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. Member
companies include 80 of the FTSE 100 index, some 200,000 small
and medium-sized firms, more than 20,000 manufacturers, and over
150 sectoral associations. The vast majority of our members are
energy users, however we also have in our membership electricity
generation and distribution companies, energy technology companies
and upstream oil and gas businesses.
2. The CBI welcomes the opportunity to provide
input into the Energy and Climate Change select committee's hearing
on emissions performance standard (EPS). Responding to the challenges
of climate change and reducing CO2 emissions requires a long-term
approach, and investment that recognises the need for significant
and secure supplies of clean and affordable energy.
3. The CBI support the Committee on Climate
Change's (CCC) view that to achieve our legally binding carbon
reduction targets, UK electricity generation must be largely decarbonised
by 2030, with progress made by 2020. Of equal importance is retaining
our security of supply during the transition to low-carbon generation,
which we believe can only be achieved through a diverse range
of generating technologies and fuels, including fossil fuels.
4. The CBI recognises that there is a need
for energy market policy development to help meet our carbon reduction
targets and ensure energy security at an affordable cost. We look
forward to the debate in the autumn on the government's forthcoming
consultation of electricity market reform on different ways to
promote decarbonisation.
5. However, we do not believe that the introduction
of an EPS will helps us meet these goals as:
— An EPS would add no additional carbon
savings beyond those already guaranteed under existing policy
and it would add another layer of complex bureaucracy.
— An EPS could deter UK investment in Carbon
Capture and Storage (CCS) which could have an adverse impact on
low carbon energy security.
— EPS originates from a fundamentality
different environmental regulatory regime.
The rest of this response sets out our views
in more detail.
An EPS would add no additional carbon savings
beyond those already guaranteed under existing policy and adds
another layer of complex bureaucracy
6. Emissions of CO2 in the power sector
are already determined by a tightening cap under the EU Emissions
Trading Scheme (EU ETS), which will result in emissions from Europe's
power and manufacturing sectors being 21% below 2005 levels by
2020. Therefore setting an EPS will add no further environmental
benefit to this existing policy. Any additional CO2 reductions
achieved in the UK would be offset by higher emissions elsewhere
in the EU within the overall EU ETS cap.
7. The CBI recognises the concern among
policy makers that following the insufficiently strong agreement
at Copenhagen, the carbon price in EU ETS gas been lower than
expected. However, we do not believe that an EPS is the correct
response to this concern. As our recent reports on energy policy
have made clear, the focus should be on assessing whether a market
mechanism (or combination of mechanism) such as a low carbon obligation,
carbon floor price or capacity payment) would be an effective
way of incentivising the high fixed cost low carbon generation
we need. Other options such as setting now a tight cap for EU
ETS Phase 4 are also relevant.
An EPS may deter UK investment in Carbon Capture
and Storage (CCS) which could have an adverse impact on energy
security
8. The successful demonstration and commercialisation
of Carbon Capture and Storage (CCS) is vital if the UK is to meet
its long term carbon reduction commitments and to ensure affordable,
secure energy supplies. To this end, the CBI supports the government's
CCS policy: funding four demonstration projects through a CCS
levy with the possibility of extending the levy to fund future
retrofit.
9. Some have argued that an EPS is needed
to prohibit the building of unabated new coal stations. The previous
Government set out a clear policy to the effect that all new coal
stations had to be carbon capture ready and must have a certain
level of CCS demonstration. The new Government could confirm this
policy and implement it through the permitting system if it wished,
without needing the complexity of a new regulatory instrument.
10. Introducing an EPS however, risks the
unintended consequence of disrupting investment intentions in
CCS. This could happen either because the EPS was set at such
a restrictive level that the amount of CCS on a new coal station
would be uneconomic (or alternatively that funding additional
to the CCS levy would be required to support each demonstration,
which would drive up costs to energy users). Alternatively, investors
may feel that uncertainty over the future level of an EPS undermines
the stable policy and regulatory framework that companies with
global options require and this could lead to delays in investment
in power plants. Any additional disruption to investment intentions
in the energy sector could have implications for energy security.
11. Furthermore, we believe that, once technically
and commercially proven, CCS will effectively become the Best
Available Technology (BAT) for new coal power stations, and an
EPS would therefore be an unnecessary additional measure.
EPS originates from a fundamentally different
environmental regulatory regime
12. The EPS originates from California which
has a fundamentality different environmental regulatory regime.
California does not operate within an emission trading scheme
such as the one currently operating within the EU. As such, California
is solely reliant on the EPS to help regulate carbon emissions
from the power sector, unlike the UK which has the EU ETS.
ANSWERS TO
SPECIFIC QUESTIONS
What are the factors that ought to be considered
in setting the level for an Emissions Performance Standard (EPS)
and what would be an appropriate level for the UK? Should the
level be changed over time?
