House of Commons Energy and Climate Change Committee Energy and Climate Change Committee Linking emissions trading systems: Government Response to the Committee's Fifth Report of Session 2014–15 First Special Report of Session 2015– 16 Ordered by the House of Commons to be printed 21 July 2015 HC 376 Published on 23 July 2015 by authority of the House of Commons London: The Stationery Office Limited £0.00 The Energy and Climate Change Committee The Energy and Climate Change Committee is appointed by the House of Commons to examine the expenditure, administration, and policy of the Department of Energy and Climate Change and associated public bodies. Current membership Angus Brendan MacNeil MP (Scottish National Party, Na h–Eileanan an Iar)(Chair) Mr Alistair Carmichael MP (Liberal Democrat, Orkney and Shetland) Glyn Davies MP (Conservative, Montgomeryshire) James Heappey MP (Conservative, Wells) Ian Lavery MP (Labour, Wansbeck) Melanie Onn MP (Labour, Great Grimsby) Matthew Pennycook MP (Labour, Greenwich and Wimbledon) Dr Poulter MP (Conservative, Central Suffolk and North Ipswich) Antoinette Sandbach MP (Conservative, Eddisbury) Julian Sturdy MP (Conservative, York Outer) Dr Alan Whitehead MP (Labour, Southampton Test) Powers The committee is one of the departmental select committees, the powers of which are set out in House of Commons Standing Orders, principally in SO No 152. These are available on the internet via www.parliament.uk. Publication Committee reports are published on the Committee’s website at www.parliament.uk/ecc and by The Stationery Office by Order of the House. Evidence relating to this report is published on the inquiry page of the Committee’s website. Committee staff The current staff of the Committee are Farrah Bhatti (Clerk), Vinay Talwar (Second Clerk), Jenny Bird (Senior Committee Specialist), Marion Ferrat (Committee Specialist), Shane Pathmanathan (Senior Committee Assistant), Amy Vistuer (Committee Support Assistant), and Nick Davies (Media Officer). Contacts All correspondence should be addressed to the Clerk of the Energy and Climate Change Committee, House of Commons, 14 Tothill Street, London SW1H 9NB. The telephone number for general enquiries is 020 7219 2158; the Committee’s email address is [email protected]. Linking emissions trading systems: Government Response 1 Special Report On 17 February 2015 the Energy and Climate Change Committee published its Fifth Report of Session 2014–15, Linking emissions trading systems [HC 739]. On 13 July 2015 the Committee received the Government’s response to the Report. It is appended below. Appendix: Government response Introduction The Government welcomes the Energy and Climate Change Committee’s report on the linking of emissions trading systems. In particular we agree with the report’s conclusion that “As the first pioneering adopter of emissions trading and a strong advocate for market–based carbon pricing policies, the UK Government has an absolutely vital role to play in driving forward international linkage”. This response has been prepared by the Department of Energy and Climate Change (DECC), with input from HMT. The Committee’s recommendations are shown in bold with the Government’s response beneath each recommendation or group of recommendations. 1. We recommend the Government make an assessment of current and future emissions trading revenue and report on different options for using the revenue including the potential to reduce other taxes and support new low–carbon technologies. The Government considers that hypothecation, or the ‘earmarking’ of tax revenue for particular spending purposes, is an inefficient way to manage public finances. Like all Government receipts, ETS revenue is remitted to the consolidated fund to support general expenditure, allowing Government to allocate resources in the most efficient way across the economy. As a result, we have been able to spend more on support for low carbon technology and other action to mitigate climate change than has so far been raised by the ETS auctions. The European Commission reports annually on the use or planned use of revenues from the auctioning of EU ETS allowances by Member States. In October 2014, they reported that Member States used or planned to use an average of 87% of the revenues from 2013 allowances, or the equivalent financial value of these revenues, for climate and energy related purposes. The UK was one of eleven Member States for whom the figure was 100%1. 