Memorandum submitted by the Engineering
Employers' Federation (EEF)
ABOUT EEF
With over 6,000 business members from the manufacturing
community (employing approximately one million employees) and
more than 20,000 associate companies, EEF is dedicated to fostering
enterprise and evolution across manufacturing to keep industry
competitive, dynamic and future focused.
As the only membership organisation dedicated entirely
to manufacturing, we are an established UK leader in the delivery
of business services, government representation and industry intelligence.
Commercially driven and re-investing profits for
the benefit of industry and members, EEF's trusted influence means
that manufacturing companies are particularly receptive to the
advice and service offerings of carefully-selected partners with
whom we choose to work.
Our network of offices in England and Wales
keeps us close to our members, allowing us to focus on local issues
and thereby to function as a unique community. Our London office
provides a focal point for development of our broad portfolio
of business services designed to deliver maximum value. From London,
EEF provides first-class representation with government and regulatory
bodies and supports our local offices in their programmes to influence
regional policy. Our structure places us at the heart of the UK
business community.
EEF's broad service portfolio is delivered by
an unparalleled team of experts including 30 economists and policy
specialists, 90 HR and legal advisers, 150 health, safety and
environment advisors, 20 occupational health specialists and around
200 trainers, based in our regional offices and in centres of
excellence nationwide.
UK Steel, a division of EEF, is the sectoral
trade association for the steel industry. All the country's steelmakers
are in membership, as well as many downstream steel processors.
OVERVIEW
Potential contribution of international emissions
trading to delivering a global greenhouse gas stabilisation target,
consistent with the UK's goal of limiting global warming to 2°C
1. Emissions trading schemes, in various
forms, have emerged as one of the main tools for governments,
around the World, in delivering Greenhouse Gas (GHG) emissions
reductions. Trading schemes in general, deliver certainty, by
way of the cap, and can address reductions where most readily
available at least cost.
2. As carbon dioxide (CO2) is a global gas and
global climate change is a global problem, it is certain that
any possible solution must also require global action. EEF believes
that the most effective, transparent and long-term solution is
a global cap on emissions, delivered through a cap and trade scheme,
which would place all participants on an equal footing. This does
not mean setting the same target across all countries, but the
scheme should seek to deliver a "level playing field"
that fully addresses the critical issue of "carbon leakage".
A level price for carbon should exist across all linked schemes
(the current price for allowances within the RGGI scheme is $3.38,
with EUA trading at
9.50).
3. EEF does believe that there are potentially
equally effective methods of reducing global emissions than just
a cap and trade scheme, such as a carbon tax.
4. A truly global agreement will enable
GHG emissions reductions to be made at least cost, but only if
all participating countries are able to invest in other parts
of the World.
Whether, and under what circumstances, emissions
trading ought to be supplemented or replaced by tax or regulation
5. Emissions trading is only one of several
possible instruments for reducing global GHG emissions. It works
well for sectors that are not subject to international competition,
such as power generation. For other sectors it works best when
all major emitters in the world are included. However, emissions
trading does provide a credible means for delivering, through
the imposition of a cap, a predictable outcome, and within Europe
remains a more politically achievable solution than alternative
measures.
6. That said, this should not rule out other
instruments, such as tax, standards or regulation, particularly
for downstream sectors. Indeed, Copenhagen does give international
negotiators the opportunity to reassess if trading through cap
and trade schemes is the most effective method of achieving the
goal of limiting a global temperature increase to 2°C. Copenhagen
does provide the last chance for governments to consider the merits
of a carbon tax.
7. EEF has previously opposed such a tax,
favouring a cap and trade scheme in the UK, as the simplest way
of reducing emissions from industry. However, with hindsight,
we have seen cap and trade schemes become over complex, over crowded
and over lapping, as is the rest of the climate change policy
area. Regional cap and trade schemes also fail adequately to address
carbon leakage, and to account for embedded emissions at borders
for both imports and exports.
8. A carbon tax regime across the whole
economy would truly account for all embedded carbon throughout
supply chains and could be administered effectively at the border.
This would enable consumers to take informed decisions when purchasing
goods and services, giving businesses that provide low-carbon
solutions to gain a competitive advantage in the market. Such
initiative will also allow consumers to make choices relating
to materials.
9. A carbon tax would provide long-term
certainty for participants in making low-carbon investments and
encourage the funding of emerging technologies.
10. Unless all other options and solutions
of reducing global GHG are considered in the run up to Copenhagen,
then we may well be limiting ourselves to a system (cap and trade)
that may not provide the best road to tackling climate change.
