Memorandum by the International Chamber
of Commerce
1. The International Chamber of Commerce
("ICC") is the largest, most representative business
organisation in the world. Its thousands of member companies in
over 130 countries have interests covering every sector of private
enterprise. The United Nations, the World Trade Organisation,
and many other international intergovernmental bodies are kept
informed of the views of international business through ICC. ICC
United Kingdom ("ICC UK") is the British affiliate of
ICC. Members in the UK include 25 of the top 30 FTSE companies,
many smaller firms, law firms and business associations.[33]
2. ICC UK takes an active role in policy
discussions on environmental issues, and we very much welcome
the opportunity to respond to this call for evidence. In view
of the remit of ICC to promote trade and investment across borders,
this submission is limited to addressing a number of issues of
international effect, as per section four of the call for evidence
published on 22 May 2008. That is not to say that members of ICC
UK do not have concerns about other elements of the proposals,
for example, the proposed methodologies for allocating emission
allowances. However, by focusing on the "international"
elements of the proposed Directive to revise the EU ETS ("Draft
Directive"), we are seeking to build constructively on ICC's
role as the primary international business organisation.
3. Should you wish any expansion or clarification
of our views we would be happy to respond to any written queries
and also to provide oral evidence to the Committee.
USE OF
OFFSETS
4. There is no clear consensus amongst the
membership of ICC UK as to the level of project credits which
should be permitted within the third phase of EU ETS. Although
some members broadly support the proposed restrictions on the
use of Joint Implementation ("JI") and Clean Development
Mechanism ("CDM") credits (in the interests of delivering
a robust carbon price), the majority of ICC UK's membership consider
the limits set out under Article 11a of the Draft Directive to
be unacceptable—particularly in view of the possible compliance
burden on European business.
5. In addition to the level of project credits
which should be permitted within the third phase of the EU ETS,
we believe that attention should also be given to two supplementary
factors, likely to impact on the ability of EU operators to meet
obligations by investing in offset projects. These are:
(i) the permissibility of project types; and
(ii) transitional arrangements for the use of
project credits in the event that an international agreement on
climate change is delayed beyond 2012.
6. With regard to the latter, ICC UK has
fundamental concerns that the provisions set out in Article 11a
of the Draft Directive are insufficiently robust to provide a
positive signal to investors and operators about the viability
of credits post-2012. Notwithstanding the Commission's optimism
that a global deal will emerge under the "Bali Roadmap",
we believe that the provisions contained in the Draft Directive
will, if enacted, hugely undermine the market in offset credits,
leading to a very significant reduction of finance for carbon
projects in developing countries.
7. In order to ensure an uninterrupted supply
of offset credits, particularly in the light of the lead-time
required for the identification and development of CDM/JI projects,
we suggest that further attention is given as to how the Draft
Directive can provide greater certainty for investors and operators.
Possible policy options include, but are not necessarily limited
to:
(a) extending the provisions set out under Article
11a (4) of the Draft Directive providing certainty on the acceptance
of credits from projects in Least Developed Countries to all developing
countries;
(b) establishing a risk guarantee fund to compensate
investors in projects for post-2012 emissions reductions in the
case of failure of the international (and/or bilateral) policy
process.
In addition to improving the functioning of
the EU ETS, we firmly believe that a policy approach along these
lines would send a positive signal to the international community
regarding the EU's confidence in securing an ambitious international
agreement on climate change by 2013.
8. As regards the permissibility of project
types, the majority of ICC UK members are not in favour of any
additional restrictions on the type of project credits that can
be used for compliance purposes—and, moreover, would support
the relaxation of existing restrictions, such as for forestry
and sink-based projects, provided that the integrity and credibility
of project credits are not compromised.
9. In this connection, ICC UK has concerns
that the restrictions on project types envisaged by Article 11a
of the Draft Directive (subparagraphs 4 and 6) would adversely
affect the supply of offset credits in phase three of the EU ETS
in the absence of a global agreement on climate change.
10. A majority of members also have concerns
regarding the proposal contained in the Commission Working Document
accompanying the Draft Directive to establish structures and procedures
to scrutinise quality standards set internationally on the use
of project credits.[34]
Whilst it is recognised that transparency and consistency is fundamental
to the credibility of a system of environmental credits, there
is a general concern that the EU risks raising doubts about its
commitment to the on-going UNFCCC process by signalling that it
will seek to enforce through domestic legislation any measures
which cannot be agreed upon internationally. This issue is addressed
on a conceptual level in paragraphs 16—18, below.
LINKING WITH
OTHER SCHEMES
11. ICC UK believes that it is vital that
the design of the EU ETS allows the fullest possible opportunity
for linking with emissions trading schemes in third countries.
Properly constructed links to other regional or national schemes
would serve to increase liquidity and may also stabilise investor
expectations, thus helping to mobilise capital for the necessary
transition to a global low-carbon economy. The recent launch of
the International Carbon Action Partnership is a welcome development
which underlines the growing interest of other countries and regions
in the world in linking up with the EU ETS.
