Earlier today there was a discussion on green carpet that took place in the UK Parliament on the European Emission Trading Scheme (ETS), carbon price floor and low-carbon investments. Very interesting one indeed!Especially as it's tomorrow when it will be decided whether UK will stick with the ETS or set its own benchmarks for carbon prices.
Dr Karsten Neuhoff was speaking on few aspects of EU ETS, like, if and how does it capture the attention of the businesses, does it provide enough clarity to decision making for businesses and does it have impact in these decisions? Well, first- yes, it does capture the attention, especially in companies that have higher expectations of the future stringency of premit allocation. If they know they'll have to pay full carbon price later, they are more likely to invest in low caron innovations now, which is a ood thing. However, EU ETS is not very clear and some aspects like free allowances, changes that are due to take place and timing is badly understood. Most of the companies assume that they need maybe just some changes to comply with standards, which is not entirely true. The actual costs of the carbon allowances are also unclear as they vary between companies, sectors and even countries. Another risk is that most enterprises are looking only for short pay-back, like investments in energy that are returned in less than 4 years. Such assumption might be wrong and I think also diminish the importance of EU ETS. At the moment there's also a risk of very low carbon prices and lots of misunderstanding of free allowances and trading them. You won't be able to get or trade them in 20 years for the same price as today, and that should also be made clear. As the reason of this whole discussion today on green carpet was because UK is deciding weather to go with the EU Climate Change policy or to set their own minimum price for carbon from 2013?
Dr Neuhoff is also asking an important question here- is the Climate Change policy actually united in the EU? Obviously, small countries might find it quite challenging to work on these problems, so they would be better off to work toether within the EU. But what about the big countries like UK or Germany? Well, according to his paper presented here on green carpet- we all, big or small, should stick together. It is a very important issue- setting of the carbon price floor (it is a mark of the lowest cost of burning fossil fuels to generate power), as it protects investors from risks of very low carbon prices. With this risk removed, investors should be more prone to invest in low-carbon innovations, businesses and programs. The problem here is that with removing itself from the ETS, UK risks of actually exposing itself to higher energy prices than as if it stayed in the ETS, Dr Neuhoff argues.
Another risk of separating UK from the ETS is scaring away the utilities investing in the UK and other EU countries, like RWe, E.ON and EDF, he says, as they will be more likely to stick with the ETS carbon prices. And in return for the ETS it is important that UK stays and supports it, if we want it to be strong and highly valued within the EU. Dr Neuhoff suggests that most benefitial strategy for the UK would be to stay with the ETS, and instead of putting effor on national policy instrument UK should negotiate and press on moving beyond 20% emission reductions targets for 2020 within all of the EU. That would give much more solid framework and consistency to both countries and investors. UK has been one of the most supportive of ETS, let's hope it will be not turning away but pressing more with its interest on the carbo price floor to create more stringent ETS.
Jeremy Nicholson took the debate a little further to talk about how industries feel about the UK's plan of carbon price floor and low-carbon investmets. One huge worrying issue here is a carbon leakage- the industrial groups might just move their production elsewhere, where they do not have to pay for emissions. What if instead of 'decarbonisation' we get 'relocation'? The target of any of the two schemes is to work out carbon prices reasonaly to save both the planet and the economy- to keep industries where they are. What matters for the industry is relative price of energy, and it's not attractive to investment if the energy price is higher than to its competitors. And this can be really problematic for the intensive energy users, like steel production and other industries. There must be a balance for them to adapt to the renewable energy and prices, and Nicholson warns the UK not to drive these industrial groups and investors away to the places (in this case- rest of the EU), where carbon floor price is a bit lower.
Peter Ainsworth was shortly discussing political context and focused more on international political perspective- questioning whether there is possible global economy of decarbonising? The EU memberstates should work together to provide a strong leadership for global decarbonising processes. Unilateral implementation should not diminish but drive and invest the effort in the ETS. But first it has to be made really clear and proven that green technologies is a safe place to invest. The financeability of the 'green deal' (scheme that's offered to households to get money for securing greener energy etc) must be proven. Basically all green innovations, incentives and schemes must be crosschecked for safe investments for also ETS to work. And it is important, the ETS should be robust, effective, and Ainswort dares to say- exportable as a global product. But first of all - every market needs a certainty. Unfortunately at the moment politicians and parties do little or nothing on Climate Change for various reasons comparing to what they could and should do having their opportunities.
Professor Michael Grubb agreed that nothing in science shows that the situation is less dangerous, but politics show that people are still not taking it serious enough. It is an economically and politically complex issue and it's challenging the old model in which countries would come together and discuss who is responsible and who should do what. It's not working anymore that way between countries, and another problem is that societies don't take up this model either. He then returned to the failures of both guns blazing and soft approaches of Copenhagen, but admitted that Cancun was a great achievement. Not big enough, as it had huge gaps on what's possible and what's yet not. Professor Grubb like Nicholson is worried that carbon price floor might not bring the low-carbon investments in the UK, but drive high carbon investment away- same leakage problem that is massively underestimated, and it is a transnational problem. So I believe UK should try to solve it together with the rest of the EU. Another problem is investment leakage- companies tend to think that there will be free allowances also in 20-30 years, which is not going to happen, so the low-carbon investment and innovations are needed now. But industries can't do it alone, they must get the support and government policies should pay the attention to that.
Professor Grubb also added another very interesting idea, which is very supported on green carpet- import taxes on those who don't pay carbon taxes. I think it's amazing! If the EU sets the carbon price floor and works on more stringent ETS, then it would fit in perfectly to impose higher import taxes to the countries or transnational companies tha do not pay for their high emissions. I'm really backing this. I think this was the most impressive thought from todays discussion. It would also benefit another very green strategy: choosing local production and services. And it also will improve all national and regional economics.
But returning to the question that the UK might separate from the ETS- I agree with Dr Neuhoff that UK should rather put more political weight on higher benchmarks in the ETS than setting its own.
Climate Strategies, which is "an international organisation that convenes networks of leading academic experts around specific slimate change policy challenges. rom this it offers rigorous, independent research to governments and the full range of stakeholders, in Europe and beyond."
Now- back to my decaf fair trade coffee with organic milk and some relaxation with my baby and kitten :)