Memorandum by Centrica plc
LEVELS OF
EMISSIONS REDUCTIONS
The proposed level of emissions reductions and
the automatic change from 20% to 30% should an international agreement
be reached.
1. Although the proposals have detailed
the provision for a reducing cap to enable a 30% reduction to
be met should international agreement be reached, we have concerns
over the definition of an International Agreement and perhaps
more importantly the timing on when this may be reached and therefore
the gradient of the reduction curve if this is delayed until after
2013.
2. We suggest that the definition of an
International Agreement should include ratification, given this,
it is highly probable that this may not be finalised until some
time after Phase III commences in 2013. If this is the case in
order to meet the 30% reduction criteria, participants will be
given an increasingly steep reduction on the overall emissions
cap. We suggest that there should be a minimum period between
the ratification of any International Agreement and the reduction
of the cap to meet the 30% target to give participants sufficient
time to meet the steeper gradients and to avoid market uncertainty.
SCOPE AND
OPERATION
The sectors and gases that the Commission proposes
to include and exclude. We would be particularly interested in
views on the inclusion of Land Use, Land Use Change and Forestry
(LULUCF) sectors, including agriculture.
3. We support the expansion of the scheme
to include other sectors and gases as this inevitably increases
efficiency. However, any expansion must not compromise the existing
scheme, and this must only be achieved where the baseline for
expansion sectors is accurately known. If there is any doubt,
any expansion should be run in parallel to the EU ETS for at least
a year to gain knowledge in this area and a robust monitoring
and verification regime must be used.
4. We support the continued exclusion of
LULUCF as we feel to maintain the integrity of the scheme work
needs to be undertaken in this area to ensure the correct treatment
of these temporary carbon savings.
The practical application and enforceability of
the scheme
5. We are happy with our experience of the
scheme to date. There have been a few issues during the first
phase, and lessons have been taken on board in the design of Phase
II, such that we feel the EU ETS is now a robust working market.
We are keen that this is maintained and it is therefore essential
that when changes are introduced, ie auctioning, these are brought
about with the working market in mind. For example, the introduction
of high volume auctions may have a large impact on the market
price and trading volumes leading up to the auction date. In our
view, it is therefore preferable to auction allowances little
and often.
6. One of the scheme's strengths is that
the proposed tight cap delivers a meaningful price signal to participants.
This, in addition to the information set out on how the cap should
be set post 2020 is both reassuring to participants and assists
in maintaining a robust emission market.
The key strengths and weaknesses of the proposal.
You may wish to consider in particular: the extent to which the
scheme as currently designed will encourage technological innovation;
whether it will result in the appropriate price signal being sent;
whether it will be efficient and/or equitable.
7. We believe that the free allocation of
allowances to sectors which are able to recover the cost of allowances
through their received price is the current Scheme's fundamental
flaw. We are therefore pleased that this particular element is
proposed to be corrected during Phase III.
8. The electricity generation sector are
proposed to have 100% auctioning of allowances from 2013, other
sectors will start with 20% auctioning and increase to 100% by
the end of the Phase in 2020. We see no reason why all sectors,
who are not subject to carbon leakage, should not have 100% auctioning
from 2013.
9. In the absence of full auctioning across
the Scheme, we would like to see the EU move to instructing a
minimum level of auctioning in all Member States in Phase III,
and the UK government targeting auctioned allowances on the power
generation sector. The removal of the current free allocation
process, ensuring that the cost of carbon is reflected in all
future planning, investment and operations decisions will ultimately
encourage lower carbon technologies and processes. It is essential
that the higher polluter is given this signal, by having to purchase
their allowances, to drive down carbon emissions.
10. To a certain extent, the scheme (Phase
III in particular) will encourage technological development, however,
in order to make some large step changes it is important that
the very high cost and risks of achieving this does not rest solely
within the business community and, we suggest, some Government
assistance should be forthcoming.
