House of Lords - European Union

Select Committee on European Union Written Evidence

Memorandum by the World Wildlife Fund-UK

VIEWS ON THE LEVEL OF EMISSION REDUCTION

1. The proposed level of emission reductions and the automatic change from 20% to 30% should an international agreement be reached

WWF considers that the EU should adopt an economy-wide 30% emission reduction target from the outset—with the effort for achieving this target split between the ETS and non-ETS sectors.[37] Consideration should only be given to adopting a weaker target should an international climate agreement not be reached. Furthermore we believe that this target should be delivered within the boundaries of the EU—with further investment in developing countries provided on top of this. The reasons for this are set out below:

To prevent catastrophic climate change we must keep the global average temperature rise as far as possible below two degrees centigrade above pre-industrial levels. To have a high chance of doing so, the 2007 IPCC Assessment[38] report confirms that immediate and globally ambitious actions are required, and suggests that industrialized countries should take on greenhouse gas reduction targets of between 25% and 40% below 1990 levels by 2020.[39] Indeed, this was the range endorsed by all EU Member States at the international climate conference in Bali at the end of 2007.

In terms of historic responsibility, industrialised nations are responsible for approximately three quarters of all CO2 emissions from fossil fuels since 1850. Clearly industrialised nations such as those in the EU have a moral obligation, as well as the financial and technological means, to cut their emissions first and foremost—and in addition to this to provide significant support to developing countries in reducing emissions (including those from deforestation and forest degradation) and where possible adapting to the already inevitable impacts of climate change. The level of climate change which the world is already locked into is imposing severe additional development challenges for people in low income countries—from food production, water and energy supply, through to impacts on health and tourism sectors. Indeed last year the UNDP estimated that by 2015 the costs of adaptation in developing countries could be approximately US$86 billion per year.[40]

Developing countries are also looking for the industrialised world to go first and show leadership. Demonstrating the achievability and viability of a low-carbon pathway, and of a serious political intent to deliver it, is vital to bring the developing world on board. The EU must play to win at the international negotiations.

In order to meet these obligations therefore WWF considers that the overall EU Energy Package must be sufficiently ambitious to fulfil two distinct goals:

— it must put the EU on a low carbon trajectory which ensures that it plays its fair part in keeping the mean global temperature increase as far below two degrees centigrade as possible; and

— it must provide certainty that long term substantial financial support will be provided to developing countries to assist them in decarbonising their economies and where possible adapting to the impacts of climate change.

The current economy-wide greenhouse gas emission reduction target of a 20% cut by 2020—which allows a large proportion of the emission reduction to be met by the purchase of credits from Clean Development Mechanism (CDM) projects—will not ensure these goals are achieved. Fulfilling these two goals clearly requires the EU to move beyond the mindset of merely offsetting its own emissions.

In light of this WWF is calling for the EU to commit to:

VIEWS ON 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

There is a suggestion that the European land use, land use change and forestry (LULUCF) sector should be included as a sector in the Emissions Trading Scheme—like the power sector and energy intensive sectors. The overall cap would be expanded to accommodate an emissions reduction target for this sector and it would be able to buy and sell allowances from the other sectors within the scheme.

The EU ETS was designed specifically as a domestic climate policy to address emissions from large industrial point sources of greenhouse gas emissions. It is crucial that the scheme really starts to deliver significant emission reductions from these sectors. As such we consider that revisions to the Directive must look to improve the operational and environmental effectiveness of the existing scheme—rather than looking to significantly expand the scheme at this time—particularly to non-industrial sectors.

As the agriculture and forest sector in the EU is very heterogeneous with a multitude of actors ranging from very small to large land owners and users, any inclusion of this domestic sector in the EU ETS would require, firstly, a cap on its aggregate land use emissions in line with the caps of the other sectors and, secondly, a harmonised set of measurements across the EU in line with the monitoring and verification procedures for fossil fuels. Both are very difficult due to practical reasons, related to implementation.

In addition the European Commission consider that "The emissions trading system should only be extended to emissions which are capable of being monitored, reported and verified with the same level of accuracy as applies under the monitoring, reporting and verification requirements currently applicable under the Directive... It is not the case for emissions from agriculture or forestry."[43] As such it is not proposing to include this sector in the scheme post 2012.

WWF agrees with the Commission and strongly recommends that the European land use and forestry sector is not included in the EU ETS. However, we would strongly support targetted policies and measures to effectively address greenhouse gas emissions from these sectors.

4. The key strengths and weaknesses of the proposal focussing on (a) the extent to which the scheme as currently designed will encourage technological innovation; (b) whether it will result in the appropriate price signal being sent; (c) whether it will be efficient and/or equitable

Whilst the EU ETS, if designed in a robust way, will be critical for helping to achieve the EU 2020 and longer term emission reduction targets by incentivising low carbon operational and investment decisions, it should not be considered a silver bullet for tackling climate change. Further policies and measures are clearly needed. Indeed the European Commission accepts this through its dedicated policies to bring forward renewable energy and improve energy efficiency in various sectors of the economy.

