Memorandum by the Church of England's
House of Bishops' Europe Panel
1. The House of Bishops' Europe Panel is
a sub-committee of the House of Bishops. It acts as a point of
reference for items affecting the Church of England's relations
with Europe and the European Union institutions.
2. The Europe Bishops' Panel (EBP) welcomes
the opportunity to contribute to the Committee's inquiry into
the European Commission's proposal for revisions to the EU's Emissions
Trading Scheme (ETS). Over the last three years the EBP has devoted
a considerable portion of its time to the European Climate Change
Programme in general and the proper functioning of the ETS in
particular. This interest reflects the seriousness with which
the Church takes the threat that climate change poses to the integrity
of God's creation, the vocation of humanity to actively steward
and care for creation, and the awareness that climate change is
already impacting disproportionately on many of the world's poorest
communities.
3. Recognising that British climate policy
and the global process is largely being shaped in Brussels, not
London, the Church appointed in November 2007 a representative
to the EU institutions. Based in Brussels this office is responsible
for articulating and advocating fresh thinking regarding the EU's
progression to a low carbon economy. This submission is reflective
of this work.
EXECUTIVE SUMMARY
4. The EU's ETS, the jewel in the crown
in the EU's climate change programme, is the prototype for a global
carbon market. It provides a cost effective and economically efficient
way of cutting greenhouse gas emissions by enabling reductions
to be made wherever they are cheapest. The EU deserves credit
for establishing this project, even it its environmental impact
to date has been limited. The ETS remains a project under construction.
The Commission's proposals for ETS reform provide a crucial opportunity
to learn valuable lessons from its early operation to improve
both its simplicity and predictability. The Commission's proposals
need to be judged from the perspective of environmental effectiveness
and the degree to which a reformed ETS can stimulate the innovation
necessary to achieve a low carbon and sustainable economy.
5. The Commission's proposals present a
significant advancement on the current arrangement.
(a) We support the decision to restrict the scheme's
scope to heavy industrial emitters, rather than widening its remit
to include other sectors such as agriculture and surface transport.
This should give the scheme greater market cohesion and simplicity.
(b) We hold that replacing national caps with
an EU-wide cap comprising Europe-wide sectoral limits distributed
to the individual member-states represents a significant breakthrough.
It would remove one of the major variables that have contributed
to the scheme's volatility.
(c) We favour an automatic transition to 100%
auctioning of allowances in 2012, but the proposal to progressively
move to full auctioning ensures at least that the "polluter
pays" principle is central to the scheme's operation.
(d) We welcome the proposal to remove current
restrictions on the linking of the EU's ETS to other cap-and-trade
systems. This opens the way for greater international collaboration,
not least with the USA.
(e) We welcome the move to tighten access to
the offset market. External credits need to supplement rather
than supplant the drive for domestic emission reductions, without
undermining the EU's wider international responsibility.
6. In a number of areas, however, the proposals
are insufficient and more radical reform is needed:
(a) We remain concerned that the EU's reduction
targets are not aligned with prevailing scientific evidence. Setting
more stringent emission reductions targets now would arguably
provide additional incentives for companies to invest in innovative
technologies.
(b) We recommend that the future management of
the ETS be given to an independent European Carbon Bank. A carbon
market is only as effective as the institutions that oversee it.
The absence of a strong central and independent authority undermines
the scheme's effectiveness.
(c) We agree with the proposed redistribution
of auctioning rights on the grounds of economic justice, but we
think that the decision to permit some member states to increase
emissions in the non-ETS sector is short-sighted both economically
and environmentally.
(d) We are concerned that most of the emission
reduction within the ETS will be achieved by a one-off shift from
coal to gas, rather than by the introduction of new clean technology
such as carbon capture and storage (CCS). Further consideration
needs to be given to how technological innovation can be funded
and commercialised.
(e) We believe that innovative green technology
could be commercialised through public-private partnerships using
the revenues accrued from the auctioning of allowances under the
ETS. The Commission's proposal allows for this possibility but
it fails to make sufficient provision for it.
PROPOSED LEVEL
OF EMISSION
REDUCTIONS
7. The Commission's proposed target of 20%
reduction by 2020 is clearly not aligned with scientific evidence.
The 2007 Assessment Report by the Intergovernmental Panel on Climate
Change (IPCC) argues convincingly that industrialised countries
should take on reduction targets of between 25% and 40% below
1990 levels by 2020. To keep the increase in global temperatures
in global temperatures below the two degree threshold, global
emissions need to come down to near zero by the end of the century.
This will require industrialised countries, including EU member
states, achieving this target by 2050.
