Push for new UK emissions trading scheme

An emissions trading scheme (ETS) for many thousands of large, less energy-intensive organisations has been given strong backing by the Carbon Trust, which says carbon emissions from business and the public sector could be cut by 10% by 2010, and 20% by 2020.

The report feeds in to the Government's energy efficiency innovation review (see p 18). It will also inform the review of the climate change programme - now expected "early" in 2006.

The business and public sectors are responsible for more than one-third of UK carbon emissions, some 54 million tonnes in 2002. Energy-intensive industries contribute about 45% of this, with large non-energy-intensive firms and SMEs accounting for 25% and 20%, respectively. The Trust finds much scope to cut emissions using existing technology. By 2020 cost-effective cuts of 12% and 20% could be delivered in manufacturing and non-domestic buildings.

Existing policies such as the EU emissions trading scheme and climate change agreements (CCAs) offer a fairly robust framework for energy-intensive industries, the Trust says, despite problematic overlaps and some perverse incentives.

However, it argues that there is a policy gap in less energy-intensive sectors. Emissions from the service sector and commercial buildings are "rising rapidly" - but energy costs, even including the climate change levy, are not strong drivers for change.

The report considers a range of options to encourage energy efficiency measures in less energy-intensive organisations. It suggests that economically acceptable increases to the climate change levy - or even converting it to a carbon tax - would have little impact in the services sector. Meanwhile, extending EU ETS coverage would offer no direct incentive to reduce electricity consumption.

Instead, the Trust calls for a mandatory trading scheme for larger organisations that fall outside the EU ETS. The Trust argues that this would "increase the transparency of energy use and emissions in less energy-intensive organisations" and require them "to articulate a clear carbon management strategy."

The proposed scheme would differ in design and scope from the existing pilot UK ETS. It would include electricity-related emissions, which account for up to 70% of the target sectors' emissions, using either grid average carbon intensity or supplier-specific data.

The report suggests that the scheme could have significant coverage. Even if restricted initially to relatively large electricity users that have half-hourly meters, it would cover around 91,000 sites owned by 14,000 companies and public sector organisations. It would also capture baseline emissions of around 20mtC, split roughly equally between manufacturing industry and the service sector.

The Trust suggests that a new UK ETS could be expanded to include fleet haulage for large companies. Indeed, it notes that CCAs expire in 2012 - and suggests that many sectors should be transferred to a UK rather than EU trading scheme.

Allocation and target-setting are tricky issues in any trading scheme. The Trust recommends full auctioning of allowances to avoid time-consuming and controversial negotiations, with recycling of revenues into climate change levy rebates for the sectors concerned.

ENDS understands the Environment Department (DEFRA) is keen to include a new UK ETS in the revised climate change plan to achieve the Government's CO2 reduction target for 2010. However, the Treasury is worried about the administrative burden for many firms.

The Trust's chief economist Professor Michael Grubb tried to ease such concerns - stressing that the proposed trading scheme is "cost-effective and designed to be user-friendly for business." He said:"The last thing we would advocate is yet more red tape for UK plc."

The proposed UK ETS is the main element of a package that could reduce business and public sector carbon emissions by 4.7-5.1mtC by 2010 and 11.2-12.6mtC by 2020. By 2020, some 70-80% of the total saving would come from rigorous implementation of existing policy instruments - with the UK ETS delivering a further 2.2-3.6mtC.

The Trust's wider plan to overcome barriers to energy efficiency includes:

  • Product labels and standards: The Trust calls for energy labelling and minimum efficiency standards to be extended to products used mainly in the business and public sectors, such as lighting, heating and air conditioning.

  • Small and medium enterprises (SMEs): This sector is notoriously difficult to influence. The Trust suggests extending its pilot interest-free loan scheme for energy efficiency investments. A new energy efficiency commitment on suppliers, similar to one that already applies to households, "may help" but savings are likely to be "modest".

  • Building regulations and labelling: The Trust calls for "strong enforcement" of building regulations, with a review of sanctions for non-compliance, in order to deliver carbon savings of up to 3mtC by 2020. It also backs "strong implementation" of the energy performance of buildings Directive (ENDS Report 370, pp 28-31 ). It argues that a wide definition of "public" buildings and an obligation to implement cost-effective measures identified in energy rating certificates could double the potential carbon savings to 1.2mtC by 2020.

  • Public sector: The Trust calls for "far stronger" leadership and use of purchasing power by the public sector. Progress towards the established target of a 12.5% cut in CO2 emissions by 2010 is rendered "meaningless" by ongoing uncertainty over an agreed baseline - and delivery will require "greatly improved governance".

    There is growing interest in the idea of "white certificate" trading, which would give firms tradable credits for individual carbon abatement projects. However, the Trust is sceptical. Verification would be complex and costly, it says, while it "may be hard to disentangle truly additional projects from those that would have happened anyway."

    The Trust argues that its programme would deliver a significant net financial benefit to British business, and "have little or no impact in terms of competitiveness...except potentially in a few limited cases." It confirms last year's finding that the aluminium industry is by far the most exposed to climate change policies (ENDS Report 354, p 5 ). However, it now accepts that the steel and cement sectors could become vulnerable by 2020, which "might justify protection against imports from regions without equivalent measures."

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