The Stern Review also warned that carbon markets needed to be complemented by other policies, such as tax and regulation, and also by targeted action to promote the rapid deployment of emerging low-carbon technologies. The Review noted that: "Carbon pricing alone will not be sufficient to reduce emissions on the scale and pace required."[44] "The next 10 to 20 years will be a period of transition, from a world where carbon-pricing schemes are in their infancy, to one where carbon pricing is universal and is automatically factored into decision making. In this transitional period, while the credibility of policy is still being established and the international framework is taking shape, it is critical that governments consider how to avoid the risks of locking into a high-carbon infrastructure, including considering whether any additional measures may be justified to reduce the risks."[45]

For example although there are very significant uncertainties over the likely cost of Carbon Capture and Storage (CCS), it is very unlikely that the carbon price under the EU ETS will be sufficiently high to cover the full costs or give investors sufficient confidence to invest in a novel, high risk technology such as CCS. For this reason, WWF and other groups are calling at UK and EU levels for a greenhouse gas emission standard, similar to that already in force in California, to apply to new and, over time, existing power plant.[46] Such a standard would act to reinforce rather than undermine the EU ETS. The principle is similar to policy in the field of appliances, where it is accepted practice to have a minimum efficiency standard with incentives (fiscal measures and product labelling) to incentivise and reward the best performers.

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

Article 24a would allow credits from offset projects from sectors within Europe not covered by the EU ETS (so called domestic offset projects) to enter the scheme. In WWF's view this would be a serious setback to the scheme's ability to influence emission reductions in the sectors covered by the scheme, and indeed across the EU as a whole.[47]

The inclusion of domestic offsets was discussed during the negotiations of the Linking Directive. However, it was decided that for the first phase that only credits from JI and CDM projects would be allowed. WWF considers that domestic offset projects should continue to be excluded from the EU ETS for the following reasons:

— If there is significant greenhouse gas abatement potential in a sector (for example transport or LULUCF) then arguably it should be governed by a separate policy and not be used to allow emissions from the ETS sectors to grow. For example in the UK the Government is developing a new mandatory UK emissions trading scheme (the Carbon Reduction Commitment) for non-energy intensive businesses and services not covered by the ETS.

— Ad hoc development of projects is not a particularly effective way of tackling emissions from a sector. Indeed the inclusion of domestic offset projects may be used as an excuse to delay the implementation of a more focussed policy for a sector.

— Inclusion of domestic offsets may make it more complicated to determine the direct contribution of the ETS sectors to EU greenhouse gas emission reduction targets and to determine whether they are playing their fair share or not.

— There is the risk of double counting of emissions reductions—both as a contribution to meeting the EU ETS cap, and towards achieving the effort sharing targets.

— Access to project credits (be they from JI/CDM or domestic offset projects) could make it cheaper for ETS sectors to meet emissions caps. But access to significant volumes of credits could disincentivise investment in clean technology within those sectors and slow down innovation. Crucially, it could help to "lock in" decisions on high-carbon infrastructure (of particular pertinence here for the power sector) which would have a significant impact on emissions from those sectors for many years to come. Indeed, this is why WWF advocates that purchase of project credits should be additional to and not instead of a strong focus on domestic emission reductions.

For future phases of the scheme the emphasis must be placed on reducing emissions from the ETS sectors rather than expanding their access to cheap emission credits from other sectors.

VIEWS ON 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

WWF agrees with the Commission's proposal—that the level of auctioning should be decided at the EU level, as left in the hands of Member States auctioning would likely remain at a low level post 2012. Member States had the option to auction up to 5% and then 10% of their allowances in the first (2005 to 2007) and second (2008 to 2012) phases respectively, but few have chosen to do so—instead succumbing to industry lobbying regarding intra-EU competitiveness concerns. In the second phase on average only 3.7% of the allowances will be auctioned.[48]

7. Which sectors (if any) should continue to receive a proportion of their emissions permits allocated free of charge, and for how long

Within a trading scheme auctioning allowances is a key design feature which helps to ensure that the progression towards a low carbon economy takes place in the fairest and economically most efficient way. Auctioning of emission allowances includes the following benefits:

— It ensures the full cost of carbon is factored into investment decisions.

— It supports the "polluter pays" principle.

— It rewards the most efficient low carbon production.

It is currently proposed that from 2013 the power sector will have to pay for all of its allowances. This is a very welcome move and it is critical that the European Parliament and the European Council do not weaken this key proposal.

