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

Examination of Witnesses (Questions 242-269)


12 MAY 2009

  Q242  Chairman: Good morning. I am sorry we are running a little behind time. You will understand why we wanted to conclude the previous session. Welcome to the Committee and thank you for coming in. I think it is the first time you have been a witness in front of us. I wonder if you could begin therefore by explaining what you actually do inside the European Commission.

  Mr Seinen: Thank you for the invitation. I am happy to be here as a witness. I am working in the European Commission DG for Environment, the unit dealing with the administration of the Emissions Trading System, so last year we went through the whole codecision process for revising the Directive and now we are continuing with a lot of follow-up issues following the revision. Another unit has responsibilities with respect to the international negotiations on climate change.

  Q243  Chairman: When we looked at this a couple of years ago, our judgment was that Phase I showed that you could have a system that worked but it could not really claim much success in terms of cutting emissions. We have got Phase II which looks more promising with tougher caps and so on but unfortunately we have now got this background of a sharp economic downturn. Do you think we are going to make better progress now and how would you rate the progress we have made so far?

  Mr Seinen: The first phase was a learning phase so, as was mentioned, all the infrastructure was set up, all the institutions, there were national allocation plans, monitoring, reporting and verification, and all that has been set up and there has been a significant carbon price, in particular in the first half, which also generated some real abatement. Indeed in the second phase we have more scarcity than in the first phase and already scarcity conditions are considered over the whole period until 2020 and there is a positive price at this moment so that in a way is proof that something is working. At the same time there is uncertainty in the light of the revision of the targets after the international negotiations. If they conclude then there will be a review and also the ETS cap is likely to be tightened. So there is some uncertainty but the market works and there is a carbon price.

  Q244  Chairman: Do you think you can point to evidence that it is now actually having the effect of cutting emissions?

  Mr Seinen: I think the evidence is in the cap itself and the fact that we managed to set a cap cut in stone in the legislation and also the fixed limit on the use of credits coming from the Clean Development Mechanism and Joint Implementation Project. It means that in the legislation the objective to reduce emissions is enshrined, so that is the basic answer to your question. I think in earlier discussions there was a lot of emphasis on technology and I do appreciate that because technology is indeed the key for the long term. The ETS is not the only instrument for achieving long-term technology abatement. ETS is not only about technology; it is also about fuel switching and it is also about replacement of old installations by current technology (hopefully the best of course). All that is being used to make sure that we respect the cap as it is now set in legislation so thereby the immediate environmental objective is secured. That does not mean that we do not need a technology policy and also a policy for renewable energy. Indeed, there is also a Directive with targets for renewable energy, so they are complementary, and we will need them and they reinforce each other. The ETS makes sure because of the carbon price that you need fewer subsidies for getting renewables and new technological development and at the same time the technological development and more renewables will make it easier to set even stricter targets in the ETS.

  Q245  Joan Walley: I think you will be aware that our Committee has been following Phase I and Phase II and that we asked the National Audit Office to report on how the proposed cuts would actually be achieved in respect of Phase III. I want to have a look at the changes that were made, I think in December, by the European Union heads of state to what was originally proposed in respect of Phase III and the consideration of what was previously in Phase II. Our concern from the National Audit Office Report is that if the full quota of project credits is used the reduction of emissions within the EU could shrink to just 7% whereas effectively we were looking towards a cut of 21%. If that is the case, would that not be wholly inadequate in respect of the objectives that we seek to get out of this?

  Mr Seinen: There was a whole debate about the use of credits coming from the Clean Development Mechanism and Joint Implementation and the fact was that, already for the second trading period in the national allocation plans, it was foreseen that installations could use up to 1.4 billion of allowances. If you spread that out over the whole period 2008-20 that would already make up 40 to 45% of the reduction effort. Therefore, the Commission proposed not to allow any additional use. In the negotiations, that has proven to be a hard point, in particular for Member States that had not allowed their companies so much use of CDM. The compromise in the end is an increase of about 10% higher use of JI/CDM which is permitted, so it is a limited increase and it is half of the effort, so that is the political balance achieved. I do not think that puts at risk the effectiveness of the ETS. I also think when you look internationally Europe shows leadership by a unilateral, unconditional promise that we will have a reduction of 20% compared to 1990 with half of it now being done through CDM. Indeed, the rest of the world, in particular the developing countries, expect Europe to make domestic efforts.

