Jerome Mayhew (Broadland) (Con)
It is a pleasure to serve under your chairmanship, Mr Robertson, and to follow the speech made by the hon. Member for Newcastle upon Tyne North (Catherine McKinnell), the contents of which I very substantially agree with. One of the wonderful things about this debate is that it stretches across the divide that so often separates the views of people in this House.
However, I approach this matter from a slightly different perspective—albeit arriving at similar conclusions—because I see this as the role of the free market. As a former businessman and entrepreneur, I want to unleash the power of the free market to help solve some of the problems that its historical performance has helped create. Too often, the market has been seen as the villain. We talk about business profiteering at the expense of the environment, or businesses trashing the world’s resources, and that applies not just to carbon net zero but to biodiversity. As Professor Dasgupta noted in his report earlier this year, in terms of the biosphere our current practices are using the resources of 1.6 worlds.
It is true that historically, the market has been almost totally blind to the cost of carbon in its economic transactions. When I buy a product—such as this glass—I pay for the raw materials, the design process, the manufacturing, the marketing, the transport and the profit, but I do not pay for the cost of the carbon emission, because that is described as an externality: it dissipates into the atmosphere and there is no significant cost attached to it. The result of that misallocation of resources is that the transaction is incomplete. As a purchaser, I am not having a true economic exchange with the supplier, because I am paying for only part of the product, not all of it. As a result, there is no signal for consumers to look at two separate products and identify the differential cost between the manufacturing process of a high-carbon glass and that of a low-carbon glass. As consumers we are blind, so all those myriad consumer decisions that we take in our economy every day are ineffective in helping give a signal to manufacturers. The process does not provide a signal to consumers; and consumers, in turn, do not provide a clear market signal to entrepreneurs and businesses.
What are we left with? At governmental level, we all know that the climate change crisis is a huge problem, so we have plans from Government, who are picking technology winners by investing in hydrogen, for instance. I hope that hydrogen will be a key part of the solution in our progress towards net zero by 2050, but it might not be. The real problem is that we are currently relying on the Government to take those kinds of decisions because the market is substantially blind. We need to unleash its power through a price for carbon.
We know that markets are without question the most efficient decider that man has ever come up with for the use of resources. They do so not for moral but for wholly personal reasons: they wish to maximise profits, and the way to maximise profits is to minimise inputs. Properly directed by market signals, the market is the most efficient resource user we can come up with. It informs millions of decisions. Crucially, the market and its myriad transactions create the individual wealth that can go on to fund the additional Government action that the market alone is unable to provide. Although I am a free marketeer, I am not a free marketeer red in tooth and claw. There is absolutely a role for Government to set the structures and give the long-term signals for the free market, and to provide assistance and support for those left-behind parts of our community that otherwise would be disadvantaged by that process.
Our biggest challenge in creating a price for carbon is that the United Kingdom economy is not self-contained; we are part of a global economy. If we increase the price of carbon in this country, which is really another name for increasing the price of energy, that will have a very direct and immediate risk to our domestic economy, particularly our manufacturing base. Increasing the price of energy in our domestic economy would result in an increase in the costs of our manufacturing base, which would then either go offshore and relocate to a lower-cost environment abroad, or it would stay and get undermined by the sucking in of lower-cost, higher-carbon imports. That would result in the worst of all worlds: the destruction of our own economic base and an actual increase in greenhouse gas emissions as transport costs are added to the costs of production.
As an economy, we have been very timid in our approach to applying a cost of carbon. We do apply it in some sectors—about a third of our manufacturing base is affected in some way by carbon pricing through the emissions trading scheme. But that is only a third: two thirds of our manufacturing base has no carbon pricing attached to it at all, and none of this country’s imports are assessed or priced for their carbon content.
How do we address this seemingly impossible conundrum? The answer is, in principle, quite simple: a carbon border adjustment mechanism. That means that, at the edge of the economy, when imports reach the border, we assess those products for their carbon content and take a similar approach to that taken in the domestic market by applying a tariff. That is not protectionist in principle, because it would apply the same price and create a level playing field, as opposed to disadvantaging exports in favour of domestic manufacturing. It must also be transparent and within the permissible exceptions of the World Trade Organisation, which allows for tariffs in environmental cases.
