Examination of Witnesses (Question Numbers
380-399)
Mr Damien Meadows
15 OCTOBER 2008
Q380 Chairman: Has the redistributive
element been agreed upon?
Mr Meadows: No—a one word
answer. Some Member States wish to delete, some Member States
wish to increase to 20%. The Industry Committee in the European
Parliament voted for 20%, but the Lead Committee Environment left
this unchanged, and I think it is primarily seen as an issue within
Council for them to resolve.
Q381 Chairman: The position of the
UK Government, I think, is that it would want to see the provision
deleted.
Mr Meadows: Yes.
Q382 Chairman: Before we move on
to something else, could I clear up one point following what Lord
Cameron was saying. How does the scheme evaluate either the issue
of free credits to perhaps electricity generation in Poland, which
I think is mainly coal-based? Free allocation would not give them
any incentive to clean up or to alter from coal perhaps to gas,
or whatever it was, but if they had to buy those credits and then
were given them back in order to improve their efficiency, is
that an incentive rather than just allowing them to keep on generating
in a polluting way?
Mr Meadows: There are various
ideas being put forward by Poland, one of the countries supporting
free allocation. In pure economic terms, whether there is a free
allocation or whether there is auctioning, there would still be
the incentive to make emission reductions. So the real question
in economic terms is the question of whether the state has the
revenues or whether the electricity companies have the revenues.
This is something we have been emphasising in contacts with Poland.
Because Poland has not had a liberalised electricity market like
other Member States, the electricity prices have not, I think
until the start of this year, given the price signal that there
has been in another Member States. So, Poland will be seeing,
I think, a 15 to 20% increase in power prices over the coming
years related to the liberalisation of the market, related to
the infrastructure investments needed. For these reasons, we are
emphasising that Poland is better off with auctioning and the
Government having the revenues. There have been proposals. If
people have seen the European Council conclusions draft, I think
it was circulating towards the end of last week, then the Presidency
was talking about time-limited derogations and subject to conditions
for investment in new facilities, so this is something which seems
to be on the table now, but the majority of Member States and
the Commission favour full auctioning from 2013 in the power sector.
Chairman: I think we are aware of those
conclusions, but I do not think they have been circulated to the
Committee.
Q383 Lord Cameron of Dillington:
Access to credits. A thorny problem. There seem to be diverging
views. One is that it undermines the whole system if you have
lax availability of possibly unaudited CERs and ERUs, but there
is the other view that this is a worldwide problem and we should
have maximum flexibility in our world tradability. We heard the
latter from the New Zealand Government, and others recently. But
under your original proposals access to external credits would
be severely restricted under phase three of the EU ETS unless
a satisfactory international agreement was reached. I am wondering
whether you can explain exactly what the Directive's provisions
are, as we have been told there are multiple interpretations of
the relevant clauses.
Mr Meadows: Absolutely. In terms
of rationale, the most important thing is to get the right international
agreement, and this is why, after 2013, the Commission takes the
view that the clean development mechanism, the CDM, or other mechanisms
are a key incentive that Europe has to get other countries to
sign up to the international agreement. If we continue to buy
CDM credits from all countries, whether or not they agreed to
do more, there would be a strong incentive for them not to do
more because for the larger emitting developing countries the
European Council is expecting them to move into more stringent
measures taken nationally, and, of course, CDM is a no-lose solution
for developing countries. So, we have said for the 50 or so least
developed countries we think the clean development mechanism is
the right solution until 2020, but for other countries we would
want their contributions to be calibrated under the international
agreement and, once that agreement is there, then a very considerable
amount, 50% of the additional effort beyond 20%, can come into
the EU system in terms of CDM credits. So, we are very open if
there is an international agreement, but if there is not, then
in fact we are still the first people in the world legislating
to say that CDM has a future after 2013, even without an international
agreement, but we do limit the quantity to the 1.4 billion tonnes
which Member States have provided for in their second allocation
plans. This is still a very large quantity. At 30 euros per tonne
it would be around 40 billion euros of transfers to developing
countries. So that is the key thing in the Commission's position,
the key rationale. In addition, if we do not have an international
agreement and so we are only aiming for a 20% reduction, which
we know is insufficient to tackle climate change, then allowing
even more credits would mean there were less emission reductions
in Europe, it would make our renewable targets more expensive,
we would have more other air pollution in Europe and, therefore,
it would make our other targets harder to reach. We know that
to reach the two-degree target it is not enough just to have CDM,
that there need to be substantial reductions in the developed
countries; so we are much more generous than the 30% scenario.
