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06 SUPPORTING FRAMEWORK

Trajectory

6.1 A robust framework for emissions reductions needs interim targets as well as a long term target for two reasons. Firstly, the pathway taken to reduce emissions to a certain point matters because the atmospheric concentrations of greenhouse gases depend on the total amounts emitted over a long period of time (see paragraphs 4.6 and 5.11). Meeting specific annual emission targets is therefore less relevant than the total level of emissions over that period of time. The later cuts are made, the greater they must be to have the same effect, so they will be more expensive. Secondly, setting interim targets gives businesses better information and more certainty on which they can base their investment decisions. The Scottish Government therefore proposes that the Bill sets out a framework for interim targets towards the 2050 target. This should ensure regular, sustained action by all future governments in Scotland to tackle climate change.

Interim budgets

6.2 It is the total amount of greenhouse gases emitted over a particular time which causes climate change, rather than the amount of emissions in any single year. Whilst there are difficulties with taking a cumulative approach for the 2050 target (setting a target for the total quantity of emissions through to 2050), it is possible to set the desired trajectory, and thus limit cumulative emissions, by establishing a set of emissions budgets. An emissions budget period would last for a specific number of years and would allow for annual fluctuations in emissions to occur whilst limiting the overall amount of emissions during the budget period.

What is 'Emissions Budgeting'?

Akin to a financial budget, an 'Emissions Budget' refers to the aggregated quantity of emissions which are permitted during a specified time period - in this example, five years long. The first budget might cover the years 2008-12 and would be expressed as 'x million tonnes of CO ₂e'.

The diagrams on page 52 provide an indicative illustration of how the first three budgets may work. Figure 8 shows a trajectory whereby the level of emissions permitted by the budget is reduced over time. Figure 9 presents the detail of how emissions within a five-year budget period may fluctuate, providing the aggregate for the five years does not exceed the limit set out in the budget. Thus a system of five-year budgets provides for increased year-on-year flexibility whilst still ensuring an emissions reduction trajectory results.

Figure 8

Figure 9

6.3 Emissions budgets will ensure scrutiny as reporting will require focus on the underlying emission trends and the impact of policies, rather than on short-term impacts of gas prices or a cold winter. Budgets would be set several periods ahead - this will allow both Government and industry to plan in advance, knowing what will be expected over the coming years so that proper investment in low carbon infrastructure can occur in the knowledge that there is an established framework in place that will value such investments. The Scottish Government therefore proposes to use emissions budgets as interim targets to ensure progress towards the 2050 target.

Level of budgets

6.4 The appropriate level at which these budgets are set will be a complex issue and it is important that the process by which they are set is transparent and robust.

6.5 The levels set must be challenging to provide a strong incentive for increased action. A number of factors would need to be considered, including but not limited to:

• Likely economic growth.
• Likely population growth.
• Likely technological progress.
• Social impacts, including impact on rural areas.
• Environmental impacts.
• Impacts on the economy and business competitiveness.
• International circumstances.
• Scientific knowledge about climate change.

6.6 The level set for the budgets should set the trajectory to the 2050 target whilst maximising benefits and minimising costs.

Q 8. What factors should be taken into account when setting the level of budgets?

Duration of budgets

6.7 The Scottish Government wishes to design a framework which gives strong incentives for early action: Stern's analysis shows that appropriate early action reduces long-term costs. One of the purposes of the Bill is to ensure that climate change action is not delayed in favour of short-term priorities.

6.8 The interim time periods need to be long enough to know whether emissions are on course and, if not, to design, implement, monitor and adapt policies to reduce emissions. It can take over a year to evaluate the effects of new policies and refine them so that they have the desired effect. Sometimes policies can have unintended consequences which may not become evident until analysis and statistics are published some years after the reporting period.

6.9 The availability of data to monitor whether targets have been met is a key issue, given the present 20-month lag for Scottish Greenhouse Gas Inventory emissions figures. Therefore any interim target of less than two years would not allow for corrective action (either policy changes, borrowing or buying credits) to be taken if there is a spike in emissions.

