Witnesses' Views
182. A number of our witnesses, including the
British Cement Association (BCA), RSPB, the Aluminium Federation
(AlFed) and 4cmr welcomed the potential to link with schemes similar
to the ETS (BCA Memorandum, para. 15.5; RSPB Memorandum, para.
10.1; AlFed Memorandum, para.10 and 4cmr Memorandum, para.10).
The Centre for European Policy Studies (CEPS) reminded us that
the Stern Review stressed the importance of building a global
carbon market as a cost-effective way of achieving climate change
objectives. According to CEPS, "the most likely and possibly
fastest way to develop a global carbon market is through linking
of national and regional schemes", such as those being developed
in Australia, New Zealand, the USA and Japan (Memorandum, p.139).
One fundamental reason to link schemes was put to us starkly by
Jerzy Buzek MEP, who noted that the EU was responsible for only
14 per cent of CO2 emissions. A 20 reduction in EU
emissions would, therefore, reduce global emissions by only three
per cent (Q 405).
183. DEFRA warned, however, that some of the
detail of the ETS, such as the small emitter threshold, may "make
it harder to link with other schemes" (Q 113). Nevertheless,
the UK Government took the view "that most of these things
are negotiable and they can be changed to have sufficient flexibility."
Indeed, "as long as we are based on the same basic principles
of environmental integrity and a tonne of CO2 is a
tonne of CO2 come what may, then most schemes should
be able to link" (Q 114). Officials emphasised that
there was substantial dialogue between the EU, the US and Australia
and that those two countries are "very much following our
philosophy and way of doing it" (Q 174). They explained
that it was not possible to work out the technicalities of linkages
until the details of other schemes were clearer but the new Directive
provided a legal framework to make such links (Q 174).
184. According to Mr Fankhauser of IDEACarbon,
the most significant barrier to linkage was the expected price
differential between schemes. This was driven by the differing
levels of ambition underlying the various emissions trading schemes
and, in some instances, the application of a price ceiling when
allowance prices hit a particular level. Mr Fankhauser warned
that such mechanisms would not be compatible with the EU scheme,
while noting that price differentials could be tackled if the
political will were there (QQ 317-8). The European Commission
confirmed that price caps would not be compatible with the EU
scheme but was confident that this was well understood externally
(Q 385).
185. As far as linkage between the New Zealand
scheme and the EU ETS was concerned, New Zealand officials highlighted
the different underlying philosophies behind the two schemes that
would act as a barrier to linkage at this stage. The EU's scheme
was more focused on reducing domestic emissions, while the New
Zealand system sought to ensure that New Zealand met its international
obligations at least cost. This made New Zealand more open to
offsetting emission reductions in other countries against obligations
in New Zealand. One reason for this approach, officials explained,
was that few of New Zealand's competitors (in the Southern Hemisphere)
face a carbon price, a competitive constraint that is particularly
acute in the agriculture sector (Q 356). In the EU, by contrast,
"the vast majority of trading is within European boundaries
and that is where the fundamentally different philosophies emerge
from in our view" (Q 356).
186. The European Commission took the view that
when linking with other schemes, it would be important to take
a common approach to external credits as, "if one of you
has taken a decision not to accept a certain type of credit, then
you cannot link with somebody who allows that type of credit without
tacitly allowing it to affect your systems" (Q 385).
A Commission representative acknowledged that the Commission had
held discussions with New Zealand in light of New Zealand's "very,
very open approach to credits" (Q 384). New Zealand
officials recognised that the types of credits accepted in each
scheme would need to be "standardised or very near standardised
for full linking to occur" (Q 353).
187. The International Chambers of Commerce (ICC)
UK suggested that the EU should adopt formal criteria for assessing
the potential to link with other schemes, along the lines of the
criteria mentioned by the Commission[78]
in its impact assessment (Memorandum, para. 13). These included
among others: the type of system; the stringency of the cap; the
units to be used; the standard of the allowances registry; the
sources covered; the emissions covered; compliance and enforcement;
and project credit provision. Both the Environment Agency (EA)
and the New Zealand government considered that linkages would
require a common approach to monitoring, reporting and verification
(EA Memorandum, para. 3.8.1 and Q 356).
188. The International Chamber of Commerce (ICC)
UK cited the recent launch of the International Carbon Action
Partnership (ICAP) as a welcome development which underlined the
growing interest of other countries and regions in linking up
with the EU ETS, and which might represent one possible forum
to develop dialogue on harmonising the design of emission trading
schemes globally (Memorandum, paras. 11 and 15). DEFRA also took
the view that the ICAP had been effective, particularly by helping
the US tap into the experience of other countries (Q 175).
New Zealand officials explained that the ICAP initiative had been
helpful in allowing New Zealand to maintain close contact with
other countries and regions that were developing emissions trading
schemes (Q 354), allowing them to share expertise and practical
experience (Q 363). They suggested that, in future, the ICAP
could "play a very important role in promoting common understanding
around important issues in the linking of emissions trading schemes".
Conclusions and Recommendations
189. It is critical that the EU ETS should be
able to link with similar schemes around the world. Emissions
trading will become increasingly effective as it becomes more
widespread. Conversely, the EU ETS will be less effective, both
in economic and environmental terms, while it remains an isolated
regional initiative.
190. The evidence presented to us suggests that
linkages will only be possible between emissions trading schemes
that share similar levels of ambition with respect to environmental
objectives, quality-control of credits, verification and enforcement
mechanisms. We note than on current projections, the third phase
of the EU ETS is likely to deliver a substantially higher carbon
price than the emissions trading schemes being developed in other
parts of the world. This carbon price differential would in turn
present a serious obstacle to establishing links between the EU
ETS and other emissions trading schemes. We therefore anticipate
that, due above all to the potential price differential, the EU
may in future face stark trade-offs between compromising the environmental
integrity of its scheme and extending its reach. It is not clear
in advance which of these two approaches will deliver more emissions
reductions overall, but this consideration should in our view
drive EU policy on linkage.
191. In view of the significant remaining barriers
to linkage between schemes, we wish to highlight the role that
the International Carbon Action Partnership could play in facilitating
international dialogue on these issues. We urge the European
Commission and the Member States to take a leading role in promoting
such dialogue.
77 http://www.icapcarbonaction.com/ Back
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SEC(2007)52, p.132 Back
