Memorandum by the Environment Agency
1. SUMMARY AND
RECOMMENDATIONS1.1 The European
Commission's review of the EU Emission Trading Scheme (EU ETS)
is a key opportunity to help mitigate the impacts of climate change.
The EU ETS must cap allowances to drive carbon reductions and
stimulate investment in low-carbon technology.
1.2. The main points of our response are:
Cap-setting and allocation. The scheme
should move towards EU centralised cap-setting from Phase III
onwards. Auctioning should replace the issuing of free allowances
as soon as possible. Any free allocation that does continue for
reasons of competitiveness should be on the basis of benchmarking.
Scope of the scheme. The scheme should
apply to aviation as soon as practically possible. The revised
Directive should include a process for including new sectors,
using a set of agreed criteria.
Linking. The scheme must link to other
trading schemes in order to establish a global carbon market.
Care must be taken to ensure equivalence of how a tonne of CO2
is measured. Preference should be given to linking with schemes
that operate within a Kyoto Protocol successor framework.
Streamlining. The best solution for streamlining
the scheme would be for all Member States to use a consistent
and broad definition of combustion. The scheme should include
an emissions threshold to remove the smallest emitters.
Monitoring Reporting and Verification (MRV)
and compliance. This must be uniformly applied so that the
scheme is underpinned by the confidence that one tonne of CO2
is the same in each Member State.
Supplementarity. The definition of Supplementarity
needs to be tighter and consistently applied. Buying credits from
overseas should not remove the incentive to invest in low carbon
technology in the EU or slow down innovation. Kyoto credits must
be quality assured. MRV standards must be the same as those in
EU ETS.
2. INTRODUCTION
2.1 The Environment Agency welcomes the
opportunity to submit evidence to the Sub-Committee D's inquiry
into the European Commission's proposals to revise the EU's Emission
Trading Scheme.
2.2 We are the Competent Authority for the
EU ETS in England and Wales. We manage the Emissions Trading Registry
and the new entrant reserve (NER) on behalf of the other UK regulators.
3. KEY INQUIRY
ISSUES
The proposed level of emissions reductions and
the automatic change from 20% to 30% should an international agreement
be reached.
3.1.1 We support a linear emission reduction
trajectory of 1.74% per year to be reviewed by 2025. This provides
much greater predictability in the cap-setting process and provides
business with the certainty to factor the carbon price into their
investment decisions.
3.1.2 We support the automatic target increase
from 20% to 30% should an international agreement be reached.
The EU set the 20% limit as a starting point for international
negotiations for a follow on agreement to the 2008-12 Kyoto target.
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.
3.2.1 The sectors that the Commission proposes
to include within the EU ETS are significant sources of greenhouse
gases and there is considerable potential for emission reductions.
These sectors lend themselves to robust and standard approaches
to monitoring and can therefore be accommodated in the scheme.
Inclusion into the scheme may accelerate the implementation of
abatement technology. We recommend caution when allocating free
allowances in cases where relatively cheap abatement exists as
this may provide a profit windfall.
3.2.2 We see a number of difficulties in
bringing methane from active coal mines into the EU ETS. Active
mines tend to be very large and interconnected resulting in problems
in defining installation and operator boundaries. We also consider
that there will be problems in accurately quantifying the amount
of gas, complicated by the very low air flows through mines.
3.2.3 With regard to LULUCF, further work
is required on improving the accuracy of emission monitoring,
and the associated reporting and verification systems and, also,
the permanency of locking up carbon. Administration costs of the
scheme are also an issue as this sector is largely made up of
a number of small companies.
3.2.4 The EU has agreed in principle to
include aviation in the EU ETS, but no date has been set as to
when EU ETS will be applied to the sector. The scheme must apply
to aviation as soon as practically possible.
3.2.5 Surface transport is also a major
source of greenhouse gas emissions and there could be significant
benefits from bringing them into the EU ETS. The agreement in
principle to bring aviation into EU ETS set a precedent for sources
such as road vehicles and shipping. We believe that further analysis
of this possibility is required. This analysis must include the
administrative cost (both absolute and per tonne of CO2) of including
these sectors in EU ETS as opposed to alternative measures to
cut emissions.
