We will now proceed to our scrutiny of two legislative proposals from the European Commission. One is a draft directive to revise and extend the emission trading scheme in the Community and the other is a draft decision on the effort sharing of member states to reduce emissions in the non-traded sectors. To assist us in our work, I welcome Mr. Tom O'Mahony, Assistant Secretary at the Department of the Environment, Heritage and Local Government, Mr. Matthew Collins, principal officer and Mr. Mark Bohan.
Climate Change Directive: Discussion with Department of the Environment, Heritage and Local Government and IBEC.
Mr. Tom O’Mahony
I thank the committee for the invitation to assist members in the scrutiny of these two proposals. The Chairman has introduced my colleagues and I wish to inform members that Mr. Collins heads up the international climate change section of the Department and is our lead negotiator in the negotiations currently taking place in Brussels on these proposals. Mr. Bohan works on the domestic climate change agenda in the Department.
The Minister met the committee last February and members will be aware that he considers climate change to be the biggest challenge facing humanity and the key challenge that will define this generation. The Minister considers this to be the case because the scientific evidence that has emerged in recent years has been quite profound. Last year research was collated and presented in the fourth assessment report of the intergovernmental panel on climate change, IPPC. Countries as varied as those in the European Union, the United States, China, India, Saudi Arabia have all recognised that this report represents the most comprehensive and authoritative assessment of climate change to date, providing an integrated scientific, technical and socio-economic perspective on relevant issues. The research concluded that climate change had been caused by man made emissions and if those emissions continue to grow, it will have potentially catastrophic effects throughout the globe by the end of this century.
Increasing greenhouse gas concentrations resulting from our emissions have already caused average global temperatures to rise by three quarters of a degree in the past 100 years. Temperatures will continue to rise by at least 1.1° Celsius and up to 6.4° Celsius by the end of this century. The impact of this scale of change is profound. For example, global sea levels will rise by between 18 cm and 59 cm, which will mean that many semi-arid areas such as the Mediterranean basin and the western United States may suffer a decrease in water resources. Between 75 million and 250 million people in Africa could experience water stress by 2020. Almost one third of plant and animal species will be at increased risk of extinction if global temperatures increase by 1.5° Celsius to 2.5° Celsius.
The IPPC estimated that carbon dioxide emissions need to peak within less than ten years and to be reduced by 50% to 85% in comparison to 2000. That is needed if we are to limit global warming to between 2° Celsius and 2.4° Celsius above pre-industrial levels and thereby reduce significantly the number directly affected by climate impacts.
Ireland is not immune to the impacts of climate change. The recent research report by Met Éireann outlined a number of impacts. Our climate will continue to warm with possible increases of 3° Celsius to 4° Celsius towards the end of the century. While this may seem a pleasant prospect to some, our winters will become wetter and our summers drier. These changes in precipitation and temperature are likely to increase the risk of flooding in winter and reduce water supplies in summer. Sea levels around Ireland are already rising by 3.5 cm per decade and the frequency of very intense cyclones affecting Ireland is likely to increase, with the result that ocean modelling suggests an increase in the frequency of storm surge events in Irish coastal areas.
The European Union has based its strategy on climate change on that scientific background. If we are to prevent the worst impacts of climate change, the Union wants to ensure the global temperature does not rise by more than 2° Celsius on average above pre-industrial levels by the next century. The only way this can be achieved is through significant reductions in greenhouse gas emissions, primarily in developed countries. The European Union's objective is to stabilise global emissions within the next decade or so and then reduce them to at least 50% below 1990 levels by 2050. In this context, developed countries should continue to take the lead by reducing their emissions in the order of 30% by 2020 compared to 1990 levels with a view to collectively reducing their emissions by 60% to 80% by 2050. This would keep us on track to meet the 2° Celsius target and be consistent with the IPCC findings. However, efforts by industrialised countries alone will not suffice. Developing countries, in particular emerging industrialising economies, must be encouraged to reduce the emission intensity of their economic growth. This will require new incentives and flexible commitments, as well as the further transfer and deployment of climate friendly technologies, as part of a new international agreement.
Between now and the UN climate conference in Copenhagen in December 2009 there is a window of opportunity for the global community to act on climate change. The European Union is determined to demonstrate a leadership role in the UN negotiations. Last year the Union set out its aims for a comprehensive and fair international agreement to come into force by the end of 2012 and that it was willing to reduce its emissions by 30% by 2020 compared with 1990 levels as part of an effective international agreement. It expects industrialised countries to take on reduction targets that would put them on a similar level of ambition in order that developed countries as a whole reduce their emissions by 30% by 2020. It is also determined to demonstrate this scale of reductions is achievable and that it is committed to transforming itself into a low carbon economy. That is the reason it made an independent commitment to reduce its own emissions by at least 20% by 2020 and by 30% as part of an effective international agreement.
This provides the global political and scientific background to the publication of the climate energy package by the Commission at the start of the year in response to a request by member state governments. It is important to recall that the climate energy package is broader than just greenhouse gas emissions because it also includes measures to increase the use of renewable energy sources, enhance energy efficiency, provide a regulatory framework to stimulate carbon capture and storage technology and amend state aid rules to support environmental actions. The aim of the package is to reduce the European Union's dependence on fossil fuel, enhance the competitiveness of the European economy and reduce European greenhouse gas emissions. The energy and climate measures mutually support the attainment of these goals.
The emission trading scheme, ETS, revision and the effort sharing proposals specifically set out how the European Union will achieve its independent target of 20% below 1990 levels by 2020. In order to achieve this target, it plans to cut its emissions levels for 2005 by 14% through two separate but linked measures. Under the revision of the ETS, the energy and industrial sectors have an EU wide cap that reduces ETS emissions to 21% below 2005 levels by 2020. Under the effort sharing proposals, member states will reduce the remaining non-ETS emissions to 10% below 2005 levels by 2020. This overall non-ETS 10% reduction is further divided between member states in a range of +20% to -20% compared to 2005 levels. A balance between the principles of cost efficiency and fairness is integral to the two proposals. The initial split between the ETS and non-ETS reductions is intended to be achieved on a cost efficient basis. In the next step, the sharing of effort between member states in the non-ETS sector is again to be split on the basis of fairness. The Commission has used the wealth indicator of GDP per capita as the main basis for this effort sharing.
The aim of the ETS revision is to make a cost effective contribution to the achievement of the European Union's overall reduction target, improve the operations of the ETS and develop a long-term carbon price. The revised ETS will cover all large industrial emitters, including the chemical and aluminium industries, and include other greenhouse gases such as nitrous oxide and perfluorocarbons. The most significant change is that a single EU-wide cap replaces the 27 ETS caps set by member states. The proposal sets a clear emissions target for 2020 and also includes linear reduction interim targets to provide as much certainty for industry as possible.
The basic principle for the allocation of allowances is auctioning because this is the most transparent process and eliminates windfall profits. Full auctioning will apply to the electricity generation sector from 2013. Auctioning will be introduced to other industries progressively in the period 2013 to 2020. Industries subject to international competition from outside the European Union will receive special treatment, including the possibility of free allocation of allowances. By 2011 the Commission will report on carbon leakage, that is, the displacement of carbon emitting industries from the European Union to other regions not subject to emissions targets. The Commission will then make proposals, if appropriate, to review free allocation levels and introduce a system to neutralise the distortive effects. Auctioning rights will be distributed to member states, although relatively more will be distributed to member states with lower GDP per capita to balance the high investment costs they will be required to meet. The auctions will be non-discriminatory and carried out on the basis of harmonised rules in order to ensure a level playing field for all participants. In addition, the Commission argues that 20% of auction revenues should be earmarked for combating climate change, promoting renewable energy sources and addressing social impacts.
In the Kyoto Protocol period 2008 to 2012 ETS companies can use credits from joint implementation and clean development mechanism projects for compliance purposes. The leftover credits from the 2008-12 period can be used during the 2013-20 period. The Commission has estimated this will facilitate credits totalling 1.4 billion tonnes in the 2008-20 period, the equivalent of one third of the total reduction during the period. When an international agreement is reached, substantial additional use of credits will be allowed automatically to meet a stricter reduction target.
Under the effort sharing proposal, there was a need to take into account the wide divergence of wealth in the EU-27. As a result, the Commission used GDP per capita as a criterion for differentiating between the member states’ ability to pay for the necessary actions within the limitations of -20% and +20% targets. In this context, a reduction target of 20% was proposed for Ireland because of our high GDP per capita. On this basis, the poorer member states can continue to grow in sectors such as transport. One consequence is that the overall cost increases marginally compared to a purely cost-effective effort sharing, but significant equalisation of overall effort between member states is achieved. The proposal also includes interim targets for member states in order to measure progress towards the 2020 target. A member state’s emissions in 2013 should be the average of its non-ETS emissions for the years 2008-10. The Commission has proposed a linear path from this 2013 level towards each member state’s national target for 2020. Within this linear target there is flexibility in order that a member state can carry forward 2% of its emission limit from next year.
The Commission proposal includes flexibilities in terms of how a member state can meet its commitments without undermining the level of ambition of the climate-energy package, ensuring significant action is taken within the European Union. Under the proposal, a member state may use clean development mechanism, CDM, credits, up to the equivalent of 3% of its 2005 non-ETS emissions, to meet its reduction target. This access to CDM credits is also transferable between member states; therefore, if a member state does not make full use of its 3% option, it can transfer the balance to another. The projects producing valid credits will be restricted to certain types.
The Commission's proposal outlines how the 20% effort sharing will be stepped up to meet a more ambitious EU target under an international agreement. The total additional reduction will be distributed proportionally to ETS and non-ETS reductions. Under the existing non-ETS target, the additional reduction for each member state will be allocated in proportion to its non-ETS emissions in 2020. Under this arrangement, the use of credits will be increased by up to half of total additional effort but they will be restricted to countries that have ratified the new international climate agreement.
I turn to the implications of the two proposals for Ireland, looking first at the ETS revision. Ireland's total greenhouse gas emissions for 2005, the base year for the new targets, came to just over 70 million tonnes. Of this, around 22 million tonnes arose in the sectors within the ETS. The most significant element of the ETS revision is that there will no longer be a national allocation plan for Ireland's ETS sector, as was the case in the Kyoto Protocol period 2008-12. Instead, the ETS sector will be structured on an EU-wide basis. On balance, this represents a major improvement for Irish industry because it will have full, non-discriminatory access to the EU-wide carbon market and will provide a level playing field for Irish companies with their competitors in the EU-27 market of 500 million. This should enable the lowest cost mitigation options to be identified and taken by European and Irish industry and at the same time ensure a transition to a low carbon industrial future.
Clearly, it is important to ensure the equal treatment of all participants in the ETS to avoid unintended distortionary effects. This is also an example where the climate energy package is mutually self-supporting, as the renewable energy proposal will also have a key role in moving the energy sector which is part of the ETS to a low-carbon future. However, it is important to emphasis that the price of carbon established under the ETS is central to providing a price signal that can guide consumption and investment decisions by the private sector towards low greenhouse gas emissions choices. Therefore, Ireland is a strong supporter of a broad, efficient and effectively functioning carbon market.
