CHAPTER 4: delivering policy clarity2030
99. The European Commission's 2011 'Roadmap for
moving to a competitive low carbon economy in 2050' identified
a 40% greenhouse gas reduction target by 2030 as "the most
cost-effective pathway" to 2050.
EU legislation, though, is currently limited to a 2020 target
with a supporting framework. There has therefore been a debate
about whether an EU framework, including a target accompanied
by further supporting measures, should be set out until at least
100. The Commission responded to the debate by
issuing a Green Paper on 27 March 2013 to consult on a new framework.
The paper reflected demands that climate goals have to take account
of the economic crisis, but still pressed for a low carbon economy
that is less dependent on fossil fuel imports. It consulted on
possible future targets such as a 40% cut in carbon emissions
over 1990 levels and for 30% of energy needs to be met by renewable
sources, both by 2030.
The Green Paper will now be the subject of discussion before legislation
101. There was a consensus amongst the evidence
received that clarity and consistency is required about what will
be the energy and climate change framework until 2030. This was
highlighted as necessary to provide more certainty for investment,
and also because inertia in the energy system could make it much
more expensive to make rapid carbon reductions later on. It was
argued that maintaining steady progress towards well-defined goals
was the most efficient approach, and that industry needed long-term
visibility of these goals.
Moreover, a clear 2030 framework was highlighted as important
to ensure that the EU has a credible and deliverable figure in
mind before the UNFCCC conference in Paris in 2015, when it is
hoped to secure a substantial new international climate change
102. For a number of witnesses, such as Vestas,
the strategic objective for a 2030 policy must be a continued
reduction in greenhouse gas emissions.
This objective had to include a 2030 target as a necessary stepping
stone, as otherwise there was the fear that people would "kick
the can down the road and not do anything".
103. Member States must be under no illusion:
failure to agree a 2030 framework will restrict investment, with
subsequent implications for energy costs, climate change ambitions
and energy security. A comprehensive framework must be underpinned
by a greenhouse gas reduction target set at the suggested level
of 40% compared to 1990 levels, and in line with at least an 80%
reduction by 2050.
EU Emissions Trading System
104. It was stressed that green investment requires
a supportive carbon price. Professor Helm stated that "If
there is no carbon price, there is no money to be made from reducing
carbon", meaning that without a carbon price, there will
be little if no investment in green technologies.
In acknowledging the necessity of a carbon price to support green
investment, the vast majority of witnesses stressed that the current
carbon price under the EU's Emissions Trading System (ETS) is
too low. The evolution
of prices until May 2012 is set out below (see Figure 1). Since
then, prices have hovered around the 5 mark, and recently
dipped as low as 2.75 on the primary market.
Evolution of carbon prices
Source: Intercontinental Exchange. Data for front-year
futures contracts with delivery in December
105. The ETS was intended to perform a multitude
of roles. As a market-based approach to achieve the most efficient
emission reductions, it was also expected to help incentivise
low carbon investment in the EU, was linked internationally as
part of the EU's contribution to global climate goals (including
support for low-cost emission reduction in developing countries)
and was intended to be a source of funding for innovation (such
as for carbon capture and storage (CCS)). There was agreement
among witnesses ranging from the Commission to EDF that, in essence,
the ETS market design has worked in contributing towards delivering
efficient emissions reductions. Meeting these reduction targets,
however, cannot be solely attributed to the ETS, but rather, is
due to a combination of factors, including: the economic recession;
weak original targets; the contribution made by renewable energy;
an oversupply of imported overseas credits;
and a greater import of energy-intensive products. The resulting
low demand for emission allowances has resulted in a priceand
level of uncertaintythat has not encouraged low carbon
investment and has significantly reduced the amount of funding
available for innovation through the NER-300 (see paragraph 57
and Appendix 4).
106. Professor Helm noted that the ETS had
produced a "short-term, volatile and low price",
and along with other witnesses called for reform of the ETS in
order to increase the carbon price. There was widespread agreement
that the ETS required reform for a number of reasons: the need
for clarity for industry investment; the potential economic benefits
of low carbon investment; the economic risks associated with stranded
investments in higher carbon energy; innovation and energy security
benefits; and the climate and diplomatic benefits to be derived
by the EU from taking a lead.
107. Some witnesses questioned the benefit of
reforming the ETS, noting that the EU accounts for only about
10% of overall global carbon emissions. CoalPro described an expensive
EU system as "utter futility" given this.
