Page last updated at 18:26 GMT, Tuesday, 18 November 2008

UK to auction carbon permits

By Roger Harrabin
Environment analyst, BBC News

Detroit industry (Eyewire)
Other European countries are passing the gains on to consumers

The UK government is to auction carbon emissions permits to power firms in a sale projected to raise between 1.5 and 2bn euros (1.2-1.6bn) by 2014.

The Treasury is being warned that if it keeps the money, it risks fuelling public cynicism about green taxes.

A coalition of green groups and business leaders is demanding proceeds fund a green energy revolution.

In the first phase of the ETS, power firms were given most of the carbon permits they requested free of charge.

This was done in order to facilitate the carbon market.

If firms overshot their carbon allowance, they had to buy extra carbon permits from the market, in turn determining the EU price of carbon.

But many energy firms outsmarted politicians by acting as though they had been forced to buy all their permits, and then passing the cost on to electricity users.

This brought an increase in energy prices - and a huge windfall to the energy sector, which it said would be needed to invest in clean energy supplies. From this month, the windfall should be over in the UK, as the firms will have to buy 30% of their carbon permits - equivalent to the Treasury's estimate of the previous windfall.


The European Commission had hoped that proceeds from carbon auctioning would underwrite the vaunted transition to a low-carbon economy in Europe. The Netherlands, for instance, is using the revenue to shield low-volume energy consumers against the rise in electricity prices.

Tackling climate change makes huge economic sense - but this battle can't be won if we don't find the money to kick-start new green industries
Keith Allott,

But the UK led a revolt against the Commission's plan and refuses to ring-fence the carbon dividend. A government spokesman said: "We are committed to reducing carbon emissions as our climate change legislation proves, but we do not hypothecate [specify the intended use of] revenues."

The Treasury is particularly nervous about the future of green taxation revenues because as cars become much more energy-efficient it will suffer a big drop in fuel taxes.

But green groups are warning that the refusal to earmark the carbon dividend will provoke even greater scepticism among the public about the government's green tax agenda. The government has been inconsistent over the years in explaining the purpose of green taxes.

It comes at a sensitive time when the Treasury is baulking at the cost of funding a full-scale demonstration of carbon capture and storage at a coal-fired power station. This technology was described by the former UK Chief scientist Sir David King as "the only hope for mankind" but it is progressing slowly - partly through lack of cash.

Follow the leaders

The UK think-tank Institute for Public Policy Research (IPPR) want money raised through the sale to be put into a separate fund similar to Norway's oil windfall fund. They argue it should be overseen by the Committee on Climate Change or another independent body.

The money, they say, should go toward improving energy efficiency in homes, investing in low-carbon technological innovation and helping meet the cost of dealing with climate change in poorer countries.

Wind farm (Eyewire)
Many say the revenue should be allocated to promoting green industry

"This is a great opportunity to help poorer households make their homes both cheaper to heat and warmer, and create jobs through investment in new green technologies," said the IPPR's Lisa Harker.

"The UK Government should follow the lead of other countries and establish a clear link between charging companies for their carbon emissions and investment in measures to help reduce emissions."

The Confederation of British Industry has joined campaign group WWF-UK and Oxfam in a call for the cash to be put toward green issues.

"The Stern review showed that tackling climate change makes huge economic sense - but this battle can't be won if we don't find the money to kick-start new green industries," said Keith Allott at WWF-UK.

"The revenues from the ETS auctions could go a long way to plug this gap, so it is frustrating that the UK Government is arguing about technical problems with earmarking revenues. It also begs the question of what alternatives the Government proposes in order to fund the transition to a climate-safe future."

A government spokesman said sufficient funds would be found to meet the UK's carbon reduction targets.

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