Another significant difference is that auctioning will replace the free allocation of allowances under the revised ETS. This will be phased in gradually for most industry, but full auctioning will be introduced for the energy sector from the start of 2013. While this may appear as a new burden on the Irish sector, it is a simpler and more transparent allocation process. This approach will also eliminate the windfall profits companies within the ETS earned from the free allocation of emissions allowances. In many cases, the opportunity cost of carbon allowances has already been passed on to the prices charged to customers. Auctioning will, therefore, merely eliminate these windfall gains accruing to the shareholders of Irish companies as a result of the creation of the ETS and transfer them to the Irish Exchequer.
One area of concern for Ireland in relation to the ETS revision is the possibility of carbon leakage, whereby industrial activity relocates outside the European Union to countries not bound by emissions targets. Our view is that the vast proportion of Irish industry will not be affected by this possibility because Irish industry is, by and large, not energy or carbon intensive and relatively energy efficient compared to most countries due its modern structure. However, that is not the case for all Irish industry. It is important from an environmental and economic perspective that this possibility is addressed in the proposal. As mentioned, the Commission has proposed reporting on possible carbon leakage by 2011 in the light of the outcome of the Copenhagen agreement. This report should be completed as soon as possible in order to minimise the uncertainty for industry, but it is nonetheless necessary to see the outcome of the Copenhagen agreement to assess if carbon leakage is a problem. Without a doubt, a global and comprehensive climate change agreement, for which the European Union is arguing, that addresses energy intensive sectors in all countries would reduce concerns of Irish industry related to carbon leakage because it would put all countries on more of a level playing field.
Access by Irish industry to the clean development mechanism under the European Union's unilateral 20% target is limited to the existing terms of access under the Kyoto Protocol phase. The Commission considers that this provides sufficient access to meet the needs of the ETS sectors. However, this access would be enhanced under a new post-Kyoto Protocol climate regime that would include a more ambitious target for the European Union. Once again, our key concern is to ensure all participants across the Union will be treated on an similar basis to ensure a level playing field.
I turn to the second proposal on effort sharing and its implications for Ireland. Of our total emissions of 70 million tonnes in 2005, around 48 million tonnes arose in the sectors outside the emissions trading scheme. Three sectors accounted for 40 million tonnes, the biggest of which was agriculture, at 19.6 million tonnes. Transport accounted for 13 million tonnes, while the residential sector, mainly the use of energy other than electricity for heating, accounted for 7.4 million tonnes. I use the words "other than electricity" because electricity generation is counted in the ETS sector. However, it must be noted that emissions from both agriculture and the residential sector have fallen slightly since 1990, whereas emissions from transport have been growing rapidly and in 2005 stood at 260% of the 1990 level.
Of the three sectors, the residential sector offers considerable scope for savings due to higher building standards and a wide range of measures to improve the energy efficiency of homes. The sector is expected to make a significant contribution to the necessary cut in emissions. However, as agriculture and transport together accounted for two thirds of all non-ETS emissions in 2005, it is clear significant reductions in one or both will be needed if the overall target is to be achieved.
The committee is aware, from its discussions with the Minister for Transport, that the sustainable travel and transport action plan has been through a public consultation process and is now being finalised. Its purpose is to develop a more effective and efficient transportation system which, in conjunction with changes in both vehicle technology and individual choices, will reduce emissions significantly from the baseline trend.
The committee has also met the Minister for Agriculture, Fisheries and Food and is aware that, while there is upward pressure on agricultural emissions because of the growth potential in the sector, there are also opportunities to achieve reductions through various changes in farm practices. The scope for intervening in the diet of livestock to reduce methane emissions is being researched intensively, particularly here and in New Zealand.
The objective, not just in these sectors but across the economy as a whole, is to identify and implement the measures which will deliver the required cuts in the most cost-effective way. We will benefit from the technologies being developed across the world in response to climate change and high oil prices, the motor industry being a particularly notable example. The Government is looking, in particular, at the incentives it can offer to encourage the consumer to adopt low carbon technologies and practices. The rebalancing of VRT and motor tax which takes effect next week is one step in that direction. The Commission on Taxation has been asked to examine the proposed carbon levy. While the target proposed by the Commission is challenging for Ireland, it must be put in the context of our own level of ambition. There appears to be a political consensus that Ireland should significantly reduce its greenhouse gas emissions and that we should be at the forefront of the move towards a low-carbon future and the opportunities it presents for the early movers.
The Government has committed itself to seeking all-party agreement on long-term emission reduction targets and the Minister for the Environment, Heritage and Local Government has said he believes this committee has a vital role to play in shaping that agreement. The Government established a cross-departmental group that reports to the Cabinet committee on climate change and energy security to identify and develop the necessary measures across all sectors and the Minister has undertaken to discuss these measures with the committee.
Essentially, the Commission's target should not be seen as shaping our national climate change policy but as being one of the objectives that will have to be met by our policy. I hope this presentation has been of assistance to the committee and we will be happy to elaborate on any aspects as required.
Thank you. I am sure members will want to put a number of questions to Mr. O'Mahony and his team. Will Mr. O'Mahony give a broad outline of the timescale involved and the procedure whereby recommendations coming from this committee would find their way through and become part of Ireland's proposals in response to these directives? When do we need to finalise the submissions?
Mr. Tom O’Mahony
We will take that question on its own. In terms of the timescale for adoption at EU level, the French Presidency aims to have first reading agreement between the Council and the Parliament before the end of this year and aims for formal adoption by the Parliament in early 2009, before it rises for the elections.
The imperative here is that with the ambition being to achieve a global international agreement at the Copenhagen conference in late 2009, it is very important for the credibility of Europe in those negotiations that it is seen to have been able to reach agreement within the Union itself. With the Parliament rising, if it is to be done it will effectively have to be done by early next year.
In terms of timescale we are looking at late 2008 or early 2009. In terms of the committee's recommendations and how this would feed in, the Cabinet committee on climate change and energy security is guiding the negotiating position. Any report from this committee would be brought to the Cabinet committee on climate change and energy security for its assessment and consideration. It would then tell the negotiating team what we were to do on foot of that.
I suggest, therefore, that the sooner a report can be completed by the committee, the better.
That demonstrates how important it was to have the Lisbon treaty passed, given that scrutiny of EU proposals by national parliaments was to be part and parcel of it. Now we find ourselves back into the old scenario of it depending on the government, not national parliaments.
We will sort out Lisbon first.
The presentation did not refer to the alarming increase in the world's population. In the 1960s there were 3 billion people and today there are 6 billion people in the world. We are heading for 9 billion. We seem to assume everything will remain static but one of the biggest problems I see that has not been taken into account is the alarming increase in our population.
It was stated that the Commission has used the wealth indicator of GDP per capita as the main basis for this effort sharing. That is the non-traded sector.
It looks like we might be improving our rating by the day if that is the case.
I was speaking to colleagues prior to the delegates' arrival and I was asked a particular question. On the one hand we have a shortage in food supply and an alarming increase in the price of food. I read a report from the European Parliament which indicated that in Europe, agriculture is not a major problem and only accounts for 9.2% of Europe's emissions, yet in Ireland it is a significant problem, accounting for 28% of our emissions.
Ireland is to be a food producer for the rest of Europe and the world. In doing so — by producing beef, milk and other foodstuffs — it does not make sense that we do not get credit within Europe for being that producer. If we continue producing, we will only be penalised from an emissions point of view. It does not make sense and it is an issue we should really take up at European level. It does not make sense in the context of the alarming increase in the price of food and concurrent scarcity. This is an ideal opportunity for a country that has all the attributes to produce good quality food and feed Europe but if we continue to increase production, we will be penalised under this system.
Just taking into account the wealth indicator of GDP per capita as the main basis for effort sharing is a cop-out and an easy way of dealing with the matter without looking at the problem. I have a strong opinion on this because from the layman’s perspective, this country has gone through butter and beef mountains to shortages of beef and other food. EU proposals that were meant to sort problems led to us selling off food for nothing to Russia and the rest of the world. We then began using the concept of set-aside, although we are now saying that is a bad idea and we should get back to producing food or something else on the land.
All these proposals, which did not make sense to people in the first place, ultimately proved to be wrong. This is another clear indicator to me that this is wrong — it does not make basic common sense. It does not make sense that if a country is part of a Union, and the contribution to the Union is a production of a volume of quality food, that the country would be penalised for emissions in that regard.
This comes down to pounds, shillings and pence to the ordinary Irish taxpayer as we will have to buy credits as a result of us wanting to feed the rest of Europe and the world. It does not make sense. I will leave it to my colleagues to ask questions but because this does not generally make sense, I urge the delegates and Mr. Collins, the negotiator, to make this point very strongly and not be afraid to do so. It is absurd for this country to be penalised for doing what Europe and the world requires.
Everything that did not make sense to us in the past but which was imposed by Europe has ultimately been reversed.
Mr. Tom O’Mahony
The Chairman has put his finger on one of the particular difficulties with the proposal as it currently stands. It is the case that no other member state has an agriculture sector that makes the same contribution as Ireland. Other EU policies would support that trend and there are also issues regarding food security, global famine and so on, all of which have to be taken into account.
The Government has already recognised this in the priorities the Cabinet committee gave the negotiators. I referred to Mr. Collins as the lead negotiator in the working party but this is cross-departmental work, with the Departments of Agriculture and Food, Enterprise, Trade and Employment, Communications, Energy and Natural Resources and others all involved. We have argued extremely strongly to the Commission that in the final package there must be recognition of the high share of agriculture in Ireland's non-ETS sector and its importance for the Irish economy and for European food security. In finalisation of the package this must be taken into account. The means by which it will be taken into account must be worked out. We are not helped by the fact that we are really on our own. Ireland is the one member state that has an acute difficulty in this area. It is hard to find allies, but nonetheless the point is a strong one and will continue to be pushed by the negotiators.
With regard to the negotiations going on at the moment, there are several things I wish to know whether the Department has raised. There is an issue, particularly for Ireland, in trying to achieve what is called permeability between the ETS and non-ETS sectors. In other words, if we make great strides in reducing emissions in the energy generation sector, which I hope we will do, that makes little or no difference in terms of Ireland's share of the burden because it is based on the collective European share. In terms of Ireland's meeting the targets that have been set, with emissions reduced by 20% below 2005 levels, it does not matter if we do not produce a single tonne of carbon in the energy generating sector within the next five to ten years. It will make no impact because that is the traded sector which is treated collectively across the European Union. Whether it is an energy generator in Ireland or Slovenia does not really matter because it is a separate pool. Much of the effort at the moment is going into the energy area, which is a good thing and needs to continue, but in terms of the Government's meeting its targets, agriculture and transport are the two big areas that must be dealt with. Are there negotiations to allow flexibility for a country that has specific problems such as over-dependence on agriculture, as Ireland does? If we make sufficient strides in other areas, can that be taken into account? We could try to create that flexibility by having a transport fleet that runs on electricity generated at night, but that is really forcing the issue.