12. Accordingly, we very much welcome the
Commission's proposal that the current linking provisions be amended
to allow for the EU ETS to link not just with ratifying Parties
listed in Annex B to the Kyoto Protocol but also to national or
regional emission trading schemes within third countries that
have yet to ratify the Protocol. By analogy, we would not support
any move to introduce provisions within the Draft Directive to
adjust the effect of Article 25 upon the conclusion of a future
international agreement on climate change.
13. Recognising that the establishment of
links needs to be carefully considered to ensure that the environmental
integrity of the EU ETS is not diminished, we would suggest that
the EU should adopt formal criteria (incorporating exclusion criteria
and control measures) for assessing the potential for linking
with other schemes—building upon the analysis set out in
the Commission Working Document accompanying the Draft Directive.[35]
As a guiding principle however, we would suggest that the EU should
avoid promulgating formal criteria that is so strict as to preclude
the development of environmentally beneficial linkages.
14. In a similar vein, we would urge European
legislators to give further consideration to whether emissions
trading systems with relative emissions targets should be precluded,
a priori, from linking with the EU ETS (as per Articles 25 (1a)
and (1b) of the Draft Directive). We believe that this is particularly
important given that the participation of developing countries
in a future international agreement on climate change could be
based on adherence to relative targets.
15. Given the potential complexities which
have been identified in linking the EU ETS with other schemes,
we would suggest that the EU should pro-actively engage with third-countries
with a view to harmonising the design of other national emissions
trading schemes with that of the EU ETS. The International Carbon
Action Partnership may represent one possible forum through which
to further develop this dialogue.
OTHER ISSUES
"Carbon leakage" and trade based remedies
16. Whilst we fully welcome the inclusion
of provisions within the Draft Directive to review the potential
impact of the EU ETS on the competitiveness of certain energy
intensive industries, we have fundamental concerns regarding the
decision to cite border adjustment measures as a potentially viable
policy option to safeguard the competitiveness of European industry
in the absence of a post-2012 global agreement. Although we recognise
that the idea of imposing taxes on carbon intensive imports has
received a considerable degree of attention in recent months,
we believe that insufficient consideration has been given by European
policy makers to the possible pitfalls of such an approach. In
this connection, particular points for consideration include:
(a) the higher cost of inputs that would emerge,
which may cause problems for European producers further down in
the production chain, potentially limiting any positive effects
in terms of avoiding net carbon leakage;
(b) administrative costs and complexities, which
would be highly significant;
(c) legal implications, in particular compatibility
with WTO rules; and
(d) the impact on the EU's (bilateral/multilateral)
trade relations.
17. More fundamentally, we believe that
it is politically clumsy for the Commission to leave the door
open to pursuing a punitive approach to international cooperation
on climate change at a time when the Parties to the UNFCCC are
committed to agree a new international agreement on climate change
by 2009. Given the myriad difficulties which these negotiations
already face, we believe that reference to border adjustment measures
should be removed from Article 10b of the Draft Directive. The
UK Government's position on this matter to date is therefore strongly
supported.
The EU ETS and international climate diplomacy
18. ICC UK fully recognises the imperative
to provide for a degree of flexibility within the Draft Directive
in view of ongoing negotiations to establish a new international
agreement on climate change under the auspices of the United Nations
Framework Convention on Climate Change ("UNFCCC"). Whilst
accepting this premise, we believe that the design of the EU ETS
should nevertheless give precedence to providing certainty and
predictability for European operators and investors for the period
through to 2020.
19. In this regard, ICC UK has concerns
that a number of the provisions contained in the Draft Directive,
which appear intended to confer the EU with negotiating leverage
in the UNFCCC process, will severely impair the predictability
of the overall regulatory framework (see eg paragraphs 6, 9 and
14, above). We would suggest that where these objectives conflict,
the Draft Directive should be amended in favour of the interests
of regulatory certainty. This should be regarded as an overriding
imperative of the legislative process given the need to send appropriate
long-term carbon price signals to enable regulated businesses
to make informed investment decisions.
20. To the extent that the Draft Directive
might be designed to contribute to the ongoing international process,
European legislators should endeavour to offer positive incentives/signals
to encourage the Parties to the UNFCCC to enter into an international
agreement by 2009. By contrast, the threat of punitive measures
or excessive conditionality requirements should be avoided.
19 June 2008
33 Please note that on this occasion the views provided
are those of ICC United Kingdom rather than those of ICC as a
whole. Back
34
European Commission (2008) "Commission staff working document
accompanying document to the Proposal for a Directive of the European
Parliament and of the Council amending Directive 2003/87/EC so
as to improve and extend the EU greenhouse gas emission allowance
trading system", at 145. [Available at: http://ec.europa.eu/environment/climat/emission/pdf/com_2008_16_ia_en.pdf] Back
35
Ibid, at 132-137. Back
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