Select Committee on Environment, Food and Rural Affairs Minutes of Evidence

Examination of Witnesses (Questions 20 - 39)



  20. Not quite, because the United States were not the only country advocating the use of flexible mechanisms. I think the Japanese were also reasonably enthusiastic about this. Presumably, it goes a little beyond the theology because the reason why one should seek to achieve progress at a nation state level must be if one is looking to the longer term. There is a limit on what you can achieve by trading out of poorer countries, and that tackling, as you said, the root cause of the problem has to be done at some point. So to simply postpone the evil day on which you confront your electorate with the need, say, in the United States, to raise the duty on fossil fuels on the gas they guzzle in their motor cars, means that severer action will be required at some later stage.  (Mr Meacher) That is true, except, I think, the evil day—as you put it—is actually quite a long way off.

  21. Certainly in American electoral terms, you mean?  (Mr Meacher) What I mean is that the capacity to obtain emission reduction credits from trading is very substantial, and it could go a long way to meeting targets for a long period ahead. Again, to be fair to America, I am not at all sure that America necessarily is looking to achieve, say, 80 per cent of its emission reduction credits from trading. I have spoken, of course, to ministers from the United States. They would say that is not necessarily so, and I think that is probably correct. They are not willing to be tied down to a precise formula. We have said it has got to be 51 per cent domestic. They would be in trouble if it then turned out to be 48 per cent or 43. They want to have a measure of flexibility. I do think the capacity for achieving emission reduction targets inside the United States is very considerable. Look at what has happened with electricity in California. The capacity for achieving reductions by a change in the energy industry of the United States is very, very considerable. I would expect, if the United States came back into the process, that they would indeed pursue that route, amongst others.

Mr Jack

  22. Can you help me to understand? You mentioned a very interesting word a second ago, "theological", in relation to emissions trading. Let us come away from the theological to the practical. How is it going to work? Who will police the trading operation? How do you get started in emissions trading?  (Mr Meacher) There is a compliance procedure. Of course, we agree basically what those procedures are as part of the nitty-gritty detail which started at Bonn and, hopefully, will finish at Marrakesh. That goes into a great deal of detail in the subtext and the schedules and the rest. There will still be, of course, questions that arise which are not going to be covered by the text. One has an executive board which operates under the UN Framework Convention on Climate Change, which has representations. Of course, this is contested as well as between Annex 1 and G77 and China.

  23. Just hold on a second. Give me a practical example of a bit of emission trading that I might be able to understand. Let me bring it down to its simplest level. Who, in the United Kingdom, is eligible to trade? Give me an example of how they would go about conducting an emission trade? Who would they tell that they had done it?  (Mr Meacher) That, again, is an interesting question because the UK is leading the world in setting up a Climate Change Projects Office which is to have a test run in this country about greenhouse gas trading. The people who are eligible for that would have to indicate that they wish to be members of the trading system. There is an incentive; the Government is actually providing a financial incentive for companies to join. There are two ways of doing it: one is to enforce a cap, which means you are required to meet that target or, if you do not have a mandatory target, you encourage companies, on the basis of financial incentive, to try and reach their targets and they are given some assistance to come into the system. That would have to have rules, which of course we are drawing up at the present time. Countries coming into the system would, of course, like joining any club, be indicating their adherence to those rules. Again, it raises the question, what are the penalties if people fail to comply or break the rules? We are having to do that in the UK and exactly the same will apply in the global trading system.

  24. If we are inventing our own arrangements, does that mean that all of our emission trading from the United Kingdom standpoint will be on a bilateral basis with whomsoever wants to be a customer for a trade? For example, say an electricity company decided that it wanted to enter this field. In what ways can it go about trading and how would the price mechanism be set for this trade? You have got the United States out of the market, if you like, to buy carbon credits, so would I assume from that that the market in carbon credits is very low? Has anybody put a monetary value on this? I am sorry if I am feeling in the dark (it sounds like, in a way, you are too) in trying to find how this thing actually works in practice.  (Mr Meacher) In some sense we are. That is why we are setting up this test run system, so that we can work out some of the modalities in a more practical way than people sitting down and writing rules. It is rather a different thing as to how it works in practice. Of course, the price of carbon is a very important issue. No government is going to be able to just simply write down a figure and say "That is the price of carbon"; it has to develop within the market. It develops, of course, in terms of the value which is put on carbon reduction in order to meet targets. The system of emissions trading is that a group of companies agree a collective target in terms of carbon reduction. Then the manner in which they do that determines the benefits that they get from it. If it is agreed, say, on a 5 per cent reduction in a year, then those that achieve 7.5 or 10 per cent make a gain and are able to make a profit out of it by selling the surplus credits that they have generated to the laggards who have not achieved the 5 per cent but, because they are obliged to meet that target, they have to buy from the more successful, more efficient companies in order to do that. So it is a very good system which is market driven but, at the same time, does achieve a definite environmental target in terms of emission reduction.