8. We are concerned that under existing
proposals a significant proportion of the EU's 20% target will
be met by emission reduction credits from outside the EU. These
credits only cancel out increases in EU emissions; they do not
result in a net reduction in global emissions. We are therefore
supportive of the position taken by WWF in pressing for an overall
greenhouse gas emission target of 30% below 1990 levels by 2020
to be achieved within the boundaries of the EU. Internationally,
the EU should invest the financial equivalent of an additional
15% emission reductions in developing countries to assist them
decarbonise their economies and adapt to climate change impacts.
THE SCOPE
AND OPERATION
OF THE
EU'S ETS
(i) Scope
9. We welcome the Commission's proposal
to extend the coverage of the ETS to the petrochemical, ammonia
and aluminium sectors as well as nitrogen oxide emissions from
the production of various chemicals. Further consideration needs
to be given to the inclusion of methane from active coalmines.
We are encouraged, however, that the Commission has restricted
the scheme to heavy industrial emitters. These sectors provide
well-verified data and clear potential for reductions in emissions,
which are essential ingredients for the effective working of any
emissions trading scheme.
10. In follows that we agree with the Commission's
decision not to include surface transport or shipping within the
ETS. Although both sectors generate significant greenhouse gas
emissions, emissions that are predicted to rise in coming years,
further analysis is required to decide whether the ETS is the
most appropriate mechanism to deal with either sector. Reaching
a global sector agreement through the International Maritime Organisation
would be the most effective mechanism to address shipping. Rising
transport emissios is best addressed by other regulatory means,
such as by road pricing and by imposing stringent emissions standards
for cars.
11. We agree with the decision both to exclude
agriculture from the scope of the scheme, as well as those industrial
installations currently covered by the scheme that produce relatively
low levels of emissions. The agricultural sector comprises a very
large number of small businesses whose emissions would be hard
to verify. Monitoring costs would naturally be very high. This
would make it difficult to determine the levels of savings achieved.
The allocation of a small number of permits to individual farmers
would generate insufficient incentive since they would not find
it worthwhile to trade them.
(ii) Cap setting
12. We support the proposal to abandon national
caps in favour of an EU-wide cap. This would remove much of the
competitive distortions and carbon price volatility that was experienced
under Phase 1 of the scheme. Agreeing a linear emission reduction
trajectory, setting the cap to 2020 and beyond, which can be automatically
adjusted following an international climate change agreement,
provides much greater predictability. Delivering an EU central
cap set out over 15 years provides a sufficiently long timeframe
for business to factor the carbon price into their investment
decisions. The automatic adjustment to the linear reduction trajectory
on the conclusions of the negotiations in Copenhagen 2009 sends
a clear signal to the wider world that the EU has the mechanism
to deliver on its commitment.
(iii) Technological innovation
13. In light of the recent analysis provided
by Deutsche Bank, we are concerned that the emissions targets
for the sectors covered by the ETS will to a large extent be met
by a one of shift from coal to gas, rather than through investment
in low or zero emission technologies such as carbon capture and
storage. This raises a number of related problems. A higher dependency
on gas carries with it significant geopolitical and economic risks.
The projected economic growth in China and India means that competition
for gas supplies will become ever more intense with the threat
of higher prices. The location of the principal sources of natural
gas in many of the most unstable regions of the world means that
gas supplies are not necessarily dependable.
14. Analysts predict that CCS could potentially
reduce the EU's carbon dioxide emissions by half by 2050. Further
effort therefore needs to be made to commercialise this technology.
The Commission's proposal to change the regulatory framework for
CCS is helpful, but it will not lead to its adoption on an industrial
scale. This will only occur when the price-per-tonne of carbon
avoided by use of CCS is lower than the price of carbon. Resolving
this issue requires a concerted and co-ordinated effort at the
European level to provide the necessary political and financial
support to those CCS projects currently underway in the EU.
(iv) The Practical application and enforceability
of the scheme
15. The Commission's proposals for both
simplifying and strengthening the scheme's compliance and enforcement
procedures are crucial to its good functioning, both in terms
of achieving the proposed reduction targets but also in potentially
linking with third countries. We remain concerned, however, that
insufficient attention has been given to the infrastructure required
for the scheme's administration. The Commission's proposals place
far too much emphasis on committee procedure ("comitology").
This risks allowing key decisions to be subject to intense political
and industrial lobbying.
