34. However, policy overlap must be guarded
against. The following diagram[8]
shows the significant overlap of climate policy instruments on
business. In December 2007, the Government undertook a consultation
on simplifying areas of overlap (the Climate Change Simplification
Project). The CBI stated in our response that this consultation
ignored the role of the Climate Change Levy. Although the findings
from this consultation may inform the forthcoming consultation
on the future of Climate Change Agreements (CCAs), policy overlap
must continue to be kept under review.
THE EU-ETS NEEDS
TO BE
CAREFULLY INTEGRATED
INTO THE
GLOBAL FRAMEWORK
AND IMPROVEMENTS
SHOULD BE
MADE TO
THE INTERNATIONAL
CARBON MARKET
35. The conclusion of a comprehensive global
climate change agreement is essential. The CBI's brief Opportunity
Knocks[9]
sets four priorities for the international agreement:
— Building a level playing field to
enhance UK competitiveness.
— Unlocking investment to deliver low-carbon
innovation.
36. Carbon markets must be a core part of
a global framework. The CBI is undertaking international outreach
with our counter-part business organisations in order to make
the case that other countries should develop emissions trading
policies, learn from the experience of the EU-ETS and design their
policies in order to facilitate the creation of global carbon
markets. We are undertaking this work in order to unlock the benefits
of emissions trading as a policy.
37. The transition to a higher EU target
must be carefully managed. Competitiveness concerns will not vanish
automatically when an international climate agreement is signed.
38. It is unclear how robust the international
agreement will be in terms of genuine, comparable carbon restraint
across major non-EU emitters. There is a risk that an agreement
is reached which the EU deems sufficient to trigger the 30% Greenhouse
Gas target, while individual sectors find their competitors outside
the EU are not in practice subject to comparable carbon restraint.
Three months following the EU's ratification of an international
agreement, the Commission must present an impact assessment of
the agreement and a new co-decision proposal for increasing the
EU-ETS target. The CBI calls for criteria to be used to assess
how effective an international agreement will be in addressing
carbon leakage concerns.
39. Linking with other emission trading
markets must be the medium/long term goal but a range of criteria
should be used to analyse whether and how to link different trading
markets. Notification of linking emissions trading markets must
be done with sufficient notice to the market. The CBI calls for
the following criteria[10]
to be used to transparently compare examples of different types
of installations in order to assess the suitability of linking:
— Compatibility of measurement, reporting
and verification: does a tonne = a tonne? This is especially relevant
as an emissions trading system in the north-east US (RGGI) uses
"short tons" and not metric tonnes.
— Level of transparency, reporting
and dissemination of annual emissions data.
— Ability to predict the balance of
supply and demand in the scheme, to forecast future scarcity.
— Transparent reporting including installation
allocation, national emissions reporting for disclosure.
— Information on scope of scheme including
source types, scheme entry thresholds, closure, transfer and new
entrant rules.
— Emissions baseline and projections,
emissions reduction targets, limits on use of project credits.
— Understand the different allocation
methodology types and how the proportion of free vs. auctioned
allocation in differing schemes will evolve. If the proportions
differed radically, and if they were to remain unchanged, this
will solidify the impact on competitiveness via increased costs
for installations with a higher proportion of non free allocation.
— Using common infrastructure like
the International Transaction Log.
40. CDM/JI is the first part of a global
carbon market but needs to be improved. The Clean Development
Mechanism (CDM) is successful in stimulating many different projects
around the world (4,586 CDM projects are currently in different
development stages), in reducing emissions (Estimate: 286 million CERs/year
until 2012),[11]
it has created new businesses both in the UK and internationally,
has transferred significant resources, and is creating "climate
entrepreneurs" and supportive policy frameworks in developing
countries. Joint Implementation (JI) has been slower to take-off
than the CDM, so EU and international barriers must be overcome
to accelerate effort.
41. The capacity and speed of the mechanisms
and processes for creating, approving and regulating CDM/JI projects
must be improved. Estimates of the time from project idea to entering
the rigourous CDM process range from six to 18 months and the
average time to complete the CDM registration process is 660 days.
These delays mean that there are far fewer CDM projects entering
the EU-ETS than allowed.
42. The scope of the project-based CDM should
consider new sources of credits, such as carbon-capture and storage.
43. The expansion of the CDM should consider
a sectoral and/or a policy basis. This would reward installations
or countries for achieving sectoral benchmarks, or reward countries
for implementation of policies such as fuel efficiency standards,
or deforestation measures.
44. All countries should recognise the international
UN approval process and avoid the regional determination of permissible
credits. Expanded capacity building and support for project development
is needed in the Least Developed Countries.
3 March 2009
1 New Carbon Finance. 13 February 2009. EU ETS Research
Note. http://www.newcarbonfinance.com Back
2
Point Carbon. 2008. Carbon 2008. p 14 http://www.pointcarbon.com/research/carbonmarketresearch/analyst/1.912721 Back
3
Deutsche Bank. 30 May 2008. Carbon Emissions-It Takes CO2 to Contango. Back
4
CCC (2008). Building a low-carbon economy-the UK's contribution
to tackling climate change. pg 306. Back
5
European Commission. (2008). "Commission Staff Working Document-Accompanying
document to the Proposal for a Directive of the European Parliament
and of the Council amendment Directive 2003/87/EC so as to improve
and extend the EU greenhouse gas emission allowance trading system".
http://ec.europa.eu/environment/climat/emission/pdf/com_2008_16_ia_en.pdf
p 24. Back
6
UK ETG (2008). "Administrative Cost of the Emissions Trading
Scheme to Participants" http://www.uketg.com/documents/ETG%20Cost%20of%20ETS%20Briefing%20Note%20_22-09-08_1.pdf Back
7
CBI (2009). http://climatechange.cbi.org.uk/uploaded/CBI-LowCarbonInnovation.pdf Back
8
DEFRA (2008). "Presentation on the Carbon Reduction Commitment". Back
9
CBI. (2008) Opportunity knocks: business expectations for a climate
change agreement in 2009. http://climatechange.cbi.org.uk/reports/00099/ Back
10
Based on UK Emissions Trading Group. 2007. "Linking with
emissions trading schemes of third countries" www.uketg.com Back
11
Norton Rose. February 2009. Global climate change-A report on
the carbon market http://www.nortonrose.com/knowledge/publications/2009/pub19791.aspx Back
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