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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 • • • • • • 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 • • • • • Scheme starts April 2001 More join at 2003 CCLA milestone Upstream sectors join 2003 Energy suppliers join 2005 Permit auction for all in 2010