16. We recommended that further consideration
be given to the creation of a European Carbon Bank (ECB). An independent
body comprising technical, economic and financial expertise charged
with managing the scheme's operation would be preferable to current
arrangements. Just as the European Central Bank is mandated with
the responsibility for controlling inflation within the Euro-zone,
so an ECB could be mandated with taking whatever steps are considered
necessary to create and sustain a transparent and efficient carbon
market. Detaching the ETS from politicians' electoral cycles would
eliminate the dangers of political horse-trading generally associated
with "comitology". This would provide additional market
assurances to business and investors. It is difficult to conceive
how current arrangements are sustainable long term when the EU's-ETS
is linked with other trading systems.
ALLOCATION AND
AUCTIONING
(i) Method of allocation
17. We agree with the Commission's assessment
that auctioning of allowances, as the basic principle of allocation,
is simple, transparent and efficient. It creates the greatest
incentive for investment in a low carbon economy by forcing the
market to factor in the cost of carbon. It best complies with
the "polluter pays" principle, and it avoids giving
windfall profits to those sectors that have previously passed
on the notional cost of allowances to their customers despite
receiving them for free. We recommend that unless a pressing and
convincing case can be made otherwise, 100% auctioning of allowances
should be the norm for all sectors covered by the ETS from 2012
onwards.
18. We are therefore disappointed that the
Commission has deviated from its own assessment on the grounds
that it is prudent to use the period 2012-20 to phase out the
free allocation of allowances so minimising the risk of carbon
leakage. Research provided by the Carbon Trust shows that except
in a few sectors (steel and cement) the threat of companies moving
to countries with less stringent environmental rules is exaggerated.
The Carbon Trust estimates that just 1% of EU emissions will be
off-shored by 2020 as a result of the ETS. Even if carbon leakage
is a possibility, we question whether the free allocation of allowances
is an effective counter-mechanism. The Commission's own impact
assessment concluded: "Allowing allowances for free does
not appear to be an efficient or even effective instrument to
remedy impacts on competitiveness".
19. We hold that the more the EU deviates
away from 100% auctioning allowances the less transparent and
efficient the ETS becomes. It potentially reduces the incentives
for investment in a low carbon economy. It also threatens to create
new areas of tension between member states as to how allowances
to be allocated for free should be distributed. The Commission's
proposal to resolve this issue through committee procedure, using
a formula combining a top-down approach to determine the total
level of free allocation and a bottom up approach to agreed benchmarks
lacks clarity. The Commission's proposal risks distorting the
market and diluting the "polluter pays" principle.
20. It is therefore imperative that the
Commission's decision to undertake by June 2011 an evidence-based
review of sectors that may be at risk from carbon leakage is independent
and resilient to industrial lobbying. We are encouraged, however,
by the timing of this review. Securing an international framework
agreement on climate change in Copenhagen in 2009 should help
address the political concerns that member states have regarding
the loss of competitiveness through carbon leakage.
(ii) Redistribution of auctioning rights
21. We support the Commission's proposal
allowing for a 10% redistribution of auction permits away from
those members states that have an average income-per-head that
is more than 20% above the EU average, except where the whole
climate and energy package is estimated to exceed 0.7% of GDP.
This makes economic sense given the weak economic performance
of many newer member states. It is also equitable in that the
arrangement takes account of the different levels of development
across the member states. The level of redistribution suggested
by the Commission would not, however, diminish the pressure on
companies based in these countries to lessen their efforts to
reduce emissions. In the absence of any reform to the EU's budget,
the proposal would provide newer member states with additional
auctioning revenue to assist with any structural adjustment programmes.
22. We believe that the redistributive features
of the Commission's proposals would carry greater weight if there
were harmony across the EU regarding the distribution of emission
caps for the non-ETS sectors. Under current arrangements, poorer
member states will be permitted to increase their emission in
non-ETS sectors by up to 20% while richer member countries will
have to cut their emissions by up to 20%. The analysis provided
by Simon Tilford, from the Centre for European Reform, in his
May 2008 article, How to make EU Emissions Trading a Success,
provides a clear warning as to the dangers of such an unfettered
approach. Internationally, the EU can hardly expect China and
India to place caps on their own emissions, while it is at the
same time exempting relatively wealthy countries such as the Czech
Republic or Poland from taking similar action. Long term, once
the burden-sharing agreement is phased out, such an arrangement
risks leaving new member countries at a competitive disadvantage.
Again a better solution would be to either use the EU budget more
creatively or use the revenues accrued from auctioning to subsidise
the costs of energy efficiency measures in poorer member-states.
(iii) Use of auction revenues
23. The Commission proposes that 20% of
revenue auctions should be ring fenced for climate related issues.
