Examination of Witnesses (Question Numbers
368-379)
Mr Damien Meadows
15 OCTOBER 2008
Q368 Chairman: Good morning. I expect
you are aware of what this committee is doing. We are looking
into phase three, of the EU ETS. We are very grateful that you
should come and give evidence because I know that the whole debate
is beginning to gel, if I might use that expression, and we would
like to ask you some questions, of which I think we have given
you notice. I should indicate that this is a formal evidence-taking
session. A note of it will be recorded and you will be offered
the opportunity of looking at the draft and making any corrections,
should there be any. I should also perhaps indicate that this
is being webcast. Just to advise you, that that is what is happening.
Good morning to you. I do not know whether you would like to make
an opening statement to us on where you see the negotiations going,
but otherwise we could certainly go straight into the formal question
and answer session.
Mr Meadows: Thank you my Lord
Chairman. I think, in terms of words of introduction, it would
just be to highlight the centrality of the EU Emissions Trading
System as Europe's main instrument to tackle climate change. It
covers almost half of the carbon dioxide emissions and, in terms
of forming a global response, it is the most likely way that certainly
the United States is going to be tackling climate change and,
through a linked system of carbon markets, we have a prospect
of limiting climate change to two degrees. It certainly is busy
times at the moment. There was a European Parliament Lead Committee
vote last week, the European Council is expected to be discussing
the EU Emissions Trading System today and tomorrow and then we
have the Environment Council meeting on Monday and Tuesday of
next week, all with the expectation that this legislation should
be agreed by December of this year under the French Presidency.
I am working as the Deputy Head of Unit principally on the EU
Emissions Trading System, but the effort-sharing decision, the
remaining targets for Member States, is also something I am familiar
with as well as the linkages with particularly the Carbon Capture
and Storage Directive. So on any of these I would be very happy
to answer questions.
Q369 Chairman: Before we go on to
one or two of the details, could you inform us of the progress
of the negotiations? Are there any particular sticking points
which Member States are finding awkward to deal with and do you
see that solutions are in prospect?
Mr Meadows: There are. To start,
there seems to be agreement on the basic architecture that there
should be a common cap across the EU, that there should be a year-on-year
trend path that is predictable and stable, on wanting harmonisation,
on actually deciding the rules for how auctioning takes place,
on monitoring, on linking to other trading systems and also on
criteria for assessing so-called carbon leakage. There is a lot
of similarity between the Council position and the Parliament
position. Coming to the differences, probably the biggest ones
in the European Parliament are that they support the mandatory
use of auction revenues to address climate change, in particular
to address deforestation, and this is to be used in countries
that ratify the post-Kyoto agreement, we expect, in Copenhagen.
They are also, across the EU ETS and the effort-sharing decision,
supporting only high quality CDM—i.e. Clean Development
Mechanism—credits. They favour free allocation for industrial
waste gases, for district heating and combined heat and power
and there were some in the European Parliament, although this
is a bone of contention—this was not an amendment adopted
last week—who wanted 100% free allocation for all industries.
So that is the central part of the European Parliament's position
which differs from Council, and the Council also has a range of
internal issues they are still discussing. I think the biggest
one is levels of free allocation. Levels of free allocation to
industry is a particular concern of some Member States. Free allocation
to the power sector is something which a smaller number of Member
States want to continue, but a number of Member States, including
the UK, want full auctioning from 2013. A third area is the aviation
sector, which was decided to be included in emissions trading
in July this year, and the European Parliament adopted amendments
on the level of auctioning for aviation, where I think there are
differing views within Council. The levels and quality of the
clean development mechanism, CDM credits, is the second area I
would highlight. Financing for carbon capture and storage is an
area where the European Parliament adopted an amendment, and there
are very differing views within Council on how this should be
done. The final two I would mention are the transition from a
20% reduction target without an international agreement to the
30% reduction target we know is necessary to stabilise climate
change and how this should take place. The final issue in Council
is the element of redistribution between Member States' equity
and solidarity. In a nutshell, those are the key areas which need
to be resolved before December.