However, others noted that a credible EU climate policy remains
globally crucial, and that other regions are following the EU's
lead: California and Australia have now implemented an ETS, the
South Korean Parliament has legislated one to start in 2015 and
China has seven pilot ETS programmes as part of its current Five-Year
108. The Commission has published a paper setting
out ways in which it believes reform could take place.
Most of the options focus on reducing directly the supply of allowances,
but also include the option of price guarantee measures such as
a floor price. This could take the form of a stated minimum reserve
price on future auctions of ETS allowances. Prices in the existing
market would rise as the current surplus was used up, until the
market required allowances from auctions bought at or above the
reserve price. The UK introduced a unilateral floor price from
1 April 2013 for its power sector, implemented with a carbon tax.
109. Many witnesses were supportive of the idea
of a floor price, and suggested that price uncertainty in the
ETS is a major impediment to investment.
It was also emphasised by Mr Wolf that determinants of the
price of carbon needed to be as predictable as possible.
Some referred to the potential benefits of a floor price in reducing
the real and perceived risks around low carbon investment, such
as the shale gas displacement impact on coal.
In addition, a floor price would greatly reduce the uncertainties
around revenues. Although the ETS was originally projected to
raise several hundred billion Euros in the period up to 2020,
current prices mean revenues will only be a small fraction of
110. A number of witnesses expressed concern
about the political difficulty of agreeing a floor price, pointing
in particular to resistance from the Commission.
The Commission itself conveyed unease about the complexity of
Member State politics, and the risks of 'managing the market',
including concern that discussing a floor price would also provoke
discussion of a ceiling price.
The Californian system has both a floor and a ceiling to create
a wide 'price corridor'.
111. There were a number of other suggestions
about how the carbon market might be reformed, all of which were
included as options in the Commission's paper on possible future
reform of the ETS (see paragraph 108). WWF, for example, suggested
a change to a 2.6% cap reduction
annually from the present through to 2050, rather than the current
1.74%. The Commission
and SSE similarly supported the development of a framework between
2020-30 that incorporated a "more restrictive target",
which they deemed would help ensure a higher carbon price.
WWF and the Secretary of State considered that a more supportive
price would be delivered by the permanent retirement of a number
Others, such as Mr Dan Jorgensen MEP, argued that the possibility
of off-setting to other countries, outside the EU, should be ended.
WWF also pointed to the issue of oversupply of imported overseas
credits, which it said are largely responsible for general oversupply.
112. On the proposal to 'backload' (see Appendix
4) the auctioning of allowances until later in Phase III (which
ends in 2020) the Commission was clear that "explicit support"
from the UK and Germany was required, warning that failure to
adopt the proposal would suppress the carbon price even further.
Witnesses considered backloading to be a necessary and helpful
first step, but stressed that the longer-term trajectory must
be clear. The
Secretary of State confirmed that the UK would be willing to support
the proposal as long as it was linked to a deal setting out a
timetable for deciding on longer term structural reform of the
ETS, which should include the permanent retirement of allowances.
It was stressed by the CBI, however, that before short-term adjustments
could be made, such as with backloading, it was first necessary
to be certain about the long-term direction of energy and climate
change policyin particular, beyond 2020.
The proposal was rejected by the European Parliament on 16 April
2013 and will be reconsidered by the European Parliament and Member
113. The recession and other factors have
made the ETS marginal in terms of driving emissions reduction.
Its history and current design render it ineffective at achieving
its other goals. Experience has demonstrated the extreme sensitivity
of the ETS to unanticipated developments.
114. We support the backloading proposal to
amend the ETS in the short-term but we agree with some of our
witnesses that it will be ineffectual without a commitment to
a timetable for longer-term structural reform. This should be
agreed by 2015 in advance of the Paris international climate change
115. The dominant options for rejuvenating
the ETS include tightening the cap and setting a floor price.
The uncertainty in revenues makes it impossible for governments
to budget effective use of ETS revenues, and the price collapse
has reduced the major source of expected EU finance for CCS.We
therefore conclude that a floor price would simultaneously increase
investor confidence and help to stabilise possible financing for
infrastructure, low carbon innovation and related applications.
116. A combination of both tightening the
cap and introducing a floor price, seen as part of a package to
attract new investment and support efficiency and innovation,
may help to alleviate some of the political opposition to both
options. Structural reform is important to restore credibility
and meet the multiple goals of the ETS, but a clear trajectory
for a reduction in the cap over the period to 2030 would remain
Renewable energy target
117. There was a divergence of views among witnesses
on the desirability of a 2030 renewable energy target as part
of the 2030 framework. Several supported such a target on the
basis that the 2020 target has stimulated investment. Mr Tindale
and SSE noted how the 2020 target has driven investment into renewable
energy, by setting
out clear targets against which to invest.