6.10 Buying credits would be one of the quickest means of making an adjustment, but this could only be done if funds were available. If the Government allocates contingent funds to cover purchase of credits, this could send a signal that Government expects to fail and would undermine the credibility of the framework. However if no provision was made, there would be no funds with which to buy credits. So it may be preferable if interim periods end just after Government budget cycles begin, to allow provision to be made if credits are needed.

6.11 Longer periods may also reduce the cost of policies to reduce emissions because the timing of policies could be adjusted to take advantage of revised information or the pace of technological development. Infrastructure lags will also be critical. We are locked into some high-carbon technologies because capital lifetime can be 40-50 years. Changes will likely only make economic sense at the end of the working life of major plants, such as electricity generators. Longer interim targets cope better with this lumpiness in the emissions trajectory.

6.12 Aligning budget periods with international and UK reporting timescales would increase transparency because international comparisons could be made, and would reduce bureaucracy because in-depth analysis will not need to be repeated in different timescales. In practical terms, the EUETS caps about half of Scottish carbon dioxide emissions and it would be more difficult to assess progress if the interim budgets were not synchronised with phases of the EUETS.

6.13 The Scottish Government is therefore minded to have multi-year budgets of at least three years. Multiples of two years fit with the financial budget cycle (the comprehensive spending review is every two years). However, there are a number of choices for the length of the budget period:

• Four years - fits with the Scottish Parliamentary cycle (However the data and policy time lags mean that the emissions for at least half of the period for which Governments will be held to account would have been the responsibility of the administration in power during the previous Parliament);
• Five years - fits with the UK Climate Change Bill periods, current EUETS phase and Kyoto period;
• Six years - multiple of financial budget cycle but allows more time to adjust policies; or
• Eight years - fits with possible future EUETS phases (2012 onwards).

Q 9. How long should interim budget periods be?

Annual targets

6.14 The SNP manifesto proposed a 3% annual emissions reduction in order to meet an ambition of an 80% reduction by 2050 against a 1990 baseline. That ambition remains unchanged: to reach an 80% reduction by 2050 Scotland must, in fact, reduce its emissions by an average of more than 3% per year. Continuous progress on reducing emissions is essential. The Scottish Government believes that reporting an annual measure of progress within a multi-year budget process would be the best means of achieving this.

6.15 At a global level, emissions fluctuations in individual countries are smoothed out and annual targets can be meaningful. However for a small country like Scotland this is not the case. Significant annual variations in emissions can occur due to a variety of factors over which the Scottish Government may have no control (such as changes in relative fuel prices or temperature etc.) and these can disguise underlying trends. In 2006, for example, gas prices were relatively higher than coal prices, which led to a shift towards coal-fired electricity production. Published figures ³⁵ for carbon dioxide emissions from Scottish sites in the EU Emissions Trading Scheme indicate an increase of some 1.2 Mt CO ₂e between 2005 and 2006, principally from power stations. Scotland is more susceptible than the UK or EU to annual variations of this kind because our emissions are dominated by a few power stations: three power stations produce about 35% of Scotland's CO ₂ emissions, so changes in production at those stations have a very significant impact on total emissions.

6.16 There is also little evidence that a smooth year-on-year reduction in emissions should be expected. In Scotland, though the general trend is that greenhouse gas emissions have been falling since 1990, total emissions levels have fluctuated year on year, with the largest annual percentage increase being 4.5% between 1999 and 2000 and the largest annual decrease 5.7% between 1998 and 1999. The Intergovernmental Panel on Climate Change does not project a smooth year-on-year fall in global emissions; it forecasts that global emissions will peak before falling more steeply. Significant changes are likely as major plants are replaced or new technologies such as carbon storage or clean coal technology are introduced. Investing in low-carbon energy will also take time as industry is diverted towards low-carbon technologies.