Moving on to the European Parliament, I would say the same view
is taken in respect of the EU ETS and the effort-sharing decision,
but an even more stringent approach. The European Parliament is
saying that only countries that ratify the new agreement should
be able to sell into the EU ETS after 2013, and they also take
a very strong line on high quality CDM projects. At the moment
we have a situation where any Member State can say no to any particular
type of project. In fact, Denmark is doing this for large hydroelectric
projects and the carbon market is becoming fragmented because
they know that the credits cannot be sold in every Member State.
It is commonly agreed that we want to harmonise this, but there
is a discussion ongoing in Council whether we allow all types
of credit that come out under the United Nations system or whether
Europe should be able to focus on particular types of credit,
and, for example—as has been done in the US House of Representatives
Climate Bill, tabled I think on 7 October, where they say that
HFC projects are not allowed—whether particular types of
project should be able not to be covered. The European Parliament,
in particular, has said that we should look at what other systems
are doing when we decide what we allow, because we know the Americans
are very sceptical of CDM, in our view too sceptical: because
you need to involve developing countries, but if you want to link
your trading systems together, then you really have to take a
look at what other systems are doing or else de facto you
would be accepting what they refuse to accept. I was interested
to see a few days ago that the House of Representatives has taken
up the same wording, basically, that the European Parliament have
on looking at what other systems are doing when making decisions.
Q384 Lord Cameron of Dillington:
I think that probably answers the question. I am interested in
the idea that having the two options is a way of forcing people
to the table, should we say, as much as actually making our system
work in a fair and equitable way?
Mr Meadows: It is an important
incentive. Another element of our proposal says that once the
international agreement is agreed, then other types of credits
can be allowed in. So, in effect, we lose nothing by taking a
strong approach now, because after Copenhagen we can reconsider
and allow in other types of credit. We have also had discussions
with the New Zealanders because they are taking, in our view,
a very, very open approach to credits.
Chairman: Before we go on to monitoring,
the discussion has now been about CDMs, so perhaps we ought to
go to linkage, because I think the two are very connected. Lord
Brookeborough.
Q385 Viscount Brookeborough: You
have already answered to a certain extent some of this, but there
are obviously obstacles in the future with linking different systems,
particularly less ambitious emission trading systems, notably
due to the difference in the carbon prices and to a lesser extent,
and you mentioned it, the quality control over emissions credits.
Are there ways in which these difficulties might be overcome without
putting the integrity of the EU ETS at risk, accepting at the
moment there would be those who say that Europe is okay within
Europe but it is leading the way, and where do you see compromises
in the future in order to make the world system link together?
Mr Meadows: We are very positive
in terms of expecting linkage between emissions trading systems.
I think we see it as the main way forward to have a global carbon
market. Here, of course, the United States is potentially the
biggest player, because their emissions trading system may be
three times the size of the European one. In terms of the elements
needed to link with other systems, we are encouraged to see most
countries tend to be thinking of mandatory systems capping absolute
emissions. These are the most straightforward to link with, but
you rightly highlight some of the key issues. In terms of the
types of credit accepted, I think in terms of external credits
this is an area where you basically need to take a common approach.
In terms of internally what you do, whether you are New Zealand
or whether you are the US or Europe looking at agriculture, for
example, within Europe, I think you can have a high degree of
confidence that countries internally will make sure that their
systems are credible, but where credits are coming from outside,
if one of you has taken a decision not to accept a certain type
of credit, then you cannot link with somebody who allows that
type of credit without tacitly allowing it to affect your system.