Mr Tindale identified another argument in favour of a renewable
energy target, pointing out its possible role in persuading the
public to support other low carbon alternatives, such as nuclear
power, in the medium-term in the knowledge that renewable energy
was being further developed.
118. A number of witnesses agreed that the 2020
target had been helpful but were unwilling at this stage to commit
to a 2030 target. ScottishPower said that a 2020 target was helpful,
but whilst it "would not rule out" a target beyond 2020,
this target might be "a more indicative target", allowing
Member States greater flexibility.
BNEF agreed that the 2020 target had offered appropriate "investment
certainty"including sufficient flexibility to Member
States over which renewable energy sources to supportbut
considered it was too early to set a 2030 target.
It stressed that much could happen in 18 years, especially in
terms of the potential for economic and technological changes.
119. Others, meanwhile, were opposed to any form
of a renewable energy target, arguing that it favoured one set
of (potentially expensive) technologies over another. Mr Atherton,
for example, commented that a renewable energy target would be
unhelpful, such as the target the UK signed up to in 2006, which
effectively locked us into "very immature, very technically
uncertain and very expensive" technologiesin other
words, offshore wind.
Mr Atherton further argued that the deadline for meeting
the 2020 target should be delayed by at least five years, and
Professor Helm shared his scepticism about the wisdom of
the 2020 target.
EDF also rejected the idea of a renewable energy target, believing
it to be "misguided", viewing it as having undermined
the carbon market itself, with concerns that it would lead to
permanent subsidies (to the cost of the consumer).
120. The Secretary of State suggested that an
electricity decarbonisation target should be explored instead,
claiming that the "logic for a decarbonisation target in
the UK is quite strong".
Such an idea was, however, rejected by RenewableUK, who noted
the need for more precision about the type of technologies required
and in what quantities they would be necessary.
121. A strengthened and more effective ETS
can provide a broad underpinning for the most cost-effective low
carbon technologies, but it cannot support all of the necessary
transformations. An EU-wide renewable energy target beyond 2020
is desirable, and so we therefore support a renewable energy target
up to 2030. Failing that, a 2030 decarbonisation target at the
EU level for the power sector should be set. Member States could
then set their own specific renewable energy targets, which should
be reported to the Commission.
122. There was a general consensus that energy
efficiency is a crucial component of the EU's energy transformation.
Oil & Gas UK noted that efficiency could help save energy,
and was also economically beneficial with important implications
for affordability and competitiveness.
A number of witnesses were supportive of inclusion within the
2030 framework of an energy efficiency target of some form, as
well as some demand-side response policies.
123. In 2012, the EU adopted an Energy Efficiency
Directive (EED) (see Appendix 6), which some witnesses, including
the Secretary of State, were hopeful would lead to a significant
energy reduction in the EU. It requires Member States to set their
own national targets in order to meet the EU-wide objective of
a 20% reduction by 2020 compared to 2007 levels. Progress will
be assessed by 30 June 2014. Mr Jorgensen MEP stated his
view that the EED will probably result in an energy reduction
of 25% across the EU.
On the other hand, we heard regret about the limited ambition
of the EED and its failure to incorporate Combined Heat and Power
were split on the economic viability of further development of
CHP and district heating,
although the latter has proved successful in other EU Member States,
such as Denmark which, according to the CIBSE, are "conspicuously
outperforming the UK".
124. SSE also emphasised that much more needs
to be done to improve energy efficiency, energy reduction and
energy management, especially as these can make significant contributions
to affordability and competitiveness.
It stressed that, the more that affordability becomes an issue,
the more important it becomes to ensure that a future framework
incorporates "demand-side targets and demand-side policies".
125. The Committee also considered the extent
to which there is a 'rebound effect', whereby consumers and businesses
increase their energy-consuming activities in response to energy
efficient methods reducing their effective energy costs. WWF thought
that this was a possible consequence, and therefore that any efficiency
targets should consider focusing on net energy savings rather
than purely on energy efficiency or be accompanied by measures
to deter such a rebound.
126. The EU has adopted the EED which needs
to be implemented across Member States. We would support further
consideration as to the introduction of binding EU-level targets
on energy consumption by 2030, consideration which should be informed
by the Commission's assessment in 2014 of the implementation of
127. There are important helpful technologies,
such as community heating systems and CHP, which must be further
developed. The potential 'rebound effect' reinforces the need
for energy efficiency policy to be complemented by measures to
price carbon appropriately.
