Press Notice No. 46 of Session 2003-04, dated 9 November 2004
FORTY-SIXTH REPORT: THE UK EMISSIONS TRADING SCHEME: A NEW WAY TO COMBAT CLIMATE CHANGE (HC 604)
Mr Edward Leigh MP, Chairman of the Committee of Public Accounts, said today the innovative Emissions Trading Scheme had led to substantial reductions in emissions of greenhouse gases, but that it was disappointing to find that this could have been achieved at lower cost to the taxpayer.
Mr Leigh was speaking as the Committee published its 46th Report of this Session, which examined: whether the risks associated with the new Emissions Trading Scheme were well managed; the way the baselines for greenhouse gas emissions were set; the effectiveness of the auction and the market; and the wider benefits to the UK economy. The Scheme is one of a series of policy measures designed to help the UK government meet and exceed its commitments under the 1997 Kyoto Protocol, an international agreement to reduce emissions of greenhouse gases, which are believed to cause global warming. The Scheme, and other measures which together make up the UK Climate Change Programme, are managed by the Department for Environment, Food and Rural Affairs. It involved an auction which allocated £215 million incentive funding over the five years to 2006 to companies and other organisations in return for promised emissions reductions, following which emissions allowances could be traded with other participants.
The Committee found that the Department has done well to introduce an innovative Scheme for encouraging emissions reductions. The market approach can be a useful alternative to additional command and control regulation of emissions levels particularly if it does encourage reductions to be made where they can be achieved at lowest cost.
Baselines for such trading schemes need to be set according to a thorough understanding of participants' current performance and activity. Some participants were rewarded with incentive funding from the Department for emissions reductions which they had achieved before the Scheme began. The Department should seek concessions from Scheme participants who have benefited unduly to deliver additional emissions reductions and maintain confidence in Scheme. The generous baselines agreed for some participants have led to a surplus of emissions reductions in the emissions trading market, and could undermine the impact of Climate Change Agreements.
The success of the Scheme in part depends on there being a functioning emissions trading market, and the Department should establish whether potential participants who would benefit from trading are in fact making use of the market. Only 34 companies participated in the Scheme in the end, although the Department had originally estimated that up to around 3,000 companies might benefit. The Department's experience suggests that innovative policies of this kind require extensive publicity and education, particularly if smaller and medium sized companies are to fully understand the concepts and the basis of participation.
Despite the small number of participants, the Department did not reduce the amount of planned incentive funding from £215 million. The Department might have retained some funds for another, subsequent auction armed with a better understanding of participant's auction behaviours and emission reduction practices, to obtain better value for money.
The Department elected to use an auction method which did not afford an opportunity to assess whether a better deal could have been secured at lower prices. The Department terminated the auction process when bids equalled the budget of £215 million. Had the Department continued the auction at lower prices per tonne, the pattern of bids to that point suggested that most of the reductions might still have been achieved at a lower price.
The Department should evaluate the cost effectiveness of the different elements within the Climate Change Programme intended to reduce greenhouse gas emissions. The Department should also evaluate the wider benefits achieved by the Scheme, including the benefits to the City of London, the learning benefits to Scheme participants and the business development opportunities for UK companies, for example in trading and verification expertise.
Mr Leigh said today:
"The Emissions Trading Scheme introduced by DEFRA is an innovative, market-based scheme that complements other regulatory approaches, and has led to substantial reductions in emissions of greenhouse gases. But it is disappointing to find that this could have been achieved at lower cost to the taxpayer. In many cases, DEFRA set targets for companies that were too easily attainable or that had already been met, and did not design the auction to result in the lowest level of public incentives the market would bear. DEFRA must learn from this in designing future schemes."
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