Speech by Phil Woolas MP on the future of carbon trading, London - 27 February 2008
Thank you for inviting me here today and thank you for coming along.
I would firstly like to try and set my remarks and your deliberations in context.
My view is that in order to undertake the new industrial revolution the world needs we need to mitigate against the worst impacts of climate change and in order to ensure that the world can continue to grow economically we need an industrial revolution in the way we produce energy.
Can public sector finances bring this revolution about? No they cannot – we need to use the market. In my view the problems caused by capitalism can only be solved by it and the only way is through a tough carbon market.
Now I know some of you are concerned by the implications of recent EU proposals for the EU-ETS post-2012 on the carbon market, forgetting I think that this proposal represents the only unilateral guarantee of the market internationally, and spells out ambitious proposals for agreement of 30% reductions in emissions to 2020.
Commission proposals cannot guarantee the market – but they do send a signal – these proposals represent a first step and propose now for the use of credits post 2012 from projects approved pre-2012, in line with the UKs proposed pipeline guarantee.
It also provides upon international agreement for automatic upscaling in demand for credits within the EU ETS. These signals are welcome - they are not enough, but they are welcome; and it is important they prefigure success in negotiation as much as they offer an immediate guarantee. I urge you to give equal weight to the international agreement envisaged in the proposals as to the details of the immediate and unilateral guarantee.
For ourselves we are still analysing the proposals, but you will know that the UK Government is committed to the development of a global carbon market and wants to see the EU leading the way in its development.
We believe the carbon market is key to environmental transformation.
It is also politically important: in just over 5 short years we have shown that despite early scepticism and the criticisms, it is possible to build an international market in carbon and generate emissions reductions from across the world.
I think it is worth underlining here that the market approach at the core of Kyoto is a US inspired approach to climate change, which was initially resisted in EU, but which I am glad to say has come to embrace the carbon market as its own, and receives regular visitors from the US to learn from our experiences.
There’s now a growing global acceptance that emissions trading will form part of our future. In just a few short years the global market in carbon has grown in value and was worth $60 Billion in 2007 – up from $33 bn in 2006.
And it will continue to grow. The UNFCCC estimate that the market could provide $100 bn towards the incremental cost for mitigation by 2030.
Some of the schemes out there at the moment have been developed using a steep learning curve. In fact I think it would be fair to say that for a scheme like the EU’s Emissions Trading scheme there was a considerable amount of learning on the job. It’s important to realise that when it launched back in 2005 nothing on that scale had ever been tried before.
It paid off though. It would not be an understatement to say that the EU ETS has established itself as a major force on the global stage, and is now regarded as a key driver in reducing emissions in the private sector.
In fact last year the European carbon market generated around $41 billion in new investments in emission reductions. Through the Clean Development Mechanism $17.5billion of this went into developing countries. And with over 2900 Clean Development mechanism projects in the pipeline we think it’s on course to reduce emission by over 2.6billion metric tonnes by 2012.
In looking forwards we need to balance continuity and change – the market must send clear and long term signals to investors, but also must develop and change to ensure it delivers on its objectives of delivering the necessary emissions reductions cost effectively.
Carbon markets and carbon finance have an absolutely fundamental role to play in this future vision.
At the core of the market is greater use of domestic emissions trading schemes with hard caps on emissions. This will drive technology development and when linked internationally it will deliver technology transfer.
The Clean Development Mechanism is a key instrument in driving change internationally; It has delivered a sea change in attitudes to mitigation world wide. The carbon market has driven London Bankers, and Swiss Financiars and German engineers are to make deals with people as diverse as Chinese factory owners, Thai pig-farmers, and Brazilian Landfill owners. Despite recent criticism I am confident that the CDM is basically sound, and that it will remain an essential tool for participation of developing countries in the future.
But the current mechanisms including the CDM need to evolve, to facilitate a real contribution to emissions reductions, to increase technology transfer rates, and working with other instruments to deliver on the promise of sustainable development in less developed countries. And a new framework is needed to enable us to forge a transition towards a truly global emissions trading scheme. Key to this will be the need to create links between the emerging trading schemes like our European model and other schemes in the US, Australia and elsewhere.
Whatever approach we take in the future the CDM will remain important and it is crucial that all CDM projects lead to emission reductions over and above those that would have occurred in the absence of the proposed project. We need to find better ways of establishing baseline and establishing additionality.
We also need to recognise the limits of what international rules, and what international markets can do. Stern underlines that, while the market and a carbon price is essential to meeting the challenge of low carbon investment, additional supportive and complementary instruments are necessary to deliver low carbon investment at scale. We are pursuing these instruments on a range of fronts
- Technology: Provision of a price for carbon is only part of the technology picture, innovation in development and deployment of technology requires additional policy and market interventions, including standards, and research and development support -why we support a range of innovative ideas such as the, NZEC Near Zero Emissions Coal Demonstration project with China, and UK Energy Technology Institute – £1 billion fund joint public private fund over 10 years;
- Investment: Carbon finance is only part of investment picture - need to find instruments that combine trading sources of international and domestic finance in innovative new financing instruments – this why we support development of the Clean Energy Investment Framework by the World Bank;
- Alternative Finance: Need to pilot new approaches to financing emissions reductions – and we are interested in exploring Brazilian ideas on a fund to support emissions reductions from forestry sector, and South African proposals on recognition of carbon benefit sustainable development policies and measures.
- Policy: We also recognise that the price signal is only effective in a supportive environment – and we need to look at barriers to the market – Energy policy, Infrastructure, Subsidies, Taxes and charges.
So, We want to make sure that the market conditions created are right, and we want a market that’s associated with increasing investor confidence. A market that motivate investors to buy in anticipation of further environmental, economic and social gains.
However we do recognise that the carbon market alone is unlikely to deliver the required development and deployment of the technology needed. But if designed correctly it can bring to market some technologies that will make a difference.
We’ll continue to work closely with our partners both in business and the environment, and with decision makers in the EU and internationally to ensure we keep going in the right direction.
Page published: 27 February 2008