Greenhouse Gas Emissions Trading Scheme (Amendment) Order 2026

Earl Russell Excerpts

Wednesday 28th January 2026 Grand Committee

I just take this opportunity to ask not just whether it is regrettable how much this is costing us all, in our household bills, and business and industry bills, but whether it is making the country less competitive. With those few remarks, I will be very grateful for the Minister’s response.

[Earl Russell (LD)]

My Lords, we welcome this order but I have some important questions to ask the Minister. My party has long argued that a robust, transparent, high-standard carbon market is a cornerstone of any credible pathway to net zero by 2050. When done well, emissions trading cuts carbon at least cost, drives innovation in clean technologies and gives industry the long-term policy certainty that it needs to invest confidently in the green transition.

This instrument makes a number of sensible technical adjustments, but this update carries more weight than most of the normal updates. We strongly support all the Covid measures; they are sensible, practical and needed.

However, uncertainty persists around our future carbon-market relationship with our closest trading partners. The Government’s own documents show that UK industry has repeatedly called for linking the UK ETS with the EU ETS, which has already been spoken to and which is a step we strongly favour. A stand-alone UK ETS would be smaller and more price volatile, driving up costs for British business compared to the stability and liquidity of a larger linked market. When paired with clean power, deeper market reforms and other measures, a linked system offers real opportunities to cut energy costs, modernise industrial processes and slash emissions.

This order moves us towards dynamic alignment by adopting EU benchmarks from 2028, alongside the phase-down of free allocation for CBAM-exposed sectors and by enabling import levies through the UK CBAM. This is the right direction. We cannot ignore the carbon costs embedded in goods we manufacture or import emissions unchecked, but this complex transition demands adaptability, coherence and close management by the Government as we move forward. We remain in a halfway house, following rules we no longer help to write, without gaining the full benefits of a larger carbon market. I seek clear reassurances that the Government are protecting UK industry, working towards positions where we are rule-makers again and ensuring that our needs are recognised and mitigated during the interregnum.

The impact assessment’s estimate of £9.8 billion net present social value shows gains from effective decarbonisation, yet the £92 million annual cost to business is far from trivial for energy-intensive industries. As free allocation pares down—particularly for cement, fertilisers, iron and steel, aluminium and hydrogen—we must not offset our emissions and jobs to less scrupulous jurisdictions. A carbon price that cleans up British industry is welcome; one that simply relocates it helps neither our targets nor our industrial base.

I therefore have just five questions for the Minister. First, the Minister’s department accepts that EU linking would reduce costs and provide price certainty. Adopting EU benchmarks facilitates that alignment. Can the Minister set out a possible timetable for negotiating a formal linking agreement? Does the Minister tend to think that any conditions might be attached to that? Industry must plan and make investment decisions now, not years ahead, so this certainty is important to it.

Secondly, on parliamentary oversight, concerns remain that dynamic alignment could allow changes to benchmarks and core design features with minimal scrutiny. Can the Minister confirm that any future changes to the 2028-30 benchmarks or material changes from further EU alignment will come by affirmative procedures and be debated in both Houses?

Thirdly, CBAM and ETS reforms help tackle import leakage, but export leakage remains mostly unaddressed. As free allocation withdraws, UK exports may face higher carbon costs than our international competitors do. So what WTO-compatible measures, targeted free allocation, export rebates or other measures are being considered to help protect exporters and strengthen our manufacturing base? On the sectors that are hardest to abate—ceramics were mentioned in the other place, and Ministers are having particular conversations with the ceramics industry—it feels that particular sectors will struggle to abate even if they want to and extra support is needed.

Fourthly, on regional fairness, the impact assessment highlights burdens on industrial clusters, particularly in Wales, Scotland, Northern Ireland and the north of England. A lot of these areas have already been hit by processes of post-industrialisation. So how do the ETS reforms integrate with wider decarbonisation strategies, including cluster sequencing, CCUS, hydrogen support and the shared prosperity fund?

Fifthly, obviously SMEs are mostly outside these schemes, but some are captured. Where they are, will tailored support and special consideration be given to their needs?

I have some general questions. How will the Government monitor and report the impacts of these measures, particularly in relation to carbon leakage? What mechanisms will track investment in clean technologies that the Government want to see and expect to happen? What mechanisms will track price changes and the competitiveness of the industries related to those?

My belief is that openness in this sector as we move forward is in everybody’s interests. We support the direction of this order but, without bolder steps toward EU ETS integration, the UK risks drifting—aligning in practice but isolated—and being subscale in market terms. That does not serve our industries, investors or climate objectives. We urge the Government to put linkage firmly on the agenda and give British industry the stable framework that it needs. Our climate and our industry standards cannot afford continued ambiguity.

[Lord Moynihan (Con)]

My Lords, I thank the Minister for introducing this statutory instrument. He generously banked the good will between the noble Earl, Lord Russell, myself and himself yesterday, and I assure him that he will have no need to draw down on that, because I am sure he will disassociate himself from his colleagues in another place when it comes to this scheme.

