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Economic InstrumentsEIUG recognises that
there is a role for a variety of economic instruments in providing incentives
to manage demand for energy and capture the externalities attributed to
emissions of greenhouse gases. Such measures may be essential if the UK is to
achieve its Kyoto commitments.
EIUG believes that a rational system of economic
measures would reflect the fact that a tonne of carbon dioxide attributable to
industrial activity has the same environmental impact as a tonne attributable
to transport or domestic activity. A disproportionate emphasis on industrial
emissions is neither environmentally appropriate not economically efficient.
EIUG believes that the design of economic instruments
introduced to help achieve environmental goals should take into account the
need to preserve international competitiveness, both within the EU and beyond.
A global solution is clearly required to deal with global emissions. We note
the non-participation of USA and Australia in the Kyoto process, the continuing
uncertainty over Russian ratification, and the absence of any meaningful
constraints on emissions in developing countries.
Comments on specific measures:
Climate Change Levy EIUG believes it is wrong in
principle to have introduced a downstream energy tax applying only to business
consumption. It is illogical for a tax to apply to electricity from sources
that are not associated with greenhouse gas emissions, such as nuclear, given
the ostensible aim of addressing climate change concerns. Climate Change
Agreements have successfully allowed many energy-intensive sectors to mitigate
the damage that would otherwise have been caused by application of the tax at
the full rate. The ability for other sectors to enter such agreements should
not therefore be artificially limited. If the government believes that sectors
within such agreements have done more than those outside to improve energy
efficiency, as recent statements suggest, the case is made for widening the
eligibility criteria. EIUG believes that with the advent of compulsory EU-wide
emissions trading, CCL should be phased out to avoid double taxation. In the
meantime, EIUG welcomes the exemption from CCL for good quality CHP.
Renewables Obligation EIUG believes government should
not specify the generation mix and that to do so is fundamentally at odds with
a market based energy policy. To require suppliers to contract a target level
of electricity from national renewable sources is a clear restriction of trade
within what should be a single, liberalised, European energy market. It would
be more efficient (and environmentally productive) for renewable generation to
be sited where the market judges the long run cost of generation to be lowest,
not to satisfy a geographic distribution based on essentially arbitrary
national targets. A system of tradeable European renewables certificates would
help alleviate this problem. The RO reduces the incentive for renewable
generators to compete with one another, removes altogether the incentive to
compete with conventional generation, and provides a perverse incentive to
ensure market share remains below government targets. The level of subsidy
resulting from the penalty charge levied on suppliers (which enables renewable
electricity to be sold at around three times the current market price) is
unsustainable.
The cost of subsidising uneconomic renewable generation
has a disproportionate impact on energy-intensive users. We note that other EU
states such as Germany are addressing this problem. We also note that many
other measures (such as industrial CHP) provide more cost effective emissions
reductions than subsidy-dependent renewables. EIUG believes that such case as
there is for retaining the RO will be significantly weakened once the EU
emissions trading scheme is active.
Emissions Trading EIUG recognises that there are
advantages in emissions trading being the primary instrument used to ensure
that the UK’s international commitments on emissions are realised at least
cost. However, serious concerns remain about the nature of the proposed
European scheme and its likely impact on the competitiveness of
energy-intensive sectors competing in international markets.
It is often asserted that the EU will benefit from a
‘first mover advantage’ as a result of its experiment with Emissions
Trading and that competing economic blocs will adopt similar measures in due
course. EIUG notes the marked reluctance of fast growing economies elsewhere,
especially but not only in the developing world, to consider being bound by
absolute emissions caps for fear of the economic consequences. EIUG is
therefore sceptical about the extent to which a European style cap and trade
regime will be adopted internationally. The development of the EU scheme should
take this reality into account in the event that such scepticism proves well
founded.
EIUG believes that the UK national cap, within an EU
system, should logically be established with reference to the UK’s
international commitments. To set the national cap at a lower level, in order
to achieve a more ambitious emissions reductions, would distort competition
within the EU in the affected sectors, and worsen the competitive position
internationally. In addition, affected UK sectors that have already reduced
emissions would have lower quantities of tradable credits than otherwise,
reducing potential income from the scheme. EIUG believes that the government
should be cautious in deciding on the level of the UK emissions cap, and fully
consider the extent of the disbenefit to the UK economy.
The allocation of initial emission rights (within the
national cap) should reflect the need to reward and not disadvantage sectors
that have made improvements in energy and/or carbon efficiency in recent years,
such as those within CCAs. The initial allocation should be grandfathered, i.e.
not subject to auction, to minimise the shock of adaptation to the new regime.
The extent to which caps are tightened or the option to increase the extent of
auctioning of emissions rights is exercised in future must be moderated in
light of the international position.
EIUG accepts that some emissions rights will need to be
retained for allocation new entrants, especially in generation. EIUG believes
that particular consideration should be given to the balance of emissions
allocated between manufacturing industries (who compete in international
markets beyond the EU) and the generators (who do not) and that it would be
perverse if allocation was done on a basis that resulted in windfall gains for
fossil fuel intensive generators.
EIUG believes the EU trading scheme should not
artificially limit the extent of international trading in emissions credits,
nor the opportunity to make use of flexibility mechanisms such as Joint
Implementation and the Clean Development Mechanism. These important features,
central to the Kyoto trading concept, will help carbon reductions to be
achieved at lowest cost. If use of these mechanisms is restricted, the cost of
carbon will be unnecessarily high.
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