  Q246  Joan Walley: But would you not agree with me that if the purpose of the cap in respect of 2020 was to achieve 21% average reductions and if the reality as a result of the exchanges is that we only end up with 7%, then we have got something to be concerned about?

  Mr Seinen: The reductions still take place but not in Europe. There is also a discussion about the Clean Development Mechanism and the solidity of the Clean Development Mechanism and Europe has a strong position for a very fundamental reform of the Clean Development Mechanism to improve its quality to go beyond just individual projects, to make it broader so that it covers the sectors, to make sure that it does not credit for anything beyond the current status but that it credits beyond a certain level of ambition that developing countries should do themselves. So there is a great scope for reform and it is an important discussion. The use of CDM still represents largely a real reduction but elsewhere.

  Q247  Joan Walley: Okay. We have recently seen that in Australia Kevin Rudd has deferred their emissions trading scheme. Do you see evidence that in Europe because of the recession that there is a lot more pressure to water down the terms of the current European Emissions Trading Scheme?

  Mr Seinen: No, I do not see that because at the moment the legislation is agreed. There is not a new proposal for revision. The international negotiations are on-going. After the conclusion of negotiations in Copenhagen we will have to see what the outcome is and what needs to be done, but for the rest in the implementation of the package the rules are firmly set in the December agreement.

  Q248  Joan Walley: Okay. Just on a very practical level, what do you see as the main actions that industry in Europe will be taking to get their emissions levels down under Phase III of the EU Emissions Trading Scheme?

  Mr Seinen: It is a difficult question for me to answer because the ETS is precisely a trading instrument where we leave it to the market to find the most cost-effective solutions. We do not prescribe precisely the ETS as a trading instrument by which we avoid setting and prescribing what the companies should do. That is why I am really a bit careful.

  Q249  Joan Walley: If I said to you that the Chief Executive of the Committee on Climate Change suggested to us that it could just end up, with for example, countries like Germany switching from coal to gas, would you agree with his version?

  Mr Seinen: I would need to have a look at the numbers whether that would theoretically suffice to respect the cap with only these measures. I do not think it is likely. It will be very costly and it is most likely to be one of the elements among many measures that will be taken, so what weight it will have I do not know. I think one of the surprises in the first years is that there was more switching from lignite to hardcoal, which was not something that many people predicted as such. Still it had a significant impact, so we are open to be surprised and see what measures turn out to be most cost-effective.

  Q250  Mr Caton: What will happen to the Phase III cap if the EU moves to a 30% target at 2020?

  Mr Seinen: There will be a new codecision process, so the Commission will make a proposal on how to implement the new target, hopefully as agreed in Copenhagen. There will be a need for a new split as to how much needs to be done in the emissions trading system and how much needs to be done outside, and then it needs to be decided how. It must be agreed of course in Council and in Parliament.

  Q251  Mr Caton: What means does the Commission have for making the ETS tougher, say, in the middle of Phase III if new scientific evidence reveals that we need to make steeper cuts in emissions?

  Mr Seinen: Of course the Commission has the right of initiative and it can always make a proposal for a change. At the same time, throughout the review process there has been great emphasis from all parties on predictability and giving long-term certainty, so a change in the middle of a trading period would not be the first thing I would think of, but I do not think it is legally excluded. At the same time if you make a change after the trading period, one option could be to set the linear reduction factor for 2021 much higher than it is now, if that were to be agreed in Council and Parliament. By creating a scarcity later on, you would also expect an increased banking of surplus allowances. If the operators of the installations expect greater scarcity later on they will try to save some of the allowances now to use later on, so you can achieve the same objectives probably by just respecting the trading periods.

