Memorandum by The Environmental Industries
Commission
ENVIRONMENTAL INDUSTRIES
COMMISSION (EIC)
EIC was launched in 1995 to give the UK's environmental
technology and services industry a strong and effective voice
with Government.
With over 330 Member companies EIC has grown
to be the largest trade association in Europe for the environmental
technology and services (ETS) industry. It enjoys the support
of leading politicians from all three major parties, as well as
industrialists, trade union leaders, environmentalists and academics.
EIC's Carbon Trading Working Group represents
over 40 leading companies in the emissions trading industry, including
Clean Development Mechanism project developers, voluntary sector
project developers, technology providers, law firms, and consultancies.
INTRODUCTION
The Environmental Industries Commission's (EIC)
core message is that a move to a low carbon resource efficient
economy is not only environmentally essential but brings huge
opportunities This message has increasingly gained acceptance
in mainstream business and Government.
One area where there are huge economic opportunities
in tackling the environmental challenges we face is the developing
carbon trading sector. Carbon trading will be a key component
of future efforts to tackle climate change and central to its
success will be a strong, effective EU Emissions Trading Scheme
(ETS).
By capping carbon emissions the EU ETS has the
potential to be a key instrument in driving the much-needed transition
to a low carbon economy and stimulating innovation in new technologies
that will increase the competitiveness of the UK and EU in global
markets.
Before addressing the specific questions set
out in the Committee's call for evidence I would like to take
this opportunity to address the crucial issue of competitiveness
and the impact the proposals for Phase III of the EU ETS will
have.
COMPETITIVENESS VS
ENVIRONMENTAL PROTECTION
In Phase I the EU ETS was hampered by problems
concerning the over allocation of allowances—due, in a large
part, to the poor quality of some of the historic and future emissions
projections used to determine allowance allocations. In contrast
Phase II allocations are based upon independently verified emissions
data.
In Phase II the situation has improved and we're
now starting to see an ETS emerge that has the potential to help
the EU achieve the much-needed transition to a low carbon economy.
By setting strict emissions caps, reducing the
free allocation of allowances, expanding the Scheme to cover as
many sector as possible—including aviation—and limiting
the use of overseas credits so that the EU ETS drives domestic
emission reductions, the EU has primed the EU ETS to meaningfully
drive investment in the low carbon technologies the rest of the
world will need to adopt if we are to have any chance of averting
dangerous climate change.
EIC has argued consistently that the future
of international competitiveness will be in leading the transition
to a low carbon, resource efficient economy and that the key driver
of this transition is world leading environmental standards. This
is a message that is finally beginning to hit home and we believe
that Phase III offers a valuable opportunity to apply for the
EU to lead the way.
It is, therefore, of concern that we are still
seeing inflated claims made by some sectors about the costs of
the Commission's proposals for Phase III and the impact they will
have on EU competitiveness.
There is no evidence to justify claims that
the EU ETS will damage competitiveness. For example, a recent
Carbon Trust report concluded; "Overall, the EU ETS can extend
with deeper emission cutbacks in Phase III (post 2012), without
damaging UK or European competitiveness."
EIC believe that high environmental standards
are essential for our future economic well-being and for the competitiveness
of the EU economy.
A key question throughout the legislative proposals
for Phase III, therefore, is whether the EU has the will to face
down vested interests and put in place a framework for Phase III
of the EU ETS that drives real emission reductions.
LEVEL OF
EMISSIONS REDUCTIONS
1. The proposed level of emissions reductions
and the automatic change from 20% to 30% should an international
agreement be reached
EIC welcome the Commission's proposals to set
a cap on total emissions at the EU level from the start of Phase
III. This is a significant step forwards from previous phases,
where Member States were able to set their own caps through National
Allocation Plans.
From the start of Phase III allowances will
be reduced annually by 1.74% in order to put the EU ETS on a pathway
to meet its contribution to achieving the overall EU target for
reducing greenhouse gas emissions from 1990 levels by 20% by 2020.