Chairman: It does not sound, then, as
if it is quite set up. I will not ask you to answer that. Perhaps
we could deal with some of those particular problems by way of
questions. Particularly let us start with carbon leakage.
Q370 Baroness Sharp of Guildford:
We have sight of the non-paper that the Commission issued for
establishing which sectors of industry are susceptible to carbon
leakage. Could you outline for us what you see as the main features
of the methodology in that paper? We have heard that only specific
sub-sectors of the industry are at risk. Would your methodology
allow you to pinpoint these particular sub-sectors and by when
do you anticipate that your analysis will be completed?
Mr Meadows: Thank you. We found
this paper of the Commission's services to be very useful in taking
forward the debate. Because a number of Member States were saying
that this is too vague, we want to know exactly now which industry
will receive what level of free allocation. The Commission's services
paper builds on the Commission's proposal in terms of elaborating
how the criteria would be applied and which industries could receive
what levels of free allocation, and the key point here really
is the Commission wants this to be evidence-based. The Commission
is not in favour of carbon leakage, and obviously the best way
to avoid this is by having a good international agreement that
other countries are contributing to reductions as well. If this
is not the case, then the measure proposed by the Commission to
take effect immediately is free allocation. The issue of border
measures, which is not one I mentioned because there is not really
an active discussion on this now, would only come later, but the
free allocation would be the immediate response, and here, on
the basis of data given by industry and using data from Eurostat,
we have been looking at potential cost increases from the value
of pollution rights and also the amount of trade there is in particular
sectors to come up with a rough indication of whether, if other
countries did not take more action, there would be potential for
carbon leakage. The paper we have released covers the steel sector,
the aluminium sector and cement and clinker. The work is proceeding
quite fast now—it was begun in March this year—and
we expect to have preliminary results by the end of this year
with various other sectors and sub-sectors coming out in the coming
weeks. Obviously an important part of deciding if there would
be carbon leakage is what the Copenhagen Treaty would provide
for. So the Commission's view is only, in 2010, can we actually
establish a list saying who gets 100%, who gets a lower percentage,
but we have had two meetings with Member States and with industry
stakeholders where this approach has been generally welcomed and
we are working out how the criteria can be applied in practice.
This is important, because the list is quite long, and then you
find you have not got data for all of these elements, and so on.
Q371 Baroness Sharp of Guildford:
Looking at the non-paper, I take it that where the degree of risk
of carbon leakage is high there is much greater sympathy for some
kind of measure which might help the industry and where it is
relatively low it would not. I note that we have had evidence
from the cement industry that cement is not really regarded in
this paper as having a very high risk of carbon leakage, which
I think they would dispute, and also from the minutes that we
have also seen of the meeting that was held on 26 September with
some of the stakeholders, but while you have got some agreement
with the methodology, actually the conclusions may well be disputed
at the end of the day?
Mr Meadows: Yes. The clinker element
of cement production we would consider to be trade exposed, justifying
that, but I am sure, whatever the outcome it will be contested
by some, we think that primary aluminium is a sector that if other
countries do not do more would be at risk of carbon leakage but
secondary aluminium, recycling aluminium, would, in our view,
not be. In fact the EU Emissions Trading System gives a big incentive
to recycle because it is more energy efficient than primary production,
but with Member States and with stakeholders the discussion will
continue for quite some time.
Baroness Sharp of Guildford: I can see
that. Thank you very much.
Q372 Lord Plumb: Obviously no-one
wants to see leakage. Nevertheless, we understand there are three
options that have been already addressed, or are being addressed,
on the risk of leakage: the border levies, free allowances and
global sector agreements. Those are three totally different solutions.
If the border levies are more likely, and one understands that
free allowances are used to mitigate the risk of leakage, would
that treatment be discontinued after a while or phased out automatically
in the event that an international agreement replacing the Kyoto
Protocol is reached?
Mr Meadows: A good question. In
terms of the measures possible, as I said, the key one is free
allocation—that is what is proposed as the main instrument.
