Public Policy: Using Market-Based Approaches - Department for ...

Public Policy: Using Market-Based Approaches
had little information on the recent emissions of direct participants and attempts
to go further in this respect could have resulted in unequal treatment for some
direct participants – if, instead of using an average, the baseline for some
participants was set only using the lowest level of emissions reported during the
previous three years, for example. Tightening the targets could also have
increased the risk that some of the participants might drop out of the scheme.
The NAO’s research into four of these companies shows that, in practice,
companies have made significant additional efforts to cut emissions and that
incentive payments are helping to pay for emissions reductions. In addition,
Defra believes that some of the direct participants are going beyond the goals
set at the beginning of the UK-ETS and these firms are attempting to deliver
further reductions, as they have discovered that further reductions lead to
improvements in energy efficiency which are cost effective for the firm. 172
During 2004, following the second year reconciliation 173 and the publication of
the NAO report, Defra negotiated with direct participants, who had significantly
exceeded their target reduction, to gain additional voluntary emissions
reductions. As a result, the total guaranteed emissions reductions over the life of
the scheme increased to around 20 million tonnes of CO 2 equivalent, from the
original 11.88 million tonnes of CO 2 equivalent. 174
It can be difficult to isolate the effect of the UK-ETS on the emissions reductions
undertaken by firms. However, according to the NAO report, approximately 66
per cent of the reductions reported by four of the main overachiever firms are
attributable to the scheme.
The market price of allowances in the UK is within the range of comparable
markets. According to the NERA report, prices in the Chicago Climate Exchange,
which is also a voluntary scheme, have been rarely above £0.6 per tonne since
the exchange’s launch in 2003. In Europe, the forward price for carbon dioxide
allowances under the EU-ETS had fluctuated between £4-£9 over the first six
months of 2004. 175 Under the UK-ETS the allowance prices has fluctuated
between £2 and £4 during 2003-2004. 176
However, the price obtained in the initial auction, £18 per tonne over the life of
the scheme, is significantly above the price estimated previous to the auction by
172 Interview with Defra.
173 The reconciliation process implies the verification that claimed emissions reductions correspond with actual ones.
174 Information provided by Defra.
175 The price of a metric tonne of CO has plunged since the UK ETS began officially on January 1, 2005, to less than
2
€7 (£4.7) from the informal ‘grey -market’ figure of €13 (£8.87) at the start of 2004. According to Time Magazine,
February 21, 2005, page 49.
176 According to DEFRA the price of allowances rose to around £4 in the beginning of 2004 when DEFRA made
known its intention to review the scheme to deal with overachievements from direct participants. See also Report
by the Comptroller and Auditor General(April 2004) The UK Emissions Trading Scheme: A new way to combat
climate change. National Audit Office.;and NERA Economic Consulting (August 2004) Review of the First and
Second Years of the UK Emissions Trading Scheme, a report prepared for the UK Department for Environment,
Food and Rural Affairs, Department for the Environment, Food and Rural Affairs: London.
162