Memorandum from the City of London Corporation,
Office of the City Remembrancer (ETS 07)|
1. The City is a founder member of the London
Climate Change Partnership and, in 1999, was a founder member
of the UK Emissions Trading Group (UK ETG), which played an important
role in laying the foundations upon which the UK, and then EU,
Emission Trading Schemes were built.
2. The development of the emissions trading market
is the result of a combination of the policy requirement to reduce
carbon emissions and a market opportunity. The signing of the
Kyoto Protocol and the resulting EU Emissions Trading Scheme (EU
ETS), have led to the development of the market in carbon allowances.
London's pool of expertise in financial and professional services
has enabled it to become Europe's emissions trading 'hub' in a
market that has seen considerable growth in recent years and a
cluster of firms servicing this emerging industry has already
3. The City Corporation therefore welcomes the
opportunity to contribute to the Committee's inquiry.
Does the EU ETS remain a viable instrument for
climate change mitigation in the EU?
4. In establishing the EU ETS, policy makers
created the demand for a commodity (an allowance to emit carbon)
which was previously considered free. To this end, in establishing
the world's only regional trading scheme, Europe has a massive
potential advantage not only in the development of new financial
products, but also in the financing of developments in new technologies
to combat climate change. Now the price of carbon has been set,
the commercial viability of abatement projects can be more readily
calculated and capital or project finance sought from the private
Can the EU ETS operate effectively in a world
without legally-binding emissions reduction commitments and other
5. Whilst emissions trading is currently a significant
tool in the fight against climate change, it is not a universal
panacea and is reliant both directly and indirectly on enabling
legislation which will lead society to a low carbon future. However,
by harnessing the market in emissions abatement, cap and trade
schemes allow specific reduction targets to be set and monitored,
and the efficiency of the market will ensure that emissions reductions
are met at the lowest possible cost.
What reduction in emissions will the EU ETS deliver
in Phase III, within the EU and abroad?
6. The overall cap in Phase III will inevitably
be far more stringent than in previous phases. Unlike in the previous
phases where discretion to determine the emissions cap was left
to member states, it is likely that the cap will be set at an
EU wide level in Phase III. Evidence suggests that the cap will
be determined by using the average total quantities of allowances
issued by Member States in Phase II as a starting point, and then
reducing this by 1.74% each year. The effect of this would be
that there will be far fewer allowances issued in this Phase which
is likely, therefore, to lead to increased prices.
Could the environmental and economic efficiency
of the EU ETS be improved by linking with other emissions trading
schemes and how can this be achieved?
7. Carbon trading is a broad church and currently
two emissions trading markets are evolving in parallel:
marketsepitomised by the EU ETS; and
markets involving Verified Emissions Reductions (VERs), which
are a key market in the US.
8. Although the UK Government's new Quality Assurance
begins to address this, VERs currently lack market infrastructure,
such as registries and monitoring. This Voluntary market may,
however, evolve into a more formal trading systemin which
case carbon offsets, such as Clean Development Mechanism credits,
may form a bridge to a wider market, and could provide a common
'currency' between schemes. The development of carbon trading
schemes will increase market value by an order of magnitude and
is likely to spawn a plethora of new products and secondary markets.
9. The primary impetus for this may come as other
nationsChina, Australia, South Korea and Japan move towards
domestic carbon trading schemes, leading to a strong possibility
that border carbon taxation may become the norm (with trading
schemes effectively becoming a form of non-tariff trade barrier).
To this end a formalised system of VERs could replace CDM as a
bridge to a global market, and could provide a common currency
10. Whilst there are arguments in favour of developing
a global trading mechanism, another school of thought suggests
that the future success of carbon markets does not necessarily
rely on a global scheme since no other commodity has one (although
no other commodities scheme has the same aims as carbon trading).
It may be that establishing a global system could be overly complex
and thus counter productive. Many regions are setting up their
own trading schemes and it might be better to allow subsidiarity
whilst allowing cross scheme fungibility.
11. Regardless of whether the future of carbon
markets is in a global trading system or greater compatibility
between regional systems, London (and therefore the UK) cannot
afford to be complacent and cede any of its commanding lead in
this field. It must capitalise on its experience in the market
so far to develop new products, protect the integrity of existing
markets and influence the development of new markets with the
long term aim of encouraging growth in carbon trading.
What actions should the UK and the EU be taking
to promote the development of compatible ETSs internationally?
12. The free flow of information and expertise
with countries developing domestic trading schemes, particularly
China, should be encouraged in order to ensure that these nations
benefit from the knowledge gained in introducing the EU ETS.
In this regard, it may be appropriate for the EU and UK to enter
into formal negotiations with China and other nations considering
domestic or regional trading schemes, outside of the UN framework,
in order to avoid the creation of non-tariff trade barrier and
to agree international standards for VERS.
Could sectoral agreements form part of the future
of the EU ETS?
13. Sectoral agreements on aviation and shipping
are already well developed. The UK Government has already gone
further than other nations with the development of the Carbon
Reduction Commitment. The scheme was originally envisaged as a
trading scheme, which would have allowed the recycling of credits
and the focusing of revenues on carbon reduction. To this end
there was some dismay over the decision to remodel the scheme
as a tax rather than on trading. In the future there may be merit
in moving back toward the original trading scheme.
Will the EU ETS be able to access viable alternatives
to international credits without the Clean Development Mechanism?
14. Yes, if moves are made to create a formalised
system for VER trading as discussed at para 9 above.
Is the EU ETS a constraint on unilateral action
to reduce emissions and, on the other hand, how are Member States'
own policies affecting the operation of the trading system?
15. Individual Member States remain free to create
the policy frameworks which enable their domestic industries to
maximise competitive advantage within the EU ETS. The mechanism
by which member states can do this is in three parts:
development of policy instruments to discourage negative behaviour.
management of markets to encourage positive outcomes (for example
the development of industry standards and the development of transparent,
long-term and clear policy frameworks).
market opportunities to industry and ensuring a strong skills
base from which growth in the low carbon sector can grow.
How serious an impact have the recent cases of
fraud had on confidence in the EU ETS? Are further improvements
in security and auditing required?
16. The large scale theft of allowances in January
2011 has given rise to a number of problems one of which is resolving
issues of ownership of the allowances issued under the EU ETS.
This is of concern because different national legislation across
Member States means organisations which hold or trade the stolen
allowances may be subject to prosecution. For example in the UK
companies may fall foul of the Proceeds of Crime Act. As a result,
given the hazards in this market, a number of large players are
now withdrawing from trading and closing their desks. There may
be further implications for futures and options trading unless
this issue is resolved quickly.
17. Practitioners are surprised at the decision
by the Council to obscure the registration numbers of permits.
It is not understood how this will aid security as it prevents
the market from identifying the provenance of the allowances.
18. In the short term the issue of liability
needs to be resolved. Attempts to increase security in the registries
are only temporary solutions. Some have argued for a system of
licencing operators is needed although it would need to be sufficiently
workable so as not to preclude project operators or day traders.
How can the EU ETS be strengthened to operate
effectively in a world without legally binding emissions reduction
19. As set out in paragraphs 7-11, it is essential
that fungibility between regional schemes is enabled. To this
end the issue of a replacement mechanism for CDM is one of pressing
concern. The development of a formal mechanism for the trading
of VERs is one possible solution to this issue, however it will
require international agreement if it is to work.
10 http://campaigns.direct.gov.uk/actonco2/home/features/offsetting.html Back