UNFCCC

UK climate change policy reflects legal obligations under international law. The starting point is the United Nations Framework Convention on Climate Change (UNFCCC), which was adopted in 1992 and came into force in 1994. To date, the UNFCCC has been ratified by 192 countries, including the UK and the US.

In terms of shaping our national climate change policies, the UNFCCC provides little in the way of concrete obligations. It obliges all parties to:

• gather and share information on greenhouse gas (GHG) emissions, national policies and best practices
• launch national strategies for addressing GHG emissions and adapting to expected impacts, including the provision of financial and technological support to developing countries
• co-operate in preparing for adaptation to the impacts of climate change.

The UNFCCC also sets, for 36 industrialised countries and those with economies in transition to a market economy (so called Annex 1 countries, which include the UK), a non-binding goal to stabilise their GHG emissions at 1990 levels by 2000.

Annex II countries are separately listed - broadly speaking the Annex I countries excluding those with economies in transition (the former Soviet Union states and central/eastern European countries). Annex II countries have extra obligations - "to provide new and additional financial resources to meet the full costs incurred by developing countries in measuring and communicating their emissions", as well as underwriting costs of transferring green technology.

The non-Annex I countries - essentially India, China and the rest of the developing world - have no specific commitments.

Kyoto Protocol

It was quickly recognised that this weak, non-binding GHG stabilisation goal would not halt increases in global GHG emissions. This led to the negotiation and agreement of the Kyoto Protocol in 1997 which had a somewhat fragile existence until it came into force on 16 February 2005 following ratification by Russia.

In terms of stimulating a national policy response, the Kyoto Protocol represents a major advance over the UNFCCC as it sets legally binding limits on GHG emissions for the UK and 38 other countries - the so-called Annex B countries. The USA is listed as an Annex B country, but notably has not ratified the Protocol.

These limits require that Annex B countries reduce emissions of a basket of six GHGs (carbon dioxide, methane, nitrous oxide, hydrofluorocarbons, perfluorocarbons and sulphur hexafluoride) down to an average of 5.2% below 1990 levels over the period 2008 - 2012 (the so-called Kyoto first commitment period). The EU 15 were assigned a single emissions reduction target of 8%. Under a burden sharing agreement, the UK accepted a target reduction of 12.5%.

There is a compliance regime underpinning these commitments, which requires any shortfall to be made up in the next commitment period, as well as payment of a penalty, suspension of the right to trade within the flexibility mechanisms (see below) and the submission of a compliance action plan.

Flexibility Mechanisms

The Kyoto Protocol did more than just introduce binding emission caps on Annex B countries. It also introduced the so-called flexibility mechanisms, namely the clean development mechanism (CDM), joint implementation (JI) and international emissions trading. These mechanisms are designed to allow Annex B countries to meet their emission reduction targets by using emissions reductions secured in other countries. CDM and JI are project based schemes; CDM allows the creation of project credits from non-Annex 1 countries, whilst JI allows an Annex 1 country to receive project credits from another Annex 1 country (with a corresponding debit to the host Annex I country's emissions target). International emissions trading allows Annex B countries which are able to operate within their emissions cap to trade surplus allowances with those which cannot.

Post Kyoto

Absolutely vital now is progress in reaching a global settlement for emissions reductions after 2012, when the Kyoto Protocol ends. The US is under particular pressure to commit to binding emissions reduction targets, as are key non-Annex 1 countries such as China, India and Brazil. Negotiations in Bali, in 2007 saw 187 countries agree to a roadmap aiming to secure an international climate change deal to take us beyond 2012 following the expiry of the Kyoto Protocol. However, of disappointment to many, no official targets for emissions reductions were set during the talks with only a vague commitment to “deep cuts” being agreed.

In December 2009, the Copenhagen Summit (the 2009 United Nations Climate Change Conference) took place. This summit included the 15th Conference of the Parties to the UNFCC and the 5th Meeting of the Parties to the Kyoto Protocol. The Bali Roadmap provided for an agreement on the climate change mitigation steps for beyond 2012 to be made in Copenhagen.