The practical application and enforceability of
the scheme.
3.3.1 The inclusion of a definition for
"combustion installation" should end inconsistent application
of the scope of the Directive, provided it is adopted properly
by all Member States. In Phase I, Member States used different
interpretations of combustion installations causing differences
in the coverage and competitive distortions in the internal market.
We support a broad definition of combustion as this simplifies
the scheme and captures all emissions. However, a broad definition
could bring smaller emitters into the scheme and so we would wish
to see an emissions threshold.
3.3.2 The backbone of a robust carbon market
is monitoring, reporting, verification (MRV), compliance and enforcement.
The current monitoring and reporting guidance (MRG) is a legally
binding Commission decision, directly applicable to member states.
The Commission's proposal for a Regulation duplicates this without
adding significant additional value. However, a Regulation is
harder to update than the existing Guidance.
3.3.3 Currently the MRG provides little
in the way of standards for verification. This is a weakness in
the scheme as verification is critical for ensuring its probity.
Formal standards are therefore required and we believe this is
best achieved by amending the MRG rather than a separate Regulation.
The scheme should develop EU-wide electronic tools to manage the
MRV process.
3.3.4 The civil penalty must remain effective
as a deterrent against non-compliance. We therefore support the
view that the civil penalty is index linked.
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.
3.4.1 Capping carbon allowances to below
business as usual is fundamental to driving the carbon price.
Member State national allocation plans for Phase II have been
cut by the Commission by around 10%. Allowances are now trading
around €25 per allowance (one tonne of CO2) from a low of
just €0.05 cents in 2007. The introduction of a centrally
set cap should help to deliver a well functioning carbon market
that drives emission reductions. We support a cap set below business
as usual, together with a clear indication of what reduction will
be required over future years, to drive Europe to a low carbon
economy.
The potential application of the new Article 24a
permitting allowances to be issued in respect of projects outside
the scope of the Community scheme that reduce greenhouse gas emissions.
3.5.1 We support the new Article 24a. We
welcome the future linking of the EU ETS to other developing carbon
trading schemes, provided equivalent standards of MRV, compliance
and enforcement are maintained. This is essential to maintaining
the scheme's credibility, integrity and effectiveness.
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.
Which sectors (if any) should continue to receive
a proportion of their emissions permits allocated free of charge
and for how long.
3.6.1 We support the European Commission's
proposal to move towards 100% auctioning of allowances. Until
this is fully achieved, we support the proposal to allocate free
allowances according to community-wide rules (benchmarking) within
sector caps, subject to competitiveness impacts being addressed.
3.6.2 We see this as a transitional measure
until all of Europe's major competitors are part of a global carbon
market, when there will be no need for free allocation.
3.6.3 The proposal for European benchmarks
could be an important step towards achieving global sectoral agreements.
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).
3.7.1 To date, non-EU credits are cheaper
than EU credits thus incentivising operators to look for carbon
savings outside Europe. Harmonising the limits to purchasing project
credit limits provides a level playing field between EU Member
States and as such, limits should be set at an EU wide level.
3.7.2 The definition of Supplementarity
needs to be tighter, to make sure that buying non EU credits does
not remove the incentive to invest in low carbon technology in
the EU or slow down innovation. Credits generated through the
Clean Development Mechanism and Joint Implementation projects
must be quality assured. MRV standards must be as good as those
in the EU ETS.
3.7.3 We support restrictions on the use
of project credits to ensure domestic reductions help achieve
the EU's overall 2020 reduction targets. We have not undertaken
any analysis on whether the Commission's proposed project credit
limits are set at the right level.
The likely feasibility of creating links between
the ETS and other similar schemes around the world.
3.8.1 We believe a broader and deeper carbon
market is at the core of a global solution to climate change.
It will drive global emission reductions and increase cost-effectiveness.
We welcome the future linking of the EU ETS to other developing
schemes, provided equivalent standards of the MRV, compliance
and enforcement are maintained. This is essential to maintaining
the EU ETS credibility, integrity and effectiveness.
June 2008
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