To align with the timeframe for meeting this target, Phase III
will be extended to run from 2013-20.
EIC welcome the clarity a longer Phase with
annual reductions will provide but believe the Scheme is still
not ambitious enough.
The aforementioned debate surrounding competitiveness
has drawn attention away from the critical issue of the level
of emission reductions the scheme delivers and, in particular,
whether or not the cap for Phase III is sufficient for the EU
ETS to play a central role in averting dangerous climate change.
SCOPE AND
OPERATION
2. 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
A central principle of emissions trading is
that it allows for required carbon savings to be achieved in the
most cost-efficient way—thereby helping to resolve concerns
about the impacts on competitiveness in Europe. However, for this
to be the case the EU ETS must include as many sectors as is practical.
Extension to further sectors and gases, coupled
with caps that drive real carbon emission reductions, would help
to ensure the gains of the EU ETS are not cancelled out by growth
in other sectors.
LULUCF
EIC believes that urgent action needs to be
taken to address emissions from land use, land use change and
forestry, which account for 20% of global greenhouse gas emissions.
One mechanism may be to allow Clean Development
Mechanism credits from forestry projects into the EU ETS.
Aviation
EIC welcome the European Commission's proposal
to include aviation in the EU ETS.
The proposal states that all flights within
the EU would be included in the ETS from 2011. However, international
flights departing from or arriving at EU airports would not be
included until 2012. The Commission plans to set the cap on aviation's
carbon dioxide emissions at the level of average annual emissions
in 2004-06. This would be kept the same for the next three trading
periods.
EIC believe that including aviation in the EU
ETS will increase demand overall for carbon emission reductions
and from Members' analysis will have the impact of increasing
the price of carbon faced by all participants since airlines have
limited direct opportunities for reducing emissions.
Members believe that airlines will be able to
recover their costs (as power producers do) by passing on costs
to consumers. This may have a relatively small impact on customer
demand but not on competitiveness of the sector overall.
Shipping
It is unclear why shipping cannot be brought
within the EU ETS using similar principles as currently proposed
for the inclusion of aviation within the EU ETS.
Small Installations
In cases where the environmental gain is disproportionate
to the administrative and financial burden that the EU ETS places
on installations it would seem logical and economically sensible
that installations with relatively small emissions are allowed
to opt out of the EU ETS, provided that they are covered by other
emissions abatement legislation, and that legislation has enforcement
mechanisms and reduction targets of comparable rigour in place.
Any threshold for determining inclusion in the
scheme should, however, be based on actual emissions from an installation
in the context of the EU ETS. The nature of the installation and
the capacity of the installation are not considered relevant.
3. The practical application and enforceability
of the scheme
EIC is of the view that any practical application
of the scheme must support the underlying aim of the scheme, namely
the reduction of greenhouse gas emissions. The public also needs
to be confident that the scheme's aim of reducing greenhouse gas
emissions is being achieved.
This is best achieved through a consistent approach
to allowance allocation across Member States and industry sectors
using appropriate baseline methodologies. Robust monitoring and
verification procedures are also necessary.
EIC believes, therefore, that monitoring, reporting,
verification should be harmonised across all Member States.
A consistent approach as becomes even more important
if the scheme is to be expanded to include other greenhouse gases.
Whilst EIC is of the view that enforcement of
the scheme can from a practical perspective be best achieved at
a national government level, a consistent approach in terms of
enforcement needs to be adopted across all Member States.
4. 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; and
— whether it will be efficient and/or
equitable.
EIC broadly welcome the Commission's proposals
for Phase III of the EU ETS.
Below we have set out what we believe are the
strengths and weakness of some of the key proposals and, where
appropriate, our proposed resolution.
STRENGTHS
Phase Length
| Strengths | Weakness
| Resolution |
EIC believe that the proposal for Phase III to run from 2013 to 2020 to align with the wider EU carbon emission reduction target is welcome.
Furthermore, EIC supports the decision to apply the 1.74% annual reduction for Phase IV of the Scheme (2021-28).
