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EU: Emissions Trading System (EUC Report)

Before I start, I should like to disclose interests. I am a managing director of a company called Riverstone Holdings, which manages private investments in energy. I am also chairman of Accenture’s energy advisory board and I am on the advisory boards of the following: Deutsche Bank’s climate advisory board; Sustainable Forest Management; and Valiance, a European infrastructure investor. I believe that that should cover all the bases. I very much support the conclusions of the report, and I congratulate the noble Lord, Lord Sewel, and the sub-committee on constructing it. I also very much support emissions trading schemes generally. In theory, the EU ETS is about the efficiency of resource allocation in the EU, getting resources to the right places. But that is in theory. I also agree that as many sectors and as many parts of those sectors need to be included in the scheme as possible. In the light of those comments, let me make four points. The potential emissions reductions that come from forest and land management need somehow to be included. Many scenarios show that if we take the period just to 2020, a period that we can probably understand quite well, up to half of the required emissions reductions could be achieved by better forest management and land husbandry. So, first, somehow that must be included. Secondly, to scale this globally there must be a link to the clean development mechanism or, more precisely, to whatever succeeds the present clean development mechanism, which is a project-based system. Given some concerns about governance, we hope to go to a programme-based system, one that can be administered more easily with the appropriate governance. The reason that that is important is that if we look at what needs to be done by 2020, two-thirds of the required emission reductions are likely to be achieved in the developing world, and the cost of achieving them will be one-third of the total, so it is very important to link a CDM mechanism to the EU ETS. The scale of expenditure in total is about $100 billion, which exactly corresponds to all overseas development assistance last year. Carbon finance flows need to be at about that scale, and much of that could be achieved by a revised CDM mechanism. Thirdly, there are plenty of exceptions in the scheme, so the EU ETS will not be a pure indicator of the price of carbon needed to reduce the amount of carbon dioxide to an acceptable level. Experience to date has shown that it will also create a carbon price that is too volatile for long-term planning. In my practical experience, the carbon price established by the trading system is unlikely to be used to determine whether a project will go ahead or not. It simply will not be used in that way, because most decision-makers will not know where to place it. We therefore need different systems to create stability of estimation, some certainty and consistency, and to do that in a transparent way. Until the system develops fully, we cannot regard it as the only mechanism to price carbon. We need it relevantly to operate alongside regulations, incentives and taxes designed to price in the carbon externality in a practical and stable way. We also need to understand that whatever we do and whatever we think about the EU Emissions Trading Scheme, it probably applies to longer-term stable investments. It does not help in determining how much research has to be done or what should be done in innovation. Nor will it inspire innovation. All these things need to be done by making choices and taking decisions. I agree with the noble Lord, Lord Giddens. These systems and mechanisms of trading, incentives, taxes and regulations are in many ways designed to create a level playing field between many energy sources. In order to understand that level playing field, we need to examine the existing energy sources and ask ourselves what explicit, or otherwise implied, subsidies are applied to these sources. That is the result of a fiscal audit, which he has suggested. Most people look at the things being talked about with regard to climate change and energy and ask a simple question: does this change the way our economy will work? Will it change the whole way we think about not just energy or climate change, but everything—not just separate and apart, but integrated with what we do? The question we have to ask is whether that will happen with this scheme, or whether it will be used as a crutch to avoid looking at the whole system that operates our economy.