Examination of Witnesses (Questions 40-59)
Dr Douglas Parr
25 JUNE 2008
Q40 Lord Brooke of Alverthorpe: It is
a fabrication.
Dr Parr: No, I am not saying that it
does not happen. As I think I said, I would accept that, yes,
it potentially could happen, but I think that one should be really
sceptical about claims that it is going to happen to a huge degree
and I think that one should definitely be very sceptical should
there be a proper agreement in Copenhagen in 2009 because then,
if there was a shift in manufacturing industry, they would be
taking a punt that, within a few years, there are not going to
be some kind of emissions reductions happening globally and whether
there are short term benefits to moving.
Q41 Lord Cameron of Dillington: Your
statement seems to be slightly undermined by the fact that there
is a controversy starting to exist in the EU about determining
the criteria for sectors that might be susceptible to carbon leakage
and that we should be treated differently, ie getting more free
allocations to prevent the transfer of economic productive businesses.
Dr Parr: Yes.
Q42 Lord Cameron of Dillington: My question
is, what criteria should apply and if, as you say, it is all a
bit of a storm in a teacup, why are people marshalling their forces
for this little debate?
Dr Parr: It is about money really, is
it not? I think that experience shows that, in the power sector,
free allocation of permits led to considerable windfall profits
because the emissions were given out for nothing and, as an economist
friend of mine said, "If you acquire a house, it does not
matter whether you bought it or whether you got it free from your
dead uncle, you are still going to charge the market rate for
it" and that is what power companies did. If an industrial
sector can get free allocation of permits when they can use those
free permits as something they can effectively charge for, then
that is windfall profits. As I have been I hope clear, I do not
dispute that carbon leakage can happen. I think that what the
Commission needs to do is to properly scrutinise the claims that
the absence of free allocation will lead to carbon leakage.
Q43 Lord Cameron of Dillington: So, you
would not like to comment on the criteria which basically is saying
which industries might be considered liable to carbon leakage.
Dr Parr: At this point, I could not comment
on the criteria. I could ask my Brussels colleagues to provide
comment if that would be helpful.
Q44 Lord Cameron of Dillington: That
would be helpful. May I bring us back to more internal matters
and discuss the scope of the ETS. Do you want to comment on the
scope? There are certain sectors which are to remain outside,
such as Forestry and agriculture. You might also like to comment
on the de minimis cut off because it is out only the larger industries
or outputters, if that is an English word, of carbon dioxide that
are being included and also comment on whether, in your opinion,
the cut off is right.
Dr Parr: Let me run over some of these
points. We are opposed to the idea of forestry and agriculture
being included in the Emissions Trading Scheme. I think that that
potentially undermines it because the sources and sinks in those
areas are much more difficult to quantify than monitoring and
verifying at the point sources. There are quite high uncertainties
associated with some of those emissions. If we want to maintain
the integrity of the Emissions Trading Scheme which we do, then
we think it is important that it is kept to those where the error
bounds on the actual emissions is pretty small and is relatively
easy to verify. So, we do not believe that land use change is
an appropriate field and sector for the Emissions Trading Scheme.
We would accept aviation into the ETS with caveats. We are a little
disappointed to see that the Commission is suggesting that there
should not be the multiplier associated with aviation emissions
so that it is only covering the carbon dioxide emissions and not
the full greenhouse gas impact. However, if it is going in, it
should go in fairly quickly and we think that it should make its
own contribution; all the other industries are going to have to
cut their emissions quite sizeably compared to 1990 emissions.
It would appear that in comparison the aviation industry certainly
will not. However, yes, if it is going in, let us get it in and
let us do it. In terms of shipping, we can see that there would
be merits in including shipping but, rather like aviation, harking
back to my opening comments, we do not want to see inclusion in
the Emissions Trading Scheme as a reason for not pursuing other
measures because, in terms of containment of emissions from both
shipping and aviation in fact, there should be other measures
to bring down those emissions including taxation—and I know
that that is very difficult in the case of aviation—and
standards and so on which would help rather than hoping that emissions
trading is going to deal with it. So, shipping, yes, providing
that monitoring and verification can be conducted appropriately
and I think our view at the moment is that it probably can but
that that needs to be properly bottomed out. In terms of other
areas, I think that we would support the inclusion of the fluoro
carbons in the ETS and industrial emissions of nitrous oxide.