Decisions on the level of free allocation to industry, that is
determined to be exposed, is intended only to happen after the
Copenhagen Agreement would have been reached in December 2009,
so in that sense it would not need to be discontinued because
it would not be given in the first place. The same with border
levies. Although US drafts of cap and trade legislation tend to
include so-called border levies, the inclusion of importers, this
is not something that we consider useful to have in legislation
at this stage. We have seen the reaction of developing countries
when this is even leaked as a draft, and it is not helpful in
reaching the right international agreement. So that idea would
only be considered after December 2009, and I think only in case
there was not an international agreement. In terms of sectoral
agreements, this is something which, if developed, can be looked
at very seriously, but it does seem that everyone has a different
idea of what a sectoral agreement would be. The Commission has
set out conditions in its proposal in Article 10(b) saying that
these must be contributing significant levels of emission reductions
and they must be binding, enforceable and subject to proper monitoring.
We have not seen sectoral agreements that would meet those criteria
yet but, again, it is one potential way forward which could also
be part of the Copenhagen Agreement. These are probably coming
up in terms of decision-making after the Copenhagen Agreement.
There is a provision in the Directive, Article 10(a), which foresees
that if the international agreement were delayed, then, obviously,
any free allocation would be reconsidered after the agreement
has been reached so as to not over allocate.
Q373 Lord Plumb: But among the European
countries or members of the European Union, do you think there
will be flexibility? We talk about border levies. We have spent
many years trying to get rid of border levies. It is the general
principle to do just that, and here we are introducing them. Would
there within that, do you think, be some flexibility between countries?
Mr Meadows: The idea of border
levies is not actually on the table in Council and European Parliament
in any developed form at the moment. There were amendments tabled
in the European Parliament which were not adopted, and the strongest
voices in favour of this relate really to the Baltic States and
some of the newer Member States in relation to imported electricity.
These are issues where those Member States have a concern, but
an issue of general inclusion of importers for steel or cement;
this is really not anything I would anticipate being included
in the December 2008 agreement.
Lord Plumb: Thank you.
Chairman: Perhaps we could move on to
the use of the auction revenues.
Q374 Lord Palmer: I have got two
questions. If I may, I will take them separately. We have been
advised that for the sake of transparency all industries, including
those deemed vulnerable to carbon leakage, should be made to pay
for their allowances at auction. A proportion of the revenues
from auctioning could then be returned to vulnerable sectors,
in the form of subsidies, to fund the transition to low-carbon
products and processes. What do you see as the practical and political
impediments to this idea?
Mr Meadows: In political terms,
it would be difficult to arrive at 100% auctioning immediately
across the board from 2013. Many Member States are very insistent
on free allocation, particularly in terms of stranded costs, in
terms of plants having set up before emissions trading was something
in place. The idea of a transitional phase out. The Commission
has proposed a phase out across the board by 2020 if there is
no higher free allocation because of carbon leakage. This is something
which has been supported by a number of Member States but not
all. Some Member States want no more than 20% auctioning in any
sector outside of power.
Q375 Lord Palmer: How are they split?
About 50:50?
Mr Meadows: Apart from one or
two influential Member States, generally the transition to full
auctioning by 2020 seems to be supported, but in terms of full
auctioning, even in the power sector in 2013, I would say the
majority support full auctioning in 2013 but around eight, nine
or ten Member States want to phase in, even for the power sector,
and the power sector is seen as the clearest example where the
opportunity costs of allowances are passed through to consumers.
In the steel sector, in the aluminium sector, and in others, industry
is saying this is not possible. That is why, in terms of transparency,
I hope we can get to the same result with an evidence-based approach
where we really look at where free allocation is justified, because
costs cannot be passed through to consumers because of competition
outside the EU. The free allocation is similar in many ways to
directly giving money. If the Commission's proposal is harmonised,
this falls outside of the state aid rules. State aid applies to
discretionary actions by Member States so it is an easier model
to work with than applying the state aid rules to the direct recycling
of revenues to industry. In saying that, the issue also comes
up of indirect emissions of the costs industry faces from the
purchase of electricity, and here the European Parliament voted
that auction revenues should be usable for indirect emissions,
and some Member States are also supporting that in Council.
