Greenhouse Gas Emissions Trading Scheme Order 2020

Baroness Bloomfield of Hinton Waldrist Excerpts

Tuesday 27th October 2020 Grand Committee

Moved by

[Baroness Bloomfield of Hinton Waldrist]

That the Grand Committee do consider the Greenhouse Gas Emissions Trading Scheme Order 2020.

Relevant document: 24th Report from the Secondary Legislation Scrutiny Committee (special attentin drawn to the instrument)

[Baroness Bloomfield of Hinton Waldrist (Con)]

My Lords, the order was laid before the House on 13 July 2020 in draft. The UK will cease to participate in the EU emissions trading system at the end of the transition period, as a consequence of the UK’s withdrawal from the EU. This draft Order in Council, laid under the Climate Change Act 2008, establishes a UK-wide greenhouse gas emissions trading scheme: the UK ETS.

Emissions trading schemes work on the cap and trade principle, where a cap is set on the total amount of certain greenhouse gases that can be emitted by installations and aircraft covered by the scheme. Within the cap, participants receive or buy emission allowances, which they can then trade with one another as needed. This cap is reduced over time so that total emissions fall. Participants are required to monitor their emissions during a calendar year and surrender one emissions allowance for every tonne of carbon dioxide equivalent they have emitted at the end of each reporting year.

The four Governments of the United Kingdom nations have agreed the policy positions that act as a basis for this UK ETS. These positions are set out in the government response to The Future of UK Carbon Pricing consultation, which was published on 1 June 2020. Further secondary legislation, to be introduced later this year under the Climate Change Act 2008 and the Finance Act 2020, will amend this order to introduce additional elements of the UK ETS.

On the importance of emissions trading for decarbonisation, a UK ETS would support us in pursuing our climate ambitions by enhancing the UK’s carbon market signals. From day one, the cap on emissions within the scheme would be reduced by 5% compared to the UK’s notional share of the EU ETS cap. That is not the limit of our ambition. The Committee on Climate Change will, in December this year, deliver its advice on the level of the sixth carbon budget. Once this advice is published, we will consult within nine months on what the trajectory for the UK ETS cap should be for the remainder of the first phase, to ensure that it is appropriately aligned to our net-zero objective. At the same time as ensuring that we reduce our contribution to climate change, the new scheme will provide a smooth transition for businesses.

The UK was instrumental in developing the EU emissions trading system and has long been a centre of carbon trading. We have drawn on this experience in designing the new system, while simultaneously improving certain scheme elements, like the tightened cap, to reflect our world-leading climate ambition. Reducing emissions while supporting UK industry is central to my department’s mission to deliver our net-zero target. Alongside carbon pricing, the Government have schemes worth nearly £2 billion operating, or in development, to support our vital energy-intensive industries to decarbonise. Our economic recovery from Covid-19 must build on the UK’s proven track record of cutting carbon emissions while still growing our economy. Over the last three decades, we have seen the economy grow by 75%, while cutting emissions by 43%. It is vital that we keep up the pace of change as we rebuild from the pandemic and look ahead to the UK’s presidency of the COP 26 climate talks in November 2021.

The Government have an ambitious range of policies in place to help industry reduce costs and decarbonise while supporting a clean, green recovery. In July, as part of a £350 million package to cut carbon emissions, the Prime Minister announced £140 million to drive the use of innovative materials in heavy industry. The 13 initial projects will include proposals to reuse waste ash in the glass and ceramics industry and the development of recyclable steel. Some £139 million was also committed to cut emissions in heavy industry by supporting the increased use of low-carbon hydrogen as a greener fuel source, instead of natural gas, and scaling up carbon capture and storage technology.

We want to show that the UK can have a thriving, competitive industrial sector, aligned with our net-zero target. To this end, in July we announced that the Government will publish a comprehensive long-term industrial decarbonisation strategy in spring 2021. This strategy will cover greenhouse gas emissions from manufacturing, including steel, cement, chemicals and oil refineries. Carbon pricing will be at the centre of this, incentivising decarbonisation. The UK ETS will provide a clear signal for businesses to invest for a net-zero future, backed by the funding and support we have, and will have, available to them.