We had a brief discussion before the representatives came in about the switch from free allocations to the auctioning system. I understand the principle of what is happening, but it would be helpful if the representatives could give us a practical idea of how that will work. At the moment, electricity generators such as the ESB get about 80% of the carbon credits they need and must either become more efficient or purchase the remainder on the open market for the going rate, which is €25 or €26 per tonne at the moment. From 2013 they will have to purchase all their carbon credits. Mr. O'Mahony seems to be suggesting they will purchase them from the State. Is that the case? How does Ireland get the allocation in the first place? Who gives it to us? Will it cost the State money? I understand the principle: if a carbon credit is worth €30 per tonne, the ESB will have to purchase credits for however many tonnes they need at that price and the State will get the money. However, where does the State get the allocation? Does it come from excess carbon credits elsewhere, either in the world or in Europe, or is it simply an allocation from the European Commission for each state? If it is, we are talking about granting states major assets which they then sell on to their electricity generators. If we make more progress in the energy sector than other countries between now and 2013, that will determine the level of allocation we need. This has not been explained in the note and it would be helpful if Mr. O'Mahony could explain it.
Electricity generators in Ireland are currently in receipt of windfall profits due to factoring in the cost of carbon to the regulated electricity price. As this does not represent any cost to the generators, they are making excess gains on the back of consumers' paying approximately 10% extra on their electricity bills. It is the equivalent of a couple of billion euro over the next four or five years. Does the Department have any plans to recycle that money either into a reduction in consumer bills or promotion of the climate change agenda by offering people alternatives? It is unacceptable that companies simply pocket this money, which is what is happening.
What progress is being made in factoring in forests which act as a carbon sink, to the carbon calculation for countries? Ireland could benefit dramatically from this.
I thank the representatives for their presentation. They have a great deal to grapple with and I wish them well in their work.
It seems it will be very difficult for us to meet our commitments without significant costs. Perhaps Mr. O'Mahony could tell us what his forecasts are in practical terms. We have a theoretical approach, but this must be translated into money. Mr. O'Mahony might mention whether the Department has done any financial estimates in this regard. Who chairs the Cabinet sub-committee in this area?
Mr. Tom O’Mahony
The Taoiseach.
I suggest, Chairman that we invite the Taoiseach to a committee meeting. It would be helpful.
Mr. O'Mahony mentioned a reduction in emissions of 30% by 2020 for the EU. When this was first discussed publicly, the impression I got was that the proposed reduction was 20% but if countries outside the EU agreed we would raise it to 30%. There seems to have been a shift so that we are now talking about a figure of 30%.
I am not sure what difference is made by a Europe-wide cap, as opposed to a cap for each country. Perhaps Mr. O'Mahony could explain this. It is also hard to grasp how the auctioning will be done, who will be responsible for it, who will manage it and who will have oversight. For example, in the UN scheme the mechanisms have been subject to a certain amount of criticism. I do not know whether these are justified, but certainly there have been criticism of its efficacy. If Mr. O'Mahony knows how this scheme will be operated it will be useful for us to get a picture.
I presume IBEC will talk to us about carbon leakage. Mr. O'Mahony says he does not believe this will be a big factor. However, in recent days we have seen up to 500 jobs in Hibernian going to Bangalore. This really undermines people's confidence about the jobs we can hold here. Obviously we are talking about manufacturing, which is a different area, but we do seem to be vulnerable with our open economy. If a study has been commissioned, it would be useful for members to know about it. It is interesting that industry here is energy efficient overall. That seems to be the summation, which is good but it can also create problems in meeting the requirements. Do we agree that auction revenues be earmarked at a figure of 20%, or do we have a separate view on the matter?
Increases in costs are already the source of much concern, especially as they impact on electricity prices. The figures are significant in terms of what is sought. In Britain there is talk of even higher increases in utilities' costs. Perhaps the delegates might discuss this issue.
We pin many of our hopes on changes in electricity generation. It is seen as a safety valve for us because we cannot deal with agriculture and have no grip on the transport sector. Therefore, what is left? In the energy sector what is left is the ESB with its great plan which we all welcome and support.
I have concerns. I point to a specific area in which it seems we are moving extremely slowly, if at all. Offshore wind energy projects are a most effective form of electricity generation. Last January the Minister announced a new tariff scheme which has yet to be approved by the European Union. EirGrid has not announced its new round. Despite the good intentions, therefore, it seems that even the European Union is not assisting us to make what are essentially massive shifts. Perhaps we might have a comment on this. Can we ensure the European Union will assist us to meet our targets to a greater degree? Is that not an issue? It seems that there is an issue with regard to offshore wind energy projects and I am not safisfied that even when the potential is there, we are able to realise it.
Mr. Tom O’Mahony
A number of points were made, of which I shall take several, while Mr. Collins will answer others, particularly those concerning auctioning, carbon sinks, the European-wide cap and carbon leakage.
Many representatives from IBEC are sitting in the Visitors Gallery. I am sure they noticed that I did not say carbon leakage was not a problem. I said it was not generally a problem but that there were some industries in Ireland where it could be a serious issue.
There are one or two areas about which questions have been put to which I shall not give detailed answers. I shall explain why. A number of Departments are involved and we deal with the European Union on a cross-departmental basis. My Department leads in the negotiations on these two proposals because they will go through the Environment Council but we do so with the input of colleagues in other Departments. Issues such as progress on offshore wind energy projects, for example, or how exactly electricity prices will be regulated and what the effect will be take me and the Department out of our territory. In this case it is that of the Department of Communications, Energy and Natural Resources, with which the committee also deals. When its delegates present to the committee, they will be able to offer much more detail on those issues. We are not in a position to offer it.
Deputy Coveney had questions on permeability between the emissions trading scheme, ETS, and emissions not covered by that scheme. That is significant and I am mindful of the final point made by Deputy McManus, that up until now we would have perecived what we were doing in the area of renewables as a huge part of the national effort. One consequence of the split between the two is that while everything that is done with renewables and electricity generation is hugely important in reducing emissions on a national basis and so on, it counts for nought in terms of our non-ETS target. If there is a country in a similar situation where, because of sectors such as agriculture, the non-ETS target is made more difficult by the split, is there, or should there be, scope for a degree of permeability?
The position taken by Ireland in the negotiations — the mandate given by the Cabinet committee — is to pursue the question of member states being able to purchase credits from the ETS sector to assist in meeting the non-ETS targets. The logic is that the cost of mitigation should be broadly the same across all sectors. If we reach a point where we have implemented all of the cost-effective mitigation options in the non-ETS sector, the only remaining options will carry, effectively, a price per tonne that will be many multiples of the price at which carbon is traded under the ETS. Economic rationality suggests that rather than, for instance, spend €100 or €200 per tonne to achieve something more in agriculture, it would be better to buy from the emissions trading sector. It does not increase greenhouse gas emissions because the total amount of credits in the sector is fixed.
There is a counter argument. I have no doubt that IBEC representatives will suggest to the committee that they do not think this is a very good idea. They certainly made it clear to us that, to the extent that governments have access to buy from the ETS system, there will be upward pressure on the price of carbon within that system. Therefore, the price is increased to industry. Our answer to that point, if it is not a case of us unfairly retaliating first, is that ultimately the whole idea of carbon trading is supposed to be about applying economics to this problem. The problem will be solved by setting a price for carbon. If this environmental objective is to be achieved with the lowest cost possible, it will be done in such a way that all measures will be taken across all sectors and all countries, up to a particular price. By the time that price is reached, the problem will be solved.
That will not happen if governments are competing with privately owned businesses. That is the danger in what Mr. O' Mahony proposes.
Mr. Tom O’Mahony
There might be a situation where Government will have to spend €100 a tonne, for example, to achieve a particular reduction in agriculture, while industry operating within the ETS will be able to operate at €30 a tonne. The measures taken at a cost of €100 per tonne are clearly not the most cost-effective in dealing with the problem. Our argument is that it follows from this that if one sector is effectively subject to a price of €100 and another is subject to a price of €30, clearly the former price is too high and, by implication, the latter is too low. Obviously, a perfect economic model will never be achieved but in that perfect model everything converges on a single price of carbon, whether it be €32 or €33.
That is not real.
That is the benefit of having a discussion such as this with politicians. The purpose of the exercise is to ensure we produce 70 million tonnes of CO2 which we must get down, for argument's sake, to 60 million tonnes. How that is done is immaterial. At the end of the day we are talking about trying to save the atmosphere. This is where the European Union gets itself into huge difficulty and how all the confusion as regards the Lisbon treaty was created. We start out with a moral issue and try to solve a problem. We end up talking about how much carbon costs per tonne and what is the best way to transfer to get from a figure of 70 million tonnes down to 60 million tonnes. The fact that some genius somewhere in Europe decided to split these elements does not necessarily mean that Ireland must go along with it and agree. If we disagree, we should say so.
Have we done so?
The benefit of having this public discussion is that it allows us to explain that we are all interested in playing our part in reducing emissions. We are trying to work out how the auction scheme will work but it is becoming so complicated. The delegation can imagine the difficulty in trying to bring the public along with us. If there were a public meeting and we discussed this matter with people, they would laugh at us and would not know what we were talking about.
The purpose of the delegation's appearance before the committee is so we can benefit from its professional experience. Its appearance also serves as a vehicle for the committee to relay its views to Government which, ultimately, will make the case to others. For example, if there are strong views from all parties on the committee that we should force a situation in Europe to bring everybody back down to earth, the Government will make that case. The purpose of this committee is to encourage development of wind and wave energy, a reduction in emissions and to argue a case for being a food supplier. We will play our part in that. I appreciate the delegation's difficulty. However, the points made here are in the context of a politician's response to a set of proposals from the European Commission. In many cases we support the concept, but the manner in which we achieve it is something we would like the delegation to take on board, especially if we are expressing this view on an all-party basis. It is important that we keep on that track.
Mr. Tom O’Mahony
The system is devised on the basis that the best way to achieve any given environmental objective, at the least overall cost, is to do so by trading. This concept has been around for some time and was used very successfully in the United States ten or 20 years ago in other contexts. It was then adopted for the emissions trading scheme. We currently have for——
I do not understand that and I would not talk of the United States and emissions. It has not applied that principle to its problem.
Mr. Tom O’Mahony
Not in recent years, but it was one of the main forces behind the development of the Kyoto Protocol. It then backed out of signing the treaty.
For the period 2008 to 2012 we are operating on the basis that the emissions trading scheme, ETS, and the non-ETS sectors are effectively combined. It was down to Ireland to draw up its national allocation plan. Ireland was able to make choices, although they had to be approved by the Commission. We were able to choose the extent to which we relied on renewables, on industry and so on. Unfortunately, a trade-off comes into play. In the Government's view, it is to the benefit of Irish industry to be assured that it is competing on exactly the same basis as all 27 member states and within the same system. There were concerns that, under the current arrangements, some member states effectively gave a competitive advantage to their own industries in the emissions trading scheme by the way in which they operated it. The split between the ETS and the non-ETS sectors has the advantage that it should put our companies on a level playing field. However, the disadvantage is it takes away our flexibility to adapt to the particular circumstances we have.
The solution we see to this is to allow Ireland pull back a certain amount of the benefit we had when the two sectors were linked together. We may be able in certain circumstances, which would have to be negotiated with many safeguards built in and so on, to identify the importance of agriculture and food security in Europe and the particular concerns which are unique to Ireland regarding the scale of our agriculture sector. These might be the type of circumstances which could give rise to some flexibility and allow one to purchase from the ETS.