  25. Am I right in saying that the mechanism you have described, if you like the bespoke UK mechanism, is out of line with the European Union mechanism? If so, what implications are there for that, bearing in mind David Borrow's earlier line of questioning?  (Mr Meacher) That is, again, an important question. We are first into the field. I think we are right to do that. There are good opportunities for getting British companies thinking about the potential for this and how it works, and there are significant opportunities for the City of London in this. The EU is proposing to do this, and of course that will be mandatory whereas ours is voluntary. There are some other changes; there is always the question of is it just about CO2, is it about the six main greenhouse gases?

  26. Is there a risk of conflict there?  (Mr Meacher) There is. I was about to say that, of course, the Commission is well aware of what we are doing and we are keenly talking to the Commission to try and ensure that there is as much seamless compatibility between the two systems as possible. Because the EU are even more in the dark then we are, they are some way away from producing such a system, but if it is going to be mandatory it will take quite a time before they actually produce it. We will strongly be arguing that it should be compatible with our system.

  27. When would you envisage, if you like, the first real world trade being conducted from a UK source? Mr Jack

  28. Who are the potential suppliers, if you like, of what we want to buy? Who is on the selling side of the market?  (Mr Meacher) Sarah is saying it has already started. When did it start?  (Ms Hendry) I think about one month ago the first forward trade anticipating the United Kingdom scheme took place. I cannot tell you who the parties were. That is an indication of the interest that companies have.

  29. You cannot tell me, as the global supremo, who they were?  (Ms Hendry) I cannot remember.  (Mr Meacher) We can give you a note if you want that.


  30. Can I try and clarify it for my purposes, you do not then give companies an entitlement to remit, what you do is they trade upon a commitment to reduce?  (Mr Meacher) Yes.

  31. If I would normally drive, for the sake of argument—I am trying to draw an analogy—20,000 miles a year and I say that I would try and cut my driving down to 15,000 miles and therefore I have 5,000 miles that are tradeable, does that work as an analogy?  (Mr Meacher) It does. What we are saying is if companies volunteer into this system—the Government has laid aside £30 million as an incentive to encourage them to join up—they are joining up to achieve a voluntary target. The buyers and the sellers are the companies within the system, they are not consumers outside. The sellers are those who have over-achieved their target, the buyers are those who have under-achieved, but it is all within the system itself.

  32. If you have futures trading then you are trading on anticipated over performance or under performance, are you not?  (Ms Hendry) Can I clarify it, Chairman, the fundamental principle of the United Kingdom pilot scheme, which is all about companies getting experience of how this might work, is a voluntary one and those companies who do not already have targets under the Climate Change Agreements would be able to bid for an incentive. That is all about companies looking at which way the wind is blowing and deciding in due course if they are going to be required to make reductions and therefore it is in their interest to do this in advance, get experience, and they are partly doing it for public credibility and public image reasons. That is the principle on which companies are participating in the United Kingdom pilot scheme. The Commission's proposal for a European scheme, which might come into effect as soon as 2005, that is their ambition, we think that is quite an ambitious target, that we believe would be the European-wide successor to some of the experience that we gained on an United Kingdom basis and we hope that we will learn from that. The proposal under the Commission's scheme is to set mandatory targets for sectors that have been required to participate and then on that basis they would have an assigned amount or target to meet and therefore it would be a very clear if their motivation in trading—

  Chairman: The minister did suggest he would send us a note on this, I think, literally an idiot's guide, think of me, on this one and how it would work in practice, an imagery model.

Mr Jack

  33. I conclude by saying, can the guide also give us some indication of how the system would be policed? I can see that at this moment in time you can strike a balance between those who are up and those who are down but I am not quite certain then how you monitor the sustainability of that position?  (Mr Meacher) We will certainly provide a note on that as well.

  Mr Jack: Thank you.

David Taylor

  34. We do not want to get too hung up on the Chairman's analogy, but to develop it a little further, if we had to ask MPs to reduce their mileage by 10 per cent, would you ever get down to 15,000, 3,000 more than the 10 per cent target then, as I understand it, and you could sell those 3,000 surplus to myself, Mark and Phil Sawford, is that the way the mechanism would work?  (Mr Meacher) Basically, yes.

  Chairman: There are one or two Labour MPs with new Jaguars.

