25 July 2006 NEW INQUIRY

25 July 2006 NEW INQUIRY

The EU Emissions Trading Scheme:
Lessons from Phase I

The Environmental Audit Committee (EAC) today announced that it will be holding an inquiry this autumn into the EU Emissions Trading Scheme (ETS).

This follows the Government's recent announcement of the UK's proposed National Allocation Plan (NAP) for Phase II of the ETS (which will run between 2008 and 2012). The Government has proposed an allocation of 238 million allowances per year during Phase II, compared to 245 million allowances per year under the current phase of the Scheme.

It also follows the emissions figures for the first year of the Scheme, published by the European Commission in May. These revealed a surplus of 44 million tonnes of allowances, leading to pronounced volatility in the carbon market and prompting fears that many EU states had set their NAPs too high for Phase I to be effective.

In design, emissions trading has some significant attractions: economic theory suggests that it maximises efficiency for each participant at the same time as guaranteeing certainty of environmental outcome. But questions have been raised about the scope of the Scheme (it currently covers less than 50% of the EU's total greenhouse gas emissions), and about the way in which permits are allocated and caps enforced.

Last year, EAC examined the EU ETS in the wider context of the UK's foreign policy efforts on climate change. The report found:

Phase 1 of the EU ETS has rightly been described as a "race to the bottom" in terms of the target caps set by individual member states. As a result, there is little prospect that it will yield any significant carbon reductions and this is reflected in the low price at which carbon is trading. Far tougher targets will need to be set in Phase 2 of the scheme and should be based on agreeing an overall cap for the EU. Indeed, it is only the existence of the Kyoto targets which will provide the driver for this process. This demonstrates the importance of such absolute targets within a post-2012 framework.

This inquiry is designed to assess the prospects for the remainder of Phase I, and the lessons that should be applied to Phase II.

The Committee invites organisations and members of the public to submit memoranda setting out their views on these subjects. Some specific issues on which the Committee would welcome comments are set out below, although respondents are free to comment on any issues which they consider relevant.

1. What are the key lessons to learn from Phase I of the Scheme?

2. How likely is it that UK firms would successfully reduce emissions by at least 7MtC by 2012, in line with the proposed Phase II NAP?

3. What have been the effects of the method chosen for allocating allowances in Phase I?

4. Has the Government identified the correct proportion of allowances to be auctioned in Phase II? Should these be drawn solely from the power sector's allocation? What will the effect of this auctioning be on industry and the price of carbon?

5. What have been the effects of Phase I so far on the competitiveness of (1) business in the UK, and (2) business across the EU?

6. What are the key issues for Phase II in terms of ensuring that emissions reductions from EU states are not cancelled out by the transferring of industry to developing economies?

7. How well are the EU ETS and the Clean Development Mechanism working together? What needs to be done to better integrate these markets? Is the CDM funding the right projects?

8. How should aviation be included within the ETS? What are the latest indications of when it will be included?

9. The Environment Secretary has said: "we will support the Commission in its efforts to enforce tough caps". What exactly should the Government be doing to influence this?

10. How well integrated are the ETS and other EU climate change policies?

11. What work needs to be done now to help design a third phase of the EU ETS? How can the experience of the EU ETS be used to help the design of a post-2012 Kyoto mechanism?

Written evidence should be sent to the Committee by 6 October 2006. For printing purposes we require submissions via e-mail to eacom@parliament.uk in Word format. We are unable to accept PDFs except for supporting documentation already in the public domain which will not be printed by us. Although we no longer require a hard copy, it is your responsibility to check that we have received your submission if no email acknowledgement has been received by you. A brief guidance note on the preparation and submission of evidence is available on the Committee's web pages. For further information on the this inquiry, please telephone 020-7219-2878.

Notes for Editors

1. Details of all the Committee's press releases and inquiries, together with its Reports, oral evidence and other publications, are available on the Committee's Internet home page, which can be found at:

The Environmental Audit Committee

Under the terms of the Standing Order No. 152A the Environmental Audit Committee is to Aconsider to what extent the policies and programmes of government departments and non-departmental public bodies contribute to environmental protection and sustainable development: to audit their performance against such targets as may be set for them by her Majesty's Ministers; and to report thereon to the House. The Committee was set up on 13 July 2005.