This will provide certainty to businesses and investors helping encourage the necessary investment in emission reductions.
| EIC welcome the clarity a longer Phase with annual reductions will provide but believe the Scheme is still not ambitious enough.
See Phase III Cap below.
| See Phase III Cap below. |
| |
|
Phase III Cap and the Use of Overseas Credits
| Strengths | Weakness
| Resolution |
EIC welcome the Commission's proposals to set a cap on total emissions at the EU level from the start of Phase III.
This is a significant step forwards from previous phases, where Member States were able to set their own caps through National Allocation Plans.
| EIC believe that the debate surrounding competitiveness has drawn attention away from the critical issue of the level of emission reductions the scheme delivers and, in particular, whether or not the cap for Phase III is sufficient for the EU ETS to play a central role in averting dangerous climate change.
EIC believe that the wider target for a 20% reduction in carbon emissions by 2020 is too low.
Whilst the EU has agreed to increase it wider target for carbon emission reductions to 30% in the context of an international agreement for tackling climate change, it is not clear what this framework has to look like in order for the EU to consider it sufficient to increase its target—and, therefore, the cap for Phase III to ensure the EU ETS makes the necessary contribution.
A single non-changeable and a corresponding Phase III cap would be more appropriate.
Waiting for a 2012 agreement to emerge also leads to uncertainty in the use of overseas credits in two areas:
1. Project developers are unable to invest in Phase III CDM projects, for example, if there is uncertainty over whether the credits can even be used.
2. Overseas credits play a valuable role in engaging developing countries in the fight against climate change.
As international negotiations continue on a post 2012 framework for tackling climate change, uncertainty over the level of overseas credits that can be used in the EU ETS means that the EU is unable to use investment in emission reduction projects as a bargaining tool to encourage developing countries to take on binding emission reduction targets.
A straightforward 2020 emission reduction target, a Phase III cap to correspond and a strict limit on the use of overseas credits would be more appropriate and provide greater certainty.
| Commit to a wider 30% reduction target by 2020.
The cap for Phase III of the EU ETS should then be set to correspond with a 30 % reduction target.
This should include a strict, harmonised limit on the use of overseas credits.
This limit should be set at a level to ensure that supplementarity is maintained whilst also ensuring overseas credits can continue to play a role in engaging all nations in the fight against climate change.
At the very least the EU should set out clearly what the post 2012 framework needs to look like for the wider carbon emission reduction target to increase to 30%.
|
| |
|
Auctioning and Allocation of Free Allowances
| Strengths | Weakness
| Resolution |
EIC believe that auctioning is the most efficient, transparent and equitable means of allocating allowances and will help the market recognise the true cost of carbon emissions.
EIC welcome proposals to greatly increase the level of auctioning.
| The level of auctioning for sectors exposed to international competition.
| Make a decision on the level of auctioning for sectors exposed to international competition as soon as possible after an agreement on a post 2012 international framework for tackling climate change has or has not been agreed.
In the context of a post 2012 international agreement, EIC believes that the Commission should look to apply 100 % auctioning across all EU ETS sectors from the start of Phase III.
|
5. 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.
| | |
The key purpose of the EU ETS is to achieve real greenhouse
gas emission reductions in the most economically efficient way.
Therefore, if such reductions can be best economically achieved
through the recognition of domestic offset projects outside of
the scope of the EU ETS then such an approach should be considered.
EIC is, however, concerned to ensure that the environmental
integrity of the scheme is maintained and that the use of credits
from domestic offset projects does not lead to double counting
of emission reduction—whereby non-ETS sectors are generating
credits simply through compliance with existing environmental
legislation that can then be sold to EU ETS sector.
ALLOCATION AND
AUCTIONING
6. 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
EIC believes that any allocation of free allowances needs
to be harmonised across Member States. Clear criteria should be
established by the Commission for the assessment of exposure of
sectors to international competition and the risk of carbon leakage.
Such criteria should be transparent and objective and should not
favour one Member State as against the others.