The Chairman is correct. Once we start using this language the discussion becomes impenetrable and complicated, which is one of the difficulties we have with the issue of climate change. We are trying to find ways to get these difficult concepts and systems available in plain language.
We must bring the public with us. That is the most important point.
If there is some give or permeability, must it apply across the board or can there be recognition that we are highly agricultural, on the periphery and need to have special arrangements?
Mr. Tom O’Mahony
It is probably unlikely that we will be able to deliver at any stage something that is designed specifically for Ireland. The reason is, ultimately, we are not negotiating with the Commission now, we are negotiating with 26 members states. What we must try to do is frame any proposals we have in terms of something that meets particular sets of circumstances and which are available to any member state where those circumstances apply.
I would like clarification on this matter, as it is important. Mr. O'Mahony said we are now negotiating with 26 other states, but these proposals came from the Commission. Can each member state accept or reject these proposals? In other words, just because the Commission has laid down proposals does not necessarily mean we all must nod in agreement.
Mr. Tom O’Mahony
In theory, the Commission is at the service of member states. The proposal is now with the Council of Ministers so, ultimately, the Council of Ministers could say to the Commission that it accepts nothing. However, politically that is not going to happen because of the importance of Europe.
I accept the real world. What I am trying to say is because they are proposals, it is possible, before they are actually put for formal ratification, to feed in good ideas which change the proposals without affecting the overall targets. Does Mr. O'Mahony understand the point I am trying to make?
Mr. Tom O’Mahony
I do.
We are not banging the table and saying we will not accept a 20% or 30% cut if it becomes an international agreement. Everyone here accepts the need to heed the strong scientific advice on cutting emissions. It is the manner in which we go about achieving the target and the way the burden is shared in the European context which is important. We will play our part, but at the same time the proposals must be realistic and we need to be able to explain them simply to people.
Mr. Tom O’Mahony
That process is ongoing.
The delegation has not heard anything here suggesting we are not prepared to play our part. We are asking questions about the options for seeking this or that.
Mr. Tom O’Mahony
The committee should find from our comments and answers to the other questions that, in general, the matters the committee has identified as those we should pursue are the matters we are pursuing. The process we are in now involves 27 member states, their negotiators and the Council of Ministers. The Commission puts a package on the table and it is then up to the member states to take that, tweak it, adapt it and to find a political agreement. Of course, the European Parliament has a role in this too.
I will ask Mr. Matt Collins to take some of the more technical questions. Deputy McManus asked how much all of this is going to cost. It is impossible at this stage to give a ballpark figure because it ultimately depends on what our precise target is and to what extent we have flexibility in meeting it. It also depends on the extent to which we use the flexibility mechanisms and this permeability we discussed. It further depends on the precise measures identified in agriculture, transport and so on.
There are actions which can be taken which cost nothing at all. The ESRI's recent mid-term review highlighted the carbon tax as a means by which significant emission reductions could be achieved. The review argued that depending on the way in which the carbon tax was implemented, the economic effect could be positive and could increase economic growth. It depends on the way it is implemented and on the purpose for which the revenue is used. If we consider the options for the transport sector, although it may be difficult to get the public to agree to significant behavioural change such as reducing the size of cars that people drive, the amount of driving they do and so on, there may be economic benefits. We are increasing, not reducing, economic growth because we are reducing our imports of fossil fuels and reducing traffic congestion. There is no easy answer to the cost. It depends on how the measures are achieved. The one thing the Cabinet committee has told every Department is that any measure it brings forward must be rigorously quantified in terms of the reduction in emissions and in terms of cost.
The Deputy asked about the 20% or the 30%. The Government and all the 27 member states are on the record as saying they hope and expect it to be 30% because the EU is strongly behind a global agreement. It has said that if there is a global agreement the EU goes to 30%. Therefore, the 20% is the first instalment, because the EU has said that if there is no global agreement it will do 20% in any case. For that reason, a package has been put together which adds up to 20%. That package is probably meaningless and will never come into play because there will be a global international agreement and the whole projectwill have to be recalibrated at a higher level of ambition for the 30%.
The final question I will take, before asking Mr. Collins to deal with some of the other issues, is the question of earmarking the auctioning revenues. A large number of member states, of which Ireland is one, not only in the environment area but throughout the different areas in the EU, has always taken a strong position on fiscal autonomy. Ireland has always been opposed to any prescription in EU legislation as to how revenues accruing to the State are to be used. That is not to say the Government would necessarily oppose using the revenue from auctioning for climate change projects but that would be a matter for the Government to decide. The Government has told the negotiators to oppose the concept of hypothecating the auction revenues. That is the case with quite a number of member states, the UK being particularly prominent in that one.
I invite Mr. Collins to look at the question about carbon sinks, auctioning carbon leakage in the European-wide cap.
Mr. Matthew Collins
The auctioning process or the ETS process is just within the European Union at present. Some of those to which Deputy McManus referred are UN projects, the CDM projects. There has been some media reports on the quality of those projects. They are entirely separate.
I can see that but they highlight risks. That is the question I was asking.
Mr. Matthew Collins
I understand where the Deputy is coming from. The ETS would be considered a very robust process because it is subject to high levels of verifiability and reporting requirements from all the participants. It would be seen as a much more robust and strong mechanism to control the emissions.
In regard to how the process works, we should not overemphasise the dramatic change that will take place after 2012. It is a revision of ETS. The ETS is already in place and large industrial plants and energy producers are already managing their allocations for carbon allowances in order to meet their needs for carrying out their business. In a sense it is just a change in terms of the allocation process. Sales or auctioning is considered easier and more efficient from the participant's point of view. In the current system, what has happened is that there has been a more bureaucratic approach where we have to decide how much they should have and allocate it to them for free. Based on either a grant or an allowance there are various inefficiencies involved. This is considered more beneficial from the industry's perspective and it is what industry actually sought through the consultation process the Commission conducted. That is why the process has been changed to a single cap and the use of a more market based approach to the allocation of the cap. We are not working on a clean sheet of paper here, we actually have the experience to date with the first phase which was not the most successful but it was a very importantlearning experience of the ETS.
We have the experience now of the second phase so we know how many allowances industry needs and we will know on an annual basis what its needs are throughout the rest of Kyoto period. That information will be the basis for deciding on the allowances that should be allocated to the member state which it will then sell to the industry. It is based on——
Is it the Council or the Commission?
Mr. Matthew Collins
That is a much more operational level activity. It will be based on the returns that come from the companies. Each year they have to declare how many allowances they use.
I am talking about the allowances the state will get to allocate from the start of 2013.
Mr. Matthew Collins
It is purely a function of the emissions, because it is based on the mid-point of emissions during 2008-2012. Therefore, in 2013, the allowances allocated will be based on the historical experience.
Could the Government and industry vie against each other to buy that allowance?
Mr. Matthew Collins
Not in the case of the ETS. In a sense, the Government will be the vendor of the allowances so it is not that we are in competition with the industry. Basically, we are providing an explicit cost of carbon which is then an input which industry includes in its normal inputs in its production activities. It is not that we will compete for the same allocation of emissions in this area. It is separate. It will be based on the historical data that comes from the Kyoto period. Largely from industry's perspective the idea is to make it a level playing field so that Irish industry is able to purchase allowances from the German Government, the Swedish Government or the Hungarian Government and there will be a series of operational rules to ensure there is sufficient liquidity in the market at the timing of the release of allowances. That will not be part of the legislation package. Those operating rules will be worked out in more detail by a committee, led by the Commission. That is the auctioning process.
In regard to the sinks issue, the Deputies have focused on a very important sector from our perspective. It is one of the priorities we have identified in the negotiations process. The sinks are the LULUCF sector. In simple terms it is the absorption of carbon dioxide by forestry. Under Kyoto we are allowed include the CO2 that is removed through forestry. Ireland, because of the structure of its forestry sector, historically new from 1980s and 1990s onwards, it is growing significantly so that there is high take-up of emissions in the forestry sector.
Throughout the EU Council discussions before the proposals it was made clear that we expect all sectors to contribute to the solution of climate change. On that basis we argue that forestry is in line with the Kyoto Protocol. The EU is determined to build upon the Kyoto Protocol post-2012 and we believe that sinks have a role to play in that area. We have made it clear in the negotiations that sinks are an important sector and we need to have them included as a legitimate part of the national response to emissions.
Why were they not included? That is hard to understand.
Mr. Matthew Collins
I can try to explain the Commission's thinking, if that is helpful, on why it excluded it. The rationale is that, aside from the EU negotiations, there is a UN negotiation process which is the Bali road map leading a Copenhagen agreement. Under Kyoto there are rules agreed on how to account for the sinks, how much CO2 is removed and how one can count that towards one's target. Those rules do not apply after the Kyoto period. There is a disagreement between the parties on how one can account for that. We are in the negotiations trying to agree what the rules will be for that sector afterwards. The Commission took the view that rather than pre-empt the international negotiations, it left them out. That was the Commission's perspective. Obviously we have a different perspective on that. We believe it is possible that there is sufficiently robust data available within the European Union on how to calculate the emissions. The 20% is a unilateral target by the European Union so it is not actually part of the international agreement. It will be surpassed by an international agreement with a higher target for the European Union. As a standalone agreement we argued that as they are our targets we should make the rules that suit us for this interim period and that it is in line with all our strategies to date to have sinks included.
We are engaged in a fruitful and active discussion with the Commission coming from two different perspectives on that. That is the reason the Commission took it as a negotiating tactic. We have a different perspective in terms of providing certainty to the sector and being consistent with previous practice to date. That is the issue with sinks but we will continue to make the case. We are not alone either. Other countries recognise the inconsistency in the current proposal.
Our position as a Government is that the aim is to have an international agreement. From a negotiating perspective it appears extremely unlikely that sinks will not be part of an international agreement. It is very difficult to imagine a scenario where that could be the case. Sinks will have to be incorporated into the European Union strategy on foot of an international agreement. We will continue to press the case but it is the negotiations taking place at United Nations level that will provide the route for the inclusion of sinks.
On carbon leakage, I am sure many people in the room have views on carbon leakage. The perspective we are coming from is that we do not want to overstate the scale of the problem of carbon leakage but we must recognise that there is the risk. It is a question of addressing and minimising the scale of that risk.
The vast bulk of the industry will not be affected by carbon leakage. Carbon leakage is very difficult to identify. An example was given of service jobs being transferred to India but they are the types of jobs that are not subject to carbon leakage because energy intensity is not a problem there. Even identifying carbon leakage is a challenge.
A number of analyses have been carried out by various countries and research institutes. They found that only a limited number of industrial sectors are subject to carbon leakage. These are iron and steel, aluminium, and cement and lime. Those are the major heavy industrial sectors. The conclusion people are coming to is that the key sector is aluminium. In the iron and steel and cement industries there are significant barriers to international competition in this area because of the cost of the product and the cost of transportation.