6.17 Annual fluctuations in emissions not only create a greater risk that mandatory annual targets would be missed, but in doing so they also threaten the credibility of the framework. Markets may not believe that a Government had sufficient policy capacity to respond to natural market variability effectively, or may believe that the Government would maintain an emissions policy that resulted in very high price spikes or that had strongly negative consequences for competitiveness. The precedents of the Exchange Rate Mechanism and Growth Pact illustrate the difficulties of maintaining fixed policies against market speculation or in the face of unexpected economic pressures.

6.18 The Scottish Government recognises that annual targets could help to encourage progress by governments - but does not think that mandatory annual targets would create a credible framework, due to the large fluctuations in Scotland's emissions. The Scottish Government believes that any mandatory targets must reflect the likely nature of Scotland's emissions and potential for reductions in order to provide a strong, credible signal to business and industry. It believes this is possible by the adoption of statutory multi-year budgets and, to support these, a strong framework of annual reporting and scrutiny. Details of the reporting and scrutiny measures which will be introduced to ensure continuous progress in reducing emissions towards the 2050 target are discussed in Section 7.

How far in advance should emissions budgets be set?

6.19 The rationale behind having longer term emissions budgets is to provide certainty for businesses and governments sufficient incentive to invest and innovate. Some technologies or changes in plant need a long lead in time and some behaviours take generations to change. The Scottish Government believes that emissions budgets should be set far enough in advance so that they can be taken account of when making most investment decisions that are likely to affect our emissions trajectory. The Government would welcome evidence about the lengths of lead-in time for most capital replacement to inform how far in advance budgets should be set.

Q 10. How many years in advance should emissions budget periods be set in order to provide sufficient time to develop infrastructure?

Banking and Borrowing

6.20 Another important issue exists around the ability of Governments to 'bank' or 'borrow' emission amounts over budget periods. Banking and borrowing would allow the Scottish Government to carry unused emissions rights over to later budget periods (banking) or allow it to bring forward emissions allocations from future budget periods (borrowing). This would provide a means of allowing for unexpected rises in emissions, instead of, or in addition to, the use of international credits (paragraph 5.47). The diagram below explains the concept of banking and borrowing:

Figure 10

6.21 Banking will incentivise Government to over-perform - to try to reduce emissions further than is necessary under the framework if it is cost-effective to do so. This could drive down the cost of reducing emissions in Scotland.

6.22 Borrowing, however, is a less certain issue. It will allow Government to correct unexpected spikes in emissions during the end of a budget period, especially as emissions data may not be available for up to 20 months. Allowing Government to correct this in the following budget period will ensure that the emissions framework remains workable and credible. However, allowing Government unlimited borrowing will reduce the certainty that both business and individuals need. The framework would lose credibility if unlimited borrowing were allowed. Therefore, finding the appropriate level of borrowing allowed is essential to the creation of a credible climate change framework in Scotland.

Q 11. What should be the limit (in terms of absolute quantity or as a percentage of the budget period) on the amount of emissions which the Government can borrow from a following budget period?

Mid-point targets

6.23 There is strong evidence that action over the next 10-15 years is critical if dangerous climate change is to be avoided. UK and European climate change objectives contain interim targets for emissions reductions by 2020. (26 - 32% CO ₂ for UK, 20% greenhouse gas for EU or 30% if an international agreement is reached). Setting an interim target in the Bill would provide more information about the likely trajectory of emissions towards the 2050 target. However, there is a danger that setting an arbitrary figure which either became implausible, or lacked sufficient ambition, would damage the credibility of the Bill. The process of setting emissions budgets in advance, on the basis of expert advice, will provide clear information about the likely trajectory. The Scottish Government is therefore minded not to include an interim target, but will consider doing so if strong reasons - and, critically, a justifiable target level - can be brought forward.

Q 12. Should the Bill include an interim point target? If so, what year (or years) should it be for (2020, 2025, 2030, etc.)? How should the level be chosen?

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