The public sector has not realised its obligations to reduce emissions and could be in for a shock at the cost
It’s a bold statement to make: that the carbon credit, a unit which puts a price on each tonne of greenhouse gasses emitted, will replace the American dollar as the currency of international trading within five years.
“It’s fairly easy to deduce,” offers John Easton, confidently. Easton, who advises organisations on how to construct ‘greener’ buildings, says that with the Climate Change Act, the Scottish Government has given legal status to its commitment to reduce the nation’s greenhouse gas emissions by at least 80 per cent by 2050.
The Act also establishes an interim target of at least 42 per cent emissions reductions by 2020, establishes a framework of annual targets and includes emissions from international aviation and international shipping.
Easton, a carbon consultant and sustainability advisor with Archial Sustainable Futures, said: “The Climate Change Scotland Act makes Scotland the only country in the world to make our commitment to the Kyoto Protocol legally binding. That means that any recipient of government funds – up to and including First Minister Alex Salmond – is legally obliged to meet that target and is subject to possible prosecution if they fail to do so.” Last September, the Government published its Carbon Assessment; a detailed study of its draft budget for 2010- 11 and the amount of greenhouse gases that government-funded activity generate, the first of its kind in the world. It shows Scotland’s public sector organisations their budgets for the year ahead in both sterling and carbon.
“Whilst this year this revolutionary Carbon Assessment has been a soft exercise to which public sector organisations will not be held accountable,” said Easton, “the likelihood is that in subsequent years’ budgets they will be held accountable to the Carbon Assessment figures. This implies that, perhaps from as early as 2011/12, budget holders for Scottish Government funds will be permitted to spend up to their allocations in pounds sterling or tonnes carbon, for whichever limit they reach first.
“The implications of this measure have yet to be examined in detail yet I am certain that this measure will radically change how we procure and operate buildings in Scotland. It is my belief, too, that in five years the carbon credit will replace the dollar as the currency of international trading.
“The current currency of world trade is the American dollar simply because of the extended period during which its domination of world markets has meant that it could pretty much insist that people bought and sold in its currency. But their grasp on that will begin to wane as the European Union and others begin to follow Scotland to the point where the carbon credit will reach an ascendancy, because of global commitments to climate change targets, eventually rendering the dollar irrelevant.” The idea that an effective price can be put on carbon and that allowances can be traded in a way that reduces emissions overall has been challenged in recent weeks. Last month, MPs said that the EU’s Emissions Trading System was failing to deliver vital green investment after a recession-fuelled collapse in carbon prices.
Westminster’s environmental audit committee called on the UK Government to consider measures guaranteeing a minimum price for carbon, such as a new carbon tax, to drum up more funds. Experts want to see carbon prices raised from their current level of €15 (£13) a tonne to around €100.
The ETS forces companies to buy permits for each metric ton of carbon they emit.
Carbon output is capped and the cap level lowered every year. As economic activity has slowed during the recession many firms have found themselves with more carbon allowances than they need. This has resulted in surplus permits being sold to raise cash, lowering prices.
But the ETS has been praised in the first detailed study of the scheme. The view that the ETS had failed to deliver expected reductions in emissions “cannot be sustained on the basis of the evidence”, it said. The study, which has been published in a book titled Pricing Carbon, was undertaken by a group of European and US economists from University College Dublin, the Mission Climate of the Caisse des Dépôts, the International Energy Agency, the University of Paris-Dauphine, the Őko-Institut in Berlin, and the Massachusetts Institute of Technology (MIT).
It assesses the first phase of the ETS, which ran from 2005 to 2007 and was regarded as a failure due to an over-allocation of emission allowances that resulted in a slump in the price of carbon. The researchers said that despite the price of carbon falling to almost zero, the scheme still led to a reduction in greenhouse gas emissions of between two and five per cent against business-as-usual scenarios, resulting in carbon savings of 120 million to 300 million tonnes during the three-year period.
The researchers said the ETS had also resulted in a “change of attitude and practice” among participating firms that has had a “profound impact” on the way they now make operational and investment decisions, adding that the scheme had gone from “a quixotic, and for some, dubious initiative” to being “an accepted fact and the centrepiece of European climate policy”.
The researchers found no evidence of companies moving out of the EU as a result of the ETS. It also downplayed complaints from investors that volatile carbon prices were undermining investment in clean technologies, noting that the volatility in the price of allowances during the first phase of the scheme was less than that of the wholesale prices of electricity and natural gas. “You can criticise the fact that the price is not high enough,” said one of the authors.
“But the mechanism is now in place and it has reduced emissions.” From next month, a carbon cap and trade scheme which extends the onus on businesses and organisations to reduce their emissions much further will come into effect in the UK. The Carbon Reduction Commitment requires energy efficiency improvements from a part of the UK economy, including the public sector, that has not been covered by emissions control before. The requirements are under penalty of financial deductions and reputational damage, backed up by a civil and criminal penalties scheme for those that get it wrong inadvertently or deliberately.
“What pricing carbon has done is to allow corporate managers and finance directors to see in pounds, shillings and pence, as it were, what the value and also the cost of this work actually is,” said Stephen Cirell, a partner with Eversheds, currently seconded to Cornwall Council as programme director for Green Cornwall. “If you need to buy an allowance in CRC costing £50 in order to undertake an activity or could stop doing it, or instead undertake some prevention work which removes the need for that allowance (eg changing bulbs in street lights) costing less than £50, which will an authority go for? This underlines neatly how carbon will radically start influencing decision taking.
“Often the way to persuade organisations to act is to take the financial route. Whilst the tree huggers might want to do something because it’s the ‘right thing to do’, everyone else does it because it saves them money!
The Government has recognised this fact and has therefore put a price on carbon.
Under the CRC the price is £12 per tonne of carbon and that is the price of a carbon allowance. However, after a preliminary period of three years, this will become a free market value. Many think the price will then soar to between £50 and £100 per tonne.” John Easton agrees that organisations would be mistaken to be complacent about the price of carbon. According to his analysis of the Scottish Government’s Carbon Assessment, the inferred price of public sector activity in Scotland is much higher. “If you look at what the Scottish Government has published in its budget and divide the funds allocated in pounds sterling by the amount allocated in tonnes of carbon, the true price of carbon may be way beyond what analysts have previously thought.
“The figure is being kept low in order to allow the [CRC] scheme to get under way without crippling people in terms of having to buy credits. After a certain period the price of carbon will be floated at a market price; according to estimates it might very quickly rise from £12 to around £45. But the kinds of numbers that you get from looking at the Scottish Government spending round mean the cost is many times more than that.” The implications for the public sector are obvious; failure to meet emission reduction targets could result in devastating financial penalties. Perhaps more alarming is Easton’s assessment of awareness among organisations of their obligations – “None of the public fund holders who I meet in my daily work have so far been aware of the carbon assessment and what this will mean for them” – and that robust accounting mechanisms for them to measure their carbon footprint are still not in place.