Trading 'not enough' to tackle CO2 emissions

Existing policies to encourage business to reduce carbon dioxide emissions are weak, confused and disjointed, according to a report from the Green Alliance.1 However, the report warns that carbon pricing has "limitations" - and argues that the advent of the EU emissions trading scheme (EUETS) should not trigger dismantling of other policies to tackle business' emissions.

The report, by the environmental thinktanks Green Alliance and the Institute for European Environmental Policy, is intended to feed in to the review of the Government's climate change programme (ENDS Report 359, pp 48-49 ). The review is looking at a range of options to get back on track for the domestic goal of a 20% reduction in CO2 emissions between 1990 and 2010.

Existing policies to tackle business emissions suffer from "complexity and lack of coherence", the report found. The overlay of the EUETS has confused the picture still further.

Many large energy users are now lobbying for the climate change levy to be scrapped because of the EUETS. They argue that the introduction of emissions caps for power generators will increase electricity prices - leading to "double regulation" when combined with the levy. Moreover, some sectors will be covered by climate change agreements as well as the EUETS.

However, Green Alliance insists that there is "no argument for dismantling or radically altering the domestic policy framework...to account for emissions trading." It urges policy makers to recognise that "a price for carbon is necessary but not sufficient" - not least because important awareness-raising benefits might be lost if the carbon price "is just subsumed into the general price of energy".

The report argues that the EUETS is "unlikely to result in a significant price for carbon in the short term", not least because of concerns that Member States have over-allocated in the first phase of the scheme. Even higher carbon prices "will not automatically encourage the development of innovative technological solutions" - while other policies will be needed to cover businesses outside the scope of the trading scheme.

According to the report, the UK should use its forthcoming EU Presidency to push for early development of allocation plans for the scheme's second phase, backed up by greater harmonisation in Member States' approaches. It calls for a re-evaluation of the use of emissions projections to underpin allocation plans - a process which Green Alliance Director Guy Thompson describes as "trying to skewer a moving target".

Other recommendations include:

  • Climate change levy: The levy should be retained as an energy tax in order to promote energy efficiency. However, consideration should be given to increasing the rate to a level that stimulates efficiency measures in non-energy intensive sectors.

    To further incentivise investments in energy efficiency, the report suggests temporary or partial reductions in the levy for companies which participate in the Carbon Trust's schemes.

  • Climate change agreements: These are seen as "an effective measure" which should be maintained for sectors not covered by the EUETS. However, the report notes concerns that the targets are insufficiently ambitious - and calls for the next round of CCA negotiations in 2007 to be "transparent and open to public scrutiny".

  • UK emissions trading scheme: This was "not considered to be an effective policy measure in its current state", with most stakeholders saying it had not resulted in additional emissions reductions. The report calls for the scheme to be discontinued, although it could also be restructured to drive emission reductions in sectors outside the EUETS such as commercial buildings.

  • Renewables obligation: Stakeholders regarded this as "one of the most effective UK instruments" because of its clear, long-term targets. However, the report calls for simpler procedures to help small-scale generators, and a range of measures to encourage technologies which are not currently prospering under the obligation.

  • Commercial sector and SMEs: The report highlights the lack of effective policies to tackle rapidly growing emissions from these sectors. It calls for the review of the climate change programme to consider regulatory solutions such as labelling requirements and product standards in addition to economic instruments.

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