Monday, January 30, 2012

Never mind steel producers squealing. This is the real carbon leakage.

consumption emissions are increasing in the UK

The price of carbon permits continues to hover only slightly above its all time low point of seven euros, and there seems to be little interest from the EU to intervene in any way that would cause it to rise.

A good price for EU carbon allowances on the trading market is required in order to boost investment in the low carbon economy.

A leaked draft resolution on the subject that is to be put before the European Parliament merely concurs that "a robust allowance price" is required and that "the present ETS allowance prices provide substantially lower incentives than anticipated".

It does not recommend taking any action.

A cross-party EU environment committee last month argued for withholding carbon permits from an oversupplied market on order to stimulate the price, but this looks unlikely in the foreseeable future.

The UK Treasury, overriding Department of Energy and Climate Change policy, decided in 2011 that a carbon price floor of £16 per tonne of carbon should be introduced unilaterally by the UK in just over a year's time.

(And, as an aside, it is a carbon price floor not a carbon floor price, as many insist on calling it. We are not talking about the cost of linoleum. Even George Osborne gets it wrong - sometimes in the same speech as getting it right.)

This means it would be up to companies registered under the Climate Change Levy to stump up the difference between the price of carbon at the time and £16 in order to provide certainty and motivation for investors in low carbon infrastructure. At the current rate the difference would be over £8 per tonne.

Existing CCL exemptions relating to fossil fuels used in UK electricity generation would be removed, and the amount of fuel duty that can be reclaimed when oil is used to generate electricity would be reduced.

Fossil fuels supplied to all types of electricity generator, including CHP stations and auto-generators, would be subject to increased taxation. This tax would allegedly (according to the big carbon emitters) be passed on to consumers.

This is not an electorally popular suggestion. Desperate mandarins at the Treasury are looking for a way out.

They are supported by manufacturers. EEF, the Manufacturers' Organisation has repeated its call for the carbon price floor plan to be scrapped, arguing that a unilateral move such as this would harm the competitiveness of UK industry.

It warns darkly of “carbon leakage" caused by manufacturing and heavy energy using companies fleeing the country to climes where such onerous burdens are not faced.

However, a different picture is offered by MPs on the Energy and Climate Change Committee, who say in a report published this week: "we believe that the threat of leakage to countries outside the EU has sometimes been exaggerated in lobbying conducted by vested interests".

Having heard evidence from all quarters, they conclude: "We do not accept that it poses an imminent threat to EU industry, except in a small number of sub-sectors.

"The problem should be addressed rationally and compensation should not be hijacked by emotive special pleading."

The MPs point out that the Chancellor has already promised a package of support for emissions intensive industries.

High emitters should come clean

They charge that the large carbon emitting companies that want this compensation must give something in return; namely, complete disclosure of the volume of free EU Allowances from the Emissions Trading Scheme they will receive, as well as the benefits to them, and of the value of support measures, so that all these subsidies for are transparent and can be weighed against the real risks of carbon leakage.

This will either expose or guard against the huge profits some firms have been a le to make from being given free allowances, but passing their costs onto consumers.

They are absolutely right. These big polluters cannot be allowed to have their cake and eat it.

For the same reason, the MPs support the inclusion of aviation within the EU-ETS but say that the EU should move towards 100% auctioning of permits to pollute by 2013 at the very latest; the target of auctioning just 15% of permits by 2020 is “disappointingly unambitious".

The real carbon leakage

But there is another sort of carbon leakage going on, that is much more damaging to the climate than that posed by polluting companies potentially relocating to a more laxly regulated nation.

Where this genuine leakage occurs is in the outsourcing of goods and services consumed in the UK and Europe as a whole to companies outside Europe.

If these emissions are taken into account, then total UK emissions have not dropped by around 14% since 1990, as the official figures ostensibly show; they have actually risen by 20% according to official figures.

These emissions are called, in the jargon, 'consumption emissions'.

In the Scottish version of the Climate Change Act, there is an obligation on the Scottish Government at least to account for consumption emissions.

Would it not be properly ethical and honest for this be applied to the UK as a whole?

A consumption-based approach to the country's carbon emissions would give a better picture of the U.K.'s impact, as Sir Robert Smith, the Scottish Liberal Democrat Member of Parliament for West Aberdeenshire, said during an Energy and Climate Change Committee hearing recently.

Defra expects to be providing regular estimates of consumption emissions, with the first results (for 1990 to 2009) expected in March this year.

The Carbon Trust already use a model for calculating consumption emissions developed by the Norwegian Center for International Climate and Environmental Research (CICERO).

The CICERO model uses two methods: Emissions embodied in bilateral trade (EEBT) and the Multi-Region Input-Output (MRIO) model.

It is the latter that Defra is using for its reports.

The rising level of consumption emissions is a direct function of the increasing balance of trade deficit, and reflects the fact that the U.K.'s imports have more or less continuously risen compared to exports since the mid-'90s except for a brief lull during the 2009 recession when we couldn't afford to buy much.

On this reasoning, one of the best ways to improve the true carbon emission figures of the country as a whole is to consume more products that are produced at home, whether they be food and drink or manufactured goods.

Improving our balance of trade will also increase our resilience to external price volatility and the economy as a whole by providing greater employment.

Amongst the other recommendations of the MPs on the ECC Committee is for the EU to pursue sectoral agreements with important emitting countries like China, from whom we import many goods, in order to target emissions reduction efforts in key industries and deal with competitiveness concerns such as carbon leakage.

But as these countries, like China, take more action to reduce their own carbon emissions by investing in low carbon generation and energy efficiency, which the UK can certainly help them with, the prices of their imports to this country will correspondingly rise.

This gives the UK another reason to produce more of the goods it consumes “in-house".

Improving our balance of trade at the same time as extending carbon taxation to cover all carbon emissions, including consumption emissions based on imports, would be of lasting benefit to the whole economy; and certainly have a better impact on overall emission levels than the sick dog that is the European Emissions Trading Scheme.

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