We do not want to overstate the fear that there will be a bleeding out of European industry. That is not in anybody's interest. The European Commission does not want to set up a climate energy regime that undermines industry in Europe. It is trying to incentivise a more efficient and dynamic industry which is consistent with limited fossil fuel use, an over-reliance on imported fossil fuel and our commitments to climate change.
The sectors are quite limited and the evidence is not available yet to indicate there is a significant risk but we still want to guard against the risk of it happening. The Commission proposal is that it will review the process and report back in 2011. A number of countries have said that is a little late and industry would like more certainty on what must be done in that regard. We would be happy if the process could be accelerated but we must wait and see what will be the outcome of the Copenhagen meeting. That is the litmus test in this area.
If the Copenhagen meeting is a success, it will set clear binding reduction targets for industrialised countries and make commitments for actions by developing countries for the first time. These can include a range of sectoral agreements and approaches that may be agreed on a global level. That is probably the best approach to address the concerns about competitiveness and reducing the likelihood of carbon leakage.
We must think carefully about the way to respond to carbon leakages. For example, the issue of a border adjustment mechanism has been raised which, as a highly trade orientated country, we would not favour. We want to encourage international trade as much as possible. We must ensure that we do not promote an approach that is counter to the long-term economic strategy the country has taken to date.
We recognise carbon leakage as a potential problem. There is limited evidence of it so far. The scale of it is narrowly defined to a certain number of sectors. The international negotiation process is the best route to address it but we will keep the review process open to allow it to be considered again in light of the international agreement.
I am conscious of the fact that the IBEC representatives are waiting to make a presentation. In view of the fact that we have some time before we make our formal presentation to the Department in writing on our recommendations, we might take the opportunity of inviting the representatives back before the committee for further clarification before we finalise that submission. Deputies Doyle and Aylward have indicated they wish to contribute. I ask them to be brief because, given the time, I want to invite the IBEC representatives to make their presentation. It is the sort of topic we could be here discussing until 7 o'clock.
I thank Mr. Collins for the presentation. On the auctioning rights, relatively more rights will be distributed to member states with lower GDP per capita. If we must buy credits on the open market it is countries with surpluses that will benefit. Is it not the case that countries with a lower GDP generally tend to have lower outputs of carbon emissions because they are not as advanced? Is it not the case that the countries with the higher GDP have the higher requirement for carbon credits? Is the Department not weighting that factor because even in a European context it is those countries with lower cost economies that countries such as ours are having difficulty competing with to hold on to jobs.
Will any derogation be given for energy saving initiatives? For example, for every €100 we spend on insulating our homes it will benefit us to the factor of €10 per year. After ten years the cost of insulating our homes will be eroded. Will any derogation or credits be given for initiatives such as that either internationally or at EU level?
Over 5,000 million tonnes of carbon are emitted from European Union countries. Agriculture in the EU accounts for 477 million tonnes of carbon emissions. The figure for Ireland is approximately 20 million tonnes. In terms of efficiency of production, if Ireland is producing 20 million tonnes of carbon emissions out of a total of 477 million tonnes, we could produce food for 35 million or 36 million people, a factor of seven of our own population. If forestry was allowed as a carbon sink or credit, 50% of the land in north European countries is afforested and with relatively low populations, one would assume they would have carbon credits. If we are to look at this issue on a European wide basis, areas of Europe have a major sink in forestry while Ireland, with a relatively low amount of carbon emissions at 20 million tonnes, could feed 30 million more people than its population. Is that not an argument we should consider making? I could ask another ten questions but I am conscious of the time.
I welcome the presentation. We are all aware of global warming, whether it be the effects on animal life, a shortage of water in Africa, rising sea levels or whatever, but the problem in Ireland is our dependency on fossil fuels. We were in Sweden last month and saw the advances that country has made in this area. They intend to be only 8% dependent on fossil fuels by 2010 while we are 60% to 80% dependent on them. We need to change our system and harness green energy from the natural resources in our environment. We have an abundance of natural resources, whether it be wind energy offshore or inland, wave energy, solar energy or energy crops. We need to develop the many opportunities we have to harness such energy as opposed to increasing our dependence on fossil fuels. Until we do that, our energy supply will be seriously undermined in terms of our dependence on fossil fuels.
I am concerned about the issues related to our GDP per capita or wealth indicator. We are probably one of the top three or four member states in the EU that has a high GDP per capita as a result of the buoyancy of our economy during the past ten years or so. The rate of such economic growth may slip in the next year or two but we will still be one of top three or four countries in economic terms in Europe. If our GDP per capita is high compared to other member states of the EU, particularly the group of ten member states that joined in recent years, will that cause international industries here to relocate to poorer countries with a low GDP per capita such as India and eastern member states of the EU to take advantage of lower wage rates?
I am aware that given the time constraints our main focus is on agriculture and what we can do help the sector. Mr. Tom O'Mahony put his finger on it when he referred to food security. We have a golden opportunity to increase our food industry, given the issue of food security and the shortage of food in the world. We have ideal natural resources for food production. We must strike a happy medium in terms of food production, energy crops and afforestation. I attended a meeting of the Joint Committee on Agriculture, Fisheries and Food this morning at which it was highlighted that only 10% of this country is under afforestation compared with 60% in Sweden. The Swedes are light years ahead of us; we have a long way to go to catch up with them. They have nuclear power and waste incineration, neither of which we have. The best thing we can do is to use our natural resources to harness power from wind, wave and solar energy. If we produce more food given that we have the natural resources to do so, will we pay the price for that under the auction system which will replace the free allocation of emissions allowances?
In regard to the research taking place in New Zealand and Ireland on the diet of livestock, will the representatives elaborate on that? I am a farmer and we depend on pasture, silage and hay for 80% of our cattle feed and the balance is made up of animal foodstuffs, including meal. What can farmers do to reduce carbon emissions in the agriculture sector?
In regard to transport, it is fine to say we could have electric cars but there would be no point in such development given that they would have to plug into the electrical grid, which would be still driven by fossil fuels. We would not gain anything by such a development, given that we import fossil fuels to generate electricity, which would power such cars when they plug into the grid. We must become independent in terms of energy supply by developing our natural resources.
Mr. Tom O’Mahony
I am conscious of the time constraints. Some of the points raised about industry relocating, agriculture and forestry were probably covered in the previous responses.
In regard to Deputy's Aylward's question on agricultural science, I would defer to the Department of Agriculture, Fisheries and Food and Teagasc on that issue and the Deputy might raise it with those officials when he next meets them. I am aware that in Ireland and particularly in New Zealand substantial investment has been made in research, but I do not know about the practical implications of that for livestock.
Deputy Doyle raised an important point concerning carbon credits. Investments such as insulation in the home are of huge benefit. If a home owner invests in insulating his or her home or the Government provides a grant for it, there will be an immediate payback in terms of the issues we are talking about. If home insulation reduces the amount of oil burned in the home, the emissions generated from the residential sector will reduce and that will help our non-ETS target. If it reduces the amount of electricity consumed in the house, the power generated by the ESB will be reduced and that will reduce the amount of credits the ESB will have buy. The Deputy was correct in pointing out that the key issue is ultimately to ensure fossil fuels have a much lower penetration in the economy. Any measure that reduces the consumption of fossil fuels in any sector will help in one way or the other.
A specific question was raised on auctioning rights, which Mr. Collins might take.
Mr. Matthew Collins
Auctioning rights are only sold to electricity generators and heavy industry. The farming sector, the residential sector or motorists will not bid for these types of credits. That will be done by the industry sector and the energy sector, which face similar cost experiences across the European Union. Deputy Doyle asked why some of the poorer member states get a reallocation of auctioning rights. This is part of the balance in the energy package. We want to achieve a cost efficient package but there must also be a degree of fairness and equity between the richer and the poorer member states. The poorer member states are better placed to address this problem.
The poorest EU member state has one tenth the level of GDP of the richest member state. That is the scale of differences within the European Union. That is what the package tries to take account of. There is a vast range of wealth levels within the European Union. We need to have a package that balances reaching our target in the cheapest way while recognising that different member states have different ability to pay for the emissions needed. That is the rationale for the reallocation.
I wish to clarify the point I raised. Will some of those countries be beneficiaries of carbon credit revenue if they have carbon surpluses? In other words, will they get a double benefit? That was the point I made.
Mr. Matthew Collins
Let us assume we are in 2020 and at the most advanced stage of the package. All countries will sell ETS allowances. Every country will benefit from the allowances. Turning to the non-ETS sector, which is the transport, agriculture and residential sectors, if those countries are able to achieve deeper reductions more cheaply than some other countries, one flexibility we would argue in favour of is that if they are able to make those savings, they should be allowed sell those savings to other countries. In that way we would achieve an approximation of the marginal costs of abatement. There is a benefit for countries in the non-ETS sector, but all countries will sell allowances in the ETS sector.
Would it be possible for Mr. Collins to prepare a short note on this in layman's language for the committee before our next meeting to allow us examine it. We might call on Mr. Collins to brief us on it a half an hour before or after a particular meeting because this area is complicated. We want to get a grasp of it.
Mr. Tom O’Mahony
Is the Chairman requesting this specifically on auctioning rights?
Yes, on auctioning rights, the position we are taking and the fact that we are seeking this. In other words, we will not discuss with the representatives something they are already convinced of. If they could tell us in simple language how this process works, it would be of great benefit. If necessary, we would ask them to——
Do the representatives envisage that Ireland might be in the position at some future date to sell credits into the ETS system rather than buy them from it? Will we always be customers, given that we are dependent on fossil fuel?
Mr. Tom O’Mahony
As matters stand, with the level of emissions we have and the scale of the challenge we face in trying to get down to the target, I cannot see any circumstances under which we would end up in that position.
That is what I thought.
Irish companies will be within the ETS sector.
That is different. Irish companies——
If, for example, the ESB is as successful as it hopes to be in terms of the switch from fossil fuels to more sustainable forms of power, the allocation Ireland will get for 2013 will be based on the average use of credits between 2008 and the end of 2012, but we may not need all of that allocation in 2013 because of the changes that the ESB has made. Therefore the State will get the benefit, will it not? We will have excess to sell to other states, is that not right?
Mr. Tom O’Mahony
It must be remembered that every member state has its block that it can sell, but it is a market and it sells to Europe as a whole. We are not just selling to the ESB and Irish firms, and they are not just buying from us. So whatever block we have to sell will be sold somewhere within the system.
Yes, I know what Mr. O'Mahony is saying.
We will come back to this topic. I thank Mr. O'Mahony, Mr. Collins and Mr. Bohan for a very interesting presentation. I am sure we will be calling on them before we make our final written submission. It was very informative. We are all batting for the same cause, although we may express it differently.
I will now invite the IBEC representatives to join us. We look forward to their presentation. I ask Mr. Donal Buckley to introduce the delegation. They are all very welcome.
Mr. Donal Buckley
On behalf of the delegation, I wish to thank the Chairman and other members of the committee for the invitation to attend this meeting. IBEC has had a climate change working group for over ten years. A small representative number of the working group's members are here today. While people have individual company names, they are obviously representing IBEC today, so we have a collective position.
Appearing as one.
