Today Sandbag published its official submission to the Climate Change Committee's Call for Evidence regarding the 5th Carbon Budget. Our submission leads with the recommendation that the Carbon Budgets should shift to full territorial accounting of carbon emissions, with a much stricter emphasis on meeting our climate targets domestically. This recommendation follows from important developments in the EU Emissions Trading Scheme which risk severely complicating the national accounting process.

The current system of accounting under the carbon budgets treats emissions in the UK's electricity and manufacturing sectors as equivalent to the UK's national allocation of carbon allowances under the EU Emissions Traded Scheme. If the British traded sector underdelivers against its ETS allowances, it is assumed to have purchased in emissions reductions from elsewhere in Europe (via carbon trading) or from further afield (via offset credits). Similarly, if the UK traded sector overdelivers, these emissions reductions are assumed to contribute towards effort elswehere in Europe.

The cracks in this accounting approach have already become apparent. Midway through the second carbon budget, the estimate of UK allocations for the same period already appears to be off track by 328 million tonnes (44%). A key problem for the Climate Change Committee is the need to estimate the volume of ETS allowances the UK's traded sector will recieve long before this has been formalised. In the first carbon budget (2008-2012) the UK could simply read across its traded secor budgets from its "National Allocation Plan", but from 2013, new harmonised rules for allocating ETS allowances across Europe make the final national allocation much less clear. Moreover, important new reforms affecting the timing and supply of the ETS allowances threaten to leave the UK carbon budgets completely divorced from reality. 

Estimating the traded share of the 2nd carbon budget (2013-2017) already involved considerable guesswork for the Committee. The 3rd and 4th carbon budgets (2018-2022; 2023-2027) involve substantially more, as they extend past 2020 into a carbon budget that has not yet been agreed. The 5th carbon budget (2028-2032) stretches the plausibility of this exercise as it reaches past 2030, beyond the latest negotiations on the design of the next ETS carbon budget. 

If this exercise wasn't already challenging, new reforms to the EU Emissions Trading Scheme make it futile. The backloading decision and the market stability reserve will radically affect the timing with which hundreds of millions of carbon allowances will be released into the market. This means UK allowances assigned to a particular carbon budget might not actually arrive on the market until several carbon budets later, if at all.

In light of the growing uncertainty about the the timing and distribution of ETS allowances, it is our core recommendation that the UK carbon budgets should henceforth be set domestically and accounted for using territorial emissions. The ETS can and should remain an important means for reducing emissions to national carbon budgets and targets, but to ensure cost-effective delivery of the UK’s long term goal, the actual emissions of the UK power and industrial sectors should be kept within national carbon budgets without recourse to traded effort from Europe or further afield.

This principle was already invoked by the Committee when it proposed that the 4th carbon budget should be a ‘Domestic Action Budget’ “with the aim to achieve it through domestic emissions reductions only (i.e. without recourse to purchase of credits in international carbon markets, including through the EU ETS). But what was a general “aim” for that budget has now become an accounting necessity and should be formalised in the Act itself. Only then can UK policymakers be sure that our national carbon budgets correspond with something real.

Read Sandbag's full submission here.