UK should ringfence EUA auction proceeds

HM Treasury just announced that Defra is going to hold the UK’s first EUA auction on 19 November. I’m not sure how many will be auctioned on that day, but over phase 2 the government will auction 85 million (7% of the UK’s total allocation). Assuming an average price of EUR 25, that’s over EUR 2 billion of revenue.

The UK government is consistently opposed to any type of hypothecation (ringfencing of revenue for particular purposes) and will not promise to use this money for any climate-related purpose. The EUR 2 billion is ultimately passed down to consumers. Given that the government has no obvious ownership of the climate, EUAs do not seem like an appropriate source of general public funds.

In an economist’s perfect world, the money would be recycled to consumers who pay the EUR 2 billion through embedded carbon costs. This is difficult to do, of course, and the next best thing is to use the money for environmental projects.

Two good options for the money would be

  • a fund for retrofitting domestic property with insulation and energy efficient heating systems. This would be a reasonable way to compensate for the incremental increase in energy bills resulting from emission trading. It would not create net emission reductions (energy generation is within the EU ETS, so lower domestic energy use means that other sectors can use the EUAs no longer required), however.
  • investments in public transport. This would be my favourite option. While it has less symmetry with the costs imposed by the trading scheme, it does encourage reductions outside the EU ETS.

2 Responses to “UK should ringfence EUA auction proceeds”

  1. You’ve made a mistake in assuming that all the costs will be passed on to the consumer.

    Not all of the ETS costs will be passed to consumers, as the largest part of those emissions permits will be for coal generation, which currently gets a windfall profit, and cannot put up their prices.

    It only the extra costs on gas generation that will be passed on to consumers, as it is gas that currently determines the electricity prices.

    You can see evidence of this in Drax’s first half 2008, and 2007 reports where they states that profits are down due to increasing carbon prices (as well as coal being a bit higher).

    Personally, I’d urge the government to:
    – Put a reserve price of £30/tCO2 on the permits and to guarantee that it will be no lower than this for the next 30 years. This creating a stable price signal to investors helping get investment in renewables that will get us off fossil fuels.
    – Use at least some of the revenue to fund a Citizen’s Climate Protection Dividend, as BC in Canada have done with their $20/tCO2 carbon tax. This is far fairer than cuts in tax rates.
    – Alternatively, some of the revenue could be delegated to local authorities for real grants to help people in poor housing to improve their energy efficiency.

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