  Q252  Mr Caton: I heard what you said about the ETS not being prescriptive but do you expect the ETS to actually help deliver the EU's targets on renewables and energy efficiency?

  Mr Seinen: Definitely, and the impact assessment shows that the ETS will help greatly to achieve the renewables targets. It is not sufficient, and that is why we also have a new Directive with targets for renewable energy, but it definitely helps.

  Q253  Mr Caton: Are the EU's overarching emissions reduction targets based on robust science?

  Mr Seinen: You mean in terms of what needs to be done to avoid dangerous climate change? Yes, definitely, it is based on robust science but I think it is important to realise that Europe cannot save the climate on its own. For that we need a good international agreement, a very ambitious outcome. 30% reduction by 2020 is indeed within the margins of what science tells us would be necessary for developed countries as a target. 20% to be realised by the EU on its own would not. I think the science tells us that for avoiding climate change in developed countries should reduce emissions by 25 to 40% by 2020, so the 20% is indeed not enough but it is still the most ambitious target around unilaterally.

  Q254  Mr Caton: Do you think it will help the objectivity of decision-making if the Commission set up something equivalent to the Committee on Climate Change here in the UK?

  Mr Seinen: I cannot positively answer that question because I do not know what would be needed in addition to what the UN already does in this respect. Of course there is a lot of scientific knowledge and studies in the UN context on what needs to be done and the recent evidence suggests that we should have more abatement rather than less. I do appreciate your question and concerns. Of course, we are at the beginning of a process, well, not at the beginning, we have had the ETS already so it is a second step, but much more needs to be done.

  Mr Caton: Thank you.

  Q255  Colin Challen: Is it not quite wrong for the Commission to claim that it is making net reductions in carbon emission from the ETS if that includes project credits from countries that do not themselves have caps? All you are really saying is that there is no net increase, it is carbon neutral; it is certainly not a reduction.

  Mr Seinen: In Bali, the roadmap for the negotiations was set out and one of the elements is that it was agreed that the developed countries should have binding targets, but for developing countries there should be policies to ensure abatement, compared to the business as usual scenario, so there should be real policies to abate emissions but not necessarily binding targets on total volumes.

  Q256  Colin Challen: This is the problem, is it not, because I was just reading the press reports of our Secretary of State, Ed Miliband, coming back from China last week and was very impressed with their plans for targets. It sounds great to have a target but if the target is only to reduce the carbon intensity of the unit GDP growth that is not the kind of target we actually want. That kind of target is what I would describe as a George Bush target.

  Mr Seinen: But of course we must also ensure that we get an agreement in Copenhagen, so it is an element in the negotiations.

  Q257  Colin Challen: Not if it is a bad agreement.

  Mr Seinen: At the same time I think this is a very important element in our views on the reform of the Clean Development Mechanism. Currently it is a system based on projects and we have about 1,500 projects. These are dots in the landscape and what we would want is to make that a system that covers the whole landscape by having sectoral approaches to make sure that there are policies so that all the low-hanging fruit, all the normal abatement is done by domestic policies and that credits are generated only for policies that go beyond that which really achieve higher reductions. From that perspective you will need monitoring and reporting and you will need much more knowledge on the sector and we see this really as a stepping stone towards cap-and-trade because once you have these sectoral policies there then you make it easier also to integrate these economies into a global carbon market and you make it easier to accept real caps on emissions.

  Q258  Colin Challen: But the proposal from the Commission, as I understand it, which may go to Copenhagen is that it talks of an OECD-wide carbon market by 2015, to be further extended to economically more advanced developing countries by 2020. Is that proposal cap-and-trade for all participants or does it include the possibility of an agreement which allows others to have targets based on carbon intensity rather than a cap?

  Mr Seinen: Indeed the Commission foresees a carbon market for OECD countries by 2015 with linked cap-and-trade systems. That does not necessarily cover the entire economies. Like in Europe, it now covers 45% of emissions and with aviation it will increase to about 55% of emissions.