Mr. Donal Buckley
Ad idem, as the Chairman suggested. I am accompanied by the following: Mr. Colm Bannon, CRH; Ms Audrey O’Shea, Glanbia; Mr. Erik O’Donovan, who is also from IBEC; Mr. Owen Wilson, ESB; Mr. John Reilly, Bord na Móna; and Mr. Liam Fleming, Aughinish. They have been working on the issue of climate change for over ten years.
I have a presentation which I would like to give quickly. To be fair, our colleagues from the Department of the Environment, Heritage and Local Government have already covered a number of issues.
Please feel free to make the presentation. Mr. Buckley has been invited here and we are only too pleased to listen to him.
Mr. Donal Buckley
I will do it quickly because I know there will be questions from Deputies and Senators. I will try to provide a broad overview of what we think some of the key points are. I will touch on three points. There are general economic issues, as well as issues regarding the manufacturing industry, and issues on the power sector. At the end, I will draw some conclusions and suggest possible recommendations. While there is a proposal, we would like to see some changes to it.
We are all agreed that the issue of climate change must be addressed, but it is a question of how we can do so. I will touch on a few words such as "flexibility", "certainty", "equity" and "efficiency". If we do it that way we will address the huge societal challenge of climate change in the most cost-effective manner. That will be crucial in future.
The commission's proposals will have enormous significance for Ireland. We welcome the scrutiny of those proposals by this committee, which is very important. We believe that some amendments will be necessary.
As regards the general economy aspect, as Deputy McManus mentioned, we will certainly be seeking a least-cost approach. We have a difficulty in that the national climate change strategy and even some of the climate change proposals have not been costed. A very good question was asked as to how much it will cost and the answer is that we do not even have a ballpark figure. We are signing up to something but we do not know how much it will cost. It is important therefore to get some sense as to what the cost will be. As regards the current proposal, we can reach the target but we will do it at a lower cost if we introduce some flexibility.
Everybody is aware of the scale of the change and I do not need to go through the changes between 1990-2005. Ireland is a different place now and we have made remarkable economic and social progress. That has placed difficulties on some of our emissions and we have seen emissions rise. Given where we are now, the decarbonisation of the Irish economy has happened faster than anywhere across Europe. While our emissions are up, they are only up if one relates industrial production to many other indicators. We have made remarkable social changes. Ireland is among the most energy efficient economies in Europe, but that creates a problem. If we now have a difficult target to reach and are already efficient, there is very little we can do, so we need to act smartly on this. We need to ensure that we can meet whatever we sign up to in an efficient manner.
As the departmental representatives said, there is a national carbon emissions target of -20% to +20%. Ireland has reduced its carbon emissions by -20%, which is the most ambitious target. That is based on GDP which has pretty much a top-down target and does not take into account the economy's abatement potential.
The size of the agriculture sector has already been mentioned. It is interesting to note that we have below average car and house ownership, so we will still see significant growth there. Our population is growing and our economy was growing up to two days ago before the ESRI put a slight pin in the balloon. Even for the first half of this year, however, we will see some growth and hopefully our growth will resume. There is still potential in the economy for growth. The national climate change strategy must be revisited on the basis of this split.
As regards the role of business, I have already mentioned that emissions and energy consumption have decoupled significantly from industrial production. Business has done a lot over the last number of years to address climate change and it will continue to do so. There is an opportunity but we must try to retain as much employment as we can in the most efficient way possible. Our colleagues in the Department of the Environment, Heritage and Local Government have already mentioned carbon leakage.
Deputy Coveney asked a good question about permeability between the traded and non-traded sectors. We have a major concern with the Government's proposal to bring some permeability between those two sectors. There are now two separate pools: one with the EU ETS and the other one with the other national targets. We would like to see some sort of arrangement between the national targets, whereby there would be permeability between countries. That is how one will get more of a least cost.
Could Mr. Buckley explain that?
Mr. Donal Buckley
At the moment, if any one of 100 companies is involved in the European emissions trading scheme, it cannot trade with the other 13,000 or 14,000 companies and try to get the least cost. Ireland has a target, but it is not allowed to go to some of the other national states to get some of the benefit that they would have got through some of the cheaper abatement mechanisms. We have an emissions trading sector and national states where the target is fixed. Unfortunately, Ireland, which has a large agricultural sector, and all the other issues I mentioned, cannot access some of the cheaper abatement options that are available, which is a problem for us.
Can Mr. Buckley give an example from the agricultural or transport sectors?
Mr. Donal Buckley
It would not actually matter. The point I am making is that any of the other 26 member states will be able to make cuts that are much cheaper than Ireland's. It is just to give some sort of permeability. We have an EU-wide scale and a national target where there is no difficulty. I will be happy for any of my colleagues to deal with this in detail when we come to it. It concerns flexibilities. Some of the solutions are in and around the flexibility issue.
Mr. Tom O'Mahony mentioned making something at least cost. The access to overseas allowances, which Deputy McManus mentioned, is a key issue. A tonne of carbon is a tonne of carbon wherever it is in the world and if one wants to operate at least cost, one must ensure one has access to overseas allowances. This proposal significantly reduces the flexibility or access to that, not only for countries but also for firms, and that will increase the cost. One will get to the same environmental target but the cost will be higher.
The inclusion of forestry was already mentioned. Everybody is clear on this. We should definitely include forestry. Thankfully, it is a growing and reasonably new sector, but all of that benefit is being lost to Ireland.
There are other issues, which I will not go into in any great detail, about having annual linear reductions and borrowing provisions. There are a number of proposals. We will send in detailed proposed amendments.
It is not a matter of how we address this, a point made by the Chairman. We believe that the target must be met in the most efficient way. A number of the elements to the proposal reduce the flexibility of member states and companies to reach that target. Once one reduces that flexibility, one increases the cost. The environmental imperative is the same. We will reach the target. The how, and the cost involved, will be critical.
I want to make one point about the international agreement. The EU, China and the US would be the key players in this and Europe is taking a lead on it. The real issue is the definition of equivalent measures. If the US signs up, we need to ensure that it is to equivalent measures. Otherwise there is a danger that we will go from 20 million tonnes to 30 million tonnes just on the basis that US may sign up. It is very important that the EU be given a mandate that when it signs up to an international agreement, those other trading blocs, in particular, the US, adopt equivalent measures. Otherwise we will see that differential and, therefore, the loss of competitiveness for EU industries. The definition of that term in an international agreement will be important.
The main issue for business is whether they can get a level of certainty. There is a governmental proposal that there be permeability between the ETS and the national governments. If one starts to see such permeability, one will see the uncertainty creep back in. Certainty is a big issue. There was a level of disappointment for some of those firms which would be impacted by carbon leakage. There is not any great willingness to bring forward the date on which they will get some sort of certainty as to what kind of provisions they will get. That is a real issue for them.
Uncertainty leads to a lack of investment. That is what uncertainty means. If there is uncertainty, people will not invest. It is too long to wait to get some sort of a certainty for investment. There is a real danger that one will see investment stop. Certainty for manufacturing as to the carbon leakage proposal is, therefore,a big issue.
The other issue is allocation. We spoke a little about auctioning, etc. The clear view of an energy-intensive company which is exposed to international competition would be that there should not be auctioning without a global market because that would put companies at a significant disadvantage. The environmental imperative is the same. If we set the quantity, the auctioning will be only about revenue and where the revenue will go. What they would like to see is benchmarking. Therefore, there is a need to get best available technology. It should be an allocation based on what is best, and that is what every company should get. The companies which are not efficient will have to buy more. That would be a mechanism.
Border adjustment mechanisms were mentioned. Let us hope we never have to go down a route like that. That would be a real difficulty for an open economy like Ireland. Benchmarks would be seen as the way forward.
The power sector would have significant concerns. One of them I mentioned already would be the governmental proposals that large governments could purchase EUAs, but that would reduces the certainty.
The restrictions on CDM/JI, which is the overseas allowances, is also a big issue because it adds to the cost. It means that any allowances need to be bought within a small pool. A global market for carbon — given that the wider the pool, the bigger the liquidity — will reduce the cost of a tonne of carbon.
A major concern for the power sector, given that from 2013 it must have full auctioning under the present proposal, is the lack of certainty as to how the methodology or timing of this will work. There is a real danger that this will have an impact and undermine the market. Matt Collins stated that this is something that will be developed as it goes along. If people will be ready and have everything in place for 2013, we need to have a clear sense of how and when the auctions will be run. A number of valid questions have been asked about the auctioning process. There is a level of uncertainty here again that is causing significant concern as to how it will happen and that has real knock-on implications for the market.
We would not like to see governments being able to purchase the EU ETS because that will only increase the level of uncertainty. We would like to see some immediate clarity on auctioning, full allocation to industry based on benchmarks, the inclusion of forestry in the national target, the reduction of restrictions on CDM/JI, and increase the flexibility on annual reductions on borrowing provisions. Those are our number top priorities. We are happy to put those into writing and elaborate on them on a technical basis. I am sure some of the Deputies have questions and some of my colleagues would be happy to answer.
If anybody else in the delegation wants to say anything at this stage, please feel free to do so.
Mr. Owen Wilson
To clarify the question raised on the permeability issue, and the issue of the split between the trading and non-trading sectors, as it stands within the trading sector there is a defined cap established. There is an allocation process, primarily auctioning but with some free allocation. The rule for the auctioning and the free allocation are determined at EU level. Once that is applied, then everybody can trade between themselves and, eventually, the marginal cost for meeting the target is discovered within the EU emissions trading sector. That is a good, clean process.
When one moves to the non-trading sector where governments have responsibility, there is also a firm target established across the EU as a whole. It has been split on the basis of fairness between each of the member states, but then it stops. The logical next step, whereby member states can trade between themselves, has been omitted. This means that there is a different marginal cost within each member state for meeting the specific target of that member state. This is where Ireland runs into severe difficulty because of all the issues illustrated previously. One would think the logical policy objective for Ireland would be that this trading process be allowed develop between the member states so that——
There is separation.
Mr. Owen Wilson
One keeps the separation. The separation was determined on the basis that a 21% reduction in the emissions trading sector will result in a cost for carbon that is the same or equivalent to a 10% reduction in the non-trading sector, on average across the EU as a whole. The problem in the non-trading sector arises because of this inability for member states to trade between themselves. If they could trade, one would end up with a common cost for carbon between the member states which would not undermine the original fairness objective, and which was determined within the initial allocation between the member states as set down in the relevant decision. The Commission has accepted the notion of emissions trading for industry but has not applied the same principle for governments. It would resolve the concerns surrounding agriculture and the costs that arise as a result of us having a particularly intensive agricultural sector.
This is one area that does not make sense to me, I am grappling with it. What I would hope is that perhaps you would make concrete proposals in terms of the amendments thought necessary and back them up with the reasons. We all are of the same view. We recognise there is a problem and we all want to solve it. In solving it we do not want to destroy ourselves. We do not want to lose jobs or make this impossible. Surely there must be some means by which we can find a common-sense solution that could be put to Europe. Hopefully, others would then see the wisdom of our ways. I am sure other countries will experience difficulties similar to those Ireland is facing.
