Greenhouse Gas Emissions Trading Scheme Order 2020

Lord Duncan of Springbank Excerpts

Tuesday 27th October 2020 Grand Committee

[Lord Bilimoria (CB) [V]]

My Lords, I thank the noble Baroness, Lady Bloomfield, for her opening speech. The UK is seen as a world leader in carbon trading. We have played a prominent role in the establishment of the EU’s first emission trading scheme in 2002, which was a pilot to the current EU Emissions Trading Scheme. There are now over 50 carbon pricing initiatives that have been, or are in the process of being, established, covering over 20% of international greenhouse gas emissions. Of these, 28 are emissions trading schemes.

The UK’s carbon pricing system, made up of the EU Emissions Trading Scheme plus a carbon price support, has overall been a successful mechanism in incentivising the abatement of greenhouse gases in a cost-effective and technologically neutral way, while mobilising the private sector, especially the energy sector, to invest in emissions reduction technologies and solutions. This has been possible because carbon pricing is one of a suite of policies which have enabled alternative and low-cost technologies and infrastructures to come forward. Carbon pricing remains an important catalyst to continue incentivising cost-effective abatement of greenhouse gas emissions.

As the noble Baroness mentioned, a replacement for the EU ETS must be introduced as the UK transitions out of the European Union. Carbon pricing must continue beyond Brexit; we need to make sure that this is replaced at the earliest opportunity. Businesses operating in these markets require more certainty before private sector investment can be deployed. A final decision on replacement of carbon pricing in the UK would be very beneficial to all sectors. Would the noble Baroness agree that Brexit negotiations should not end without agreement on the UK’s replacement for the EU ETS? Surely this should be a priority. It is critical that the EU ETS is replaced by a UK ETS. The preference of the CBI, of which I am president, is that a UK ETS should be introduced as soon as possible and—I ask if the noble Baroness would agree—should be linked to the EU ETS so that markets can align. It is widely known that introducing a UK ETS is relatively easy. It is the linking that will cause problems: computer systems need to be set up, and so on.

Following the sixth carbon budget advice from the Committee on Climate Change during December 2020, any changes to the UK emissions trading scheme, once introduced, whether related to the emission cap or sectors included within scope, should be implemented by at least January 2023. When developing the “UK ETS”, the Government should ensure that sectors negatively impacted by carbon pricing, such as energy-intensive industries, are protected. They will still require compensation by free allowances to protect competition and mitigate the risk of carbon leakage. This is a critical aspect of the UK scheme and emissions abatement moving forward. A heavy industry cannot compete on a level playing field with international counterparts that have a less stringent carbon policy. Competition between these sectors must be protected, and until the Government fix this issue with other policy decision-making, free allowances as a form of compensation must remain. This is critical, and every effort should be made to link the “UK ETS” with the EU ETS.

If the UK Government cannot introduce a UK emissions trading scheme by 1 January linked to the EU ETS, it is possible that a carbon tax would be introduced. Can the Minister inform us whether this is a possibility? The CBI can support such a carbon tax, although only as an interim measure that should be replaced by a UK ETS when it is ready. The carbon tax must be ambitious and fairly implemented, and there should be compensation for heavy industrial emitters: that must continue.

I hear that Treasury officials are said to be interested in a report that suggests that a carbon tax of £75 per tonne of CO₂ emitted by 2030 on greenhouse gasses could raise up to £27 billion of taxes, which would, of course, help the Covid recovery, cushion household bill rises and support clean energy. In fact, Guy Newey, strategy director of Energy Systems Catapult, said that a coherent strategy was needed:

“The danger with relying solely on a carbon tax is that no one believes politicians will not scrap it when things get tough, so no one invests. A cap-and-trade scheme that guarantees an outcome, alongside regulation and innovation support, is much more likely to lead to cuts in emissions.”


The International Monetary Fund says that a combination of carbon pricing and an initial green stimulus would turbocharge economic recovery from the coronavirus and help put the global economy on a sustainable growth path post endemic.

Direct emissions in the UK from buildings fell by 4% in 2017. However, 19 million out of 27 million homes in the UK have an EPC rating below C. In fact, only 1 million homes have low-carbon heat. We need to make a huge investment in heat. Does the Minister think that a new green finance bank is a possibility?

As president of the CBI and Chancellor of the University of Birmingham, I have been privileged to chair the Heat Commission, whose report was recently released. It highlights the fact that decarbonising the UK’s heating system is the greatest challenge that the UK faces in meeting its net-zero target of 2050. The commission made various recommendations. It said that it was vital that

“business, Government, regulators and communities work together to shape policies.”

One recommendation is that the Government should include low-carbon skills in the national retraining scheme, including training in heat pumps, hydrogen boilers and the move from gas boilers. This would create almost 1 million jobs and would make us not only more efficient from a sustainability point of view but more effective.

Does the Minister agree with the recommendation that energy-efficiency in heat should be a national infrastructure priority? It would create a new low-carbon heating scheme to replace the domestic renewable heat incentive with a grant system. It recommends creating a national delivery body to co-ordinate heat decarbonisation—an Olympic-style delivery body. It mandates that after 2025, all new boiler installations must be part of a hybrid system or be hydrogen-ready. Heat accounts for about 40% of energy consumption and is in large part delivered through the combustion of natural gas, so if we deal with this, and take these recommendations into account, we will get to net zero by 2050.

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

We cannot hear the noble Baroness, Lady Bennett of Manor Castle, who was next to speak, so we will come back to her and move straight on to the noble Baroness, Lady McIntosh of Pickering.

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

We are going to return to the noble Baroness, Lady Bennett of Manor Castle.

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[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.

Motion agreed.

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

My Lords, I remind you all to hose down your desks and seats before you leave.