Does Brexit offer a ‘golden opportunity’ to pursue EU ETS alternatives?

With MPs set to vote on the final amendments of the bill to withdraw the country from the European Union (EU), the debate surrounding the UK's future involvement in the EU Emissions Trading System (ETS) has intensified this week with a lively debate in Parliament.

The ETS covers 45% of the greenhouse gas (GHG) emissions emitted from energy-intensive sectors. In the UK, more than 700 UK-based energy intensive installations, including power stations, manufacturing facilities and oil refineries, participate in the system. Unlike the departure from the EU there is an option for the UK to continue to participate in the scheme. Indeed, Iceland, Lichtenstein and Norway all do so despite not being members of the EU.

The Business, Energy and Industrial Strategy (BEIS) Committee yesterday (7 February) heard from industry experts about the UK’s future role in the scheme. Speaking on behalf of Britain’s manufacturing industry was Andrew McDermott, technical director at the British Ceramic Confederation. McDermott contended that the UK should consider leaving the ETS when the current phase expires in 2020, citing “perverse incentives” in the system which prevent heavy industries from optimising output.

“The system is based on absolute carbon emissions,” McDermott said. “It means there is an actual driver to meet targets by reducing output. It also acts as a break on growth. If you manufacture more, you are going to emit more, and that’s pushing in the wrong direction. It gives you a perverse incentive not create output or grow, and of course as we know, we need many more houses, which includes bricks and roof tiles. We have the capacity there, so we should be growing those industries, not reducing them.”

McDermott noted a “fundamental dichotomy” within the ETS in terms of carbon price signals. Power generators want a higher carbon price to incentive investment in renewable technologies, he said, but heavy industry prefers a low carbon price to boost international competitiveness.

He said the Government should “seize the opportunity” to offer an approach which is “less carrot, more stick”. A range of options were suggested; such as an opt-out scheme currently employed by the continent’s smaller emitters, or an increased focus on the Climate Change Agreement, which McDermott said maintains a focus on energy and carbon efficiency but doesn’t act as a “choke on growth”.

“Brexit is a golden opportunity for us to do something different,” he said. “It’s an opportunity for the Government to boost its investment credentials, to offer an approach which is less stick, more carrot. We need more positive incentives to actually invest in energy and carbon-efficient manufacturing.”

Fundamental flaws

McDermott’s claims were disputed by International Emissions Trading Association (IETA) fellow Dr William Kyte OBE, who suggested the alternatives proposed were “extremely expensive” and impeded business decision-making on emissions reductions.

“They are mostly under relative targets,” Kyte said. “That gives Government a dilemma because they have no guarantee they are going to meet their carbon caps. That’s one of the very big benefits you get from the ETS – absolute certainty that the cap is going to be met.

“Andrew’s argument has some fundamental flaws. The ETS is not a cap on growth. It places a cap on emissions, and you can either cut your emissions or you can buy from somebody else who can cut them for cheaper. So there’s no cap on anybody to cap their growth at all.

“He’s also mixed up price and cost. At the moment we have a very low price in the ETS because across Europe people are pursuing high cost basis on interests in terms on high subsidies for other systems.”

The last recession and over-allocation of allowances in the previous phase of ET resulted in a collapse of the price of allowances, which has now fallen below €4. Critics highlight that the low carbon price removes the incentive for big emitters to reduce their emissions and invest in low-carbon technology, as it is cheaper to buy carbon credits than invest in change.

The current ETS phase, which aims for an overall emissions reduction of 21% compared to 2005 emissions for power stations and industrial plants, has set carbon restrictions at 1.74% each year. The cap does not fall in line with the objectives set in the Paris Agreement, and Kyte acknowledged the need to reform these “very weak” targets.

“If the cap was tightened, the ETS problem would probably be solved overnight,” he said. “You need to make sure you have a target that is ambitious. Renegotiating the target in line with the Paris Agreement is an absolute priority. Whether it’s a UK or EU system, you need stringent targets to make an ETS work properly.”

Worldwide scale

The UK’s carbon price floor was created to work in conjunction with the ETS scheme, with an aim to underpin the price of carbon at a level that drives low-carbon investment. The Government announced in the 2016 Autumn Statement that the carbon price floor will be capped at a maximum of £18 per tonne/CO2 until 2020 to limit the competitive disadvantage faced by business and reduce energy bills for consumers.

With the EU carbon price at such a low level though, Kyte acknowledged that the EU ETS isn’t working “as well as it should.” He did, however, advocate the UK to remain in the scheme until at least 2021, insisting that the system provides the “least-cost” approach without a threat to competitiveness.

Kyte proposed the introduction of a UK-based ETS scheme which mirrors the EU model. Indeed, several other states have already taken this route; China, for example, announced plans to introduce a national ETS in 2017 that will cover eight sectors, while New Zealand, California, Quebec and South Korea all have applied the system in some form. These national systems could become increasingly interconnected to provide economic and environmental benefits, Kyte suggested.

“We could have the benefits of working a worldwide scale and Britain working, in carbon terms, on a wider market than the EU alone,” he said. “On a worldwide basis, it’s best to draw in as many people to the ETS across the world as possible. This means other countries are thereby bearing carbon costs and we no longer have that competitive issue, and global emissions come down.”

George Ogleby

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