Decisions regarding the level of free allowances to be allocated
should be taken as soon as possible after an agreement
on a post 2012 international framework for tackling climate change
has or has not been agreed. If a truly global agreement is reached
the risk of "carbon leakage" will be a lot smaller because
more countries will have binding emission limits, therefore the
proportion of allowances allocated for auction can be increased.
7. Which sectors (if any) should continue to receive a
proportion of their emissions permits allocated free of charge,
and for how long?
It is proposed that the power sector and carbon capture and
storage will be subject to 100% auctioning from 2013. Installations
in other sectors will receive a partial free allocation, starting
at 80% of their emissions for the period 2005-07 in 2013. This
will gradually decline by equal amounts each year to zero free
allocation in 2020.
Expections will be made for installations in sectors that
are exposed to international competition and, therefore, pose
a risk for "carbon leakage"—whereby the installations
relocate productions to countries outside the scope of the EU
ETS that do not set similar emissions caps, therefore leaving
them free to pollute. Installations in these sectors will receive
up to 100 % of their allowances for free—a decision will
be taken on which sectors are at risk by 2010.
EIC believe that auctioning is the most efficient, transparent
and equitable means of allocating allowances and we welcome the
proposal to gradually phase out the free allocation of allowances
on the basis that this will assist with establishing a carbon
price.
For those sectors exposed to international competition there
is concern auctioning could drive business outside the scope of
the EU ETS to areas where they would be free to pollute. The evidence
suggests this concern is much overplayed, however it highlights
the importance of securing a post 2012 international agreement
on tackling climate change.
As aforementioned, if a global agreement is reached the risk
of "carbon leakage' will be a lot smaller, therefore the
proportion of allowances allocated for auction can be increased.
In the context of a post 2012 international agreement, EIC
believes that the Commission should look to apply 100 % auctioning
across all EU ETS sectors from the start of Phase III.
8. 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
It is proposed that part of the rights to auction allowances
will be redistributed from the Member States with high per capita
income to those with low per capita income in order to strengthen
the financial capacity of the latter to invest in climate friendly
technologies.
EIC believe that the level of auctioning should be harmonised
across all Member States. Furthermore, we support the proposal
that 20 % of auction revenues should be hypothecated.
THE INTERNATIONAL
DIMENSION
9. 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)
In addition to competitiveness, one of the key debates emerging
from proposals for Phase III concerns the extent to which organisations
operating under the EU ETS can make use of overseas credits to
meet their targets.
The Commission has set out two proposals for the use of overseas
credits in Phase III. The first is based on achieving the EU's
overall target of reducing emissions by 20% by 2020. Under this
scenario operators will only be able to make use of any unused
credits from Phase II of the EU ETS. The Commission estimates
that this will allow operators to achieve more than a third of
the emission reductions required in Phase III through the use
of overseas credits.
Folllowing a post-Kyoto international agreement the EU has
committed to increase it target to reduce carbon emissions to
30% by 2020. In this context the limit on the use of overseas
credits will be automatically increased up to half of the additional
reduction effort.
EIC believe that the continued use of overseas credits is
crucial for engaging all nations in the fight against climate
change and forming the foundation of global trading scheme. However,
there must be a limit on the use of such credits, as overseas
emission reduction projects must supplement rather than undermine
domestic action.
10. The likely feasibility of creating links between the
ETS and other similar schemes around the world
EIC believe that the European Commission should begin to
link the EU ETS to other emerging carbon markets as they are implemented
so that the EU ETS can form the foundation of a global carbon
market. However this should be done with caution. It is particularly
critical that the EU ETS is not undermined by linking to another
ETSs that do not have such rigorous environmental goals.
The issue of supplementarity will also need to be clearly
defined if the EU ETS is to link with other Schemes around the
world. It will be crucial that the European Commission develops
clear guidance for companies and Member States on the quantity
of overseas carbon credits that can be utilised. A clear division
between what is available to the public and private sector would
also greatly aid the planning process for industry.
20 June 2008
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