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Financial Times: Trading is just one way to tackle climate change

By Graeme Sweeney
Published: May 14 2007 03:00 | Last updated: May 14 2007 03:00

From Mr Graeme Sweeney.

Sir, You argue that taxes are a better way to reduce carbon emissions than trading schemes (“Carbon markets create a muddle”, editorial April 26). That’s too narrow-minded. Trading is one of a number of important tools that will be necessary to address climate change.

The central objective of climate change policy should be to reduce CO2 emissions by encouraging investment in technologies that lower emissions. Taxation does not do this. It is a blunt instrument to achieve an environmental objective. Taxation channels capital away from industries that are capable of delivering emissions-reduction projects and gives it to governments with no guarantee that they will spend it effectively. Trading schemes, by contrast, are a much sharper instrument. They give business incentives to improve energy efficiency and develop new technology. Unlike some incentive systems, they do so without using public funds.

You also assert that carbon taxes are more difficult to eliminate than artificial markets. Don’t underestimate the fragility of a tax-based system. Taxes are set by governments that come and go. It is far more difficult for politicians to intervene in established international markets.

By many measures, the European Union’s Emissions Trading Scheme (ETS) is a success. From a cold start two years ago, it is now a vibrant market that is driving companies to reduce their carbon footprint. It has reacted promptly and clearly to market information and provided sufficient depth and liquidity for traders to execute their business. These are all characteristics of a market that is working. This is real and is happening today.

The ETS is still in its infancy, and more can be done to improve it. For example, debate continues over whether to auction allowances or give them away. While Shell does not favour auctioning, governments may do so eventually because it allows them to capture some of the value of allowances and is an efficient way to allocate them: they go to the bidder who values them the most. If auctions are used, the money raised should be recycled back to the company or industry and directed to helping further reduce emissions. Clearly, if allowances are given away, they should not lead to windfall profits – something that can be avoided, for instance, by steps such as tailoring the allocation of allowances to specific sectors.

Shell is one of many companies and organisations actively participating in reviews of the ETS. They should lead to improvements that will help the EU meet its target of reducing CO2emissions by 20 per cent by 2020.

Graeme Sweeney,

Executive Vice-President,

Shell International Renewables,

2501 AN The Hague, The Netherlands

Copyright The Financial Times Limited 2007

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