  Q259  Colin Challen: What I mean is if China were coming into this agreement—

  Mr Seinen: You could have a cap-and-trade system for certain sectors. China is not part of the OECD but they could also join with a cap and trade system, and we would hope they would join, but there still remains the question should there be a binding target for all emissions in China. In a way these are two separate issues.

  Q260  Colin Challen: That binding target being a capped target?

  Mr Seinen: Binding targets like we have under Kyoto for Annex I countries.

  Q261  Colin Challen: Is it very likely that they will come into this, do you think, the Chinese particularly?

  Mr Seinen: In our communication we focus in the very first place on the OECD. I think everybody realises the need to fight climate change and to do it in the most cost-effective manner, so I certainly do not exclude that.

  Q262  Colin Challen: What about the United States, they talk now about introducing cap-and-trade, but what do you think the prospects are for that and what are the key issues we would have to address if we want to see some linkage?

  Mr Seinen: I think the key issues are fairly sensible. There should be an absolute cap on the system so there should not be a leakage. There should be sound monitoring and reporting and verification. I think these two are the most important and then you can still see which design features would need to be adapted to make it fully compatible. You would have to decide whether you have full linking where you accept unconditionally each other's credits for compliance or whether you do it through a gateway which puts a quantitative limit on to the use of each other's credits.

  Q263  Colin Challen: If for any reason they do not have a federal cap-and-trade system could the EU ETS link up with the existing regional US cap-and-trade markets?

  Mr Seinen: The provisions in the revised Emissions Trading Directive also allow linking to sub-federal systems.

  Colin Challen: Thank you.

  Q264  Joan Walley: Could I turn to the inclusion of aviation in Phase III of the ETS and ask you how have you projected the impact that this will have and what do you think the effect is likely to be on airfares and on carbon emissions from flights?

  Mr Seinen: The impact assessment that accompanied the proposals for the inclusion of aviation predicted that the increase of emissions from aviation would no longer be 142% but fall down to 135%, so still a significant increase and not a very big reduction. We would expect aircraft operators to pass on the cost of emissions in prices which would mean for flights within Europe a limited amount, around perhaps €5 to €15; for inter-continental flights it would be higher. I do not recall exactly the amount but in the impact assessment all these figures were there.

  Q265  Joan Walley: Okay. Just looking at the windfall that the energy companies made from Phase I, what kind of windfall do you expect the operators of aviation will be making from Phase III? Have you specified at all, and if so how have you specified the environmental action that you would expect to be made in return? Has this been spelt out by the Commission?

  Mr Seinen: Yes, in the impact assessment it was clearly explained that one can expect aircraft operators to pass on the cost of emissions, whether or not they receive them for free, like they do with fuel costs. If the kerosene price increases you also get a surcharge on your ticket, so there was no reason to expect it to be different for carbon costs. That is why the Commission proposed less free allocation. Also in the Parliament there were voices but this was not adopted.

  Q266  Joan Walley: Mr Challen has briefly touched on the US but I just wondered how the Commission is dealing with objections to the plans in respect of aviation from the US Government and also from the aviation industry? It would be useful just to have a sense of how you are addressing that.

  Mr Seinen: With the new Obama administration we have not heard objections against the system that Europe now has adopted and is putting in place.

  Q267  Joan Walley: Do you mean formal objections?

  Mr Seinen: There are no formal objections and no legal cases. Rather to the contrary, contacts with the AFA rather suggest a willingness to co-operate and I think it is also interesting to note that in all the draft bills about cap-and-trade systems in the US, aviation and also maritime transport were always included, not necessarily directly, but via the fuel sales. Of course if a US cap and trade system comes into being and covers aviation the Commission of course is open to discuss what needs to be done to avoid double counting.

  Q268  Joan Walley: I am right in believing that there have been vociferous objections from the US Government towards these proposals, am I not?

  Mr Seinen: Under the former administration the language was tougher, yes.

  Q269  Joan Walley: But you say that there has been a change in approach with respect to aviation?

  Mr Seinen: I think so. We have not heard the same objections.

  Chairman: Unfortunately I think we are out of time now. We are very grateful to you for coming in. I hope we will keep in touch with you and your colleagues in the Commission.

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