Perhaps our guests will make written submissions on this matter. We are determined, as a committee, to put forward proposals to the Government. All parties are represented on the committee and if we can reach agreement in respect of our written submission, the Government will find it extremely difficult to ignore us. It would then be a case of bringing the battle to Europe. We will leave it to the appropriate Ministers to fight on our behalf in that regard.
Mr. John Reilly
I am chairman of IBEC's climate change working group. We have been considering this matter for almost ten years. The Chairman's remarks on Ireland's unique position in the context of our level of agricultural emissions and the fact that we produce enough food to feed seven times our population — and providing benefits to Europe and the world in that regard — were interesting. IBEC is on record as stating this for ten years and we are of the view that no one listened to us. We completely concur with the request made by the Chairman to our negotiators to return to Europe before it is too late in order to try to address this issue.
Ireland Inc. has been painted as the bad boy of Europe in the context of its emissions performance. People simply take CO2 emissions and convert methane emissions from the agrisector into CO2 equivalents and divide the result by the size of our population. That is disingenuous to Ireland. We support the Chairman's opening remarks with regard to trying to seek — it may be too late to do so — some form of acceptance of what is the actual position in whatever renegotiation takes place in the context of effort-sharing.
While I agree with the point relating to agriculture, a dollop of honesty is also required. Ireland is a disgrace in the context of how it has responded to commitments it gave under Kyoto. Our major commitment in respect of the Kyoto Agreement states that our emissions should only be 13% above 1990 levels but they currently stand 25% or 26% above those levels.
Transport is mainly to blame in that regard.
That is the context in which we enter negotiations. Other countries take a dim view of Ireland's performance to date. However, I accept Mr. Reilly's point regarding agriculture. Ireland is very different from other countries in this regard and we should try to make that case.
Let us not pretend that, with the exception of agriculture, Ireland is a good performer. That is not the case. Even as regards energy efficiency in the economy, we are not doing that well. There are some reasons for this. In the context of cost or emissions, energy in Ireland is not particularly efficiently produced. Having said that, however, we must try to make a special case in respect of agriculture.
The point relating to the equivalence in systems was well made. If there is going to be a trading system within the European Union, there must be some level of guarantee — regardless of whether it is agreed in Copenhagen — that other regions of the world will put similar systems in place. If equivalence is not achieved, there will be dramatic differences from region to region as regards the pricing of carbon. This will result in certain countries being completely uncompetitive. Do our guests envisage that a European trading system will be able to maintain itself in the context of a world market for carbon or do they foresee that the latter will replace the ETS if it is agreed in Copenhagen?
On benchmarking and allocations from 2013 onward, are our guests stating that, in the context of the energy sector, for example, we should benchmark what is an acceptable level of emissions for X amount of power? Alternatively, are they indicating that an energy generating station will be benchmarked against a similar facility? How would one benchmark Moneypoint power station against that at Huntstown, particularly when one considers that one uses gas and the other coal? Will our guests clarify the position in this regard?
We invested a great deal of thought and effort into considering the windfall profits energy generators are making as a result of the fact that the cost of carbon is included in energy prices at present. Will our guests indicate IBEC's official position in respect of this matter? There was no public response from IBEC when the committee went out on a limb with regard to this issue.
I agree with the comments on carbon leakage. I am of the view that the committee would like to make a number of strong recommendations in respect of that matter. How does IBEC envisage that the commission will monitor the position in that regard? Will it try to measure the number of companies that are leaving and, by means of a survey system, try to establish why they are doing so? How does one measure the threat of carbon leakage in a real sense?
We appreciate the fact that our guests were obliged to wait such a long time to appear. It might have been better if they had come before us prior to the civil servants because it would have been interesting to hear what the latter might have to say regarding the issues raised by IBEC.
Our guests probably have businesses to which they must return.
On carbon leakage, I presume our guests are referring to the assessment to be carried in the period to 2013. They indicated a hope that a decision would be made by 2009. That seems far too soon, particularly when one considers the complexity of this issue. Are they saying this in the context that there might also be a period of hiatus thereafter? It does seem particularly efficient if the assessment relating to carbon leakage is being carried out when the horse has already bolted. That will not be of help to anyone. Will our guests envisage how the assessment could be carried out in a way that might prove helpful?
It was stated that there should be no auctioning without a global market. Are our guests stating that the auctioning arrangement should not come into play until after agreement is reached with the major players, such as the US and others, at Copenhagen?
It was also stated, in the context of power and energy generation, that auctioning could have an impact on the market. We cannot do without electricity. Costs are increasing and I would be interested in obtaining an estimate from IBEC as to how high they will rise. Given that we cannot do without electricity, what do our guests mean by stating that auctioning could have an impact on the market?
"Carbon leakage" is a peculiar term to apply to what is essentially a loss of competitiveness, jobs and industry. It does not appeal to me. Will our guests indicate the companies that are most likely to be affected by carbon leakage and outline what we can do to protect them? Will they also indicate the scale of the problem relating to carbon leakage? As Deputy McManus stated, it does not seem particularly efficient to carry out the assessment when the horse has already bolted. The complete picture should be provided in order that people might know the extent of that into which we are facing.
Mr. Donal Buckley
Various members of the delegation will reply to particular questions but I will answer the easy one posed by Deputy Coveney. The Deputy asked about the EU ETS and comparable systems. The US and others are talking about a cap and trade system. They are using the wonderful words "dockable" and "fungiable". They will be unable to trade with each other straight away but that will be the position in the longer term. Ultimately, one hopes there will be one system for carbon trading but that is a long time away. That is the overall objective.
Benchmarking was intended for the manufacturing industry and not the power sector. Mr. Bannon will take up this point.
Mr. Colm Bannon
The issue of benchmarking is very much tied into the carbon leakage issue because we are talking about a change from free allocation, which is perceived by some as bad, to an auctioning scenario. Carbon leakage is happening. I come from the cement side of the house, CRH, and 10 million tonnes of cement was imported into Europe last year. That increased from 2.5 million tonnes two years ago. That leakage is occurring due to a drop in European competitiveness, which will be exacerbated by the problem of carbon increasing to €50 or €100 per tonne. This is a great difficulty in terms of doing business when a company is energy efficient and has made the investments.
Within our cement, lime and periclase businesses, we are in double digit reductions compared to 1990 in carbon intensity per tonne of product in Ireland. If we do not obtain free allocation to a benchmark, we will be faced with a situation where the rest of the world outside Europe will have no constraint on it whatsoever from a carbon perspective. Before we produce a tonne of cement, we will be faced with a cost of, say, €50 per tonne of carbon. Cement is carbon intensive and even though we are reducing the intensity, it still incurs a significant base cost, which is not imposed on our competitors in Turkey, Egypt or China. That is a major problem. We agree entirely with the Chairman regarding a global agreement. We are all for it but we also want a level playing field for all products traded globally.
There is a misconception. I was disappointed the departmental officials stated earlier that the carbon leaking issue is very specific to a small number of industries. It is very real and our power costs over the past five years have increased by 70% while our fuel costs have increased by 90%. We are not getting that back in the marketplace. We are faced with an increase of 25% or more in power costs before the end of this year. If the power sector is subjected to this post-2013, we will be faced with a direct passing on of carbon costs on top of this. Carbon leakage is, therefore, happening and, as the Chairman said, it is about jobs and competitiveness, not carbon. If factories close in Ireland, they will not reopen that easily. Products trade on the world market and we agree entirely with a global approach to this issue. We are completely with the committee in attempting to address the problem and we have addressed the problem in domestic industries.
I refer to benchmarking. Last week, our association made a presentation to the Commission in which we suggested that free allocations should only be provided if one is best in class and under that, one pays. This will completely incentivise production in clean technology in Europe and it will also encourage, at the Copenhagen meeting and in discussions on the global situation, other countries to come on board and buy into a BAT-based benchmarking. Nobody is looking for a free ride on this. We must invest if we have not done so but we cannot go further than best available technology. It is grossly unfair to penalise European or Irish industry that is using best available technology. The companies represented by IBEC will have a major difficulty if this issue is not recognised before a global agreement is reached. Ultimately, such an agreement can recognise best available technology for everybody. Carbon leaking and benchmarking are deeply interlinked but, at the end of the day, it is a question of competitiveness and the uncertainty is difficult to deal with.
Mr. Liam Fleming
I am grateful for the opportunity to attend the meeting with IBEC. I agree with everything Mr. Bannon said. If one is participating in an energy intensive, globally challenged industry, one has a completely focused view of the directive. The Department commented on the fact that only a few sectors would be impacted but they are trying to set the record straight and trying to make sure the directive is modified or amended to reflect the risks. For instance, my business is 20% energy intensive, which means the energy cost of the business is 20%. Under the directive, if there is an international agreement, by 2020 we will receive no allocation and, as a result, the energy cost of our business will increase to 30%. Another 10% will be added to the energy cost of our business. The labour cost of our business is also 10%.
If the international agreement goes ahead, we will be faced with an increase in costs of 10% and that will mean, if we are to stay steady, we will have to eliminate the full cost of the workforce. That is not feasible and, therefore, if the agreement is to maintain parity around the world, we require the increase in costs we will observe to be matched by everybody else. We propose that the international agreement must affect everybody classified as energy intensive and, therefore, everybody would be constrained by it.
Mr. Donal Buckley
Mr. Bannon will comment on the uncertainty about the Commission's proposals. Deputy McManus asked two good questions about timing.
Mr. Colm Bannon
As the Deputy indicated, timing is a difficulty. We want to encourage the Commission to make the decision on what industries are likely to be subject to carbon leakage early in 2009. Currently, the Commission's proposal suggests it will indicate in 2010 what industries are subject to carbon leakage and may receive special treatment and will not make a final decision on levels of free allocation until the middle of 2011. For example, CRH invested €200 million in its cement plant in Drogheda, which is our biggest investment ever in Ireland. It will be the most energy efficient cement plant in the world when it comes on stream. That decision was made before this proposal was on the table.
The position across industry is we want this decision made early next year. We cannot afford to wait until the greater international decisions are made. This could be an encouragement rather than a disincentive.
It has been stated by some people that if Europe lists the industries that it is essentially prepared to deal with through free allocation to a benchmark, this will put the rest of the world off, but we think it is the other way around, that if Europe takes the lead on this and shows that it is only prepared to make free allocation to those working as best in class, as I said, this should encourage the other countries to come on board and deal with the issue in the same way. What the Commission is proposing is that in terms of timing nobody will know whether they are part of the auctioning proposals or free allocation until, in essence, 2011. We would be very strong in our opinion that this decision should be made much earlier so that investment decisions can be made.
I can give examples. A world major in my area recently invested in Egypt rather than investing in the upgrading of Italian plants and Italian jobs. The second biggest company in the world has made a decision to hold €1 billion worth of investment in Europe in this sector until this issue is clarified.
Is that not happening anyway to an extent? Companies are setting up in countries outside the EU anyway, apart from all this.
Mr. Colm Bannon
All this can be the straw that breaks the camel's back. For energy-intensive and carbon-intensive industries, if they have already done what they should be doing and they have invested in the best available technology, where does one go after that?
That is a fair point.
It is a complete contradiction of the whole process of encouraging people to become efficient and to be environmentally friendly if at the end of the day the only penalty is they will lose their business.