The result of the Copenhagen Summit was the Copenhagen Accord. This document was formulated by a small group of countries, amongst them, the U.S and China. The summit as a whole did not adopt the accord but voted to "take note" of it. The accord, amongst other things, provided for the following:

• recognition that global temperatures need to be limited to a rise of 2 degrees Celsius when compared to pre-industrial temperatures;
• a promise of $30bn (£18.5bn) in aid for developing countries, to be used for adaptation and mitigation measures, over the next 3 years;
• a goal of $100bn per year in aid by 2020 to help developing countries cope with the effects of climate change; and
• a commitment by Annex 1 countries to submit their emissions targets for 2020 by 31 January 2010; and
• a commitment by Non-Annex 1 countries to implement and submit steps to mitigate climate change by 31 January 2010.

For many, this was a disappointing result. The participants did not commit to a legally binding reduction in GHG and the accord is too vague in relation to how its targets will be achieved. Furthermore, Annex 1 countries are free to choose what their targeted emissions reductions will be. On the plus side, the world's two largest polluters, China and the U.S. have, for the first time, committed to a reduction in emissions as well as officially recognising that a global temperature rise should be limited to 2 degrees Celsius. The agreed aid package of $100bn by 2020 and $30bn for the period 2010-2012 will also go a long way in assisting developing countries in the fight against climate change.

EU Initiatives

In response to these international obligations, Europe launched an Emissions Trading Scheme (ETS) in 2005, now the largest environmental asset market ever created. This requires Member States to impose CO 2 emission caps on their energy intensive industries and power sectors. In a similar way to the Kyoto Protocol, caps translate into an allocation of allowances, and allowances matching emissions must be surrendered by operators of affected installations annually.

Failure to do so triggers penalties, whilst operators emitting within caps may sell surplus allowances to those who are short.

The ETS began with a pilot phase, covering 2005, 2006 and 2007. Affected businesses will find life harder in the scheme's second phase, which began in January 2008. The Commission's response to criticisms of the first phase has been to reduce the amount of allowances available, by reducing emission caps, in an attempt to maintain a high carbon price, and to increase pressure on Member States to secure ambitious allocation plans.

But the Commission has been busy on a number of other fronts, culminating in the announcement from Brussels in March 2007 of a series of agreed 2020 targets (restated in January 2008 as part of its new Climate Action and Renewable Energy Package). Notably, these include a CO 2 emission reduction target across Europe of 20% (on 1990 levels), increasing to 30% if a global climate change deal is reached with the US and others post 2012 when the Kyoto Protocol expires. Also announced, after much haggling, was a mandatory 20% by 2020 renewable energy target Europe wide - a challenging target given that the share of renewables across Europe currently stands at 8.5%.

As for transport, the ETS will capture aviation from 2012 , whilst the car industry remains under siege. The new 2020 targets include a 10% binding minimum share for biofuels in transport fuels, and the Commission plans more legislation to improve fuel quality and promote a second generation of biofuels, which are to be sustainably produced. The Commission also plans to require manufacturers to make an 18% cut in CO 2 emissions from new cars by 2012.

These 2020 targets were reinforced by the EU in January 2008 with the publication of its Climate Action and Renewable Energy Package. This package had three key themes:

• Emissions Trading: an overhaul of the ETS from 2013 (Phase 3), with wider coverage and, notably, the current system of national allocations scrapped in favour of a single EU wide emission cap and a rationing of allowances by linear decrease over the period from 2013 to 2020 consistent with the 20% reduction target.
• Renewables: after much haggling, an allocation of the binding 20% by 2020 target amongst member states, with the prospect of trading between member states via guarantee of origin certificates, together with a relaxation of state aid rules for renewables.
• Biofuels: a restatement of the 10% by 2020 target, but with its environmental credentials bolstered by new sustainability criteria for producers.

These new initiatives complement the Commission's recent Energy Efficiency Action Plan, aimed at reducing energy consumption by 20% by 2020. This Plan will accompany another Directive on energy performance of buildings, which has already meant tighter energy performance standards in UK building regulations.

The Pollution Prevention and Control Act 1999 (PPCA 1999), including a whole host of secondary legislation, brings into force the EC's Integrated Pollution Prevention and Control (IPPC) Directives in the UK. The purpose of this legislation, in addition to implementing the IPPC EC Directives, is to :

• regulate activities which are capable of causing environmental pollution; and
• otherwise prevent or control emissions capable of causing such pollution.

