Trading Futures proposals for emissions trading in the UK Chris Hewett Research Fellow Institute for Public Policy Research

Tony Blair, March 2000 “ Climate change is not going away.… And if business does not seize its chance, it risks being left behind in the race for low carbon technologies.”

Kyoto Protocol Manifesto pledge of 20% CO 2 cut Marshall Report and CCL CBI/ACBE Emissions Trading Group Draft Climate Change Programme COP6, November 2000 Policy Context

Key principles of emissions trading Environmental credibility Shared responsibility Stimulating innovation Protecting competitiveness Polluter pays Adaptability and flexibility Part of a package

Domestic consumers Full CCL payers Energy efficiency targets per unit output Absolute carbon caps Tradable emissions Tradable emissions Electricity Generation and Oil Refinery Energy Supply Industry Capped Emitters UPSTREAMUPSTREAM DOWNSTREAMDOWNSTREAM Where does responsibility for emissions lie? PHASE 1 PHASE 2 Financial Incentives

Domestic consumers Full CCL payers Energy efficiency targets per unit output Absolute carbon caps Tradable emissions Tradable emissions Electricity Generation and Oil Refinery Energy Supply Industry Capped Emitters UPSTREAMUPSTREAM DOWNSTREAMDOWNSTREAM Phase 1 - downstream PHASE 1 PHASE 2 Financial Incentives

Setting the cap

CO2 is a waste product of energy use Society currently pays for consequences of climate change Polluter pays principle means Government should sell pollution rights on behalf of the public Most efficient means of allocation is auctioning Allocation: who owns the emissions?

Investment decisions of large emitters were made when climate change was not considered important Cost of CO2 emissions is taken into account in market price of companies Right to pollute already owned by large emitters ‘Grandfathering’ would give credit for early action Allocation: who owns the emissions?

Fully auctioned permit system should be in place for 2010 Government ‘lends’ property rights to existing emitters for Downstream users not responsible for upstream emissions 20% cap applies to all late entrants New entrants or plant expansion must buy permits or pay full Climate Change Levy Allocation recommendations

Penalty for non-compliance would be payment of full Climate Change Levy Sets a price ceiling on permits in case the cap is too ambitious Revenue from penalty CCL payments should be hypothecated for emissions reduction Protecting competitiveness

Access to international emissions trading UK could ban trading in ‘hot air’ by not recognising e.g. trades with Russia Downstream emissions traders should be exempt from CCL is cap is ambitious Incentives to join

Domestic consumers Full CCL payers Energy efficiency targets per unit output Absolute carbon caps Tradable emissions Tradable emissions Electricity Generation and Oil Refinery Energy Supply Industry Capped Emitters UPSTREAMUPSTREAM DOWNSTREAMDOWNSTREAM Phase 2 - upstream PHASE 1 PHASE 2 Financial Incentives

Phase 1 is voluntary with incentives linked to the Climate Change Levy CCL is compulsory No upstream policies in draft programme If phase 2 was also voluntary then Government would have to pay upstream industry to join Government should set a mandatory cap for upstream Voluntary or compulsory?

Big drop in upstream emissions No decrease forecast for Should we assume demand will continue to increase? USA evidence that energy efficiency improving faster than previously To stimulate innovation, a reduction cap should be set by Government Cap and allocation

Upstream only require permits for the emissions related to net energy used in production To be consistent with phase 1 and avoid double counting, set baseline at 2000 CCL price ceiling as before Allocation rules

Upstream permit requirements driven by energy demand in non-permitted sectors Government must use other policies to help upstream industry Increase CCL Spending on renewables, CHP, efficiency Transport White Paper Emission reduction credits Reducing demand

Domestic consumers Full CCL payers Energy efficiency targets per unit output Absolute carbon caps Tradable emissions Tradable emissions Electricity Generation and Oil Refinery Capped Emitters UPSTREAMUPSTREAM DOWNSTREAMDOWNSTREAM Phase 3 - midstream PHASE 1 PHASE 2 Financial Incentives Energy Supply Industry

Energy efficiency and renewables obligations in the Utilities Bill CCL applied at point of energy supply SMEs could be given ‘permitted energy contracts’ by suppliers Could transform supplier obligations into permits covering all domestic emissions Phase 3 - midstream

Extra resources to end fuel poverty by 2010 Diversification of coalfield communities a priority Set up a Carbon Trust to pump-prime low carbon technologies, e.g offshore wind, solar, fuel cells Supporting policies

Scheme starts April 2001 More join at 2003 CCLA milestone Upstream sectors join 2003 Energy suppliers join 2005 Permit auction for all in 2010 Possible Timetable