It is also proposed that energy intensive sectors and aviation receive 80% of their allowances for free in 2013 with this percentage declining every year to reach zero by 2020. Furthermore, the Commission proposes to identify by end of June 2010 the energy intensive sectors and sub-sectors which may be at risk of relocating outside the EU in the absence of a global climate change agreement. The Commission then plans to make appropriate proposals on how to support these sectors by June 2011—these may include adjusting the proportion of allowances that are received for free by the sectors/sub-sectors.

WWF accepts that only in the absence of a robust international agreement on climate change should the European Commission investigate possible measures to address the risk of relocation to specific energy intensive sub-sectors. In light of this we agree with the Commission's proposal to wait until June 2011 before making suggestions on support measures. However, in the meantime we strongly believe that the Commission should advocate 100% auctioning for all sectors from the start of 2013.

In particular we see no reason why aviation should not be subject to full auctioning from the start of the third phase. This sector is clearly not at risk of relocation and research suggests it is also likely to reap windfall profits akin to those accrued by the power sector. Indeed a recent study undertaken on behalf of the UK Government concluded that a substantial level of auctioning would be needed to avoid such windfall profits.[51]

NOTE: Under the current proposal the Commission estimates that by 2020 revenues from auctioning could amount to €50 billion per year.[52] As stated earlier, the EU needs to offer substantial investment to help developing countries in reducing emissions and where possible adapting to the impacts of climate change. Revenue from auctioning provides a valuable source of funding for climate mitigation and adaptation activities.

WWF therefore recommends that:

— All auctioning revenues should be used to fund climate protection and adaptation measures.

— At least 50% of the auctioning revenues should go to assistance for developing countries; and

— The remaining 50% of revenues earmarked for climate mitigation and adaptation activities within the EU.

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

Please see our response to question 1 for our general view on this and why the EU needs to move beyond the mindset of merely offsetting its emissions. In addition:

Access to emission reduction credits within a 20% or a 30% economy wide emission reduction target as is currently proposed by the European Commission will both delay domestic reductions and will likely keep investments in high-carbon infrastructure—such as new unabated coal fired power stations—financially viable. This could lock us in to high emissions for decades to come—putting 2020 and longer term emission reduction targets out of reach—or at a minimum making future reductions much more costly for taxpayers and companies to meet. Indeed a lesson from the recent past cautions against too much flexibility in meeting emission reduction targets. Final decisions made last year by the European Commission on access to volumes of project credits in phase II of the EU ETS meant that sectors covered by the scheme are allowed to increase their emissions by up to 150 million tonnes of CO2 above their 2005 emission levels. This is the equivalent of the annual emissions from around 31 coal fired power stations. Clearly this is not acceptable for a scheme which is meant to be driving down emission reductions within the EU.

Secondly—crucial to the integrity of the CDM is that projects are truly "additional" (that they would not have happened in the absence of the mechanism) and that they contribute to sustainable development in the host country. However, there are significant concerns over whether the CDM is achieving these twin objectives. To highlight just two of the growing number of studies that have raised concerns over the lack of additionality:

The sustainable development goal is also often overlooked with developing countries competing with each other to attract and host new projects at the expense of ensuring that they meet sustainability criteria. For example India sets rather ambitious criteria on paper but to date the government has failed to reject a single project put forward for approval. Furthermore, since the sustainability component of the CDM has no monetary value, no differentiation is made between projects that contribute to the development of a local community and those which do not.

In light of these concerns WWF considers that only external credits from CDM projects which meet the Gold Standard[55] accreditation and/or equivalent quality must be allowed to enter the EU ETS from 2013. And we maintain that access to credits should be in addition to, and not instead of a strong focus on domestic action which across the EU economy delivers at least a 30% greenhouse gas reduction by 2020.

May 2008

37 With the EU ETS sectors continuing to deliver two-thirds of the effort as proposed by the European Commission. Back

38 IPCC: Intergovernmental Panel on climate change, the ca 2,500 scientists from 130 countries elaborating the world's most authoritative scientific review on climate change. Back

39 Full working group III report, chapter 13, Page 776, http://www.ipcc.ch/pdf/assessment-report/ar4/wg3/ar4-wg3-chapter13.pdf Back

40 UNDP (2007) Human Development Report. Back

41 For the EU ETS sectors this translates roughly into a 36% cut in emissions from 2005 levels. Back

42 Again, with the EU ETS sectors taking on their fair share of this commitment. Back

43 "Proposal for a DIRECTIVE OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL amending Directive 2003/87/EC so as to improve and extend the greenhouse gas emission allowance trading system of the Community" COM (2008) 16 Final. Back

44 Stern Review, Part IV: Policy response for Mitigation, Chapter 16-Accelerating Technological Innovation, 30 October 2006. Back

45 Stern Review, Executive Summary, 30 October 2006. Back

46 For more information, see Evading Capture: Is the UK power sector ready for carbon capture and storage, on www.wwf.org.uk Back

47 As the use of credits from offset projects does not actually reduce net greenhouse gas emissions-it merely allows the capped sectors to pollute above their cap. Back