For once, this is a policy that is solely conceived by the Labour Government. It is a straightforward decision by DESNZ to increase carbon taxes on major industrial users which depend on hydrocarbons, particularly gas in the UK industrial market. Many industries have no choice but to use gas, and no alternative firm sources of supply; indeed, they face heavy dependence on high electricity prices to stay in business.

The Minister’s speech may sound technical, and it is true that 104 pages covering the order and the Explanatory Memorandum take some digesting, but a reread shows exactly what this statutory instrument does. The good news is that the noble Lord, Lord Lemos, sitting beside the Minister, is a good Lewisham man and he had no difficulty understanding every word of the particular trading scheme order that is before us. He will be able to help the Minister; I see he is already doing so.

What does this order do? It reduces the supply of free allowances—the key point that was made by the Minister—and thus it increases the carbon tax cost to many of the UK’s major energy industries in a highly competitive global market. These free allowances have been the mechanisms used to protect businesses such as ceramics, cement and steel from being undercut by cheaper imported products from countries that do not charge carbon taxes.

Take the very real example, considered and referred to by the noble Earl, Lord Russell, which was considered in another place yesterday by Gareth Snell, the Labour MP. He focused on the ceramics industry and said that this sector

“is very difficult to decarbonise”

but that it is

“producing things that are integral to the Government’s missions, whether that be house bricks for our house building programme or advanced ceramics to support our defence industry … because we cannot make steel in this country without ceramics … We are still at huge risk of carbon leakage. We work in an unfair market at the moment, not least because of the way in which non-market economy status countries import into this country … the ceramics sector is desperately trying to do all that it can to reduce its output of greenhouse gases, but that is really difficult when it has to run a kiln at several hundred degrees for many hours to do the bisque and the glaze firing, and run refractories for 12 to 14 hours at 1,500°C. Electrification is not available to many of those businesses at the moment, because the capital to invest … is simply not available; the profit margins on their products do not allow for it … We are wedded to gas for the foreseeable future”.

The sector fears that,

“as we move at pace to meet some of the decarbonisation agendas and reduce the overall cap through the emissions trading scheme, that will mean that the free allowances also have to come down, which will push the ceramics sector into having to buy many more free allowances”,—[Official Report, Commons, Delegated Legislation Committee, 27/1/26; cols. 9-10.]

leading to higher costs.

Even in the Government’s net-zero nirvana of green power plants, gas is the dispatchable power in the system. There is no other choice; nothing else will keep the lights on when the wind does not blow and the sun does not shine. This SI needlessly imposes a tax that inflates the price of gas to the industry and then passes the additional cost through to the consumer when they have no other choice.

Everybody wants clean rivers, clean energy and an improved environment with a clear commitment to tackle global warming. But these objectives should never purposely lead to deindustrialising the country, negating growth and increasing unemployment in our high labour-intensive, high energy-consuming industries on the altar of net-zero zealotry.

We have among the highest power prices in the world and today we are putting them up again. If you drain free allowances out of the system, energy costs rise yet more in comparison with international competitors. Not surprisingly, international companies will relocate abroad in more competitive markets and accelerate deindustrialisation in the petrochemicals sector, the steel sector, ceramics and refineries. Sadly, this may also apply to data centres in the future, with fewer choosing the UK for the very same reasons.

--- Later in debate ---

[Lord Whitehead (Lab)]

The Government recently introduced an average reduction of £150 off electricity bills, through placing legacy bills into Exchequer arrangements rather than putting them back to households through obligations. We will continue to look at that on a wider basis. That is a good start for reducing energy bills, as it changes the nature of how the low- carbon economy works.

The noble Lord, Lord Moynihan, asked why we are changing these arrangements in a fairly rushed way. Part of the answer is that, if we are to have a good CBAM in place—after all, it is coming in a year after the EU CBAM—we have to get our skates on. We also have to get our skates on in linking the UK ETS with the EU ETS. The noble Earl, Lord Russell, is aware that, just six months after the linkage arrangements were agreed in principle at the EU-UK summit last April, the November negotiations and discussions started, and they are still under way at the moment. There are a number of answers on timescale and so on that I cannot give right now, but I assure the noble Earl that these are clearly under way and that there is a clear out from those negotiations.

I am conscious that we have spent a long time on this. I will write to the noble Earl and the noble Baroness on the remaining outstanding issues. I hope that I have been able to give a reasonably reassuring position on the need for this SI and the wider context of the underlying direction of all this policy and why this SI leads to a much better and more stable series of arrangements for both the UK ETS and CBAM, as it comes forward.

[Earl Russell (LD)]

We have had a good debate on this. We may have strayed slightly off the topic into some broader areas, but it is important that these issues are discussed and that, when we disagree, we disagree well. I thank everybody and the Minister for their responses.

[Lord Whitehead (Lab)]

I commend this instrument to the Committee.