So this is an area where, linking back to the CDM discussion,
we are very conscious that the United States is highly unlikely
to allow all types of CDM credit. We think, however, CDM is vital
to engage developing countries. So I think a mechanism whereby
we can make sure that the credits are of quality and a mechanism
by which, when we link up with other systems, we can align this—I
think that is, hopefully, quite straightforward because countries
should generally be looking for high quality credits. Europe is
much further advanced down this road. The US is planning an extremely
broad approach, but coming to the other areas in terms of ambition
in the system, something that would cause a problem is having
a price cap. This has been proposed, I think, by Senator Bingaman
in the US, that if the price of carbon increased above ten dollars,
then you would simply pay the Government, and obviously European
companies would not be happy to pay the US Treasury ten dollars
to get out of their obligations in Europe. Europe would have a
temptation to set a price cap at nine dollars 99 and get the US
money. Basically, linking would not be possible in that situation,
but that is quite well understood in the US. We see a price cap
being proposed in the Australian system for the first few years
but they are not planning to have it long term, and the main US
bills do not have price caps. In terms of the level of stringency,
this is obviously a key issue, where I guess we want other systems
to learn to walk before they have to run, because in Europe we
know how much there needs to be done to tackle climate change
right now. In US bills we see a comparable level of stringency
in 2050—they are looking at an 80% reduction—but in
terms of levels of ambition in the short term, then it is not
clear that they are as ambitious, and I think this would be a
real point for discussion between the EU and the US.
Q386 Viscount Brookeborough: When
the New Zealanders were giving evidence the other day, and I was
not here for that but I was reading, when talking about the costs
of meeting their obligations, they said, that by minimising these
costs they believe they give themselves the best chance of achieving
their environmental goals. Do you believe that we in Europe are
talking in the same terms or we are actually saying by increasing
the costs we would achieve our goals? Are these opposite ends?
Mr Meadows: We are talking the
same language, because emissions trading allows the lowest cost
reductions, so therefore we can have more ambitious goals, but
I think Europe is at the head of the pack in terms of the emissions
reductions we are signing up to.
Q387 Viscount Brookeborough: You
mentioned the other nations of the world that are already going
down this route. What can you tell us about China and India and
Asia?
Mr Meadows: In Asia, South Korea
is looking very seriously at emissions trading systems. The international
negotiations, I think, well, it is still an early stage compared
to Copenhagen, so it continues to be difficult to get countries
to accept that there are large differences between the Gulf states
in levels of emissions and GDP and less developed countries, and
in particular with China and India, there are sectors of the economy
which are directly competing with EU sectors. On the other hand,
there are sectors such as households where there is a move to
motorised transportation instead of ox carts. I think this is
a complex area which over time will become differentiated between,
basically, households and transport and the industrial sectors.
Europe is not expecting the same contributions from India and
China by 2013, but I think as you look further forward we would
be expecting the industrial sectors to make a stronger contribution;
but it is the OECD countries that we see as the prime candidates
for emissions trading from 2013.
Chairman: All of this will not work unless
it is monitored.
Q388 Earl of Arran: On this particular
subject on monitoring, reporting and verification, we understand
that these would be provided for in the draft directive to be
harmonised across Member States. Could you elaborate a little
bit on this and explain why the Commission deems it necessary?
Is it trust or lack of trust amongst other Member States?
Mr Meadows: I will call it credibility,
and it is credibility both within the EU and to third countries.
In the US the Environment Protection Agency does the monitoring
for power plants, and actually the US would be quite reluctant
to involve the private sector in this, although other systems
such as the New England system are following the European approach
of using private sector verifiers. But in our law Member States
almost agreed on the language, or provisionally agreed on the
language last week, saying we can only link to systems which have
comparable monitoring stringency and credibility, and we see that
in US legislation as well, that the monitoring would have to be
credible. Here, although this is certainly an element of success
of the trading system so far, we are conscious that Member States
are taking, to a degree, different approaches on insulation boundaries,
on the way transfers of CO2 for other purposes outside of a plant
are covered. All of this is much more harmonised already than
if we had 27 different trading systems in Europe, but we see that
it can be done better, and in particular, for verification, the
companies, the accountants carrying out verification can do so
in one Member State without automatically being allowed to in
other Member States, and for internal market reasons it is much
better if verifiers can work across the EU. So it has probably
been one of the least controversial areas, with the European Parliament
and Council moving to have a harmonised system through regulations,
and we will be working with stakeholders and Member States up
until 2011 or so to get rules that apply in the same way right
the way across Europe.
