I don’t suppose Gordon Brown has spent much time thinking about CERs or EUAs recently. Presumably it’s the abysmal by-election results and simmering leadership plots which keep him up at night. A Telegraph front cover this week earnestly reported that Alan Milburn had already signed up to be David Milliband’s new Chancellor. Mr Brown must be hopping.
But interestingly CERs and EUAs could provide the magic dart he needs to reverse his poor political fortunes. Yes, really. Allow me to set out my stall.
The British public are fed up with high petrol and energy prices. With rising inflation, public sector wage freezes, tumbling housing prices and remortgaging no longer an option, there is simply less money in the household kitty to pay for it. And the effects are ubiquitous – commuting to work, heating your home, buying groceries and going on holiday are all more expensive.
In addition, disillusionment with perceived hypocrisy abounds. High emitting cars are now penalised through increased car duty, but the government approves Heathrow’s third runway with little apparent regard for the environmental consequences. Last week Centrica, who own British Gas, simultaneously announced a one third increase in fuel bills and pre-tax profits of almost £1b for the year end. So whilst Joe Punter struggles to pay his bills, Mr Cat gets Fat and Gordon Brown is apparently learning pilates in Suffolk.
Of course a substantial proportion of Centrica’s profits will be reinvested in the costly exercise of switching to renewable energy, and their profit only represented a 4% return for their investors, but that doesn’t cut the mustard with a sceptical public. If only there was a way to make it all seem fairer.
There might be. The permits which allow and limit the amount of pollution produced by European energy companies and others, known as EUAs, are currently given out by most EU member states for free, including the UK. But each tonne of them can be freely bought and sold at market; at today’s prices each tonne is worth €19.10 each. Point Carbon has estimated that this will create a windfall profit of between €6 and 16 billion for energy companies in the UK alone. Nice, if you happen to be an energy company.
A fairer alternative is to auction them off. Fearful of alienating stakeholders in their pioneering cap-and-trade scheme, the EU has limited the maximum auctionable proportion at 10% of each national allocation. However 10% amounts to roughly £1.5b of new revenue for the UK government over four years, and this figure is liable to increase ten-fold after 2012 with EU plans to abolish the auction limit altogether. Cap and trade schemes proposed in Australia and the United States already propose that 100% of permits should be auctioned.
Auctioning could also narrow the price difference between the EUA and the CER, a comparable emissions reduction certificate used by the UN Clean Development Mechanism to tackle emissions in the developing world, and also valid as an EU pollution permit. Faced with having to pay for EUAs, post-auction carbon markets could value CERs higher as their relative cost: compliance value ratio looked more attractive. This may add to convergence pressures from the news this week that the EU plans to go live with the international transaction log, the software linking the two schemes, in October this year.
Of course the energy companies would probably pass the cost on to their customers through raised prices, so are the public not effectively worse off as a result? That depends on what Gordon Brown decides to do with his new revenue.
He could use some of it to invest in renewable energy or other progressive technologies. For example the CBI believes that EUA proceeds should be used to fund carbon capture and storage demonstration plants, although the WWF are sceptical. But the energy companies would argue that much of their profits are currently allocated to developing renewable or sequestration technology anyway so auctioning would merely add unnecessary cost and bureaucracy.
Perhaps more compellingly, Mr Brown could channel a sizable proportion of the money directly into fuel poverty reduction and finally appeal to the intransigent public and their day-to-day concerns. A populist move with benefits for the environment and the economy: just what the doctor ordered.
Kevin Rudd’s government in Australia is already on top of this: the influential Garnaut report, which attempts to shore up some of the detail around their planned cap and trade system for 2010, recently suggested that “Fifty per cent of all revenue from emissions permits should be returned to households via tax breaks, social security payments and energy efficiency incentives – concentrated on the lowest half of income earners. Of the remaining half of permit revenue, 30 per cent should be spent on compensation and adjustment in business and industry and 20 per cent should fund the commercialisation of low-emission technologies.”
To be fair, the logic hasn’t escaped Mr Brown entirely – the UK plans to auction 7% of its national allocation at the end of 2008. But increasing this to 10% as part of a package of well thought through plans to tackle fuel poverty and other sensible initiatives might go down rather well with UK voters. And it also lets him neatly sidestep the misplaced calls for him to increase corporation tax for energy companies and lets EUAs and CERs do what they’re supposed to do: set the minimum price required to reduce pollution.
Caught between Northern Rock and a hard place, Gordon Brown must peer out at the darkening economic gloom and wonder if his political sun will ever shine again. What he needs is some bright ideas. So where shall we start the bidding Gordon – 7 or 10%?