This approach allows, in principle, for the increasing of the price of carbon for the domestic market, safe in the knowledge that imports will have a similar price attached. A lot of work has been done by think-tanks and others—and, I hope, by the Treasury and the Department for Business, Energy and Industrial Strategy —on how we can start applying this approach in practice. Conceptually, it is a very simple process, but it has the potential to be fiendishly difficult to apply. If we can apply it, the benefits would be enormous. The market signals would incentivise the reduction in carbon manufacturing processes that this country seeks to achieve.
The benefits would also expand beyond our borders. If a manufacturer in a third country—let us say, for example, in China—exports its product to the United Kingdom, they will not want to receive a significant tariff addition to the price of the product. The Chinese Government—or any other third-party Government—have a choice. They can think to themselves, “Well, we can either have a tariff applied to our exports, which then gets paid to the UK Treasury, or we can apply a similar process ourselves and keep the money here in China.” The third option is that they reduce their 70% to 80% reliance on coal for their energy, and reduce the differential between their carbon production and our own. All these are very positive international signals that we can spread beyond our borders through the imposition of a CBAM.
There is evidence that this is already working. On 15 July the European Union published a draft Bill to implement a carbon border adjustment mechanism throughout the European Union. Even before that has come to fruition—it is just at draft stage—there is evidence that automobile manufacturers in South Africa are already seeking to decrease the carbon content of their manufacturing process, because they are concerned that they will be adversely affected by the imposition of a CBAM in the European Union. Even the publishing of a Bill—a draft Bill—is already having real-world positive impacts on the reduction of carbon.
Another advantage is the potential for reshoring manufacturing production to the United Kingdom. It removes one of the current disincentives for high-energy or relatively high-energy production in this country because we do have a price for carbon through the ETS. That is not sufficiently significant to change consumer behaviour on a more widespread basis, which we wanted to do, but it is enough to provide a minor disincentive to have manufacturing in this country. If we can remove that disincentive, it will encourage reshoring. Research undertaken, I think by Capital Economics, into the steel industry in the United Kingdom has concluded that steel manufacturing’s international competitiveness would actually be increased through the imposition of a carbon border adjustment mechanism by between £50 and £75 per tonne through the 2020s.
In my submission, we have a political opportunity now not just with the advent of COP26, but, more significantly perhaps, with the publication of a draft Bill by the European Union. This gives us an opportunity to address one of the key challenges to a CBAM, which is how we deal with the concern or disapproval of large exporting countries that have a high carbon input—for instance, China. We have an opportunity to join forces with the European Union and have a more internationalist approach to the introduction of a CBAM now. It would not hurt given that, dipping into another language, we have a certain froideur across the channel currently, and sticking to the same approach, what about a bit of rapprochement?
There is a joint objective here. With Brexit, we are allowed to be nimble of foot. We can come up with these policies ourselves, and we are not held back by a pan-European approach. Equally, it does not prevent us from agreeing and co-operating with the European Union when it is in our national interests. I think this is a great example of where our national interests and those of the European Union coincide very neatly, and it gives us an opportunity to build bridges should we wish to do so. It also helps us with the potential approach to China, in that it is the entire European market that is taking—or potentially taking—this approach, as well as with the United States of America, which has expressed an increasing interest in the concept of some form of carbon border adjustment mechanism.
I mentioned earlier that CBAMs are simple in principle and hard to apply in practice. I am agnostic as to how we do it, and many different approaches have been suggested. We could expand on the current ETS. We could, as Mr Carney has suggested, take the key products that are internationally traded—steel, cement, aluminium, chemicals and so forth—and start on that basis, but then build out into the wider economy as we gain confidence and competence in the process of a CBAM. We could apply it by sector assessment by country, which would be more of a purist approach, but much more complex to apply. I suspect that the answer is to start small and to grow as we learn; but the sooner we start, the better. I conclude my speech by challenging anyone to come up with a way in which we can impose a price for carbon without some form of carbon border adjustment mechanism.