This draft Order in Council establishes a UK ETS which will be operational from 1 January 2021. It establishes the following key areas: the scope of the UK ETS, and this includes energy-intensive industries, the electricity generation sector and aviation; the cap on allowances created under the UK ETS each year, which will initially be set at 5% below what would have been the UK’s expected notional share of the EU ETS cap over the 2021-2030 period; a full review of the UK ETS in 2023; the monitoring, reporting and verification requirements for UK ETS participants; a robust and proportionate enforcement system; and the roles of the national regulators in monitoring and enforcing the scheme.

This order will establish a new carbon pricing regime for the UK, encouraging cost-effective contributions to our emission reduction targets and furthering progress towards our net-zero goal. I commend it to the House.

--- Later in debate ---

[Baroness Bloomfield of Hinton Waldrist (Con)]

I thank noble Lords for their valuable contributions to this short debate, and for their broadly supportive comments on carbon pricing and this SI. I recognise the strength of feeling about the carbon emissions tax and reassure noble Lords that no decisions have been taken about it; I shall certainly make sure that their voices are heard.

The noble Lord, Lord Bilimoria, raised the need to ensure that our heavy industrial emitters receive free allocation to ensure competitiveness. Free allocation of allowances will continue to be the main policy instrument through which carbon leakage risk and competitiveness impacts are addressed in the UK emissions trading scheme. Our initial UK ETS free allocation approach will be similar to that of the EU ETS period 2021-30, to ensure a smooth transition for participants for the 2021 launch. In 2019, the value of those free allowances given to the UK installations was over £1 billion, taking an average EU allowance price of £22. The Government also compensate some energy-intensive industries for the indirect cost of the ETS and other climate policies passed on to electricity prices.

The noble Lord, Lord Bilimoria, also mentioned the CBI’s heat commission report. I welcome his commission’s thoughtful recommendations on how to decarbonise this too often forgotten sector, which the noble Baroness, Lady Bennett of Manor Castle, described as a Cinderella sector. As he will know, industrial heat processes are within the UK ETS, but heating in domestic and non-domestic buildings is not. The Government plan to publish a heat and building strategy in due course that sets out our immediate and long-term actions for decarbonising heating in buildings. An industrial decarbonisation strategy will be published in the spring.

My noble friend Lady McIntosh raised a series of important and detailed questions. Given time constraints, I will be happy to respond to them in writing, but she also raised the impact of Covid on the aviation sector, as did other noble Lords. Our absolute focus in government at this time is combating Covid-19. We recognise the challenges that Covid-19 has caused the aviation sector and are working closely with the industry to provide support, but it is important that we continue to work on our longer-term priorities, including tackling climate change. There should be a minimal impact on the sector, as the UK ETS will ensure that aircraft operators continue to face obligations for emissions on UK routes that will no longer be part of an EU ETS.

The noble Baroness, Lady Bennett of Manor Castle, rightly said that we should question whether we are going far enough. That is the right question to ask and why we are committed to consulting within nine months of receiving the Committee on Climate Change’s sixth carbon budget advice, to ensure that the cap is net-zero consistent.

My noble friend Lord Moynihan, the noble Baroness, Lady Bennett, and the noble Lords, Lord Bilimoria, Lord Bradshaw and Lord Grantchester, all raised linking a UK ETS with the EU ETS and the status of negotiations with the EU. As noble Lords will appreciate, negotiations are still ongoing and it would clearly be wrong of me to prejudice the outcome of those discussions. We are continuing discussions with the EU on carbon pricing, and we have also been clear with the EU that we are open to considering a link if it is in both sides’ interests. We have been clear that, whatever decisions we take on carbon pricing and whatever the outcome of those negotiations, we will ensure that the UK will have an ambitious carbon pricing system, in line with our net-zero commitments.