11. It is however vital that alternative
methods such as taxation be seen precisely as that: alternatives,
not supplements.
THE EU EMISSIONS
TRADING SCHEME
The record of Phase II of the EU ETS, and prospects
for the success of Phase III
12. It is too early to access whether Phase
II of the EU ETS has been successful, as we are only now starting
the second year of a five year phase of the scheme. Of course,
the ability to bank Phase II allowances into Phase III provides
a strong link between the Phases, that was absent in the transition
from Phase I to II.
13. We need to be clear as to what is meant by
"success" of the Phase. If the aim of the EU ETS is
to reduce carbon emissions within the EU27, then we are virtually
guarantied success, as this is dictated by the cap, which will
be met, as the price of allowances will be set at the cost of
abatement. This issue is further explored below.
Extent to which the carbon price will be sufficient
to drive low-carbon investment, in particular decarbonisation
of energy
14. It should be clearly understood that an emissions
trading cap and a carbon price, are essentially two separate drivers
in reducing emissions. The cap delivers certainty and in terms
of the EU ETS will be met, irrespective of the price of EU Allowances
(EUA). It is often asserted that a low carbon price will weaken
the EU ETS, but it should be remembered that the aim of the Directive
is to reduce absolute emissions to a pre-determined level, by
an agreed date. A high or low carbon price does not affect this
outcome.
15. If the price of carbon is low, this can only
mean one of two things: either that output is lower than predicted,
for example as a result of a cyclical downturn or the loss of
market share to imports, or that there are more opportunities
for cost-effective mitigation than previously envisaged.
16. Commentators who assert that the current
low carbon price indicates that EU ETS is failing need to take
a longer-term perspective. We all share the hope that the current
economic downturn is temporary and that industrial production
will return to pre-crisis levels in the medium to long term. Carbon
emissions will then of course rise, largely in line with production,
and many industrial participants will again need to enter into
the market to purchase allowances, if EUAs were not banked during
this downturn.
17. It would be extremely short sighted
to consider adjusting the current cap to take into account this
temporary reduction in carbon emissions. It should be recognised
that this is a long-term exercise and short-term fluctuations
between supply for carbon and demand for carbon will take place.
However, having set the pathway towards a particular long-term
target and in the absence of incontrovertible evidence of a need
for further action, then the need to long-term certainty should
prevail.
18. EEF appreciates the danger that a low
"spot price" for carbon, may inhibit future investment
in a low-carbon economy. However, we would reiterate that the
EU ETS is a market based scheme, aiming to deliver a tangible
cap on industrial emissions at least cost. There are other policy
instruments currently in place, that also aim to drive low-carbon
investment, in particular decarbonisation of energy, such as the
Renewables Obligation (capital grants scheme), the Climate Change
Act and other parts of the Climate action and renewable energy
package, agreed in December 2008.
19. Governments can not, and should not,
rely on the EU ETS alone to deliver the catalyst to long-term
low-carbon investment. EEF has concerns that the keenly anticipated
expansion in low-carbon energy generating capacity, most notably
from nuclear, that is vital over the next decade, may be derailed
by a low carbon price. The Government must ensure that the financial
viability of these major schemes is robust and the vagaries of
a short-term EUA price fluctuation does not dictate the UK ability
to meet its commitments as set out in the Climate Change Act.
20. EEF does not believe that creating an
artificial floor (or indeed ceiling) price for EUA should be introduced.
Artificially influencing the prices of EUA would jeopardise the
market based functions of the scheme and could send a signal to
participants that further government intervention may be possible.
Ironically, this could have the effect of creating uncertainty
in the market.
21. It is possible that an artificial floor
price could actually limit options to link the EU ETS with other
trading schemes.
Impacts of economic recession on the workings
of the EU ETS
22. As the EU ETS is based on absolute targets
allocated on an ex-ante basis, it is entirely predictable that
if the manufacturing sector is hit by an economic downturn, which
results in a drop in output, then carbon emissions from the sector
will be reduced significantly, albeit temporarily.
23. EEF has previously advocated that the scheme
should be based on efficiency of plant, rather than absolute targets,
and that allocation of allowances should be ex-post, based on
actual production levels, and not an estimate based on historical
production.
24. Both of these proposals would have addressed
the perceived carbon price and cap issues that have resulted in
the perception that the scheme is not working. For example, if
allowances had been subject to ex-post adjustment, it is likely
that carbon prices would not have collapsed to the extent seen
during the current recession.
