CBI leads the way toward UK emissions trading

The emissions trading scheme would enable businesses that have reduced their CO2 emissions below a specified target to sell excess emission credits to businesses that require additional emission allowances.

“What is good is that the Government is allowing business to design a structure that will work for them, but the permit allocation rules and targets will have to be set by government,” Liz Reason, director of Ilex – an energy markets consultancy – told edie. “DETR is going to have to make some tough decisions and I hope they are ready to do so.”

Friends of the Earth (FoE) is content with CBI’s plans, but warns that any emissions trading system will take some time to set up. “In principle, trading is quite elegant, but how do you allocate the permits? You need to have a robust monitoring body,” said Tim Jenkins, senior research officer at FoE’s Sustainable Development Unit. Jenkins’ guess is that a trading scheme is unlikely to be operating much before 2008. “Emissions trading is a medium-term endeavour. It’s going to have a specific and narrow role to play in emission reduction.”

British industry is largely in favour of emissions trading, but less in favour of the Government’s plans to tax businesses’ energy use. Ilex’s Reason argues that the proposed Climate Change Levy focuses too much on reducing businesses’ overall energy consumption and not enough on encouraging industry to switch from heavily-polluting, carbon-based energy to less harmful sources.

“There is an argument that in the short term, all the gains are going to be made by increasing energy efficiency and not by fuel switching,” agreed Jenkins. “But energy efficiency has slowed down recently and there are cost-effective measures that companies can implement right now. In the longer term, the Climate Change Levy should include a better reflection of the carbon content of energy bought by a company.”

At this stage, industry is lobbying for exemptions from the Climate Change Levy. Several sectors are expected to be given exemptions, including the iron, steel and aluminium industries. Jenkins is adamant that exemptions should be granted based on criteria suggested by the EU’s Integrated Pollution and Prevention Control Directive. The directive identifies specific processes that are energy intensive and warrant an exemption, rather than identifying whole sectors of industry. “Government has to make sure that only firms that really need an exemption get it. Obviously, everyone is trying to get one.”

Environmental groups like FoE are arguing that the Climate Change Levy should be seen as a positive instance of tax reform. “Why tax firms based on how many people they employ, when you can tax employers a little bit based on how many people they employ and based on how much energy they use,” said Jenkins, referring to the proposal that companies’ paying the Climate Change Levy will pay lower National Insurance rates.