Any statutory UK scheme for emissions trading is unlikely to be in place before 2008, when the international greenhouse gas trading system is due to be in place, warns Marshall in his report, "Economic instruments and the business use of energy." But he urges the government to make an immediate start on a UK trading scheme to give Britain an informed negotiating position in the international arena. It would also give British firms a lead, he adds. The report suggests a dry-run pilot with interested players as soon as possible.
Running alongside a tradeable permits system should be some form of energy taxation to encourage energy efficiency and emissions reduction -- particularly among small and medium sized enterprises (SMEs). SMEs account for 60% of total UK CO2 emissions from business. He prefers a "downstream" tax on the final use of energy by industrial or commercial consumers. Tax rates would reflect the carbon content of different fuels.
The tax should be designed to increase incentives for take-up of renewables. He considers tax relief on electricity from renewables, but he points out that a downstream tax may make it difficult to exempt electricity not supplied directly to the final customer. Audited "green" electricity contracts, however, may make this more practical. Alternatively, says Lord Marshall, it may be possible to provide direct incentives to renewable generators on the basis of the approximate percentage of electricity coming from them. He does not elaborate further on this approach.
Lord Marshall stresses that revenues from an energy tax must be recycled in full to business, with some channelled into promoting energy efficiency or schemes to reduce greenhouse gas emissions, such as "carbon trusts," which promote low carbon technologies, or energy audits for SMEs.
Marshall also calls on the government to look beyond its current emissions targets to give clear long term signals. The commitments agreed to at Kyoto were only the beginning, he comments. Future international negotiations will present even greater challenges.
Chancellor of the Exchequer Gordon Brown says the government will consider Marshall's report as it develops its strategy on climate change.