We are fine with that. In terms of the threshold for inclusion,
I do not think that we have a definitive view either way on that.
I think the important thing is that the integrity of the scheme
is maintained much as I would say about the potential inclusion
of aviation and shipping in that, is the inclusion of more point
sources actually going to help or hinder the Emissions Trading
Scheme in delivering its outcomes? Yes, you could expand it to
include more but, at the same time, with the sort of changes in
thinking that we want the Emissions Trading Scheme to drive, you
can at least make an argument that, if you get down to quite small
companies, then it is just going to be a matter of compliance
rather than actually trying to drive change. So, I think that
there are arguments both ways but I do not think we have a strong
view that it should be lower.
Q45 Chairman: Are you suggesting that
forestry, agriculture and road transport are too difficult to
put into the ETS? Should there be some other way of looking at
their carbon emissions? You have said that the integrity of the
ETS is an important one and I understand why you are saying that,
but I would have thought that your organisation particularly would
have some view as to not just allowing forestry, agriculture and
road transport to sit outside it without any—
Dr Parr: Absolutely not. There is of
course another directive going through at the moment, the Cars
and CO2 Directive, and we have been very active in pushing for
improvement in proposed standards for emissions associated with
vehicles from that. It seems to us that that is just a more appropriate
way in which to deal with it. How would you actually include all
these individual drivers in the scheme because that does not seem
to make an awful lot of sense? Would you do it by actually addressing
the fuel suppliers? The whole point of their business is to supply
fuels, so what is their abatement option? It would basically just
be a variable tax. If you want to tax fuel, then tax fuel. Do
not try and do something terribly complicated with the Emissions
Trading Scheme. It seems to us that whilst transport absolutely
needs to be tackled as part of the package, the Emissions Trading
Scheme does not offer particularly good options for doing that
and that the best opportunities lie elsewhere.
Chairman: I think that you have made
your case pretty clear.
Q46 Lord Plumb: You said earlier that
you would wish for maximum auctioning.
Dr Parr: Yes.
Q47 Lord Plumb: And that is of course
based on the allocation, so you were presumably agreeing with
the Commission since they have proposed that it will be 100 per
cent and as from I think 2013 reducing it to 80 per cent and to
zero in 2020. What about the differentiation here? How do you
consider the differentiation between the power sector and others
to be justified? The second part to that question deals with the
free allowances and how they are allocated and I would like your
views on that. If a system of benchmarks is used, how should they
be determined?
Dr Parr: Our belief is that we should
move to auctioning as soon as possible and 100 per cent auctioning
as soon as possible. That deals with the two issues I have already
mentioned, one about windfall profits and the other about revenues.
We see the revenue stream as a potentially very valuable stream
both for domestic EU reductions and playing its part in the external
context. So, there is a high level of revenues available. Notwithstanding
earlier remarks about the potential for carbon leakage, I think
that the free allocation of permits will still be seen as a potential
for windfall profits in other sectors. So, we do not see the particularly
strong argument for not going to much higher levels of auctioning
much earlier as close to 100 per cent from the beginning.
Q48 Lord Plumb: I have read the comments
made by other organisations that have submitted their views. For
example, the cement organisation illustrates the point you are
making where it says, "If the cement industry were subject
to auctioning, a substantial burden of additional costs would
be imposed and the domestic construction market is facing difficult
times". How do you equate that therefore to the point you
have already made?
Dr Parr: I guess that that is partly
the point about carbon leakage and would actually these companies
end up substituting for those which are not part of the EU. I
think that the Commission will have to take a look at the cement
industry because it has a prima facie case. At another level,
cement is a high CO2 emitter and, if it is not bearing the full
cost of its environmental impact, then that needs to be factored
into the price which is to some extent the rationale behind the
Emissions Trading Scheme and, if that leads to substitution away
from cement, then, from a climate perspective, that is the Emissions
Trading Scheme doing its job and substituting lower carbon material's
functions and so on for cement. It seems to me that again, notwithstanding
the carbon leakage point, there is a case to be made that they
should still be subject to full auction.