The noble Lord, Lord Grantchester, asked why the cap, while 5% lower than the EU ETS, has been set at 156 million tonnes above current emission levels. The cap we are setting at the start will enable a smooth transition from the EU ETS to the new UK ETS to provide certainty for business. Demand for allowances is expected to come from the banking of allowances for future years or as a hedge against price increases. As such, some headroom is crucial to allow for these behaviours to continue without risking price spikes in the early years of the system. This has been acknowledged by the Committee on Climate Change in its advice to us. This initial cap is already more ambitious than the UK’s notional share would have been if we had stayed in the EU ETS. I reassure the noble Lord that once we have received the Committee on Climate Change’s advice on the sixth carbon budget, we will consult next year on a net-zero consistent cap. It would not be right to set the level of the cap before we have received this advice, but I reassure him that we are seized of the urgency of making this decision once this advice has been received.

I confirm to my noble friend Lord Moynihan that international credits cannot be accepted for compliance with the UK ETS. This is the same as would have applied in the EU ETS during the same period. With the UK ETS we will continue to lead the world in carbon pricing, which is why we plan for the UK ETS to be the first truly net-zero consistent emissions trading scheme.

My noble friend asked how the devolved Administrations will be actively involved in the decision on the eventual carbon pricing mechanism. This concern was also raised by the noble Lord, Lord Bradshaw. We have worked closely with the devolved Administrations throughout the development of the UK ETS. Their views on the ETS and the potential carbon emissions tax have been communicated clearly and are understood by the UK Government. The final policy decision will be made collectively by the UK Government, but with full consideration given to the devolved authorities’ views. We will of course work with them to ensure that they have the support needed to implement either policy option.

My noble friend also asked for the likely date of the first UK ETS auction in 2021 and about the operation of a market stability reserve. The current proposed timing for introducing UK emissions allowance auctions is the second quarter of 2021. We will not bring in a supply management mechanism like the MSR from day one because an SAM cannot be operational in a stand-alone UK ETS until approximately mid-2022. This is due to the requirement for at least one year of verified UK emissions data. We will have a transitional auction reserve price in place to prevent very low allowance prices and ensure minimum price continuity. We will consult separately on the design of a stand-alone SAM if it is required in due course.

The noble Lords, Lord Grantchester and Lord Bradshaw, and others asked questions about whether the Government will proceed with the UK emissions trading scheme or a carbon emissions tax. We understand businesses’ need for policy certainty and will provide it as soon as we can. This instrument is required to establish a UK ETS, either stand-alone or linked. It is critical to ensure that this can be delivered for the end of the transition period.

I think I have answered most questions. I will read Hansard and, if I have not, I will reply in writing.

This Order in Council, laid under the Climate Change Act 2008, establishes a UK-wide greenhouse gas emissions trading scheme, which will drive cost-effective emissions reductions across our intensive industries, and our power generation and aviation sectors. As we reach the end of the transition period, this legislation will ensure that the UK has a domestic carbon pricing policy fit for the net-zero future that we have led the world in committing to. The UK was a pioneer in carbon pricing and trading almost 20 years ago and has taken a leading role in the continued development and improvement of the concept through our participation in the EU ETS. We have therefore designed the system with the benefit of that knowledge and experience.

In this way, many features will be familiar to businesses. We will fulfil our promise of a smooth transition to our future carbon pricing policy. At the same time, launching a UK ETS will allow us to have autonomy to pursue our climate goals in the way that works best for UK. In some areas, we have already taken the opportunity to make the system work better for the UK and we will continue to do this as the UK ETS evolves over time. Most crucially, we will consult on aligning the emissions cap of the UK ETS with our net-zero commitments. We will seek to implement changes by January 2023 and no later than January 2024.

Alongside the UK ETS, the Government have an ambitious range of policies in place to help industry to reduce cost and decarbonise while supporting a clean, green recovery from Covid-19. These schemes must of course be supported by an effective carbon pricing policy. With the EU ETS having covered around a third of UK emissions between 2013 and 2020, carbon pricing is a key tool for achieving our carbon emission reduction targets at the least cost to business.

[The Deputy Chairman of Committees (Lord Duncan of Springbank) (Con)]

As a point of clarification, one of the difficulties we have in hybrid sittings is that those present cannot be permitted to follow up and ask additional questions, simply because those participating remotely cannot do so. But should any of those present wish to pursue these matters with the Minister I am sure she would be amenable—I can see her happy smiling face—to doing that should it be required.