The PPCA 1999 and related legislation seeks to achieves this by concentrating on the most significant industrial and agricultural activities and the sensible use of natural resources. The legislation also includes a requirement for industrial and agricultural activities with a high pollution potential to hold a permit.

The IPCC legislation, in particular, manages the activities of significant "installations" by regulating:

• raw material and energy use;
• how the site operates and the technology used;
• emissions into air, water and land;
• how any waste produced is managed; and
• accident prevention.

UK Initiatives

On a domestic level, the government reassessed its policies in a revised Climate Change Programme published in 2006, followed by a new Energy Review laying the ground for a nuclear build programme and streamlining of the consents process. In 2007 the government published the Energy White Paper “Meeting the Energy Challenge”.

These documents set out a plethora of other measures, some new and some which had been around for some time. Key amongst these is the Climate Change Levy, which operates as a tax on energy use by industry, commerce and the public sector. Another major initiative is the Renewables Obligation, which was introduced in 2002, and is the UK government's main support mechanism for the expansion of renewable electricity. The scheme, administered by energy regulator Ofgem, requires electricity suppliers to source an increasing percentage of their supplies from renewable sources, and is based on the issue of green certificates to qualifying generation stations in proportion to their electricity output. An updated scheme came into force on 1 April 2009 which brought in mechanisms for the targeting of support to those renewable energy technologies which most need it, this is known as 'banding'. As of 1 April 2010, the scheme has been extended until 2037 for generating stations accredited after 25 June 2008 (subject to a 20 year limit).

The buildings sector has also been targeted. It accounts for about 40% of the EU's energy requirements, and offers the single largest potential for energy efficiency. Developments have been largely driven by the EU, and include a new Code for Sustainable Homes, Energy Performance Certificates, and ever tightening Buildings Regulations.

In April 2010, a new carbon trading scheme, the CRC Energy Efficiency Scheme (CRC), came into force in the UK. The CRC is a cap and trade scheme, fully affecting in the region of 5000 large non-energy intensive organisations, with a further 15,000 organisations being required to register and provide information on their energy consumption. The aim of the CRC, as the full name would suggest, is to encourage participating organisations to use energy more efficiently.

The CRC will initially apply to any person or body which carries on business in the UK, is a counterparty to an energy supply contract, and whose total annual half hourly metered electricity use in 2008 was 6000MWh or more. Organisations whose electricity is settled on the half-hourly market, but whose consumption does not exceed 6000MWh, will still be required to make an information disclosure. All government departments will be required to participate regardless of energy use.

Participating organisations will need to monitor their emissions and purchase annual allowances (set at £12 per tonne of CO2 for the initial phase) to cover their anticipated energy use at the beginning of each compliance year. After the first phase, the price of the allowances will no be longer fixed and gradually the number of allowances available will be reduced, likely causing an increase in price. Allowances will also be available for purchase on the secondary market. This allows participants to sell allowances where they have reduced consumption by more than they expected or to purchase more allowances where they have higher emissions than expected. There will be no sale of allowances in the first year to ease the transition into the scheme for participating organisations.

At the end of each CRC year (1 April to 31 March), league tables are produced representing how well individual organisations fared in comparison to others based on a number of factors. Depending on where an organisation appears in the league table, they could either be entitled to a recycling payment in excess of the amount spent on allowances (i.e. because of a good league position) or a payment less than that paid for allowances in the event of poor performance.

More detailed guidance can be found in the various Martineau publications on the subject. Click here to access these.

The Value Added Tax (Emissions Allowances) Order 2009 (SI 2009 2039) inserted a new zero-rating Group 17 (Emissions allowances) into Schedule 8 of the Value Added Tax Act 1994. This provides that the supply of carbon credits or allowances is zero rated from 31 July 2009. Before 31 July 2009, the sale of carbon credits in the UK was a standard rated supply for VAT, giving rise to the possibility of carousel fraud.

These developments support those who argue that the EU, especially the UK, has a key role in driving forward climate change policy globally. The Government certainly thinks so, with several pieces of legislation setting the scene.

The first of these, the Climate Change and Sustainable Energy Act 2006, does a number of things, notably giving the development of microgeneration a shot in the arm via a number of measures including the publication of annual microgeneration targets, the review of permitted development rights to ensure adequate take up of microgeneration in the domestic sector and changes to the buildings regulations. The Act also seeks to facilitate the involvement of local authorities in promoting microgeneration technologies in community energy schemes, and establishes a regime of reporting of emissions reductions achieved by government departments.

