MPs haul DEFRA over the coals on UK emissions trading scheme

Members of the House of Commons Public Accounts Committee have accused senior officials in the Environment Department (DEFRA) of "stupid decisions" in setting up the UK's emissions trading scheme - leading to an "outrageous waste of public money". The scheme's second year again saw massive over-achievement against targets - and DEFRA is now trying to stop the surplus undermining other policies to reduce greenhouse gas emissions.

The hearing on 12 May followed the National Audit Office's investigation into the trading scheme. The NAO confirmed many of its shortcomings - but pulled its punches in several key areas (ENDS Report 351, pp 27-30 ).

Members of the Public Accounts Committee proved much less diplomatic. Labour MP Gerry Steinberg dubbed the scheme a "mockery" - and described the £215 million incentive payments for the 31 direct participants as an "outrageous waste of money". He told DEFRA officials: "There's an old expression that you can baffle people with bullshit, and you have got me baffled, I will tell you!"

Edward Leigh, the Conservative chair of the Committee, told officials: "I'm not going to criticise you at all for using an innovative way of encouraging good behaviour as an alternative to heavy-handed regulation. But that doesn't stop me from criticising the way you actually handled the scheme."

The NAO focused on four major companies - Ineos Fluor, Invista, BP and Rhodia - which accounted for most of the massive over-compliance in 2002, the scheme's first year (ENDS Report 340, pp 4-5 ). Crucially, greenhouse gas emissions from these companies were already controlled under environmental regulation.

Details of the scheme's second year were not available as ENDS went to press. However, DEFRA has confirmed that participants have "reduced" emissions by more than 9 million tonnes of CO2 equivalent in the first two years - beating their collective targets by a huge 7mtCO2e.

Mr Leigh said the scheme "seems to be paying [the four companies] £111 million for keeping emissions down to levels they had already achieved before they joined." He suggested that DEFRA was paying the companies "to achieve something that they probably would have achieved anyway".

Other MPs suggested that any additional savings could have been achieved more cost-effectively by giving grants to fit abatement equipment, or by enforcing regulatory obligations.

Labour MP Brian Jenkins pointed to chemical firm Rhodia's £1.25 million investment in an incinerator to abate HFC releases. He noted that the company - which has received an incentive payment of £23 million - already has an obligation to minimise its emissions under pollution control legislation.

Sir Brian Bender, DEFRA's permanent secretary, clung to a finding by the NAO's consultants that 66% of the apparent first year "savings" from the four companies could be attributed to the scheme. In fact, the NAO warned that this figure is "cautious" and may overstate the scheme's impact.

Henry Derwent, DEFRA's director of climate, energy and environmental risk, said: "We tried to give credit for early action. A number of companies said: 'It's unfair to penalise us for what we've already done voluntarily and pay those who have done nothing so far.'" In fact, most - if not all - of this "early action" appears to have stemmed from regulatory pressure.

Sir Brian admitted that "we did not strike the right balance" in setting emission baselines for the four companies. "We've learnt about the importance of incorporating future emission projections into baseline setting," he said. "If we were going to do it again, we'd do it differently."

Mr Derwent said that DEFRA had "learnt the lessons about trying to mix regulatory schemes and market schemes." He suggested that this should be "less relevant" in the EU emissions trading scheme - perhaps optimistically, given the scope for opting in non-CO2 greenhouse gases and new sectors in the scheme's second phase.

Liberal Democrat MP Richard Allan observed that "one strand of Government policy is potentially undermining another, the climate change agreements." He warned that companies under CCAs are "likely" to "buy in cheap tonnage from Ineos Fluor and Invista to meet their targets, making a profit from the taxpayer purely on paper without any emission savings."

Mr Derwent accepted that the issue is one to worry about, and admitted that "the methodology [for setting baselines] has led to an oversupply." But he went on to claim that "all the reductions are valuable from the point of view of the atmosphere and global warming" - missing the point that "reductions" from an artificially inflated baseline are not real, yet in a trading scheme can be used by other companies to avoid taking action.

Sir Brian told MPs that the problem is "not irreversible". He revealed that DEFRA is talking to the four companies about possible restrictions on the use of surplus allowances - and this will "intensify in light of the results from the second year of the scheme". DEFRA has commissioned consultants to report on possible solutions by the end of May.

MPs also criticised the low level of participation in the scheme, the decision to spend all of the £215 million budget on a single auction, and the high price paid for the emission reductions.

Only 34 companies took on targets, and three of those have since dropped out. DEFRA's initial modelling suggested that incentive payments could attract 420-3,100 firms, and it publicised the scheme to more than 5,000 eligible firms.

Mr Derwent insisted that the auction had been a success in delivering more emission reductions than expected. In fact, he said, officials had "a very strong fear that there would not be enough participants to make a viable auction" - and would have pulled the plug if it had attracted fewer than 20 participants.

Sir Brian claimed that the scheme as a whole has been successful, and "left the country and companies well-placed" for EU and international trading. "We'll look back to the early 2000s as a time when the decisions had taken place so that this new commodity was centred in the City of London," he said.

However, Sir Brian contended that it was "premature" to work out whether the scheme's wider benefits, together with the price of carbon, represented value for money.

The NAO accepted that the scheme has led to a "small core" of expertise in the City - but said it was "too soon" to say if this would be enough for the UK to become the centre for future international trading.

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