Emissions Performance Standards

Memorandum submitted by the CBI (EPS 28)

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 1600MW), if taken forward solely by developers starting operation in 2014, is estimated at £2.4-2.8bn NPV 20091. 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 lose2, 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


[1] http://www.decc.gov.uk/assets/decc/Consultations/A%20framework%20for%20the%20development%20of%20clean%20coal/1_20091117144132_e_@@_CoalCCSresponseIA.pdf

[2] http://climatechange.cbi.org.uk/reports/00415/

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