Q49 Lord Plumb: Is not the land a high
CO2 emitter?
Dr Parr: The land is a CO2 emitter or
it is a greenhouse gas emitter, but the levels of emission are
subject to high levels of uncertainty.
Q50 Lord Plumb: Does ploughing the land
create a greater amount of emission than just the land itself?
Dr Parr: Ploughing does, yes. I am struggling
to see where this one is going!
Q51 Lord Plumb: It is not going anywhere,
I am just asking you the question because one is told that ploughing
the land means the release of CO2 to a much greater extent
than people believed earlier. That was said to me by a scientist
in the middle of our international competition on ploughing and
I happen to be President! I merely ask the question of you as
you are an expert in this field to see whether you agree with
what was being said.
Dr Parr: Yes, I would agree.
Q52 Lord Plumb: Should we stop ploughing
is my question?
Dr Parr: It is a bit of a joke but actually
there is a very serious point underneath it which is that—
Q53 Lord Plumb: It is a serious point.
Dr Parr: Agriculture is quite a significant
contributor to climate change emissions.
Q54 Lord Plumb: You asked where this
question was going and where it was going is that you said that
agriculture should be excluded.
Dr Parr: Yes.
Q55 Lord Plumb: Agriculture is a big
subject.
Dr Parr: It is, I agree, but there are
uncertainties associated with it and it depends where you put
the functions that agriculture performs in your hierarchy of social
needs. I think that food production is quite high up. If you need
to engage in agricultural practices in order to provide food for
the population, then I would accept that that is kind of necessary
really. It might not be perfect in terms of climate change emissions
but, boy, we have to do it, so there we go. I think that what
is missing in the whole piece at the moment is a good and effective
connection between agricultural practice and greenhouse gas impact
and then a further step which goes beyond research which is to
say, how do we incentivise the right sort of practices? We are
a long way from that at the moment.
Q56 Viscount Brookeborough: From time
to time you have come back to free rather than auctioning.
Dr Parr: Yes.
Q57 Viscount Brookeborough: And you immediately
come into windfall profits and if windfall profits are necessarily
a very bad thing. If they actually contribute to reductions in
the long term of greenhouse gas, we have to pay for it and windfall
profits may be one of the ways. I just perceive that you are against
windfall profits.
Dr Parr: We are not going to avoid profit
because, let us face it, the renewables industry is going to have
to make a lot of profit before it makes anything work. My contention
is that, if there is a revenue stream from emissions trading permit
auctioning which can be used for helping to deliver a low carbon
society both here and elsewhere, then that is a better use than
having a company make profits from it. That is the problem I have
with it. Companies make profits and that is what they are in the
business to do, but this is a profit that arises effectively from
public policy when public policy could be changed in such a way
that it delivers a revenue stream that can deliver other positive
outcomes.
Q58 Viscount Brookeborough: If you think
about control of other industries, that has happened with many
of them. Milk quotas were given to farmers and they then became
valuable. Quotas of fish were given to fishermen and they then
became valuable. I am not sure that there is a very easy way round
it in that, if you wish to introduce some form of control, you
then tell all the businesses that they have been producing for
ages but that they have to pay to produce more. You have to have
a standard somewhere and a base and I am not sure that, if you
give it free initially to set it up and maybe auction from now,
that is necessarily of such value.
Dr Parr: We are looking back into the
past and we can perfectly understand why it happened like that
but I think that, with the experience we have now gained, we can
tune it to get better outcomes for the taxpayer and better outcomes
for our objectives.
Chairman: Perhaps we can move on to what
you would like to see happen with the revenue streams.
Q59 Lord Palmer: The Commission's proposal
includes a provision that 20 per cent of auctioning revenues should
be targeted at various climate change measures. In an ideal world,
how do you think revenues from the auctioning of allowances should
be used and, as a matter of interest, very roughly, what would
20 per cent be in monetary terms?
Dr Parr: I am afraid that I do not know
off the top of my head. The figure of 50 billion for the total
auctioning revenues comes to mind.
Lord Palmer: Fifty billion?
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