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EU: Emissions Trading System (EUC Report)

I venture with some trepidation into this incestuous debate, but I start by congratulating the committee on the excellence of its report. I do not want to question its excellence, but I want to comment on the wider context of the ETS. It is worth remembering its background. The European Commission originally wanted a carbon tax. Carbon markets have their origin in the US, where they were used with some success to control emissions of sulphur dioxide. The EU switched to carbon trading in the face of opposition to EU-wide taxes, and I fear that this country was one of those opposing such a tax. The Commission originally proposed to auction credits. The noble Baroness mentioned economists. Some American economists invented the notion of carbon trading. It is worth remembering that they insisted that auctioning the credit was crucial for the success of the scheme. What happened in the European Union in the run-up to phase 1 was that lobbying from business and some nations sunk the proposal to auction credits. That is one, but not the only, reason for the conclusion drawn by the noble Baroness, Lady Sharp, which I also draw, that phase 1 of the ETS was a failure. As is mentioned in the report, the Commission likes to call it a learning experience. Putting it bluntly, one has to say that it is a failure. We have some data on its consequences for lowering emissions. Some studies indicate that emissions were something like 5 per cent lower than they would otherwise have been if the scheme had not come into operation. That figure is almost certainly empty. It is more apparent than real, because it probably comes from the fact that originally member states produced tactical exaggerations of their emissions in the build-up to the scheme. We know that they did that; it is quite well documented. I am pleased to see, in a phrase that was also quoted by the noble Baroness, Lady Sharp, that the committee says that, ""its record—in delivering emissions reductions cheaply and efficiently—is as yet unproven"." I hope, with the committee, that the scheme in its new form will meet with success, but it is plainly an open question at the moment. The noble Baroness, Lady Sharp, also said that it is worth asking why Governments like emissions trading schemes. In principle at least, they are quite popular with Governments. The reason is basically the one to which the noble Baroness alluded; all will be resolved by the magic of markets, and it does not seem like a tax even though it is a tax, so it has a certain intuitive political appeal. The ETS in its new form, just like in its previous forms, must be situated in the context of a diversity of other policies and strategies that Governments have to follow. To me, that is a really crucial point, and I should like to make three sets of observations about it. First, we must be careful not to measure success in terms of turnover. I have seen this so much in studying the literature on this over the past year. In 2007, the World Bank estimated the size of the global carbon market at $64 billion a year. Yet plainly that is irrelevant. What counts is how far it has actually reduced emissions. The report has a very good section on monitoring and standards, but it mostly covers monitoring the standards involved in the actual operation of the scheme itself. It is crucial that we monitor outcomes, but this is not discussed in the report. We must try to work out how far such schemes on the ground actually reduce the proportion of CO2 or greenhouse gases going into the atmosphere. I assure noble Lords that we have only very partial data on this at the moment. Most of those who favour carbon trading talk in terms of the sheer volume of trading that is generated. Whatever other benefits that might bring, it does not show us anything about the case under consideration. Secondly, as noted on page 18 of the report, carbon pricing on its own will not deliver new technologies, although it could provide something of a stimulus to them. As for low-carbon technologies and limiting emissions, we need one or more significant technological breakthroughs. I note what the committee says on CCS. The committee is discussing it in the context of the emissions scheme. As noble Lords quite rightly said, it is problematic. We do not really know how effective it will be in the longer term, no matter how much money is pumped into it. I feel very strongly that, alongside the ETS, Governments need to reverse their attitude towards technological innovation. I remember the noble Lord, Lord Browne, speaking eloquently about this in a debate that we had in your Lordships’ House about climate change. Governments should talk less about costs and emphasise competitive advantage instead. They should stop talking only of problems and start talking of opportunities. I note that President Obama has been dragged into duty in this discussion. He wishes to set up a trading scheme for the United States, but there is a massive contrast between his approach to climate change and innovation and that of the European Union, which—and I say this as a strong pro-European—is still a typically bureaucratic, complicated concern with regulation above all. President Obama’s approach has an inspirational quality to it. He says, "Look, we’re on the cusp of a new economy. Let’s invest in it and promote innovation. Let’s see if government can help businesses to secure a competitive edge". There is probably a gestalt switch in business and technology whereby the companies that are environmentally progressive will be more competitive in the marketplace, and a strong reversal of emphasis is needed to go along with carbon trading and the other target and regulation-bound commitments to which the Government have signed up. Thirdly, no matter how successful or otherwise the European trading system might be, it will not take away the need for a robust fiscal policy, and the Government should not shirk from that. We know that fiscal policy must take the form of a mixture of penalties and incentives. We know, not least because of work done in BP and the inspiration of the noble Lord, Lord Browne, that however the carbon cap is set, it is not going to be enough to guarantee adequate pricing for most low-carbon technologies. We know that we will need further taxation-based platforms for those technologies to get off the ground, because they are not competitively priced against existing fossil fuel technologies. We also know that we need an overall fiscal order on climate change. I have been studying all the major EU countries that are signed up to the ETS in this respect, and I have found that hardly any of them have made an overall fiscal audit. By that I mean not only introducing carbon-based taxes but auditing existing subsidies for fossil-fuel businesses. I do not know how far the Government have got in making such an audit, but I would like to see them at the leading edge of the European countries in so doing. My conclusion is that the report should be situated in a wider context, which has to involve diversity of policy. Wherever one looks in climate change—I say this having now spent a couple of years immersed in the literature of it all—there are strongly problematic elements. I support the principle of a more rigorous European trading scheme for carbon trading. I also support the principle of the internationalisation of that scheme, but that second objective is a long way off. At the moment, my conclusion will be similar to that of the noble Baroness, Lady Sharp, in that there is a strong component of faith in the ETS at the moment. It can therefore be no more than one set of policies in the context of a whole series of other robust policies that have to be instituted elsewhere.