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EU: Emissions Trading System (EUC Report)

I thank the chairman of Sub-Committee D, the noble Lord, Lord Sewel, for introducing this debate on the committee’s report on the revision of the EU’s emissions trading system. The noble Lord is an excellent chairman. This has been a good report to work on and I believe it has been well received by the Government and the Commission. There is no doubt that global warming poses a great threat to our very existence. With the prediction that the planet may warm by anything from 2 degrees to 6 degrees by the end of this century, it is sensible to take precautionary moves to mitigate that part of the rise over which mankind might have some control by curbing greenhouse gas emissions. As the noble Lord, Lord Sewel, said, when we started taking evidence for this report last June, the FTSE stood at 5,970 and the oil price was hovering around $145 a barrel. As Members of the Committee will know, that situation has drastically altered. Today, the FTSE is around 3,850 and the oil price is around $46 a barrel. Industrial and manufacturing output has dropped substantially, and unemployment has reached 2 million and is rising fast. It is easy to see therefore that making predictions for a system that will enter into force in 2013 is fraught with difficulties. However, we did not start with a blank sheet of paper, but with the experience of the first two phases of the ETS. The scheme was Europe's response to the Kyoto Protocol, which runs out in 2012, so the third phase of the ETS will be a very important contribution to the next stage of European climate change planning. We have examined the scientific advice, and we have listened carefully to a number of business voices and environmental voices, as well as to Governments. There appears to be agreement that we must tackle this problem now and not leave it to future generations, but it is not clear that the scope of the trading scheme envisaged for 2013 is wide enough to deliver the reductions required to reduce emissions by 20 per cent by 2020 from the 1990 level. Although the report notes the difficulties of including agriculture and forestry within the ETS because of weaknesses in verification and monitoring, we heard from the New Zealand Government, who seem to have overcome these difficulties. Shipping is another area that should be brought in, but the co-operation of the International Maritime Organisation is needed. Reduction measures in those sectors of the economy that are excluded from the scope of the ETS account for 50 per cent of emissions. They must be brought in before too long to provide a proper cap for the system. As an aside, the Kyoto Protocol has not been ratified by the United States, which accounts for 20 per cent of global manmade greenhouse gas emissions, while other large emitters such as India and China were not included in the protocol. The first phase of the system allowed nation states to set their own emissions limits to reflect their commitment under the Kyoto treaty and to allocate nearly all the permits free of charge. As the noble Lord, Lord Sewel, said, this has resulted in windfall profits for some industries. However, with the carbon price at about €8 or €9 per tonne last week, it is unlikely to stimulate environmentally efficient investment. Governments will lose out on expected revenues while companies sell unwanted permits in order to maximise their cash positions because of the recession. We have argued that all the permits, other than those in the sectors liable to carbon leakage, should be auctioned in the third phase, in order to allow the marketplace to find the correct level. There is no doubt that the oil price and the carbon price are related, hence the dramatic fall in the price of the permits. It is considered that permits trading in the range of €35 to €45 would provide the necessary stimulus to encourage green investment decisions. However, the decision taken by the European Council in December 2008 watered down its original proposals, and it has agreed that 70 per cent of permits should be auctioned by 2020 and 100 per cent by 2027. Although it is tempting to comment on all the recommendations in our report, I shall comment on only one further point which I consider to be important—the use of external credits. In our report, we suggest that external credits in phase 3 should be limited to those available and unused in phase 2. We note in paragraph 225: ""External credits can play an important role in reducing global emissions cost-effectively as long as they do not crowd out developing countries’ own efforts to cut emissions"." The offset mechanisms created under the Kyoto Protocol are the clean development mechanism and joint implementation. These are methods to allow businesses and Governments in developed countries to fulfil their emission reduction commitments by purchasing carbon credits generated by projects that result in emission reductions elsewhere. Over 1,000 projects have been registered with the CDM executive board. The UK was the primary purchaser of 59 per cent of CDM/JI credits in 2007, largely for onward transmissions. The EU will have to monitor this trade very carefully to make sure that the emissions target set for the various member states is not fulfilled more than their allocation by external credits. The European Council meeting in December had to balance the scientific evidence and the agreed targets for emission reduction against the political climate of a deepening recession. That is what politicians do; and, of course, the result was a bit of a fudge, with brave words about commitment and then the announcement of a compromise deal. There is auctioning phased in over a much longer period, with extra time-limited derogations and the continuation of free permits in several sectors. The threshold for small emitters was raised from 10,000 tonnes to 25,000 tonnes. Generous concessions were made on the extent to which national targets on CO2 reduction could be made by CDMs. The energy trading system is a tax on industry, which will be passed on to consumers by higher prices, especially in the energy field. With demand for industrial products falling fast, businesses will have to think very carefully about energy-efficient investments, but without that investment we run the risk of missing our national target and the EU its commitment to the international protocols.