Uncertain plans

EU emissions trading and the UK's draft National Allocation Plan leaves British business unsure of itself. Peter McCrum finds out why

As the dust settles following the publication of the first draft of the National Allocation Plan (NAP), now is a good opportunity to examine the reaction from industry, consultants and other stakeholders. The problem is finding a consensus of opinion regarding NAP and the wider issue of European emissions trading, even among organisations with common interests. What is apparent is that emissions trading remains highly contentious and the NAP draft has only fuelled the controversy.

As part of the European emissions trading scheme, the National Allocation Plan sets out how greenhouse gas emission allowances will be apportioned. These allowances can be traded across Europe, enabling participating countries to meet emission reduction targets. If a particular installation exceeds its target, it may purchase allowances from another European organisation that has allocations for sale. Ireland was the first country to release details of its allocation plan, closely followed by Denmark and the UK.

A vital measure

The UK is a leading proponent of trading and Margaret Beckett, secretary of state for DEFRA, reiterates her government’s support for the scheme: “The EU emissions trading scheme will be a vital measure in our drive to reduce emissions across Europe,” she says. “We have set the overall number of allowances for UK industry at a level which moves us beyond our Kyoto commitment towards our tougher national goal and which recognises the need to preserve the competitive position of UK industry.”

This is the crux of the issue as far as British business is concerned – will the emissions trading programme have an adverse effect on the competitiveness of UK business in Europe?

Waiting in anticipation

This is why energy-intensive industries have been awaiting details of the plan with some anticipation. Even to the casual observer it is obvious that they are likely to feel the effects of the proposals first and should therefore provide an indication of what the rest of industry and large consumers of energy might expect. A spokesman for RWE Innogy, which operates and manages domestic oil and gas-fired power stations, says: “We’re currently in the process of evaluating the impact of the proposals. There are lots of details to be worked out and we’re still in discussions with the relevant government departments.” This cautious tone has been echoed by the CBI. Its senior policy advisor on energy and climate change, Gillian Simmons, says: “We are still waiting to see the equivalent efforts of other Member States with regard to their allocation plans. Although it has been suggested that we might expect a 6% increase in industrial energy prices, the impact of this remains uncertain and we’ve got to be cautious when trying to evaluate the likely outcomes.”

Increasing costs for industrial users

This 6% increase for industrial users has been estimated by the government’s Partial Regulatory Impact Assessment and has been widely accepted as a reasonable assumption. The assessment also anticipates a 3% increase in energy costs for households. Electricity generators have been selected to bear the greatest burden because, it is argued, they don’t face significant international competition and are considered to have the lowest CO2 abatement costs. Unsurprisingly, electricity providers are not pleased with this outcome. A spokesman for Powergen says: “We are disappointed the government has chosen to allocate on the basis of more aggressive carbon targets than we are likely to see adopted by other European governments. We are also disappointed that the power sector has been singled out to bear the brunt of the additional costs arising from the emissions trading scheme.

“We note that the government has suggested that power prices are likely to rise as a result of this allocation. We will do everything we can to optimise our operations to minimise the increases in costs and therefore minimise the price increases customers are likely to see, but increased prices are inevitable as a result of this government action.”

Unduly punitive

Other sectors are also feeling the pinch and complain that the proposals are unduly punitive. The Confederation of Paper Industries is concerned that the allocation plan does not contain sufficient or transparent enough data to verify how sector and installation allocation has been determined.

The Chemical Industries Association also has worries. The director-general, Judith Hackitt says: “The choice of a two-stage process for the NAP may be a good beginning, but the government must ensure that any benefits it offers are not undone by tougher overall targets driving up input costs such as electricity. In addition, the UK government needs to be very sure that it has not adopted a stance that is out of step with other EU Member Sates, thereby disadvantaging the UK’s chemical industry.”

An uncertain legislative environment

Consultants to British business endeavouring to advise clients on reducing energy costs are faced with a complex and unpredictable situation. On one hand the government has committed the UK to reducing emissions, which has a significant and inevitable cost implication, on the other they need to provide clients with advice on how to reduce energy costs. “People we have been speaking to and people we have be advising have certainly got the feeling that is going to be tight”, says Daniel Waller of Future Energy Solutions. “They don’t believe they have enough allowances to meet their ‘business as usual’ needs. They feel they are being asked to take on an unfair proportion of the burden in an increasingly uncertain legislative environment.

“Forward planning over 5-10 years will have been disrupted and what was feasible under climate change agreements will no longer be feasible under the EU emissions trading programme.”

His clients are advised that transaction costs and arrangements for monitoring and verifying energy consumption may need to change. While many companies understand the need to reduce emissions per se, some believe the NAP has diluted the economic purity of the emissions trading system in the way that it has been implemented.

“Those energy-intensive industries that have been capped are likely to be pretty energy efficient because energy is such a large proportion of their costs,” Waller says. “This therefore begs the questions as to where the savings can be made.”
But he is confident that there are still opportunities for British businesses to comply: “The scheme has bought energy right back into the boardroom. Energy costs and an organisation’s carbon profile will directly affect their bottom line and this will encourage innovative thinking from energy managers.

“I remain very optimistic that despite ambiguities with the scheme it raises the profile of energy in business. Probably not since the oil crisis of the 70s has energy been such a prominent issue.”

Initially, this uncertainty can’t be good for business, but with time, once the wrinkles have been ironed out, there is some optimism that the scheme is workable and may even deliver its intended environmental improvements.

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