UK: October 23, 2007


LONDON - Britain will not use money the government gets from auctioning carbon emissions permits to help it in the fight against climate change, it said on Monday.


Selling carbon emissions permits to businesses participating in Europe's carbon trading scheme could raise 60 billion euros (US$85.24 billion) a year for European Union governments from 2013, Deutsche Bank estimates, and businesses are already lobbying for a slice of the windfall.

But Britain will pool any revenues into the general government budget, rather than earmark, or hypothecate, them to particular causes in advance.

"The UK will not be hypothecating auction revenue to a specific area of expenditure," the government said, in response to advice from an environment committee of British lawmakers.

That committee had recommended that Britain spend the money on measures to curb climate change.

"Hypothecation could mean that expenditure may not necessarily be allocated according to priorities -- this would be inefficient and distortionary," the government said in reply.

One senior European Commission official, Fabrizio Barbaso at the European Commission's energy and transport directorate, said last month that the auction revenues should be spent on alternative, low-carbon sources of energy like wind and solar.

Such renewable energy contributes less to global warming but is more expensive than conventional fossil fuels like oil and coal, and so needs support both in research and development and installation to drive investment and bring costs down.

"We'll need a much higher subsidy for renewable energy and hypothecating auction revenues is one of the obvious ways of doing that," said Deutsche's Mark Lewis.

The Deutsche estimate of auction revenues is based on a 35 euros carbon price and 100 percent auctioning of permits to all participating businesses. The carbon price for 2008 delivery on the European Climate Exchange on Monday was 22.2 euros.

National European governments can auction up to 10 percent of emissions permits from 2008-12, the second phase of Europe's carbon trading scheme, while the rules from 2013 are undecided.

To read the full government report on Reuters InterActive, click on http://www.reutersinteractive.com/Carbon/79448


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