After Lord Deben and I gave evidence to the Energy and Climate Change Select committee, EEF, the manufacturers’ organisation, picked up on my statement that we had consulted widely, but not been provided with specific reasons to change the fourth carbon budget.
In order to change the budget there would have to have been a significant change relative to one or more of the budget setting criteria.
While EEF have made clear to us their strong view that the budget should be changed because the EU has not yet agreed a 2030 target for emissions reduction, there was no expectation that this would have happened by now. The fact is that EU developments have been consistent with assumptions underpinning the budget, including the European Commission’s recent proposal for an EU 2030 target for greenhouse gas emissions reduction (we will produce a separate blog on this shortly).
Neither has there been a change in competitiveness impacts associated with the budget, which remain incrementally small and manageable and, if anything, smaller than when the budget was set.
This blog summarises our interaction with EEF and provides more detail on particular issues of EU circumstances and competitiveness impacts associated with the fourth carbon budget.
We have had extensive and helpful engagement with EEF. They have made clear to us their strong view that the budget should be changed, because it is a commitment to action in the 2020s before the EU has agreed its ambition to reduce emissions over this period.
Our discussions with EEF focused on developments at the EU level, potential for emission abatement in industry, and competitiveness impacts associated with the fourth budget. We all agree these are key issues, but our assessment is that there has been no specific change with respect to the criteria in the Climate Change Act, based on evidence and analysis, which would justify changing the ambition in the budget at this time. Any change should be made after the EU 2030 package has been agreed, which may take some time.
On the EU, our assessment is that developments have been consistent with the assumptions underpinning the budget:
- Whereas there had in 2010 been limited progress towards agreeing an ambitious 2030 EU target, things have now moved forward, first with the publication of the EC’s pathways to meeting the 2050 EU target, then with the Green Paper suggesting possible ambition for a 2030 target.
- In addition, latest estimates of the default trajectory in the EU ETS Directive (which would only be relevant if negotiations fail entirely) now imply a much tighter cap for the UK, so that even this is not far from the currently legislated fourth carbon budget.
- Most recently, the European Commission proposed a 2030 target which is consistent with the fourth carbon budget.
That there is not yet formal agreement on this proposal by the European Council and the European Parliament does not represent a change in circumstances, given that there was no expectation there would be agreement by now.
We have a statutory duty to consider competitiveness. It is a risk we take very seriously. Carbon leakage resulting from carbon measures would impose costs for the UK without addressing the climate change problem – by contrast, in our work we seek to find the lowest cost path for the UK that is consistent with tackling climate change globally.
We focused on competitiveness and carbon leakage in our May 2013 report, which found:
- So long as some countries move at a different rate and/or in different ways to others, then there will always be a potential competitiveness risk.
- However, this does not mean that no country should do anything until every other has committed to action – it means that where costs are imposed in advance of other regions then those sectors at risk of leakage (either through relocation or decisions to invest elsewhere) should be suitably protected. The important questions then are whether ways exist to provide this protection and whether UK/EU policies do so.
- The evidence shows that while there are competitiveness risks for electricity-intensive users in particular, these are being addressed through Government policies introduced as part of the agreement to set the fourth carbon budget (e.g. EU ETS indirect costs, the carbon price underpin and costs related to the Electricity Market Reform – the latter subject to State Aid clearance).
Whilst there may be issues around eligibility and targeting support on the right sectors, risks specifically related to the fourth carbon budget are incrementally small and manageable, and less than at the time the budget was set, given it could now be met with lower levels of investment in low-carbon power generation.
Furthermore, sticking to the currently legislated budget means sticking to the cost-effective path to the UK’s statutory 2050 emissions target and providing more policy stability for low-carbon investors. Both of these will contribute to keeping costs down in the long run, ultimately providing a competitive advantage in the UK, so long as there is sufficient protection during the transition.
While we therefore disagree with the EEF that the budget should be changed, we agree strongly that the package to support electricity-intensive industries should be extended out in time, given its currently short duration, and the need for these industries to make investment decisions covering much longer periods.
We will continue to talk to the full range of stakeholders as we move onto our next pieces of work, which will be our annual report to Parliament in July this year, then the advice on the fifth carbon budget covering the period 2028-32.