Impacts on and responses by UK firms covered by
the EU ETS
25. The impacts on UK installations covered
by the EU ETS are entirely predictable. If the output from a sector
falls to 50% in the same month, as a year ago, like we have seen
in the UK steel sector, then emissions will fall and many of those
installations will be long in allowances and will need to decide
whether to trade or bank surplus allowances. In some instances,
the decision to sell EUA will be out of necessity to ensure basic
survival of that installation,.
26. Selling surplus allowances in the event of
reduced production is perfectly valid & legal within the rules
of the scheme, so to is reducing production a valid way to reduce
emissions.
Implications of the EU ETS for business competitiveness,
and how to address them
27. The implications of the EU ETS for business
competitiveness are considerable for those sectors that are fully
exposed to international competition and are highly carbon intensive.
EEF is reasonably satisfied that the agreed EU ETS revised directive
text does take account of this.
28. Of course, issuing 100% free allocation to
sectors that are subject to carbon leakage limits the additional
unilateral cost to those sectors in complying with the scheme.
However, cost increases will still be borne by those sectors,
as the free allocation is based on the cap, rather than need.
29. EEF does not favour border measures
as the preferred route for addressing carbon leakage. Border measures
would not address the loss of export competitiveness, and they
could only be made compliant with the WTO principle of national
treatment by the introduction of an unworkable level of complexity
and furthermore could lead to retaliatory measures and could undermine
international cooperation to achieve a global emissions reduction
target.
30. It is therefore imperative that a robust
international agreement to reduce global GHG emissions is agreed
in Copenhagen in December 2009. Only then can we ensure that all
competitors in the market are equally "incentivised"
to become more efficient and to pass through the cost of GHG into
pricing of products, enabling purchasers to make comparative choices
between materials, in the knowledge that they include the global
warming impact in the price. This will eliminate the element of
competitive distortion from international trade.
31. However, the importance of international
"sectoral agreements" should not be underestimated.
It is acknowledged that a truly international agreement must include
a critical mass of high-GHG-emitting countries, if it is to have
any hope of succeeding. This is also true of addressing carbon
leakage. Only if a critical mass of, for example, steel companies
across the globe are included in an agreement, can that sector
fully internalise the cost of carbon. This would apply to all
globally traded sectors and highlights that geographical agreements
alone, may not solve the competitiveness concerns.
Effects of the expansion of the EU ETS to encompass
aviation
32. Whilst EEF advocates that all parts
of the economy should play a part in limiting GHG emissions in
order to meet targets set out within both the EU ETS and the Climate
Change Act, we have concerns that including aviation into the
EU ETS in 2012 could distort the market significantly.
33. As a matter of record, EEF was opposed to
the inclusion of aviation. The sector currently has little abatement
potential, other than through reducing the number of flights.
If the EU wishes to encourage people to fly less, there are more
effective economic measures at its disposal.
34. Unless the cap is increased to fully
take account of emissions from the aviation sector, then the effect
of including the sector in the scheme will be to tighten targets
for the remaining installations.
Allocation or auctioning of EU ETS credits, and
the use of auctioning revenues
35. EEF does not believe that the hypothecation
of auction revenues for government business support for carbon
mitigation purposes is the most effective way of providing significant,
long-term support and certainty of outcome in the aim of reducing
UK GHG emissions.
36. To hypothecate auction receipts is short
sighted and would not provide the timely support for industry
at times when the support is needed most, namely when auction
revenues are low, during an economic downturn. When the economy
is buoyant, business is better placed to invest in future mitigation
measures and therefore it is expected that the need for direct
support to reduce emissions is less crucial. Business support
should be assessed on a case by case basis.
37. If the UK is to have the ability to
develop the technological solutions needed to address climate
change, far greater investment in R&D will be required—well
beyond the resources of individual companies.
38. EEF strongly believes that government
should firmly commit to long term, significant support for accelerating
the transition of the UK towards a low-carbon economy. UK R&D
government funding support is extremely low compared to other
Member States and other regions.
39. Whilst we accept the setting up of the
Environmental Transformation Fund could go some way to addressing
this, we have concerns that much of the funding is not focused
on UK business, but international projects.
40. Committed business support from government,
therefore could provide a unique opportunity to assign funding
to UK industry that will enable it to become a world leader in
climate change mitigation. As we have said, this support does
not have to come directly from the money raised through EU ETS
auctions, but should come out of the Treasury Consolidated Fund.
41. The important question here is whether
the government is fully committed to working with UK industry
to deliver the low-carbon economy that EEF members are working
hard to achieve.