128. Certain industries, such as cement and aluminium,
are particularly reliant on energy. For these industries, energy
makes up a significant proportion of their total costs. Some of
our witnesses considered whether these industries, which are particularly
affected by changes in energy costs, required specific policies.
By way of example, the UK Government have announced specific support
measures to electro-intensive industries in relation to the UK
carbon floor price. The CBI was particularly insistent on the
need to ensure support for such industries, noting that the policy
framework has to help "specific businesses as well as the
consumers facing challenges".
129. INEOS argued that energy-intensive industries
make a significant environmental and economic contribution to
the green economy, stressing that they must be protected from
the effect of punitive fiscal decarbonisation measures on energy
prices. It cited Germany and France as examples of best practice
in this regard, in the form of tax rebates and long-term energy
130. Other witnesses noted that many businesses
are increasingly wary of measures that may hamper competitiveness
and increase short-term operating costs. The IPPR noted that some
businesses view ambitious climate change policies in the UK and
EU as potentially self-defeating if they lead to carbon leakage
(where production and the consequent emissions are displaced to
countries with less stringent carbon regulation).
The IPPR did qualify, however, that it has found no evidence of
carbon leakage occurring, stating that costs attributed to climate
change measures as a proportion of total energy costs facing energy-intensive
industries are still relatively small (although these costs are
projected to increase). It argued, therefore, that the aim should
be a set of policies that enable innovative businesses and start-ups
to capture new low carbon growth opportunities, whilst assisting
existing and hard-to-treat industries to adapt their business
models to the transition. IPPR suggested three potential policies
that could be implemented at EU level to support energy-intensive
industries: raising the carbon price to provide a better incentive
for low carbon innovation; expanding the ETS to include imported
energy-intensive goods to prevent future carbon leakage; and ensuring
that ETS revenues are spent on low carbon projects.
131. In our report on the 2008 revision of the
ETS, we acknowledged
that some sectors of industry may be at risk of carbon leakage
as a result of high energy prices. Our preference was for global
sectoral agreements to be reached in order to put these industries
on an even footing with their non-EU competitors. In the meantime,
we argued, special provisions should be made within the ETS for
those industries, such as free allocation of allowances.
132. Acknowledging the drawbacks of continued
free allowances in the long-term, and the difficulty of constructing
global sectoral agreements to fully factor in carbon costs, it
might also be possible to include importers in the ETS (Article
10b of the ETS Directive) or to impose a tax on carbon-intensive
imports from third countries. While Professor Helm was supportive
of this approach, the Commission warned not only of the administrative
complexities, but also the risk of over-or under-taxing imports.
Additionally, the Commission expressed fear that "retaliation
and trade measures" would follow in other jurisdictions.
Professor Helm rejected that argument, suggesting that a
tax would be justified on environmental grounds.
133. We agree that energy costs have a disproportionate
impact on a small number of energy-intensive industries and that
this is an issue to be addressed in the post-2020 framework. In
order to make a full evidence-based position for that framework
possible, we recommend that the Commission explore urgently the
various options, such as: free allocation of allowances under
the ETS; global sectoral agreements; and any global trade-compatible
measure that could equalise costs between domestic and third country
producers. Some income derived from the auctioning of allowances
under an ETS with a floor price could be offered to assist energy-intensive
industries to develop and adopt innovative energy efficient technologies.
The politics of a 2030 framework
134. We heard much scepticism surrounding the
prospects for reaching an agreement on the 2030 framework. It
was observed by witnesses such as Mr Froggatt and Mr Davies
MEP that the economic crisis since 2008 has entirely altered the
political dynamic, particularly given that everyone was now "nervous
about spending any money".
135. Regarding the ETS, Professor Helm noted
that there was a great deal of political capital invested, meaning
that scrapping it would be an "enormous setback", and
unlikely to be an option favoured by the Commission or Member
Statestherefore, the ETS must instead be improved.
On that basis, the development of future policy should be understood
as being about economic competitiveness and growth, in addition
to decarbonisation. According to Professor Helm, to present
an argument in this manner would prove "more fruitful"
than if it was based solely on climate change.
136. The Commission argued that targets and burden
sharing needed to be set in such a manner that none of the Member
States felt that they were "losing out", and indeed
that the outcome was of economic benefit.
The SSE stressed the difficulty of coming to an agreement because
of the differing interests among the 27 Member States. Consequently,
that would make it challenging to come up with anything other
than "suboptimal" or "lowest-common-denominator"
a result, flexibility may well have an important part to play
in achieving an agreement.
