MPs Criticise Governments Plans for ‘Carbon Floor Price’
The Energy and Climate Change Select Committee has published a report on ‘The EU Emissions Trading System.’ The report concludes that the Government’s proposal to introduce a Carbon Floor Price and will not achieve any additional emissions reductions and is likely to reduce the efficiency of the EU Emissions Trading System (ETS) at the expense of UK taxpayers.
The Carbon Floor Price will set a minimum price for carbon that will apply only in the UK. It will work by charging a “top up” tax on emitters if the price of EU allowances falls below the price floor – the lower the price of EU allowances, the more “top up” UK emitters will have to pay. As the Select Committee identifies, based on current prices UK emitters covered by the EU ETS would be subject to a “top up” of £10 per tonne of carbon dioxide.
The rationale behind this unilateral approach is to provide a more certain carbon price in the face of volatile prices in the EU ETS. The Carbon Floor will be introduced from 1 April 2013 at £16 per tonne of carbon dioxide, increasing to £30 by 2020. The Select Committee concludes that it could have a “devastating impact on UK industry” without real environmental benefit. It also concludes that the policy will lead to intra-EU carbon leakage. The total amount of emissions allowed in the EU ETS is capped at a European level, therefore reducing emissions in any particular Member State will not reduce overall emissions—emitters in other countries would simply have more allowances available and would not need to reduce their own emissions as much. If the Carbon Floor results in greater emissions reductions in the UK than other EU countries these savings will still leak to other Member States.
The remainder of the Committee’s report includes a series of recommendations to improve the operation and environmental effectiveness of the EU ETS. It concludes that the EU should take action to increase the price of carbon by setting aside a significant volume of EU allowances and increasing the annual reduction of the ETS cap. From 2013, the centrally decided EU-wide cap on emissions will reduce annually by 1.74% of the average annual level of the cap in Phase II of the ETS (2008 – 2012). This will deliver an overall reduction in emissions of 21 per cent below 2005 levels. The Committee is calling for the annual reduction to be adjusted to set out a long-term trajectory that would achieve a 30% reduction in emissions by 2020 and 60 – 80% by 2050.
The Committee also calls for an EU-wide auction reserve price. From 2013 at least 50% of allowances will be auctioned, compared to 3% currently. In the UK there will be 100 per cent auctioning to power sector. An auction price would work by allowing governments to buy back allowances when they fall below a certain price.
The report also addresses the recent inclusion of aviation in the EU ETS. Currently, for developed countries, domestic aviation emissions are counted as part of that country’s emissions for the purposes of their international emission reduction commitments, but international emissions are not. From the start of 2012 emissions from all domestic and international flights that arrive or depart from an EU airport will be covered by the EU ETS. It will cover any aircraft operator, EU or foreign based. It is estimated that this could cover around 60% of international aviation emissions.
In 2012, emissions from aviation covered by the EU ETS will have to be cut to 97% of the total emissions from the sector between 2004 and 2006. Between 2013 and 2020 the cap will be reduced to 95% of 2004 – 2006 emissions. The vast majority of carbon allowances to the aviation sector will be given away for free; however 15% will be auctioned. The Committee calls this is “disappointingly unambitious.” It also calls on the UK to make the level of Air Passenger Duty contingent on compliance with the aviation rules under the EU ETS.
Another important issue that the report looks at is the question of how to extend the trading system in the absence of binding global targets. Instead of further unilateral extensions, such as the inclusion of aviation, the Committee favours the adoption of agreements with other countries to cover emissions in specific sectors. Such sectoral agreements could take two forms: 1) a sectoral cap-and-trade system to cover key sectors of the economy or 2) offsetting schemes that accept credits from a scheme that measured reductions in a particular sector against a baseline. The Committee also suggests the future expansion of the EU ETS to cover more of the non-traded sectors, such as household heating and transportation.
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