Q376 Lord Cameron of Dillington:
The idea that you either give free allowances or you charge for
allowances and pay them back, was an idea that was put to us last
week or the week before, saying that this would be much more transparent
because it would make people hone in on the costs of their carbon
emissions. You have answered the question really, but I was just
wondering whether, as an idea, it is something that has got any
sort of go in Europe at all. Have you heard about it before?
Mr Meadows: When we developed
this proposal we looked through a whole range of ideas, but this
is probably one in our impact assessment that we would have put
aside quite early on, I think, on the grounds of political feasibility.
The same result in practice should be reached if free allocation
is given out on the basis of evidence. So that element, I think,
can be seen as identical. The element that is different is that,
even where an industry is seen as not being exposed to carbon
leakage or where for aviation the Commission position is the same,
there should be 80% free allocation in 2013, phasing down to 0%
in 2020, and in terms of political acceptability that seems to
have broader support than full auctioning to begin with.
Q377 Lord Palmer: Moving on, if auction
revenues are not earmarked, how might state aid guidelines need
to be adapted to allow funds to be channelled to industry to support
mitigation and adaptation measures? Do you foresee any potential
for such provisions to be abused?
Mr Meadows: There is the potential
for misuse. This is where the Commission has produced another
services paper, which I am not sure if the Committee has seen,
but I can leave or have it sent, on the use of auction revenues
to tackle climate change, because, in practice, over the last
seven years the Commission has approved 98% of environmental state
aid notifications that have been made to it. I do not have the
figure to hand, but I think the amount of state aid properly granted
in Sweden compared to other Member States is something like a
factor of 10 times more; so there is the potential for Member
States to use auction revenue or, indeed, any public revenue,
in many, many ways to tackle climate change, for research and
development, for carbon capture and storage. The newer Member
States in particular expressed a need for more information on
how they could do this, there was a willingness to reduce their
emissions in this way, and many of their production facilities
and power generation are much more carbon intensive. The willingness
was there but they tended to see the Commission as a potential
obstacle because of state aid examination. That state aid examination
will not go away, but we are emphasising to Member States that
we will work with them in terms of showing them the procedures
to be followed.
Q378 Lord Wallace of Tankerness:
What you have said is that it is welcome insofar as the Commission
would be flexible about allowing state aid in these circumstances,
but I think it all proceeds on the basis that it is a matter for
the individual Member State to decide whether or not that is what
they wish to do with the auction proceeds. Does the Commission
have a view as to whether, if not all, at least a proportion of
the auction proceeds should be hypothecated to adaptation measures,
mitigation measures?
Mr Meadows: I was careful to say
that the state aid paper talks about auction revenues or, indeed,
any public revenues, because in state aid terms there is no difference
between the two. The Commission is proposing that Member States
should—and I emphasise that word "should"—use
20% of auction revenues to tackle climate change. In the aviation
emissions trading law it was agreed that Member States should
use all the revenues to tackle climate change, but because this
applies to half the economy, the potential auction revenues are
much bigger—in the realm of 30 to 50 billion euros per year—so
the Commission's proposal is that 20% should be used, and this
recognises the UK's concern that it is eventually a national decision.
A number of Member States are very keen to basically have an indication
that they should be using this revenue in that way and in particular
the redistributive element of the package. It is said that all
of that redistribution should be used to tackle climate change;
so when there is the redistribution from the UK, Germany and France
that that redistribution is actually used to solve the climate
change problem. The Parliament has adopted mandatory wording,
wording on a fund, an international fund. This wording is not
agreed with Council and I see it as being one of the major issues
in the coming weeks.
Q379 Lord Wallace of Tankerness:
Can I clarify, and I do not want this to be nit-picking, but you
used the word "should" and have emphasised the word
"should" on number of occasions. Is that the status
of a strong recommendation as opposed to a mandatory element?
Mr Meadows: It is not legally
binding, the word "should". We had many, many discussions
with the UK on aviation before the word "should" was
agreed. The Commission feels that this should be an acceptable
outcome. On the other hand, in Council some Member States want
to delete this provision altogether; others see it as important
also vis-a"-vis the rest of the world. We know there will
be a need for financing to tackle climate change. I think the
Eliash Report yesterday also mentioned this, and this is one potential
source.
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