2. We recommend that the Government ensure that, when supporting other countries to develop their emissions trading systems, it promotes designs that are compatible 1 See http://eur-lex.europa.eu/resource.html?uri=cellar:eb290b32-5e8e-11e4-9cbe- 01aa75ed71a1.0019.03/DOC_2&format=PDF. 2 Linking emissions trading systems: Government Response with the EU ETS. Aligning design elements will help improve the prospects of linking in the future. The Government should focus on engaging with China and the US as the world’s largest economies and because they have already embraced emissions trading. Government’s vision is for an efficient global carbon market comprised of a network of linked ETSs. We agree with the Committee that the greater the standardisation of design elements of ETSs, the easier it will be to achieve this objective. Wherever possible we advocate standardisation of emissions trading systems whilst accounting for local concerns and circumstances. It is important to recognise that whilst there are significant benefits to standardisation of schemes, the same model will not work for all and countries will need to develop ETS tailored to their domestic circumstances. We work in two key fora: in the UNFCCC negotiations, and through the World Bank’s Partnership for Market Readiness (PMR), a multi–donor trust fund which promotes the development and standardisation of carbon markets around the world. Furthermore we work with international bodies, such as the International Carbon Action Partnership, to share UK’s extensive experience on emissions trading to produce best practice guides and technical assistance. We have also run a wide range of Prosperity Fund projects2, delivered through our global network of Climate Attachés, to share lessons learnt from the EU ETS and help build the conditions for carbon markets around the world. The Government has for a number of years prioritised its bilateral engagement regarding carbon markets on China and the US. Thanks to these efforts we have formalised our cooperation on carbon markets through memoranda of understanding with the Chinese government and the administration in the US State of Washington, and seek to build on these links. In addition the EU has recently set an ambitious greenhouse gas reduction target for 2030 and the UK is working with other Member States to build consensus around reforms to strengthen the EU ETS in order to ensure that ours remains the most robust ETS in the world. This will make us an attractive partner for linking. 3. We recommend that the Government focus on getting agreement in the European Parliament and Council to implement the market stability reserve (MSR) at the earlier date of 2017 rather than in 2021, as originally proposed by the European Commission. We agree that to be fully effective, the European Commission’s MSR proposal needs to be strengthened by starting earlier (by 2017), as well as by placing back loaded allowances and other allowances due to be auctioned at the end of the current phase directly into the reserve. These amendments will tackle the surplus of allowances at an earlier date, stabilise price development and increase certainty for investors and business. As the negotiation progresses, the Government continues to build support for strengthening of the MSR along these lines across the EU institutions. The European Council Conclusions in October provided a political commitment to reform the EU 2 The Prosperity Fund is an FCO-administered fund to “tackle climate change, strengthen energy security and promote an open global economy in key emerging economies”. Linking emissions trading systems: Government Response 3 ETS through the MSR. Whilst discussions amongst Member States on the detail are on– going, the UK continues to be encouraged by the significant number of Member States that support the Government’s position on the start date (including Germany, France, Sweden, the Netherlands and Slovenia). The European Parliament has now agreed a mandate in support of strengthening the MSR, including for it to start by 31 December 2018 at the latest. As such, we are optimistic that agreement will soon be reached in support of a strengthened MSR. 4. We recommend, therefore, that the Government ensure the Agreement promotes use of carbon markets and facilitates the future linking of emission trading systems. It should also ensure that provisions which will preclude the future development of carbon markets are actively avoided. The Government is seeking to ensure that the Paris Agreement promotes use of carbon markets and facilitates future linking of emissions trading systems through the inclusion of two provisions: that markets can be used within the post–2020 global framework, subject to adherence to rules (such as to avoid double counting), and; that there should be one or more UN–administered crediting mechanisms. The international rules and norms should facilitate the development of trading systems at a regional and national level and enhance countries’ mitigation efforts towards a 2 degree goal. The international