Ultimately, as the Commission observed, any future agreement could
(and may need to) be reached by a qualified majority
rather than unanimously among the Member States.
137. Witnesses also drew our attention to the
2015 deadline for a new international climate change agreement
under the UNFCCC, with the culminating conference to be held in
Paris. This deadline should exert pressure on the EU to agree
a position on a 2030 framework ahead of the international negotiations,
a view that was expressed by Mr Davies MEP.
Regarding the 2013 UNFCCC Conference to be held in Warsaw this
November, the government of Poland noted that any decisions taken
must maintain "the political momentum for global climate
agreement" on the agreed schedulethat is, to be adopted
in 2015 and enter into force by 2020.
138. We conclude that the future framework
can and should be seen and articulated as an economic opportunity
for all Member States. It must overhaul the ETS as an instrument
for supporting strategic investment both by industry and, through
revenues raised, for supporting innovation (for example, in CCS
and offshore turbines), European infrastructure investment and
energy efficiency. Provisions on the ETS must form part of a package
along with policies on renewable energy and associated infrastructure,
energy efficiency, and energy-intensive industries. We note that
the unanimous support of all Member States may not be required,
as any future agreement could be reached with a qualified majority.
201 COM(2011) 885 Back
COM(2013) 169 Back
Q 2, Q 189, Q 190,Q 192, Q 209, Q 211, Q 315, ABB Limited, CER,
DECC, ETI, WWF Back
Q 230 Back
ABB Limited, E.ON, EDF, Vestas, WWF Back
Q 197 Back
Q 140 Back
Q 9, Q 95, Q 123, Q 125, Q 191, Q 248, CER, Fiona Hall MEP Back
European Energy Exchange Back
COM(2012) 652 Back
Overseas credits are awarded to emissions reduction projects outside
the EU and can be sold to operators in the EU (and elsewhere)
to count towards domestic (EU) emissions reductions. The ETS has
only accepted credits that qualify under (and are monitored by)
the UN under the Kyoto Protocol, and excludes land-use-based credits;
additional restrictions apply from 2013 Back
Q 67, Q 113, Q 181, Q 199 Back
Q 123 Back
Q 95 Back
Q 113 Back
Emissions trading: Cap and trade finds new energy, Nature,
Vol. 491, November 2012 Back
COM(2012) 652 Back
Q 12, QQ 28-29, Q 95, Q 123, Q 169, Q 199 Back
Q 214 Back
Q 95 Back
Q 89, Q 199, Q 249 Back
Q 258. In contrast to a floor price, which defines a minimum charge
on emissions, a ceiling price defines a fixed price at which additional
allowances are made available in excess of the cap Back
Under the ETS, the cap is an absolute total of emissions allowed
to be emitted by all participants. It is set by the Commission
and each participant is allocated an individual limit or cap for
their own emissions Back
Q 312 Back
Q 67, Q 199 Back
Q 312, Q 374 Back
Q 249 Back
Q 312 Back
Q 219 Back
Q 28 Back
Q 374 Back
Q 312 Back
Q 9 Back
Q 195 Back
Q 9 Back
Q 197 Back
Q 173 Back
Q 177 Back
Q 174 Back
Q 143, QQ 176-177 Back
Q 195, Q 197 Back
Q 376 Back
Q 99 Back
Q 72 Back
Fiona Hall MEP Back
Q 248 Back
Combined Heat and Power (CHP) integrates the production of usable
heat and power (electricity), in one single, highly efficient
process. CHP generates electricity whilst also capturing usable
heat that is produced during this process Back
A district heating scheme comprises a network of insulated pipes
used to deliver heat (in the form of either hot water or steam),
from the point of generation to an end user Back
Q 195 Back
Q 311 Back
Q 25, Dr Karsten Neuhoff supplementary evidence Back
Q 307 Back
IPPR. See also QQ 25-28, Q 249, Dr Karsten Neuhoff, EDF, ScottishPower
supplementary evidence Back
European Union Committee, 33rd Report (2007-08): The Revision
of the EU's Emissions Trading System (HL Paper 197) Back
QQ 129-131, Q 223 Back
Q 52, Q 253 Back
Q 123 Back
Q 137 Back
Q 269 Back
Q 198 Back
The EU's system of voting whereby a decision among Member States
needs to be supported by at least 55% of Members (currently 15
out of 27) and representing Member States comprising at least
65% of the EU population Back
Q 258 Back
Q 253 Back
Poland, Ministry of Environment Back