13. As set out above, the CBI remains unconvinced
that the EPS will have any positive impact in terms of carbon
or energy objectives and we do not support its introduction. If
the Government does introduce an EPS, we believe the least damaging
option would be to set the EPs at a level consistent with the
previous Government's policy of expecting new coal stations to
have a certain amount of CCS demonstration.
What benefit would an EPS bring beyond the emissions
reductions already set to take place under the EU ETS?
14. EU ETS is already an effective policy
tool in placing a limit on the amount of CO2 emissions. An EPS
would, therefore, add no additional carbon savings beyond those
already guaranteed under existing policy. The EU's emissions from
power and manufacturing sectors will be 21% below 2005 levels
by 2020 (and tighter if the EU adopts a more stringent overall
greenhouse gas target for 2020) and an EPS will not increase this
carbon reduction further.
How effective is an EPS likely to be in driving
forward the development of CCS technology?
15. To ensure that the continued use of
fossil fuel, and in particular coal, is compatible with our carbon
targets, the demonstration and commercialisation of CCS is crucial.
The CBI is therefore concerned that the introduction of an EPS
may deter investment in CCS for the reasons outlined above, which
could ultimately have an adverse impact on energy security.
16. One of the main drivers behind a firm's
investment decisions with regards to CCS is government support.
The rationale for government intervention relates to the need
to overcome innovation market failures, which will result in suboptimal
levels of investment. In the absence of government support for
CCS technologies, the private benefit to investors is lower than
the social benefits as the capital investment to carry out a demonstration
is substantial. The cost of a CCS demonstration of 300MW net capacity
on a post-combustion plant (gross 1,600MW), if taken forward solely
by developers starting operation in 2014, is estimated at £2.4-2.8
billion NPV 2009.[56]
As such, it is important that the Government does not bring forward
any policies that could have a detrimental impact on investment
in CCS technology.
Should the UK's CCS demonstration programme cover
gas-fired as well as coal-fired power stations?
17. As laid out in our recent brief, No
time to lose,[57]
the CBI believes that, given the potentially important role of
natural gas in the UK's energy mix in the 2020s, consideration
should be given to extending the CCS demonstration programme to
gas-fired power stations.
Could the introduction of an EPS pose any risks
to the UK's long-term agendas on energy security and climate change?
18. Investors and companies with global
options require a stable policy and regulatory framework, therefore
the imposition of an arbitrary EPS may in effect act as a barrier
to investment. A reduction in this critical flexible capacity
may result in a narrower generating base, thus having significant
implications for energy security.
What is the likely impact of an EPS on domestic
energy prices?
19. An EPS would most likely increase domestic
energy prices. As noted elsewhere, the introduction of an EPS
at this stage has the potential to skew investment in the energy
market. If this results in a less diverse energy mix, then the
UK will be more vulnerable to commodity price volatility and supply
constraints. This vulnerability is likely to have an adverse impact
upon domestic bills.
Are any other European countries considering an
EPS? If so, should the standards be harmonized?
20. As far as we are aware, no other EU
country is currently considering introducing an EPS.
Could unilateral action by the UK to introduce
an EPS contribute towards global climate negotiations in Cancun
in November 2010?
21. The introduction of an EPS will do little
to contribute towards global climate negotiations. Firstly, the
EU negotiates as a block at global climate negotiations. As such,
the fact that that an EPS has not been implemented elsewhere in
the EU will mean that an EPS will have limited impact on negotiations.
Furthermore, negotiations at Cancun will be focused on agreeing
emission reduction targets. The EPS is a policy implementation
tool and as such would not be directly relevant to negotiations.
22. Secondly, the introduction of an EPS
would send out the message that the government does not feel that
the EU ETS is an effective policy tool in helping to meet carbon
reduction targets. This is likely to lead to a lack of confidence
in whether global mechanisms, such as global emissions trading,
will contribute to reductions in carbon emissions and could potentially
increase the barriers to an agreement of these mechanisms.
Can greater use of Emissions Performances Standards
internationally help promote agreement on global efforts to address
climate change?
23. EPS can play a role as one of the array
of measures available to governments to address climate change,
but it is difficult to see how emissions trading and EPS can be
used alongside each other. The aim of an emissions trading scheme
is to deliver emissions reductions in the most economically efficient
manner. Imposition of an additional standard will reduce the economic
efficiency of the scheme.
Business Environment Directorate
September 2010
56 http://www.decc.gov.uk/assets/decc/Consultations/A%20framework%20for%20the%20development%20of%20clean%20coal/1_20091117144132_e_@@_CoalCCSresponseIA.pdf Back
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http://climatechange.cbi.org.uk/reports/00415/ Back
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