Carbon Budgets - Environmental Audit Committee Contents

3  Proposed review of the fourth carbon budget

32. The question of whether the advice of the Committee on Climate Change should have been followed or a less stringent fourth carbon budget set largely revolved around anxieties about the potential impact on the UK's relative international industrial competitiveness.[72] The compromise reached within Government, it appears, was to accept the CCC's recommended figure for the fourth carbon budget, but also to undertake a review in 2014 of the carbon budgets.

33. The Government runs a number of downside risks from opening up the possibility of changing the already-set carbon budgets:

  • As the Committee on Climate Change stated, the fourth carbon budget 'should be regarded as an absolute minimum' because 'a less ambitious budget, requiring further acceleration towards the end of the 2020s would ... put the 2050 target at risk'.[73]
  • Taking action to reduce emissions later will cost much more than taking action now. The Stern Review estimated that the negative impact of climate change could be equivalent to a fall in global GDP of 5-20% each year. This would be as a result of adaptation costs (such as increased heating and cooling bills, and flood defences) and impacts which cannot be adapted to (such as health impacts and increased flood damage).[74] However the estimated cost of meeting the fourth carbon budget is less than 1% of GDP in 2025 (the mid-point of the fourth carbon budget period).[75]
  • Setting stable carbon budgets provides a strong signal to investors in low-carbon technologies,[76] which would be undermined by the prospect of changes in 2014.[77] As the Secretary of State agreed, maintaining such a positive signal would help the UK establish itself as an early mover in low-carbon sectors before other countries do so.[78] The Grantham Institute was concerned that the prospect of the 2014 review cast 'doubt on the Government's claims that there are significant opportunities (in terms of jobs and international trade) in developing a competitive advantage in key low-carbon technologies'.[79]

Also, the timing of the 2014 review is difficult as international negotiations to limit global temperature rises to 1.5 degrees Celsius may be ongoing at that time (paragraphs 11 to 13). The Government should be prepared to ensure that any international agreement reached before 2015 is factored into its review of the fourth carbon budget.

34. The carbon budgets already set should be regarded as the absolute minimum for emissions reductions, and any loosening of them may put achievement of the UK's 2050 target in jeopardy. A review of the carbon budgets threatens to undermine the benefit of the Climate Change Act, producing uncertainty about the trajectory for emissions reductions upon which key Government policies will be formulated and technologies developed. The Government should therefore set out as soon as possible the scope of the 2014 review, including the range of actions and the limits on policy change that might plausibly flow from the review.

The rationale for the 2014 review

35. The carbon budgets are made up of emissions from the 'traded sector' (sectors covered by the EU ETS) and the 'non-traded sector', with the UK's share of the EU ETS cap representing the 'traded sector' component of the carbon budgets (paragraph 18). WWF's view was that the carbon accounting rules hamper the Government putting in place meaningful carbon budgets:

...The cap for the traded sector is now set at EU level, meaning that the carbon budget for the UK traded sector is essentially based on a formula for sharing out auctioning revenues, rather than on the UK's actual emissions. This will become increasingly disconnected from the UK's real emissions, and also makes it difficult for the UK to increase ambition for the traded sector unilaterally.[80]

36. In accepting the CCC's recommended fourth carbon budget, the Government regarded it as 'very ambitious but technically feasible'.[81] The budget was 'conditional on EU progress towards the EU emissions goal' and if in 2014 'our domestic commitments place us on a different emissions trajectory than the EU ETS trajectory agreed by the EU, we will, as appropriate, revise up our budget to align it with the actual EU trajectory'.[82] The review was, as the Secretary of State told us, to make sure that "we are not just keeping our eyes on the horizon but we are looking behind us to see whether everybody else is still there [so that] we are not so far out in front that there are serious penalties". [83]

37. The Government states that the level of the fourth carbon budget is consistent with emissions reductions set out by the European Commission in its Roadmap (paragraph 14).[84] However, the development of the EU ETS is uncertain beyond 2020. The European directive setting out the rules for Phase III of the ETS (2012 onwards) tightens the emissions cap each year by 1.74% of the average annual Phase II cap.[85] The Emissions Trading System directive allows for a review of this rate of reduction to be undertaken between 2020 and 2025. Should the EU move to a 30% reduction target for 2020 (paragraph 3), the Government expects the EU ETS cap to be tightened further.[86] The level of the traded sector emissions required during the fourth carbon budget period will be determined by the EU ETS cap then in force, and the Government's working assumption in its Impact Assessment is that 'carbon budgets will be amended once this [cap] is known'.[87] The fourth carbon budget period, covering 2023-27, as well as these potential changes and reviews, come later than the Government's proposed 2014 review, at which point it will be little better placed to reflect likely EU ETS developments than now. There is, more fundamentally, an inconsistency in the Government's position of trumpeting its acceptance of a recommended carbon budget for 20 or so years hence while at the same time envisaging the possibility of overturning that commitment just three years from now, and risks undermining the Climate Change Act which aims to set a long term trajectory of emissions reductions based on independent scientific advice.

38. The Climate Change Act allows the carbon budgets to be changed providing there have been 'significant changes' affecting the basis on which the previous decision was made. The risk for the UK in seeking to meet challenging carbon budgets is that the EU ETS cap will not be sufficiently tough to drive significant traded sector emissions reductions, because that would require additional cuts in non-traded emissions to make up the remainder of the carbon budget. The Secretary of State told us, however, that changes to the EU ETS emissions cap would not count as a significant change, with the EU ETS cap changing the traded sector cap in the UK automatically.[88] That leaves some uncertainty about what 'significant changes' would allow a change in the budgets. If it decides in 2014 to amend the carbon budgets, to comply with the Climate Change Act the Government will need to demonstrate clearly that there had been significant changes affecting the basis on which the budgets were set. In its response to this Report, the Government should outline what sort of 'changes' could sustain a lawfully compliant change in the budgets. Before any changes are made following the 2014 review, either to the level of the budgets or perhaps to bolster traded sector emissions reductions outside the Emissions Trading System (e.g. by accelerating the rise in the UK carbon floor price), a full impact assessment should be carried out.

72   See online articles from Guardian and BBC:;;Oral evidence taken before the Liaison Committee on 17 May 2011, HC 608-ii, Qq 32-34 Back

73   Committee on Climate Change, The Fourth Carbon Budget - Reducing emissions through the 2020s, December 2010, page 12. Back

74   HM Treasury, The Stern Review: The Economics of Climate Change, October 2006.  Back

75   The Fourth Carbon Budget - Reducing emissions through the 2020s, op cit, page 12. Back

76   HM Government, Implementing the Climate Change Act 2008: The Government's proposal for setting the fourth carbon budget, May 2011, page 17. Back

77   Ev w7, Ev w24, Ev w31  Back

78   Q 10  Back

79   Ev w31 Back

80   Ev w24 Back

81   HM Government, Implementing the Climate Change Act 2008: The Government's proposal for setting the fourth carbon budget, May 2011, para 17. Back

82   ibid Back

83   Q 8 Back

84   Implementing the Climate Change Act 2008: The Government's proposal for setting the fourth Carbon Budget, op cit, para 16. Back

85   Directive 2009/29/EC of the European Parliament and of the Council of the European Union, 23 April 2009.  Back

86   Department of Energy and Climate Change, Impact Assessment of Fourth Carbon Budget Level, May 2011, page 60. Back

87   ibid, page 62.  Back

88   Q 9 Back

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Prepared 11 October 2011