Ian Duncan: Free allowances to be 'beating heart' of EU ETS reform

Ian Duncan on the difficulties of building cross party consensus, skeleton reports and shadow meetings and why free allowances are set to be the 'beating heart' of the EU's emissions trading scheme reforms.

By Brian Johnson

Brian Johnson is Managing Editor of The Parliament Magazine

31 May 2016

Drafting his report, says Ian Duncan, was in many ways, the more straightforward element of being Parliament's lead rapporteur on reform of the European Union's emissions trading scheme (ETS). "It's ensuring it maintains its integrity as it evolves and retains the support of those behind it, that's the challenge," says the ECR group MEP. 

Meeting up with the fellow Scot as he put the finishing touches to his report last week (if you are reading this, his report has gone public) there's a sense of pride from Duncan and his staff on what they've achieved. 

From the outset, the Tory MEP deliberately set out to "do things differently" in a bid to avoid the pitfalls and failures of previous attempts at restructuring Europe's flagship CO2 reduction scheme.


"I'm pleased by how this has all unfolded because I've been a shadow rapporteur and watched others put together reports. So I've seen it done badly", he says. 

On an issue as potentially divisive as ETS reform, creating a better understanding of the positions of his colleagues and their respective political groups has been crucial in his attempt to succeed where successive reforms have failed. 

"The important thing for me - and this is why we did what we coined 'shadow meetings' - was that on each of the core areas where we thought there would be controversy, we had Chatham House style meetings. These were free flowing, assistants could speak, members could speak and the witnesses we brought in were broadly suggested by the others."

"This allowed us, after those meetings had taken place, to set up what we've called the 'skeleton report' where we basically identified all the issues that we thought needed to have an answer and we sought responses."

This has allowed Duncan to produce what he hopes is a report that will be viewed positively by Parliament's larger political groups. 

"You can only do these things through collaboration; you can't do it on the basis of running ahead and occasionally looking over your shoulder and hoping there are followers behind. You have to link arms, especially if you are in a smaller group, and I'm in a smaller group. So I have to do it not just by persuasion, but by being open and very frank with people." 

Quite simply, Duncan doesn't have the numbers to railroad his views through the Parliament; so rather than risk repeating the failures of past ETS reforms, he decided to take a pragmatic approach and focus more on the areas where he believed he could build cross-political group consensus. 

"And that has helped I think in this ETS dossier because I don't have the votes. My group, the ECR, even if they all supported me, which they don't, wouldn't provide enough votes, so I need to corral the entire Parliament and the different political groups into a place where there are compromises that they can comfortably accept. Actually drafting the report wasn't easy, but it was more straightforward because we knew exactly where the compromises were."

It was while working in Brussels for the Scottish Parliament that Duncan says he was exposed to how the political world worked here, "and with the Lisbon treaty coming along and the empowerment of the European Parliament, people began to recognise that this wasn't just a rubber stamping area anymore, there were things that could be done."

Following his predecessor Struan Stevenson's decision to step down at the last European elections, Duncan decided he wanted to see things from the inside. "At that point I worked for the Scottish Parliament in a restricted job, so I couldn't be politically active."

"So even before the nomination came along I had to resign my job before I put my hat in the ring, before the whole process began, before I knew whether I'd be top of the list or bottom, I had to resign." Duncan went from a job where he was earning a good salary to earning around €10 an hour. 

"My partner was very helpful in keeping the wolf from the door, thankfully. Then, through that process I was ranked number one and that made things easier, though not certain by any means. There were a few whiskery times when it didn't look that promising".

However, in May 2014 he became Scotland's only Conservative MEP. "The results of the European elections were the best we'd had for some time and the party is now in fine fettle."

Gregarious, charming and determined to make a difference, Duncan describes himself as socially liberal and fiscally conservative - his overarching interests and passions lie within the wider environmental world.

"That's why I chose my committees carefully and within those committees I have chosen my dossiers with a degree of focus, because those are areas I believe I can add value to."

This lack of political dogmatism occasionally confounds his fellow MEPs. "The first joint publication I did was with Dutch Greens MEP Bas Eickhout when we looked at a North Sea energy grid; how would it work, what would it mean."

"We both came in from slightly different directions but we were broadly sharing the same views; that this is good for the Netherlands and good for Scotland. Bas was surprised at first, pleasantly, I think and we continue to talk about future collaborations."

Shortly after being appointed as rapporteur, Duncan said that the issue of free allowances would be the "beating heart" of the ETS debate. 

"With the carbon price sitting around at €5, that's never going to drive change. At best that's an irritant. So we need to be looking at drying up the allowances, which are flooding the market. This was the principle ambition of the market stability reserve (MSR)". 

It was, he says, all going very well right up until the global economic downturn. "We found that the trajectories that industries had been on were simply not correct anymore and that the allowances were just washing around. The MSR was meant to be the first drying stage, but this will not really become a functional driver of innovation unless we start to see a carbon price that becomes more than just an irritant."

However, it's not all down to the ETS' failure in forcing companies to change their ways, he argues. "Good companies should be innovating all the time. It should be in their DNA. But you've got to recognise that some are better than others at it."

"That's why we have these funds for modernisation and innovation, to help drive progress where there are innovation log jams. We need to encourage innovation by whatever means we can. One would hope that the carbon price will begin to reflect reality and as it rises, innovation is encouraged."

On the thorny issue of carbon leakage, one that often divides MEPs within their own political parties and groupings, Duncan says that again he wants to take a pragmatic approach. 

"Carbon leakage at the moment isn't really a factor that you can see. There may well be questions around what I call 'investment leakage' at this stage where you actually find certain companies arguing that if the price were to rise inside the EU, 'would we want to invest there?'"

"That could happen, but at the moment carbon leakage is something that we need to prepare for rather than address in real time. But there is no doubt that if this ETS reform works, the risk of carbon leakage will be real." 

"Once you start to move back to where this whole journey began, with a carbon price of around €30, then you are talking about a serious driver of costs. It is then that we may witness the beginnings of carbon leakage. That's what we've have to guard against. The last thing we want to do is to create a bright new tomorrow inside Europe with no emissions because there are no emitters."

The challenge, Duncan says, is in creating a balance and a less "monolithic" approach. After the economic downturn there really should have been a fundamental reform of the emissions trading scheme that reflected the new reality.

"But there wasn't. We ended up with the mechanism in place, rolling forward, the allowances glut that we are living through, with certain sectors even doing well out of it. I don't think it was anticipated that would happen, but we are a long time through that economic crisis now and are only stumbling towards the reform that we know needs to happen".

Duncan says he's tried to find workable ways to address the core challenges of reforming the ETS, on linear reduction, the Paris accord, carbon leakage and the impact on smaller emitters. 

"Tiering is also one of the key challenges that we face. The broad debate has been, do you want to open the option share, do you want to tier it through or do you want to tier it using the cross-sectoral correction factor.

"Tiering has been pushed by a number of individuals, so has opening up the option share. I've been very clear that whatever comes out, I'm advocating it because it works, not because I'm dogmatic."

He also wants to ensure those sectors that need some safeguarding can receive the protection that they missed out on in previous phases.

"We'll know if I have indeed not surprised anyone when the report comes out on Friday. I hope that people will judge it on its workability and I think, - and this is where I'm talking with my shadows - to see how then we begin to marshal it through the next steps."

"EU member states have been a little bit distant so far," he adds, "Council are giving nothing away. They are playing their cards remarkably close to their chest. I don't quite know where that third point in the triangle is. I know where the Commission is, I know where I am, where are they?"