Fri 25 Feb 2011 – According to a report by carbon offsetting company Carbon Retirement, the United Kingdom has earned more than one billion euros ($1.35bn) from the auction of EU Allowances since its first auction in Phase II of the EU Emissions Trading Scheme (EU ETS) in November 2008. Revenues raised through allowance auctioning is set to rise dramatically in Phase III and the UK could make a further 64 billion euros by 2020, with aviation joining the scheme in 2012 and additional greenhouse gases and manufacturing processes being covered from 2013. Despite European Commission proposals that at least half of auction revenues should be used to help reduce greenhouse gases, develop renewable energies and clean technologies, and shift to low-emission forms of transport, the UK has refused to hypothecate revenues. An attempt by the European Parliament to force EU member states to comply when passing the Aviation EU ETS directive was rejected by EU Council ministers.
Making polluters pay the price of their carbon emissions through the EU ETS is certainly a positive step towards reducing emissions, say the report’s authors, but they question whether the UK government will be as fully committed to mitigating climate change when it comes to spending the money. In Carbon Retirement’s view, earmarked revenue would provide stable financing for green projects, and ought to be used to address fuel poverty, provide green funds for developing countries and help meet climate change targets.
The amount of money generated by the UK through auctioning allowances is second only to Germany, which has generated over €2 billion to date from auctions. Germany has a much higher level of emissions, and as a consequence is allowed under EU rules to auction over twice as many allowances as the UK per year. Other countries using auctions include the Netherlands, Austria, Ireland and Hungary.
At a carbon price of €15 per tonne, the UK stands to generate €328.5 million this year. Revenues will rise considerably from the start of Phase III of the scheme in 2013, and the European Commission estimates that governments across Europe as a whole will make around €15 billion a year.
Quoting Carbon Trust estimates, at a price of €28 per tonne in 2013 and €39 per tonne in 2020, the UK would earn €32-64 billion over the eight years of Phase III.
The UK government acknowledges that in Phase III there is a “legally non-binding” commitment from EU member states to spend at least half of the revenues from auctioning to tackle climate change both in the EU and in developing countries. Its position, however, is that earmarking is inefficient and also inappropriate for the EU to determine member state spending.
According to the report, earmarking works well elsewhere in the EU. It says Germany currently earmarks €400 million of auction revenues annually, with €280 million set aside for national projects and €120 million for international projects. The report says other EU countries also earmark environmental taxes for various related initiatives.
As energy companies pass on the cost of carbon to their customers and energy price growth outstrips people on lower incomes, Carbon Retirement says that the most vulnerable members of society are being tipped into fuel poverty, and the trend is likely to continue. “Earmarking revenues from EU Allowance auctions for subsidised community energy generation or energy efficiency in social housing would be a very sensible way of balancing out the potential adverse effect of the EU ETS on this group.”
Revenues should also be used to support mitigation and adaptation in developing countries through the Green Climate Fund – recently agreed at the Cancun climate summit – which is seeking to raise $100 billion a year. The report suggests that earmarking auction revenues by the UK government – yet to specify where its proportion of the funding will come from – would set an example that the rest of the EU may follow.
Revenues should also be used to help the UK meet its renewables target, the report noting that the UK ranks third from bottom in Europe for renewable energy generation, ahead of only Luxembourg and Malta.
Carbon Retirement is a carbon offsetting company that leverages the EU ETS to reduce emissions, providing an alternative to traditional project-based offsetting. Clients include private equity firm 3i, the Church of England and the UK Committee on Climate Change.
Carbon Retirement (download report here)
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