DEVELOPMENT OF
A GLOBAL
CARBON MARKET
Progress of cap and trade schemes in other countries
(notably, the United States), and the prospects for, and practicalities
of, linking between them
42. Linking of trading schemes will increase
liquidity of the EU ETS carbon market in Phase III However, it
will only address leakage if those schemes subject sectors to
comparable levels of carbon cost internalisation. Moves to link
national, sub-federal or regional entities can only be acceptable
if there is equivalent scope/coverage and equivalence of effort
(eg RGGI where only power stations are caught will could result
in artificial market distortions) within all the schemes that
propose to be linked.
43. The development of cap and trade schemes
in other countries and states is progressing at a significant
pace. Most encouraging of all is the commitment by the new US
administration to, "Implement an economy-wide cap-and-trade
program to reduce greenhouse gas emissions 80% by 2050" and
to "Make the US a Leader on Climate Change".
44. A step-by-step, bottom-up approach, with
an ultimate aim of a global agreement may yield a more robust
system, than a scheme delivered by a top down approach. It is
now for governments to bring firm proposals and commitment to
the negotiating table in Copenhagen in December 2009.
45. EEF believes that it is not regional
coverage that is fundamental to whether a scheme should be considered
for linkage to the EU ETS, but rather the robustness of the scheme
and whether it puts competing sectors on an equal footing.
The robustness and effectiveness of "offset"
schemes (ie those without a cap), such as the Clean Development
Mechanism (CDM), and the issues around linking them to cap and
trade schemes
46. EEF believes that the option of meeting
domestic targets through carbon credits derived from abatement
overseas is essential. Emissions should be reduced where it is
most cost-effective to do so. Therefore, there should be as few
restrictions as possible over the quantity and sources of credits
which can be used to meet EU targets.
47. However, this can only be achieved if credits
represent actual emissions reductions. Credits should not be counted
unless assurances exist that emission reductions associated with
such credits are genuine, sustainable and fully verifiable to
a standard comparable to that agreed by the Clean Development
Mechanism (CDM) Executive Board.
48. If this mechanism is adhered to then
linking these schemes to domestic, or international trading schemes
can only improve their ability to deliver reduction targets and
achieve the aim of limiting the change in our climate. The ability
to use CDM credits can increase international cooperation and
expand abatement options.
UK CARBON BUDGETS
The relationship between emissions credits and
the UK carbon budgets set up under the Climate Change Act
49. Given the Kyoto Protocol's wide political
acceptance, and established rigour, EEF welcomes the government's
proposal that all the units which are recognised under the Kyoto
Protocol and EU ETS be eligible to count towards the UK carbon
account. Otherwise the currency (ie CO2e) will be valued differently
in its accounts than from the UK's. Taking this into consideration,
we agree that carbon units recognised under the international
agreements such as Kyoto Protocol and EU ETS qualify.
50. Furthermore, the adoption of a plausible
method for carbon accounting has the potential to make carbon
off-setting easier and more credible. Its adoption could remove
some of the uncertainties related to the use of off-setting methods
and accelerate their acceptance in the Kyoto process and the international
carbon market.
51. By using consistently recognised carbon units,
both government and non-governmental organisations will be able
to demonstrate that they have used the appropriate process to
assess risks, define boundaries, measure emissions and report
on them in a way that is meaningful and comparable. A rigorous
and consistent method of reporting will add credibility to the
cuts in emissions being made and will make it easier for government
to set credible targets for the future.
Transparency of and justification for counting
the purchase of emissions credits (especially from "offset"
schemes) as decreasing emissions from the UK
52. As we have said before, while EEF supports
the unlimited use of CDM credits without restrictions, we believe
that any approved CDM carbon credits must be assessed to be additional
ie that the planned emission reductions would not occur without
the additional incentive provided by carbon credits. Therefore,
EEF would urge the government to note that "additionality"
is key to the integrity of carbon markets and should be a prerequisite
for carbon reduction incentives and regulations in future public
policy including the formulation of the UK carbon account. EEF
believes that if the UK government is aiming to structure a carbon
account that reflects meaningful incremental emissions reductions,
additionality is required and needs to be assured.
53. Furthermore, for the carbon markets to remain
credible enough to be used for compliance against future carbon
mandates, the UK needs to protect the credibility of existing
carbon markets. Government should encourage carbon offset markets
that can help reduce greenhouse gas (GHG) emissions. This requires
that both government and non-governmental organisations find ways
to select and target emissions reductions that are additional
and measurable.
54. EEF advocates that government need to
work closely with EU and international partners to improve the
rules of the CDM, but strongly urge that businesses be given adequate
information and consulted on the process at an early stage. Standards
for additionality need to be clear, stringent and measurable in
order to avoid injecting uncertainty into the carbon market.
3 March 2009
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