Q389 Earl of Arran: It is terribly
important that the reporting and monitoring all stems from a level
playing field, is it not?
Mr Meadows: Yes, and also in terms
of costs for industry, where Member States take slightly different
approaches, then the costs of verification, the costs of monitoring
differ and, obviously, this is something where there is no good
reason for that to be the case.
Q390 Lord Brooke of Alverthorpe:
As I understand it, you were saying that we are in a position
where, broadly, we would be able to reach an understanding with
the United States in these areas, that we have maybe different
ways of application but the commonality is there which would be
acceptable to both parties. Why is there, or appears to be, such
a difficulty with CDMs, such a wide variety of views being held
between two continents, and what can be done to overcome it?
Mr Meadows: For CDM monitoring.
Q391 Lord Brooke of Alverthorpe:
Yes.
Mr Meadows: For CDM monitoring.
We have seen the situation has improved. I think the Executive
Board of the CDM has been getting better. I think the big differences
between Member States and the European Parliament at the moment
are that some Member States are saying that anything that comes
through the United Nations system is de facto something
we should accept.
Q392 Lord Brooke of Alverthorpe:
Which the States do not? The Americans do not.
Mr Meadows: No, the Americans
do not. The thing is, the CDM is only one of the mechanisms. There
are things such as "joint implementation track one",
and this could effectively be an agreement between Russia and
Ukraine to turn governmental assigned amount units straight into
credits useable in the EU, basically unrelated to a project. So
when you talk about UN safeguards, there are no UN safeguards
for this type of joint implementation. In addition, because in
our year-long stakeholder consultation most people agreed it was
more important to link up carbon markets than to have the CDM,
the CDM oils the wheels, but the long-term objective is linked
systems, and here the Americans are in a unique situation.
Q393 Earl of Arran: Turning to enforcement,
what enforcement mechanisms will be available after 2012 to ensure
compliance with the provisions of the EU ETS and, secondly, how
do you envisage that post-Kyoto international agreement could
be effectively policed and are there any lessons to be drawn from
the Kyoto Protocol?
Mr Meadows: Thank you. Firstly
on this, I would differentiate between compliance with a company-based
trading system such as the EU ETS and compliance with the Kyoto
Protocol, because back in Marrakech in 2001 the EU was looking
for a very strong compliance system. We got agreement in Marrakech
but agreement without the very strong compliance system. That
was in effect the last minute concession needed. In addition,
internationally you can say that countries that do not meet to
their Kyoto target will have a more stringent target in the next
period, but they have not yet agreed to the next period. Canada,
for example, has said that it will not necessarily comply with
its Kyoto target this period, and so this enters into, I guess,
a traditional area of international law where it is more difficult
to enforce commitments than it is within domestic legal systems.
For us compliance is vital in the EU Emissions Trading System,
it must be cheaper to comply than not to comply or the EU Emissions
Trading System will not work, and we have the 100 euro per tonne
penalty applicable to ensure companies comply. So we would only
link up with trading systems which have strong compliance measures,
and the Kytoto Protocol is important as an umbrella for setting
targets for states but it does not directly link with the company
trading systems linking together. To highlight this, one thing
I can announce, maybe you have heard already, but the EU Emissions
Trading System will link up at 8.00 a.m. tomorrow morning with
the United Nations International Transaction Log, so CDM credits
will start flowing into the EU system from tomorrow. At the same
time, we had a law which entered into force last Sunday on the
registry system, and this provides that by 2012 the EU system
will really be self-contained and we would be able to link to
other systems either through the UN or directly to those systems.
We are conscious that a US system is likely to be a credible system.
We want the US to be part of the next international agreement,
but if the US is not part of that agreement, then we want to be
able to link, we want the possibility to consider linking with
them anyway because the senate majority differs for ratifying
a treaty to having a cap and trade system up and running and UN
infrastructure would find it quite difficult to link to a non
party. So our architecture is set up based on a company trading
system which can be linked to any other company trading system,
and that is where effective compliance would be foreseen.
Earl of Arran: Thank you very much. Thank
you for your advanced notice as well.
