Conclusions and recommendations
The rise of emissions trading
1. Carbon
pricing, and emissions trading in particular, is an effective
method for reducing emissions. Emissions trading systems are increasingly
popular and spreading around the world. These systems can provide
a new revenue stream for governments which can offset other taxes
or support innovation. We were surprised that the Government had
not yet considered the best use of revenue generated from emissions
trading. We were pleased to hear that the Prime Minister thought
it was an area worth examining. We recommend the Government make
an assessment of current and future emissions trading revenue
and report on different options for using the revenue including
the potential to reduce other taxes and support new low-carbon
technologies. (Paragraph 10)
Linking emissions trading systems
2. As
emissions trading systems develop and mature around the world
there will be increasing opportunity for them to grow and expand
so that emissions can be reduced in the most cost-effective way.
This expansion is likely to occur by the linking of systems to
one another. We recommend that the Government ensure that, when
supporting other countries to develop their emissions trading
systems, it promotes designs that are compatible with the EU ETS.
Aligning design elements will help improve the prospects of linking
in the future. The Government should focus on engaging with China
and the US as the world's largest economies and because they have
already embraced emissions trading. (Paragraph 21)
The EU Emissions Trading System
3. The
issue of surplus allowances in the EU Emissions Trading System
(EU ETS) must be addressed urgently. We recommend that the Government
focus on getting agreement in the European Parliament and Council
to implement the market stability reserve (MSR) at the earlier
date of 2017 rather than in 2021, as originally proposed by the
European Commission. Once it has been reformed the credibility
of the EU ETS will increase along with the prospects of linking
it to other systems in future. (Paragraph 28)
Securing an international climate agreement
4. The
Government's focus in Paris at the end of 2015 will rightly be
on securing a global climate agreement which will keep global
average temperatures below 2°C. Carbon markets and emissions
trading systems can play an important role in helping countries
achieve their commitments in an efficient and cost effective way.
We recommend, therefore, that the Government ensure the Agreement
promotes use of carbon markets and facilitates the future linking
of emission trading systems. It should also ensure that provisions
which will preclude the future development of carbon markets are
actively avoided. (Paragraph 38)
Conclusion
5. Carbon
pricing, and emissions trading in particular, is an established
and well recognised policy instrument for controlling greenhouse
gas emissions in a cost effective way because it provides flexibility
to participants on how they want to reduce their emissions. A
global carbon market would be the most favourable outcome in the
long term because it is one of the most economically efficient
ways to reduce emissions. However, attempting to achieve this
benign outcome by means of a top-down process is extremely unlikely
to succeed. Instead a bottom-up approach aimed at developing a
network of regional, national and sub-national emissions trading
systems, which gradually come together by linking, is much more
likely. A global climate agreement that promotes carbon pricing
and is favourable to linking represents the best chance of developing
a global carbon market in the long term. The move towards a hybrid
approach-which combines top-down elements for establishing and
reviewing targets, with bottom-up elements of pledge-and-review
tied to national policies and actions-in the international climate
negotiations could significantly improve the prospects of linking
carbon markets and is a welcome development. The world's largest
economies, which have embraced emissions trading, China, the US
and the EU will be the leading players in this process. As the
first pioneering adopter of emissions trading and a strong advocate
for market-based carbon pricing policies, the UK Government has
an absolutely vital role to play in driving forward international
linkage. (Paragraph 39)
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