Post date: Friday, 27th April 2012

Government calls for permanent set-aside of GHG emission allowances to boost price

 
David Cameron at the clean energy ministerial

David Cameron said yesterday that getting the right price for carbon is "a real priority for me".

Any emission permits removed from the market to stimulate the price of carbon in Europe must be done so permanently, the government says, in a statement released yesterday.

The statement was published at the same time as David Cameron was giving his speech to the Clean Energy Ministerial yesterday, at which he argued that the cost of renewable energy needs to come down, and a chief mechanism for achieving this is “developing a proper global carbon price so that different energy sources can compete on a level playing field".

This, he said, means “ensuring the EU leads the development of carbon pricing in a way that maintains the competitiveness of industry" which he called "a real priority for me".

The statement argues that “the market needs a clear signal" to strengthen the price of emission allowances, which “would not be delivered if there was a possibility that the allowances would be sold back into the market at a later date".

The statement comes in the government response to the Committee on Energy and Climate Change's Tenth Report on the EU Emissions Trading System, which was given to the Select Committee on March 28 but was only published yesterday.

30% emissions reduction target

It reaffirms the government's desire to see Europe adopt a 30% emissions reduction target for 2020 as recommended by the committee, which is led by Conservative Tim Yeo.

It says that adopting this goal, which it “strongly supports", at “the earliest opportunity" is the most cost-effective way of meeting the long-term EU objective of reducing emissions by 80-95% by 2050.

It acknowledges that investors need “a clear long-term trajectory for emissions" reductions within the EU.

"This is why the government has been supporting the European Commission's Low Carbon Roadmap to 2050 and wants to see Environment Council Conclusions that welcome its findings," the statement says.

Cost

It adds, “we recognise that for the UK the cost of a move will be significant but we believe it is manageable".

But in practice, for Britain, the cost of achieving a 30% reduction by 2020 would be negligible, as we are almost at this level now. Last year, the UK official figures reveal that emissions were 29.4% below 1990 levels.

The table below shows progress to date and future targets according to the binding fourth Carbon Budget under the Climate Change Act:

From this it can be seen that the real challenge for the UK lies in meeting the 2025 target of 50% reductions, which would be harder if the "dash for gas"-fired electricity generation, currently being encouraged, continues.

The effect of the dash for gas

Gas-fired power already accounts for 44% of the UK's generation capacity. Since 1 January 2007, 18 consents for new gas-fired electricity generating stations totalling 21,360 MW have been given.

DECC’s latest ‘central’ emissions projections (UEP) scenario, published on 13 October 2011, shows that a further 4.7GW will be added up to 2020, but this does not include additional policies to meet the 4th carbon budget.

DECC's projection is showing that UK emissions will reach about 470MtCO2e by 2020, well within the target, but the targets for 2030 and beyond may be missed if all the gas stations are allowed to run free of limits on emissions until 2045, as announced by Ed Davey last month.

Natural gas plants would be consented under a 450g/kWh-based emissions limit as part of the proposed liberal new emissions performance standard (EPS).

How liberal this is can be seen from the fact that a new combined cycle gas turbine plant already emits under 400g/kWh, while an open cycle gas turbine emits slightly above 450g/kWh, but since it operates less frequently, it is unaffected by the measure.

New gas-fired capacity is considered important to meet future demand as older plants close.

The fourth carbon budget is to be reviewed in 2014, and may be revised then.

EUA set-asides

It is still uncertain whether the European Commission will decide to set aside emission allowances to support the price of carbon.

EU Climate Commissioner Connie Hedegaard stated on April 19 that she has “asked DG Climate Action to prepare the first annual report on the ETS”.

"This offers an opportunity to include a review of the auction time profile," she said, which, translated, means that a set-aside of EUAs might be adopted through a so-called EU comitology process by the end of the year; but is by no means certain.

The economic recession has reduced demand for EUAs, whose price has come down from close to €30 in mid-2008, to the current level of €6.14. Investors in low carbon tech need the price to rise.

A Commission report on the ETS was initially due next year, but is now brought forward.

The question remaining is what will happen with the EUAs that might be set aside. That is why the issue of longer term action to protect the carbon price was also discussed by the ministers on 19 April in Denmark.

A majority recognised that the best way to achieve this is to adopt a binding EU greenhouse gas emission reduction target for 2030.

Carbon leakage

The Government's statement also details its efforts worldwide to create a global emissions trading scheme by supporting local markets and their expansion in most of the industrialised and developing countries.

This includes strengthening monitoring, reporting and verification rules.

Regarding the issue of “carbon leakage", which is the battle cry of energy-intensive industries seeking free emission allowances under a threat that they might site their factories outside of Europe, the government agrees that too many companies are given allowances that they don't need; "significantly more than the evidence suggests", in their words.

It says it will lobby to improve matters in the second stage of the European Emissions Trading Scheme. However, it defends George Osborne's decision to give £250m of support to the energy-intensive industries in the UK until 2015.

"The best way to address carbon leakage would be a legally-binding international climate agreement, creating a level playing field for industry inside and outside the EU," it says.

Carbon price floor

The statement also robustly defends its carbon price floor strategy, described as being “designed to create investment certainty" and "address the specific investment challenge faced by the UK".

A low price for EUAs means that maintaining the carbon price floor will be more expensive for the Treasury.

Responding to criticism from MPs that the carbon price floor will fail as the difference between the UK tax and the price of EU Allowances widens, the Government says that the policy should be seen in the context of the whole tax system, and that's why the announcement of the carbon price floor in Budget 2011 "came alongside a further cut in corporation tax to help a shift from direct taxation to indirect taxation".

UK greenhouse gas emissions and future targets
according to legally adopted fourth Carbon Budget
 

Year

MtCO2e

% reduction

1990

778.3

 

2011

549.3

29.4%

2020 target

513.678

34%

2025 target

389.15

50%

2030 target

311.32

60%

2050 target

155.66

80%

Story: David Thorpe, News Editor

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