At the moment, the European Union simply gives away a large portion of its ETS permits to the big polluters. These permits authorise the holders to pollute the atmosphere, to agreed levels, at no cost. Yes – for free. This is absurd. The cost to the environment is clearly not zero. It’s mad that this forms the heart of an emission reduction scheme.
The current arrangements also have two very unwanted consequences: It encourages companies to grossly overstate their predicted emissions in order to sell those they don’t use to make a windfall profit, while at the same time removing any economic incentive for them improve their energy efficiency.
Auctioning the total quota of ETS permits would ensure that companies only receive the number they feel they will really use – and removes the incentive to be greedy in order to sell on excess permits at a profit. Equally important, it will make economic sense for companies to make efficiency changes that cost less than the equivalent amount of ETS permits. So if a new technology, like a boiler upgrade, costs £5 per tonne of carbon saved, versus a carbon price of £10 per tonne, making the technology investment becomes the sensible thing to do.
The other way of making ETS permits an effective stick (or carrot) for polluters to improve their energy efficiency is to put sufficiently few up for auction. This will push the price of the permits high enough to ensure that many companies take big action to pollute less – the whole point of the ETS in the first place.
Let’s hope the coalition will support these intentions with solid action, both at home and at the EU, where the ultimate decisions of the fate of the EU ETS will be made.
The Environmental Industries Commission have kindly provided a summary of the main issues in the coalition document:
- The two parties agree that cuts of £6bn to non-frontline services can be made within the financial year 2010-11. Other policies on which they agree include further support job creation and green investment, such as work programmes for the unemployed and a green deal for energy efficiency investment.
- The parties also agree to seek an agreement on taxing non-business capital gains at rates similar or close to those applied to income, with exemptions for entrepreneurial business activities.
- Measures to promote energy from waste through anaerobic digestion;
- The creation of a green investment bank;
Sustainable buildings and energy efficiency
- Home energy improvement provisions paid for by savings from lower energy bills;
- Retention of energy performance certificates and the scrapping of Home Information Packs
- A commitment to reduce central government carbon emissions by 10% within 12 months
- The provision of a floor price for carbon, as well as efforts to persuade the EU to move towards full auctioning of Emissions Trading Scheme permits
- Mandating a national recharging network for electric and plug-in hybrid vehicles;
- The establishment of a high-speed rail network;
- The cancellation of the third runway at Heathrow;
- The refusal of additional runways at Gatwick and Stansted;
- The replacement of the air passenger duty with a per-flight duty; a proportion of any increased revenues over time will be used to help fund increases in the personal allowance.
- The establishment of a smart grid and the roll-out of smart meters;
- The establishment of feed-in tariff systems in electricity, as well as the maintenance of banded Renewables Obligation Certificates;
- Measures to encourage marine energy;
- The establishment of an emissions performance standard that will prevent coal-fired power stations being built unless they are equipped with sufficient CCS to meet the emissions performance standard;
- Continuation of the Labour government's proposals for public sector investment in CCS technology for four coal-fired power stations;
- Increasing the target for energy from renewable sources, subject to the advice of the climate change committee.
The Liberal Democrats to maintain their opposition to nuclear power while permitting the government to bring forward a national planning statement for ratification by parliament so that new nuclear construction becomes possible. This process will involve the Government completing the drafting of a national planning statement and putting it before parliament, and a specific agreement that a Liberal Democrat spokesman will speak against the planning statement, but that Liberal Democrat MPs will abstain.