We welcome the decision in principle, but we think that the figure
is far too low and needs to be reconsidered. Auctioning revenues
should not be used or seen by member state governments as a "windfall
profit". Rather, they present an opportunity to finance the
substantial investments needed in technological responses to climate
change within the EU as well a contributing to adaptation and
mitigation projects in vulnerable countries in the developing
world. We recognise the resistance of some member state governments
to imposing legally binding hypothecation at an EU level, but
we believe that, in the absence of clearer investment signals
from national governments, as well as any progress in reforming
the EU budget, the move would be warranted and in keeping with
the findings of the Stern Commission.
THE INTERNATIONAL
DIMENSION
(i) Linking with similar schemes around the
world
24. We welcome the Commission's proposal
to removal of all restrictions on external linking to allow linkage
with regional, national or sub-federal systems. Current provisions
have enabled the ETS to link with those Annex B countries that
have ratified the Kyoto protocol. This has permitted linkage arrangements
with Iceland, Norway and Lichtenstein, but these same provisions
have handicapped the EU in taking forward negotiations with other
third parties. Ideally, the EU's-ETS would only be linked with
those systems covered by an international agreement, but the proposals
are sufficiently flexible to allow linkage in the absence of such
an agreement. The EU should continue to press the USA to sign
up to a post-2012 agreement, but the revisions to the ETS directive
sensibly provide the opportunity for closer collaboration between
the EU and the US regardless.
25. There are clear signs that the US position
on climate changing is gradually shifting to an acceptance of
the necessity of imposing mandatory cuts on domestic emissions.
At a federal level, several climate change bills are currently
before Congress, most notably the Jefford-Boxer, Kerry-Snow and
the Lieberman-Warner bills. At a state level, both California
and New York have passed legislation to reduce GHG emissions by
adopting emissions trading schemes similar to the ETS, while 10
North-eastern states have formed the Regional Greenhouse Gas Initiative
(RGGI). These developments are underpinned by a shift in public
opinion about the dangers of climate change and increased frustration
from the business community fearful of exclusion from an emerging
but lucrative market.
26. The diversity of bills in front of Congress,
with their differing scope and application, suggests that whichever
model is decided upon, negotiations for a linking agreement will
be intensely complicated. There are clear economic, political
and environmental benefits in securing a linking agreement, but
these benefits could be lost if any arrangement is poor designed
or executed. The decision by the Commission to list 10 criteria
against which any impact assessment study will be conducted is
helpful. The question remains, however, whether the decision to
link to another emissions trading scheme will be taken on political
rather than technical grounds, and the degree to which any decision
with inspire market confidence whilst preserving the environmental
integrity of the EU's-ETS. We recognise that member states will
ultimately want to reserve for themselves the final decision,
but we suggest that the responsibility for any impact assessment
study should be entrusted to an independent European Carbon Bank
rather than being left to the Commission.
(ii) Clean Development Mechanism (CDM)
27. We recognise that the CDM provides a
market mechanism by which companies can earn emission credits
by investing in developing countries. A 2007 report by Lehman
Brothers, The Business of Climate Change: Challenges and Opportunities,
indicates that by mid-2007 EU member states had committed
to investing 7.5 million Euros by 2012 under the CDM and JI. These
investments promise a reduction of more than two billion tonnes
of carbon dioxide. The CDM therefore provides a source of technological
transfer to assist developing countries in introducing cleaner
energy.
28. In theory at least it does not matter
where the emissions reduction takes place as the environmental
effect is the same. In practice, however, the primary political
purpose of the EU's-ETS is to provide a market mechanism by which
the EU meets its emissions targets by decoupling economic growth
and emissions. Unless the EU and other developed economies can
drastically cut their own emissions it is difficult to see how
they can persuade developing economies to stabilise and in time
reduce their own emissions. It is self-defeating when a country
such as Spain is only able to meet its Kyoto target by extensive
use of the CDM and JI. The Commission calculates that in the absence
of an international agreement carbon prices within the EU ETS
could fall to as low as four Euro per tonne if the EU maintained
its current stance on imported credits and if there was no successor
to Kyoto.
29. It follows therefore that regulating
access to the CDM must be done in such a way that it does not
undermine the market incentive for companies to invest in new
green technologies at home, nor close of developing countries
access to clean technologies. The Commission is therefore right
to impose stricter controls on the use of imported credits under
the CDM, especially in the absence of an international agreement.
However, as argued previously, we believe that it would be far
more effective to make provision for the reduction targets to
be met within the boundary of the EU and for the financial equivalent
of an additional 15% emissions reduction to be invested in developing
countries to assist them with their adaptation and mitigation
efforts.
June 2008
| 