David Taylor

  35. Can we go back to Bonn, that confident morning when you came out and said it was a brilliant day for the environment, and at the same time you were uttering those immortal words there were other delegates who were expressing their dismay and disappointment and frustration at the failure of the negotiations to reach a conclusion in relation to the combined mechanisms that have been referred to, particularly because of the pressure of Australia, Canada, Japan and Russia. Are you optimistic that in Marrakesh that those four countries in particular will, indeed, agree an enforceable compliance mechanism? If that is not to happen would you go along with the weakening yet further to allow them to sign up and therefore to ratify. It is a major concern, because the previous track record of voluntary agreements has been pretty poor and if Kyoto is to be diluted to the point that it is effectively a voluntary mechanism it will inevitably fail and where do we go from there? Is that an issue of compliance mechanism, particularly for the four countries I have mentioned, and how much more negotiation, how many more concessions need to be made, or will they render the treaty a dead letter if that is what happens?  (Mr Meacher) We shall see. I certainly believe that the compliance mechanism must be enforceable. I think we are all agreed that if you do not have an enforceable set of rules it will unravel. There is no question, it cannot be voluntary, it has to be mandatory. The question is as to the detail about which way that should be done. There was agreement reached at Bonn on the compliance mechanism about the penalty, because that is a rather important issue, what happens if countries fail? There was agreement that any excess emission in any given commitment period would have to be addressed in the next commitment period at a rate of 1.3 faults. In other words, supposing I as a country failed to meet the target by 10 million tonnes, in the next commitment period I not only have to meet the 10 million tonnes that I have failed to, in addition to whatever else the target is of the next period, but a further three million tonnes as a penalty. Because I failed in the first round I would have to reduce in accordance with the new target, plus a penalty of 30 million. There are still a lot of issues. Whether the compliance procedure is an amendment to the Kyoto protocol or not the umbrella group wish it to be neutral. There is the issue that the umbrella group, and I have to say the EU, want to have 50/50 memberships between Annex 1 countries and developing countries in the enforcement and what is called the facilitative branch. The key point is the enforcement branch, we are the ones that are going to have to meet these targets and we believe we should have at least 50 per cent of the places in the enforcement branch. That is still disputed in some parts of G77. Thirdly, the umbrella group is opposed to one state being able to trigger a compliance procedure against another. One can see the kind of infighting that that could generate but it does produce a transparency within the system which we, on balance, think is desirable, but that is a point of contention. The umbrella group want sanctions to be more voluntary and in their terms less rigorous. This is where we come to the point you have made, that our view is perfectly clear on that, it cannot be voluntary, it has to be clear, precise and enforceable. Lastly, there is a point of contention about the EU bubble because the umbrella group have always used the bubble as a means of getting back at the EU, which they see as leading this process, cheating on the side by having a system of trading within the bubble which is not subject to the trading requirements of the wider trading system, whereas the EU position is: we are going to deliver that target collectively and as long as we do that we are permitted to do that under Article 4 and we should not be subject to any further obligation. There are these lists of technical issues that remain to be resolved, they have not been resolved. The bottom line is that it has to be clear and enforceable, if it is not that there will not be agreement. I do believe that despite the reluctance of some of the countries you mentioned I think the chances of getting agreement after further haggling and further technical changes is high.

Mr Todd

  36. We will require an objective process of measurement in this, an audit process to identify outcomes, which looks like a tremendously attractive growth opportunity, how is that going to be done? Who is going to do it? If we are going to trade these things round I want to know that David has actually done what he has said, because otherwise he sold me a dud—he might be doing that anyway?  (Mr Meacher) Absolutely. You are entirely right, the purpose of the compliance procedure, to put it in non-diplomatic terms, is to stop countries cheating. There has to be a system, as I say, which is therefore enforceable. We also need a system of monitoring and reporting, which is as near foolproof as we can get it.

  37. We have to make sure there is no argument about the scientific outcome and there has to be a measurement process. Everyone can say, that amount of carbon was the outcome of that particular process. Is there sufficient scientific consensus that can be agreed with precision?  (Mr Meacher) The difficulty about that is that the national registry for each of the signatory parties are required on an annual basis to make a submission to the secretariat of the UN Framework Convention on Climate Change, which is run by Michael Cutajar. That provides the basic transparent data of what each country is claiming. Of course if there were doubts about this questions could be raised at meetings or conferences of the parties, which take place every year, undoubtedly there will be questions raised, and the country which is queried would, of course, make a response. This has to be an open and transparent process and it is not easy. Particularly in regard to sinks the science at the moment is not yet certain. There are genuine uncertainties.

  38. What you are talking about very often is net outcomes. Are you talking about, particularly with carbon sinks there is a process, a natural process in the use of these carbons, it is not as simple as you plant a load of trees and you get something at the end, there is a net process within natural activity that you are talking about.  (Mr Meacher) Of course the issue about whether it is gross or net is one of the issues that has been discussed. I agree with you, I think it is incremental, it is the additional gain which is significant. Supposing you have a forest which is in place in 1990 clearly you cannot count the fact that the forest is there, because it is doing it anyway. We are talking about extra effort.

  39. Also, forests change over time and trees cease to consume carbon and instead they die, it is a natural process.  (Mr Meacher) Absolutely.

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