Is a reward and penalty system being suggested?
It is certainly the most important requirement so that decisions can be made rather than waiting until almost the end of this phase two period, which is where we are now.
Mr. Colm Bannon
First we want certainty. Second, it is clear the energy-intensive industries in Ireland are concerned that they will be included among those industries as subject to carbon leakage and that the Commission will agree to those major industries that are energy-intensive being involved in this grouping, and that this decision is made next year. We hope that would be a European position that could then become global as the global discussions develop. There is absolutely no environmental benefit in decamping the production of any of our products from Ireland to north Africa. Our association has estimated that the additional CO2 associated with shipping the material from the Mediterranean rim with back haul will add about 20% to the CO2 emissions per tonne of product made to best EU standards. There is no environmental benefit in doing this either. This is an issue about which the directorate responsible in Brussels must hear the message.
I stated that this is all about trying to reduce carbon and in the process of doing so we do not want to destroy business or introduce regulations that will defeat our primary purpose. I ask the delegation to include this in their written submission and we will pursue it.
Mr. Donal Buckley
I will ask Mr. Reilly to predict the electricity prices in 2020 because somebody asked that question.
Mr. John Reilly
Electricity prices are a function of a number of different variables, from fuel prices to location, the generation mix and the age of that generation mix and lots of other complex issues, including the price of carbon. To be honest, we are even struggling within the industry. The one thing we can be certain about is that even with our own predictions of electricity prices for next year, we will almost certainly get them wrong. It is very clear that the whole emissions trading scheme, the whole agenda here, has rightly been to put a price on carbon and factor that into the price of whatever the commodity is that one is purchasing, whether that is cement or electricity. There is no question but that the sum of the proposals in the directive and some of the proposals being made by our Government in terms of allowing Government access to EU allowances which the electricity sector must purchase by auction, will put upward pressure on the price of allowances and, therefore, naturally, put upward pressure on the price of electricity. It is as simple as that. That is in essence what the scheme has been designed to do and is doing.
In response to Deputy Coveney's question about the efficiency of Irish industry, the Irish electricity sector has improved its efficiency in the period since 1990 by more than 30%. The average emission from our portfolio is in the region of 9 tonnes of carbon dioxide per megawatt hour produced in 1900 and I think the current figure is about 0.6 tonnes, and that will continue to reduce. We are producing significantly more electricity now than we did in 2000, for the same amount of CO2 emissions. In fairness to the Government, the Legislature and policy-makers, this has been driven by the penetration of renewables, by the new market structure which is delivering more efficient plant, such as new and more efficient peat plants and new and more efficient gas plants. There is not a lot more we can do. We must remember that even with our ambitious targets on renewables of 33% and perhaps even 42% as indicated in the all-island grid study, unfortunately 60% or 70% of electricity will still need to come from thermal sources in 2020. The one certainty is the Irish electricity sector is delivering in terms of reducing emissions intensity and will continue to do so.
Mr. Donal Buckley
I will ask Dr. Wilson to answer the question. I referred to the auctioning process and how that could impact on the market. I think I was talking about the carbon market but there are concerns about auctioning.
Mr. Owen Wilson
In transiting from this current phase which ends in 2012 to the next phase which starts in 2013, we are moving from approximately 80% to 0% free allocation of the requirements to power generators. Moneypoint and Huntstown will get 0% each, to clarify the point made previously by Deputy Coveney. The problem is the directive is not explicit in how this auctioning should be undertaken. It simply indicates that the Commission shall prepare a regulation at some subsequent date and then member states can proceed with establishing the administrative frameworks, the auctioning structures. Our concern is we could have in excess of 27 different auctions because regions within a number of member states will also be allowed auction. With 27 different sets of rules, with a multiplicity of languages and a multiplicity of application procedures across Europe and with all companies involved in the emissions trading scheme seeking to purchase in these auctions, it could result in a totally chaotic outcome.
The other problem for the electricity sector is that in looking forward, it will be concluding contracts for electricity sales for 2013 in 2011. It will be fixing prices with its customers. To do this, it needs to know what the price of allowances may be in the future. It is not clear there will be a smooth transition once such large-scale auctioning is introduced. There is a severe risk to companies that they will underestimate the consequences of auctioning in their contracts with implications not just for the emissions trading sector but also for the electricity sector. This could cause significant disruption within Europe and within Ireland to the operation of the electricity market.
Should installations with emissions of 20,000 tonnes or 25,000 tonnes be excluded from the ETS?
Mr. Donal Buckley
The threshold of approximately 25,000 tonnes is the level of proportion between the burden and the impact. Those on the Irish scheme are particularly small and some of the educational institutions have been involved. They are based on capacity as opposed to output and their output is very small, purely because they may have a back-up capacity. They are faced with the entire cost of the monitoring and verification which is very significant. Clearly they should be out. We would see approximately 20,000 tonnes to 25,000 tonnes as being the appropriate level that would equalise the burden with the impact.
How many companies are involved?
Mr. Donal Buckley
I can send the list to the committee. The tail in Ireland is quite big. There may be 25 companies which might represent up to 40 installations. They would form a significant portion of it. Many of the smaller entities are faced with the verification cost. We are talking about CO2 as a tradeable commodity. There is a significant trade. In the current NAP the EPA took out four or five very small companies. However, another good chunk of companies could come out without any impact. The level of emissions that would be taken out would be minuscule. However, there would be a reduction in the administrative burden.
Mr. Buckley might include that.
Mr. Donal Buckley
I have a list of the tail.
I have a question that affects two of the businesses represented here. Maritime transport and the emissions produced by shipping are not in the ETS. Obviously Ireland is more vulnerable than other European countries in terms of the cost of shipping bulk product, including alumina and cement. Has IBEC made representations to Government on keeping it out of the scheme or making a specific case for Ireland on the matter?
Mr. Colm Bannon
We have not specifically made representation on the issue.
Has IBEC discussed it or does it have a view on the matter?
Mr. Liam Fleming
Aughinish has not made any representation. We do not really have a strong viewpoint on the matter so far. Freight transport costs have doubled in the past five years. As a trading country Ireland will probably suffer relative to others. Along with air transport coming into the system it would appear to be an inevitable consequence of the general push. It is a marginal issue for an individual company. It is probably a bigger issue for Ireland or the EU as a trading bloc. So far we have not made any direct representations.
Mr. Donal Buckley
On a general point, we need to consider the alternatives to address emissions in the transport sector. If we have a large liquid market, it might be the most cost effective way of doing it. Mr. Fleming is correct. It will obviously add cost.
Mr. John Reilly
We are all aware of how complex and rapidly moving this matter has been in recent years and especially in recent months. In the past 12 or 18 months we have been preparing for the aviation sector being included. We are of the opinion that what is critical is a proper global agreement. The absence of a global agreement, including aviation, will drive up the price of allowances. It is in now and that is it. It is just a question of how it will be done. We would have had concerns in that regard and would have expressed those concerns. It would be similar if we investigated maritime transport in detail. The answer to all these issues is a real global emission scheme that delivers on the environmental agenda and offers the least cost solutions to anybody regardless of where they operate, whether in shipping, aviation, manufacturing or producing power. That is what we would support in terms of the overall system.
Mr. Liam Fleming
Taking up a point on the auctioning confusion among member states and the issue of confusion regarding an international agreement, Ireland and the EU learnt considerably from the original ETS directive and the first and second NAPs. One of the issues was the ease of different interpretations of who was in, what was in and for how much. Our industry learnt that interpretation was turned on its head by different member states. With the panacea of a future global agreement the same situation will certainly arise. Certain countries will interpret one way to the detriment of others. It is not realistic to move to a finalised working global agreement in one step based on our experience.
We would have guessed this, but we have now actually experienced it through the first NAP, in which different countries used a narrow, medium or broad definition of a combustion plant. Ireland adopted the broad definition. Once the rule was created, Ireland incorporated everybody within the rule, whereas other countries excluded totally where they could. A future international agreement will only emerge gradually, which is why we favour a benchmark system. We need to establish an international benchmark and validate that everybody is allocated to that. Having an allocation below a benchmark would introduce a cost that would be internalised in the product. Down to the benchmark, people can invest. However, once we go below a benchmark we are adding cost that is not recoverable. It is important that all industries internationally do that. To do that will take several years. It needs to be phased in starting with a benchmark setting for everybody. When verified that every installation in a sector is allocated to a benchmark it would then be possible to ratchet down the allocation towards zero and fully meet the objective. However, it will not go there in one go.
Cement could be much cheaper in Poland than in Ireland because of the way it is implemented in different countries.
Mr. John Reilly
It might also happen less efficiently to the detriment of the environment, which is what carbon leakage is about.
Mr. Donal Buckley
Deputy McManus's asked about the number of companies and which companies are affected. I thank the committee for this opportunity. This is a major issue for business. Some of the businesses are represented here today. As somebody involved in the manufacturing and food sector, I ask Ms O'Shea to give a very brief outline of the matter.
Ms Audrey O’Shea
I will take the opportunity to take a step back and consider manufacturing in Ireland in its entirety. While in 2005 national emissions increased by 23% over 1990 levels, it is very important to consider that industrial production had increased by 330% and industrial energy efficiency intensity has actually reduced by 54%. To paint Ireland's industry as being the bad boys of Europe is not appropriate. Based on those figures we rank at number 1 for energy intensity. Within the food and drink industry in Ireland, the agrifood sector produces 800% of our needs. Therefore we are supplying an important food substance to Europe and the world. While we are not an energy-intensive industry to the same extent as the cement and alumina industries, we are still open to and under the scrutiny of international competition. When considering investment we are looking at profitability, operational costs and marginal costs. Some of the companies I represent in the food and drink industry have decided to invest in areas outside the EU, including America, China and North Africa.
As has been alluded to several times today, we do not know the costs Ireland will incur. We would request a marginal abatement cost curve study to be carried out. I will make a final point regarding the food and drink industry. The Stern review has been taken quite seriously by all our colleagues in Europe. Stern does not advocate the reduction of food production or the reduction of agriculture.
Mr. Donal Buckley
We may have missed one or two questions and I will be happy to follow them up. If we missed some, that was my omission. I will take the Chairman up on his kind invitation to send in a submission, which will outline some solid things.
I thank the witnesses for attending. It has been very informative from all points of view. The joint committee will do its best. We are all fighting for the same cause and the joint committee would be only too pleased to anything, within reason, to assist industry. We look forward to receiving the written submission.
A two-day debate on climate change will be held next week in the Dáil. If IBEC has strong views on the issue, it should make a submission to us before the debate in order that members can raise them with the Minister in the House.
I compliment IBEC on its preparedness for the forthcoming changes, which is impressive.
It would be worthwhile if IBEC were to send its submission by next week because members could highlight some of the issues in it during the debate. It was a result of the joint committee's activities that the Dáil will formally discuss these proposals and the issue of climate change. We would welcome any ammunition IBEC can provide which would be helpful to Ireland Inc. For this reason, I ask IBEC to send its submission, even if it is not a final draft, to the clerk to the committee.
The joint committee went into private session at 5.22 p.m. and adjourned at 5.25 p.m until 1.15 p.m. on Wednesday, 9 July 2008.