ALLOCATION AND
AUCTIONING
Whether decisions about the proportion of permits
to be allocated for free rather than auctioned should be taken
at the EU level or at the Member State level, and what the time-frame
for such decisions should be.
11. As stated above, in the absence of full
auctioning across the Scheme, we would want the EU to instruct
a minimum level of auctioning in all Member States for Phase III.
Member States should then be free to work within these levels
to determine the level of allowances to be given for free and
those that should be auctioned. The harmonisation of markets across
the EU is important where these markets interact or compete against
each other. However, it should be noted that some sectors, for
example, power generation, do not compete against each other across
the EU, and therefore harmonisation in this sector is not necessary.
Which sectors (if any) should continue to receive
a proportion of their emissions permits allocated free of charge,
and for how long?
12. Only those sectors that are subject
to, and can provide evidence of, carbon leakage should be given
any free allowances. Any provision of free allowances, must be
made in an open and transparent way, and on going evidence must
be provided for the free allowances to continue. We do not support
giving free allowances to the power generation sector, as we suggest
that the power generation market can or will suffer from carbon
leakage.
Whether the redistributive element of the Commission's
proposal (whereby poorer Member States are allocated more auctionable
emissions permits, thereby increasing the revenues accruing to
their Treasuries) is appropriate.
13. We suggest this issue is outside the
practicalities of the scheme, and as such should be discussed
at Member State level.
THE INTERNATIONAL
DIMENSION
The extent to which EU operators should be allowed
to meet obligations under the ETS by investing in projects to
reduce emissions outside the EU through the Clean Development
Mechanism (CDM).
14. We understand and accept that a balance
needs to be struck between effort at home and abroad, and that
the UK needs to show some leadership in finding real carbon cuts
at home. Given this balance will depend on a number of factors
including the speed of development of new technology and the availability
of good-quality projects, we do not believe that identifying a
precise balance is helpful.
15. Project credits have an important role
to play in delivering global emission cuts which should be recognised.
We believe that projects developed under the Clean Development
Mechanism deliver real and enduring carbon emission reductions
in developing countries which currently do not have any emission
reduction targets and, in the absence of legally-binding targets,
open a pathway to Kyoto for many developing countries.
16. There is also substantial potential
for technology transfer from these projects to other countries
whether directly covered by the EU ETS or not. Allowing the use
of credits for compliance under the EU ETS supports these project
streams, supports innovation in UK business, and allows reductions
to be made at lowest cost.
17. The UK is emerging as a market leader
in the financing of these kinds of projects. Imposing low limits
on the use of credits within the UK damages the ability of UK
companies to invest in emission-reducing projects in the developing
world, and might check the development of this important new market.
18. To protect the credibility of the EU
ETS and other international emissions trading, it is imperative
that projects are subject to rigorous accreditation to ensure
minimum quality standards are met. Within the CDM this role is
carried out by the UNFCCC's CDM Executive Board and we are confident
that this system is providing the necessary robust and rigorous
assessments of proposed projects.
The likely feasibility of creating links between
the ETS and other similar schemes around the world.
19. Ideally, directly linking the EU ETS
with other emission schemes outside the EU will help to deliver
emission reductions at the lowest cost to the global economy,
and will aid development of a more liquid market. This should
only happen, however, when other schemes are established, and
when the principles behind those schemes as well as their operation
allow a direct linking.
20. It is vital that any linked schemes
operate with similar underlying processes to ensure the robust
nature of the EU ETS is maintained. Areas to consider would include:
(a) Mandatory caps on emissions.
(b) Equivalent monitoring, reporting and
verification standards.
(c) Similar access to limited external credits.
(d) Absence of market interventions ie price
caps, buy outs.
21. In the absence of such direct linkages,
project credits from the CDM and JI markets can act as important
linking mechanisms and help to ensure that the EU ETS is not operating
in a vacuum from the global economy.
June 2008
| 