More recently the Climate Change Act 2008, Energy Act 2008 and Planning Act 2008 have become law. These form the Government’s three “legislative pillars” to tackle climate change and reduce carbon emissions. 

The Climate Change Act makes the UK the first country to set itself legally binding carbon reduction targets (although the legal consequences of a failure to achieve these targets are not at all clear). The main target is a cut in CO 2 emissions of 80% (against 1990 levels) by 2050, with an interim target of 34% by 2020. The government has a duty to report each year to parliament on the UK's yearly emissions of greenhouse gases as well as the impact of climate change and the governments plans to adapt to it.

The Climate Change Act requires the government to set 5 yearly “carbon budgets” intended to plot a trajectory towards the 2050 target. The Act has also established a Climate Change Committee (CCC), one of whose tasks is to advise the Government on the ‘carbon budgets’ which are necessary in order to provide the required trajectory to meet the UK’s overall 80% by 2050 emissions reduction target. In its recent inaugural report, the Committee advised on three carbon budgets, covering the periods 2008-2012, 2013-2017 and 2018-2022, and proposed GHG cuts of up to 42% by 2020. The 2009 Budget from the Chancellor is the first to incorporate this ‘carbon budget’ element, and the Chancellor has largely followed the CCC’s advice by announcing two sets of carbon budgets. One set will apply straightaway (so called “interim budgets”), whilst the second set of budgets (”intended budgets”) will apply if and when a new global climate change deal is reached to replace the Kyoto Protocol which expires after 2012.

Other Climate Change Act provisions introduce some politically sensitive measures, including domestic waste reduction schemes and mandatory charging for single use carrier bags as well as amendments to the Renewable Transport Fuels Obligation.

The Energy Act addresses security of supply of gas by licensing and regulating UK offshore gas storage within as large an area as allowed by international marine law. It also establishes a regime for the licensing and regulation of carbon capture and storage, paving the way for the UK Government's ground-breaking CCS demonstration project. It introduces amendments to the Renewables Obligation with the aim of creating greater incentives for renewables electricity generation; introduces feed-in tariffs for small scale electricity generators (see below); provides for the mandatory installation of smart gas and electricity metering and paves the way for regulation on renewable heat incentives (see below).

The Feed in Tariffs (FITs) for small scale renewable electricity generators (up to 5MW) came into force on 1 April 2010. FITs are designed to kick-start the large scale up-take of renewables around the country. The scheme should drive down renewable technology costs going forward and provide a boost to the renewable manufacturing industry.

FITs is a clean energy cash-back scheme designed to encourage electricity consumers to install renewable electricity generators by paying the consumer for the electricity produced by such generators. FITs not only include a payment for every kilowatt hour of electricity produced (generation tariff) but also a payment for any surplus electricity exported back to the grid (export tariff).  More information is available in our recent publication, which can be accessed here: http://www.martineau-uk.com/publication_event/updates/Energy-Bulletin-February-2010-the-feed-in-tariffs.pdf

The Renewable Heat Incentive (RHI) is another clean energy cash-back scheme to help the UK meet its target of having 12% of the country’s heat generation come from renewable sources by 2020. Currently, this figure stands at just 1%. The statutory basis of the scheme is set out in the Climate Change Act 2008 but the detail will be contained in secondary legislation. The scheme is similar to the FITs in that it provides for payments to be made in return for renewable energy production. However, unlike the FITs, there will be no upper limit to the size of installations to be included in the scheme. The RHI is expected to come into force in April 2011.

More information on the RHI can be found in our recent publication which can be accessed here: http://www.martineau-uk.com/publication_event/updates/Energy-Bulletin-February-2010-Renewable-Heat.pdf

Through the Planning Act, the Government aims to streamline the planning regime by including single consent for major infrastructure projects and creating an Independent Infrastructure Planning Commission. This should speed up the applications for nuclear projects, wind farms and clean coal plants.

The Planning and Energy Act 2008 came into force in November 2008. The Act gives local planning authorities in England and Wales the power to include within their development plans requirements that developments in their area shall use proportions of low carbon and renewable energy as may specified by the authority and shall meet energy efficiency standards, again as specified by the authority, which may be in excess of those specified in general Building Regulations.