Chairman: Perhaps we should go on to
evaluating an international agreement. Earl of Dundee.
Q394 Earl of Dundee: We know that
the European Union would commit to tighten its central emissions
cap, in part, in the event that a satisfactory international agreement
can be reached in the first place. What kind of criteria, therefore,
would be used to determine whether the international agreement
should trigger the tightening of the cap?
Mr Meadows: We are careful here
to use exactly the terms of the European Council in terms of an
agreement to a 30—I think it might be at least a 30% reduction
of emissions by 2020 for developed countries, with appropriate
commitments by major developing countries, and some in the European
Parliament and some in Council have tried to change these words
but this tends to create a lot of debate to come back with exactly
the same formulation from heads of state. So this is what the
EU is looking for internationally: a Copenhagen agreement whereby
the developed world commits to 30% reductions as a whole and the
major developing countries commit to more than just CDM. The process
for moving the EU trading system from 20 to 30% is specified to
happen when the EU ratifies this agreement. This means that after
everybody returns from Copenhagen the legislators would look at
that agreement and only if it is good enough, only if the EU wants
to ratify and commit itself to it, would we move to 30%. So that,
basically, leaves the appraisal to legislators in 2010 as to whether
the agreement is good enough.
Q395 Earl of Dundee: Could there
be perhaps sharper background clarification, from the legislators
no doubt, on how this matter is progressed and judged upon: who
will make decisions; roughly when—you say 2010, but there
may be other dates—and what kind of process altogether?
Mr Meadows: The process proposed
by the Commission, which we began to discuss quite a lot in Council,
is for the switch to a 30% reduction to happen from the year after
the community as a whole ratifies the Copenhagen agreement. So,
the likelihood is that the United Kingdom, the other 26 Member
States and the community as a whole will ratify the next agreement.
That is what happened for Kyoto, and we discussed for some time
whether it should be 27 plus one, whether it should be the community
and every single Member State who ratified. I think after the
Irish referendum, Member States came to see that it was probably
best not to make the transition to 30% dependent upon every single
Member State ratifying but when we commonly decide. Some Member
States still want to say it should only happen when the Treaty
enters into force. For example, with Russia, because of their
delayed ratification, Kyoto entry into force was delayed. The
Commission's line here has been that there is no obligation on
the EU to commit itself to the 30%, to ratify the Copenhagen agreement,
before other countries. When the United States pulled out of Kyoto,
we took a decision that we wanted to ratify anyway, but there
is nothing preordained that says that the EU has to ratify before
we see other countries ratifying. So, that is the key element
of transition. At the same time, there is a debate now about how
much of the elements should be revisited when we go to a 30% reduction.
The European Parliament is very keen to keep this as narrow as
possible, just talking about the actual extra effort, but some
would like a much wider discussion.
Q396 Chairman: Would you explain
how the decision will be taken by the community? Will it be taken
by the Council? Will it be determined by co-decision? Is there
an outline of that already?
Mr Meadows: The procedure would
be by qualified majority, as it was for Kyoto in Council, and
I think, under the Treaty of Nice, the European Parliament would
be involved in something that is very close to co-decision. I
am told there may be a small difference, but it would basically
be a co-decision procedure so the European Parliament and Member
States would be involved in moving to 30%.
Q397 Viscount Brookeborough: I think
at the very beginning in your introduction you said words to the
effect of "when we have reached 30%, then we will have stabilised
global warming". I thought that was a rather sweeping statement,
and obviously we are talking about Europe at the moment. What
happens when global warming does continue? There is quite a differing
view on that, and I am not disputing the merits of carbon trading
or reducing it, we all believe in it. Would you just set it out.
Mr Meadows: Europe by itself is
something like 14% of global emissions and well beyond 30% reductions
are needed, we are told, to stabilise at two degrees centigrade.
The Bali Action Plan mentioned reductions, I think, of 25 to 40%
by developed countries by 2020 as being necessary. These, of course,
were entirely domestic reductions. So our 30% reduction proposed
would have an extra 5% which could come in from clean development
mechanism. I think scientifically, when I see recent reports from
the Met Office and others in terms of what needs to be done, it
is difficult to say we are doing too much to tackle climate change,
but we are certainly doing as much or more than any other region
of the world. The advantage of emissions trading is that it is
a system that other countries can follow. It also involves developing
countries in more ways than other climate measures do.
