in Reality Check edited by Richard D. Morgenstern and William A. Pizer
Article written with Matthieu Glachant.
As part of the national strategy to meet Kyoto obligations, the UK Government launched 48 Climate Change Agreements (CCAs, hereafter) negotiated with trade associations representing energy intensive industries in 2001. These CCAs exhibit two original features.
To begin with, they are embodied in a sophisticated policy mix in which they are combined with an energy tax, the Climate Change Levy, and an emission trading system. The levy provides the sectors with an incentive to enter in CCAs by granting an 80% tax rebate to participating companies while they can comply with their CCA target by purchasing allowances through the emissions trading scheme (ETS). A second characteristic of CCAs is that they look like the ideal voluntary agreement in the sense that they fit quite well with the recommendations on the design of voluntary agreements found in reference policy documents (e.g. OECD, 2004). They were designed under a clear and credible threat (paying the full energy tax). Significant efforts were made during the negotiation process to establish the Business-As-Usual trend in order to measure the genuine strictness of the CCA targets. Monitoring and enforcement provisions are also particularly well-specified. Agreements are enforceable contracts which allow punishing non compliant companies. Clear final as well as interim targets are set. To sum up, CCAs seem well equipped to be efficient.
Have CCAs met these expectations? In particular, have they led to more environmental improvements than what would have been observed without CCAs? In this chapter, we describe this policy experience and implement a novel methodology to assess the environmental strictness of CCAs targets. This method exploits the idea that the ETS market price reveals the marginal abatement costs of the CCA participants.
The structure of the paper is as follows. Section 2 describes the UK Climate Change policy and the context in which CCAs were negotiated. In section 3, we describe carefully the contents of CCAs. Section 4 is dedicated to the interim assessment of CCAs' achievements from the participants' point of view. We develop our own assessment in section 5. The overall conclusion is that CCAs have clearly been successful in meeting the energy consumption targets. But those targets were probably modest for the majority of CCA companies. Contrary to the expectations based on theoretical considerations, CCAs may not have delivered much more emissions abatements than what would have happened anyway.