Transcript No Slide Title

Trading Futures
proposals for emissions
trading in the UK
Chris Hewett
Research Fellow
Institute for Public Policy Research
“Climate change is not going
away.… And if business does not
seize its chance, it risks being
left behind in the race for low
carbon technologies.”
Tony Blair, March 2000
Policy Context
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Kyoto Protocol
Manifesto pledge of 20% CO2 cut
Marshall Report and CCL
CBI/ACBE Emissions Trading Group
Draft Climate Change Programme
COP6, November 2000
Key principles of
emissions trading
•Environmental credibility
•Shared responsibility
•Stimulating innovation
•Protecting competitiveness
•Polluter pays
•Adaptability and flexibility
•Part of a package
Where does responsibility
for emissions lie?
U
P
S
T
R
E
A
M
D
O
W
N
S
T
R
E
A
M
Electricity Generation and Oil Refinery
Tradable
emissions
PHASE 2
Energy Supply Industry
Tradable
emissions
Domestic
consumers
Full CCL
payers
Energy
efficiency
targets per
unit output
Absolute
carbon caps
PHASE 1
Capped
Emitters
Financial
Incentives
Phase 1 - downstream
Tradable
emissions
U
P
S
T
R
E
A
M
D
O
W
N
S
T
R
E
A
M
Electricity Generation and Oil Refinery
PHASE 2
Energy Supply Industry
Tradable
emissions
Domestic
consumers
Full CCL
payers
Energy
efficiency
targets per
unit output
Absolute
carbon caps
PHASE 1
Capped
Emitters
Financial
Incentives
Setting the cap
Industrial Sector Carbon Dioxide Emission Projections
Carbon Dioxide Em issions (MtC)
40
Business As
Usual
35
All Cost
Effective
30
20% reduction in carbon
dioxide emissions by 2010
25
All Technically
Possible
20
1995
2000
Year
2010
Allocation: who owns
the emissions?
• CO2 is a waste product of energy use
• Society currently pays for consequences
of climate change
• Polluter pays principle means Government
should sell pollution rights on behalf of the
public
• Most efficient means of allocation is
auctioning
Allocation: who owns
the emissions?
• Investment decisions of large emitters
were made when climate change was not
considered important
• Cost of CO2 emissions is taken into
account in market price of companies
• Right to pollute already owned by large
emitters
• ‘Grandfathering’ would give credit for early
action
Allocation
recommendations
• Fully auctioned permit system should be
in place for 2010
• Government ‘lends’ property rights to
existing emitters for 2001-2010
• Downstream users not responsible for
upstream emissions
• 20% cap applies to all late entrants
• New entrants or plant expansion must buy
permits or pay full Climate Change Levy
Protecting
competitiveness
• Penalty for non-compliance would be
payment of full Climate Change Levy
• Sets a price ceiling on permits in case the
cap is too ambitious
• Revenue from penalty CCL payments
should be hypothecated for emissions
reduction
Incentives to join
• Access to international emissions trading
• UK could ban trading in ‘hot air’ by not
recognising e.g. trades with Russia
• Downstream emissions traders should be
exempt from CCL is cap is ambitious
Phase 2 - upstream
Tradable
emissions
U
P
S
T
R
E
A
M
D
O
W
N
S
T
R
E
A
M
Electricity Generation and Oil Refinery
PHASE 2
Energy Supply Industry
Tradable
emissions
Domestic
consumers
Full CCL
payers
Energy
efficiency
targets per
unit output
Absolute
carbon caps
PHASE 1
Capped
Emitters
Financial
Incentives
Voluntary or compulsory?
• Phase 1 is voluntary with incentives linked
to the Climate Change Levy
• CCL is compulsory
• No upstream policies in draft programme
• If phase 2 was also voluntary then
Government would have to pay upstream
industry to join
• Government should set a mandatory cap
for upstream
Cap and allocation
• Big drop in upstream emissions 1990-2000
• No decrease forecast for 2000 - 2010
• Should we assume demand will continue
to increase?
• USA evidence that energy efficiency
improving faster than previously
• To stimulate innovation, a reduction cap
should be set by Government
Allocation rules
• Upstream only require permits for the
emissions related to net energy used
in production
• To be consistent with phase 1 and
avoid double counting, set baseline at
2000
• CCL price ceiling as before
Reducing demand
• Upstream permit requirements driven by
energy demand in non-permitted sectors
• Government must use other policies to
help upstream industry
• Increase CCL
• Spending on renewables, CHP, efficiency
• Transport White Paper
• Emission reduction credits
Phase 3 - midstream
Tradable
emissions
U
P
S
T
R
E
A
M
D
O
W
N
S
T
R
E
A
M
Electricity Generation and Oil Refinery
PHASE 2
Energy Supply Industry
Tradable
emissions
Domestic
consumers
Full CCL
payers
Energy
efficiency
targets per
unit output
Absolute
carbon caps
PHASE 1
Capped
Emitters
Financial
Incentives
Phase 3 - midstream
• Energy efficiency and renewables
obligations in the Utilities Bill
• CCL applied at point of energy supply
• SMEs could be given ‘permitted energy
contracts’ by suppliers
• Could transform supplier obligations
into permits covering all domestic
emissions
Supporting policies
• Extra resources to end fuel poverty by
2010
• Diversification of coalfield communities a
priority
• Set up a Carbon Trust to pump-prime low
carbon technologies, e.g offshore wind,
solar, fuel cells
Possible Timetable
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Scheme starts April 2001
More join at 2003 CCLA milestone
Upstream sectors join 2003
Energy suppliers join 2005
Permit auction for all in 2010