JOINT STATEMENT/KEY ASKS FOR THE SECOND PHASE OF THE EUROPEAN…

JOINT STATEMENT/KEY ASKS FOR THE SECOND PHASE OF THE EUROPEAN
EMISSIONS TRADING SCHEME

This is a joint statement by:

Christian Aid
Friends of the Earth
Green Alliance
Greenpeace
Institute for Public Policy Research
People & Planet
RSPB
Sustrans
WWF

22 May 2006

The European cap and trade system, otherwise called the EU Emissions Trading Scheme
(ETS), is the most ambitious and innovative intergovernmental policy so far aimed at
reducing greenhouse gas emissions. Europe is leading the way in implementing market based,
cost-effective solutions to a global problem. The ETS covers nearly half of Europe's CO2
emissions, so its success is vital to deliver the EU's targets under the Kyoto Protocol. A
successful ETS could also form the cornerstone of future global agreements to fight climate
change.

However, the system is being seriously undermined by a number of mistakes made during the
first phase of the scheme (2005-2007) ­ with the result that it is currently failing to deliver
real cuts in greenhouse gas emissions. Governments must now learn from these mistakes
and improve the system in the second (2008-2012) and subsequent phases.
In particular, we urge the UK government to:

·   Make sure industry does not get an over-allocation of CO2 permits. This has been a
    major problem in the first phase, as the recent market crash in the carbon price has shown.
    In the past few weeks, the price fell by more than 60% (from around 30 Euros to around
    11.5) as information emerged about the real level of emissions in various countries.
    Unlike many other countries the UK was short of allowances in 2005 ­ but this was
    because of high emissions from the power sector due largely to a return to coal burn. The
    allocation to other energy intensive industries was in fact 9.5 million tonnes above what
    they actually emitted. We therefore, remain very concerned about the reliance of the
    government on future emission projections as a method to set a cap. Using this method,
    whilst giving permits out for free, clearly acts as incentive for industry to inflate
    emissions projections in order to ensure it maximizes the number of permits ­ which have
    a significant financial value. This fundamental flaw could be rectified by ensuring that
    future allocations are based on a "distance to target" approach which sets a percentile
    reduction on a fixed historical baseline rather than on questionable and uncertain
    emissions projections.

·   Ensure that allocations are consistent with the target of reducing emissions by 20%
    by 2010. The review of the Climate Change Programme and the draft National Allocation
    Plan states that the cap will be set at a level of between 3 and 8 Million tonnes of carbon
    (MtC) less than business as usual projections for 2010. However, the lower end of the
    range would actually mean that industry would be allowed to pollute more than in the
    current phase of the scheme. Even the top end of the range will fail to deliver the long-
    standing 20% target.

    Assuming that the additional savings from the sectors not covered by the scheme - as
    outlined in the revised Climate Change Programme - are achieved, then the cap for phase
    II needs to be set at around 60MtC (220MtCO2) per annum. Under the current projections
    this is equivalent to a 12MtC reduction from business as usual. The total cap for the 5
    year period of phase II should be set at 300MtC (1100MtCO2).

·   Auction the maximum amount of 10% of CO2 permits (as allowed by the Directive).
    At the moment, permits are given away for free. It is estimated that this has led to
    windfall profits of around £800 million per year for utilities. Auctioning the maximum of
    10% of permits and deducting these partly from the power sector's allocation could in
    part begin to redress these windfall profits. The revenue could be used to stimulate new
    renewable energy and energy efficiency technology; and provide compensation, if
    necessary, to the few industrial sectors which may be genuinely exposed to international
    competition as a result of the ETS. In addition auctioning of allowances will ensure that
    companies invest in low-carbon technologies and will reduce lobbying by industry for
    more allowances ­ a process which led to serious over-allocation in the current phase of
    the scheme.

·   Stop encouraging utilities to burn more coal. The return to coal-burn in power stations
    is one of the main reasons why UK emissions have been rising in the past few years, and
    the UK is struggling to achieve the 20% target. We recognize that retaining some coal
    capacity may have some value in ensuring diversity of supply and avoiding over-
    dependence on natural gas. However, there is a very big difference between retaining a
    few relatively efficient coal-fired power stations and signalling to utilities - as the
    government has done - that they can effectively continue using as many inefficient and
    polluting stations for years to come. The second phase of the cap and trade system must
    therefore encourage a switch away from coal towards cleaner ways to produce electricity.
    Currently the government is proposing to calculate the number of permits it will give to
    the power sector by using 5 different fuel specific benchmarks (based on gas, coal, non-
    good quality CHP etc.). Technology specific benchmarks provide no incentives for fuel
    switching or investment in energy efficiency measures ­ they merely reward business as
    usual. Therefore, a product, rather than technology specific benchmark should be used in
    order to reward investments in low-carbon fuels and highly efficient technologies. This is
    where an allocation benchmark is defined for a certain product e.g. producing one unit of
    electricity (kWh) should be benchmarked with a certain allowance across the whole
    sector, independent of the generation technology and fuel used. Using product specific
    benchmarking would mean that a coal fired power station would receive the same number
    of permits as a gas fired station producing the same amount of electricity - even though
    coal is obviously a more carbon intensive fuel than gas and would need therefore need to
    buy more permits to match its high CO2 emissions.

·   Encourage the development of efficient ways to produce heat and electricity, such as
    good quality Combined Heat and Power (CHP). We welcome the creation of a separate
    sector for Good Quality CHP as a useful first step in helping to appropriately allocate
    credits to this sector for the significant savings it delivers. However, the current proposals
    for the treatment of new installations to the scheme need to be improved in order to
    encourage investment in new Good Quality CHP over less efficient heat and power.

·   Work with the European Commission and other Member States to improve the
    system for future phases of the scheme and explore environmentally effective ways of
    including other sectors, such as aviation.



For further information, please contact any of the organisations that have signed this
   statement.


You can also contact:
Germana Canzi
Senior Campaigner, Energy& Climate
Friends of the Earth
26-28 Underwood St
London N1 7JQ
Tel 0207 4901555 (switchboard)