Q398 Lord Brooke of Alverthorpe:
In the Directive's Explanatory Memorandum you note that shipping
and road transport might be included in the EU ETS at a later
stage, but that there is little prospect of including agriculture
or forestry for the time being. We have seen that the European
Parliament has pressed for shipping to be included as soon as
possible. I wonder if you could explain how you see the scope
of the ETS expanding in the future and say something specifically
about shipping and on what basis we can see the changes taking
place?
Mr Meadows: Absolutely. I will
start, if I may, by the overall targets of the EU, because it
is said often in the legislation and also in our proposals that
all sectors should be contributing to emissions reductions and
to the 20% target. In the EU's 20% target aviation emissions are
included, even though these emissions are not included in the
Kyoto Protocol targets. We do not think they can be ignored. However,
agriculture or forestry is not included in the 20% target because
the international rules need improvement, and shipping is not
yet included in the 20% target because the data is generally of
very poor quality. Estimates range between 500 million tonnes
and one billion tonnes a year over emissions. So we did not have
good enough data to include this in the 20% reduction, but we
take the view that in principle shipping should be contributing
to the 20% and 30%. That is the core of the European Parliament's
position as well, that shipping should be contributing to the
20% and 30%—they voted the same way for forestry—and
that then the legislators have a choice: either emissions trading
covers shipping by a certain date or else the effort-sharing decision
must cover shipping by a certain date, but you cannot just ignore
shipping. Although I think the timelines are quite short that
have been adopted by the European Parliament, the Sixth Environmental
Action Plan of the EU said that the IMO (International Maritime
Organisation) must agree measures by 2003 or the EU will take
action. No such measures were agreed, and in London last week
the IMO, I think, failed to make progress again on greenhouse
gas measures. We are seeing a failure to move forward on shipping,
and, of course, this places a disproportionate burden on other
sectors and, in terms of carbon leakage, it does not make sense
either because nobody is flying cement to Europe from China, and
in terms of shipping, if there is no carbon price applied there,
then it is not a sensible signal. So the Commission sees shipping
as a promising candidate to include in emissions trading but we
have not got a proposal on the table yet. It may come in 2010.
The discussion up until December 2008 is whether, in principle,
shipping is included in the targets or not.
Q399 Lord Brooke of Alverthorpe:
Separately, going right back to the beginning when you listed
the obstacles that still remain to be resolved before we get the
Directive through in December 2008, which would you highlight
as the most difficult one that will remain at the end of the list?
Mr Meadows: Coming back to the
questions about full auctioning and recycling of revenues, I think
the free allocation is possibly the most difficult discussion.
Even on aviation and the level of auctioning this is a difficult
discussion, whether free allocation should stay at 85% for free,
whether it should diminish to 0% in 2020, as the European Parliament
adopted, and the same in other sectors, determining whether steel,
cement, others, would be eligible for free allocation or when
those decisions will be taken. Council is tending to favour decisions
being taken in 2009, but the Commission's view is that 2010, after
Copenhagen, is the best time because in 2009 we cannot really
judge this without a Copenhagen agreement, so what help is it
to produce a list which then has to be changed anyway? Some industries
say it is some help anyway, but I think that would be one of the
most difficult elements. Otherwise, I think the free allocation
potentially in the power sector, the treatment of new Member States,
the redistribution is part of the overall package. Although it
is present in the emissions trading proposal, it is something
to do with the overall balance and the fact that our new Member
States have quite demanding targets, whereas their Kyoto targets
were not so demanding. So there is this equity that has to be
decided upon as well. I would personally see the emissions trading
as not being the most difficult element of the package, because
the European Parliament and the Council are relatively close together,
apart from on issues such as the use of auction revenues, where
a compromise has been found in the past, in July, between the
institutions. On the effort-sharing decision, I think the European
Parliament and the Council are further apart. I think agreement
is still altogether possible, but there is a lot of dialogues,
a lot of negotiations to take place.
Lord Brooke of Alverthorpe: Thank you
very much.
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