Blue skies ahead for UK ETS?

More than a year has now passed since the introduction of the UK government-backed greenhouse gas Emissions Trading Scheme. The concept was simple: Create a trading system whereby companies can meet pre-defined targets by reducing their own emissions, or by buying surplus allowances from another participating organisation who have managed to beat their emissions target. Of course there are other factors involved, but the essential aim of the scheme is to facilitate the reduction of greenhouse gas emissions from industry.

The progress of the UK ETS from concept to present-day has been at times controversial, but has remained the subject of much scrutiny. This was always going to be the case, as not only was the UK ETS the first of its kind in the world, but the eyes of the world have been watching closely as other countries prepare to launch their own schemes.

The research, which was conducted by the Climate Change Group of Enviros Consulting and Katharina Kroger, an MSc student at Nottingham University, set out to examine the key aspects of the design and implementation of the direct entry side of the UK ETS and to comment on its contribution to the development of the UK greenhouse gas market.

Response rate

The research underpinning the survey involved a survey of all direct participants as well as a representative sample of firms that decided not to participate in the scheme. A response rate of around 50 per cent was achieved for both groups of firms. Additional context is provided from Enviros’ experience in working with a large number of companies in both the direct entry side of the ETS and the Climate Change Agreements.

The findings of the report are summarised under four headings, the first of which is ‘Motivation for Participation’. The report concludes that, “The most important factor determining a firm’s decision to participate was the prospect of financial gain offered by the government made available through the auction. Additional reasons for participating were that it provided an additional driver to implement energy efficiency measures, to learn about emissions trading and enhance corporate reputation through demonstrating environmental initiative.” The report continues, “The main reason why firms decided not to participate was because of the risk of not achieving any form of emission reduction. The factors underlying this response were the high costs of emissions abatement and rising emissions profiles. Lack of time and expertise, and the complexity of the scheme were also cited as factors deterring firms from entering, although they were very much secondary to the issue of risk”.

Emission status

Under the heading ‘Emission Status’, the survey reveals that, “Some 80 per cent of emissions of participating firms were declining at the time of entry. Over half of these were declining due to emissions abatement activities but a substantial proportion were reducing due to declining business activity”. The report adds, “With regard to the means of achieving the emission reduction targets only four per cent had the intention of buying emissions at the time of the auction. The vast majority intended to meet their targets by internal abatement activities. Over half of participating firms expected to exceed their targets and bank or sell any surplus”.

If there has ever been a recurring accusation levelled at the UK government, it is one of not providing enough information about the various schemes and sources of advice that it offers to industry. In its ‘Provision of information’ section, the survey results indicate that, “Adequate information was made available to firms to allow them to make the decision on whether or not to participate in the scheme”.

According to the report’s ‘Equity Issues’ findings, “Access to the scheme was not found to be discriminatory. Participants currently span a broad range of sectors including manufacturing, chemicals, education and retail. Whilst it is mainly the larger firms that have participated there was no specific barrier to smaller firms participating, other than the time required to understand the scheme, which was the same for all firms”.

Achieving objectives

In conclusion, the report states that, “After one year of activity, two out of the government’s three objectives for the creation of the direct participant scheme can be said to have been achieved. The scheme has certainly provided firms – and the government – with experience of emissions trading, and as a corollary has helped stimulate the development of a UK-based emissions trading support industry”. On the downside, the report makes the further point that, “The case for the effectiveness of the scheme in creating significant reductions in emissions is less clearly made. There is evidence to suggest that business as usual emissions have been bid into the scheme, but this paper is not able to provide any quantitative analysis on the extent of this ‘hot air'”. The report goes on to, “Conclude that by its voluntary nature the scheme was always likely to include some business as usual emissions. The relevant question is ‘is the hot air a price worth paying for the benefits of the scheme?’ It is probably too early to draw conclusions on this matter. The full effects of emissions trading schemes are yet to be felt throughout the world and the UK’s collective experience brought to bear”.