Greenhouse Gas Emissions Trading Scheme (Amendment) (No. 3) Order 2022

Thursday 3rd November 2022 Grand Committee

Considered in Grand Committee

13:53

Moved by

[Lord Callanan]

That the Grand Committee do consider the Greenhouse Gas Emissions Trading Scheme (Amendment) (No. 3) Order 2022.

[The Parliamentary Under-Secretary of State, Department for Business, Energy and Industrial Strategy (Lord Callanan) (Con)]

My Lords, I beg to move that the draft Greenhouse Gas Emissions Trading Scheme (Amendment) (No.3) Order 2022, which was laid before the House on 7 September 2022, be approved.

The UK Emissions Trading Scheme—the ETS—was established under the Climate Change Act 2008 by the Greenhouse Gas Emissions Trading Scheme Order 2020 as a UK-wide greenhouse gas emissions trading scheme to encourage cost-effective emissions reductions, contributing to the UK’s emissions reduction targets and our net-zero goal. This scheme replaced the UK’s participation in the EU Emissions Trading Scheme—the EU ETS—and the 2020 order applied existing rules on the monitoring, reporting and verification of emissions with modifications to ensure that they work for the UK ETS.

The 2020 order was subsequently amended by several statutory instruments in 2020, 2021, and 2022 to set up the scheme. These included provisions for the free allocation of allowances and the UK ETS registry, as well as a series of technical and operational amendments to improve the running of the scheme. Regulations under the Finance Act 2020 established rules for auctioning allowances and mechanisms to support market stability.

The purpose of this order is to amend the 2020 order to enable the inclusion of flights from Great Britain to Switzerland within the scope of the UK ETS. The existing UK ETS currently covers domestic flights, flights from the UK to the European Economic Area, and flights between the UK and Gibraltar. Since our departure from the European Union, flights between the UK and Switzerland are not covered in either the UK ETS or the Swiss Emissions Trading System, creating a gap in ETS coverage.

The Government consulted on the policy in this draft instrument between May and July 2019 as part of a consultation on the future of UK carbon pricing. In the 2020 government response to that consultation, we committed to include UK to Switzerland flights within the scope of the UK ETS if an agreement could be reached with Switzerland. I am happy to say that we have now agreed with Switzerland to cover these flights, and Switzerland has amended its relevant domestic legislation to ensure that flights from Switzerland to the UK are included in the Swiss ETS from 2023.

This instrument amends the 2020 order to include flights from Great Britain to Switzerland in the definition of “aviation activity” and to bring them within the scope of the UK ETS for the start of the 2023 scheme year. In 2019, UK to Switzerland flights amounted to approximately a quarter of a megatonne of CO₂, which is less than 0.2% of the UK ETS cap for the 2023 scheme year.

Noble Lords should note that the policy intent is to include flights from across the UK to Switzerland within the scope of the UK ETS. However, as the Northern Ireland Assembly was not able to consider affirmative legislation at the time when the instrument began the legislative process, this legislation brings only GB to Switzerland flights into the scope of the UK ETS. Once the Northern Ireland Assembly is functioning, equivalent legislation will be proposed to the Assembly as soon as possible to ensure that all flights between the UK and Switzerland are then covered. This order will enable the inclusion of flights from Great Britain to Switzerland within the scope of the UK ETS.

In conclusion, this SI will close a gap in coverage in the UK ETS, fulfilling the commitment set out in the government response to the future of UK carbon pricing consultation and upholding our agreement with Switzerland. On that basis, I therefore commend this order to the Committee.

[Lord Teverson (LD)]

My Lords, I very much thank the noble Lord for that explanation. It is good to see the usual BEIS team opposite.

I went to Switzerland on holiday this summer. I was very lucky to do so. We went by train.

[Lord Callanan (Con)]

Do you have pictures for us?

[Lord Teverson (LD)]

Yes.

We avoided airfares and carbon emissions from aeroplane travel. I bring this up because one of the issues is that the cost of travelling by train all the way through from Cornwall where I live and back again was significantly more expensive—I would say up to three times more—than travelling by air. This is a real issue in terms of climate change emissions and the whole way we manage this area.

At the heart of that to some degree is the tradition that comes from the EU ETS, which is a free issue of permits. I am sure that the Minister will be able to tell me what it is, but I think that the price per tonne of carbon in the UK ETS is around £60—I am not sure, but it is a significant amount of money anyway. I am interested to understand how much money or valuable assets we are offering as a public authority to the airline industry in terms of the number of permits times their value. I would be very interested to understand that. The airlines are able to sell on these permits, and quite rightly, because it is a marketplace. That is how we incentivise the industry, and other industries, to make their carbon emissions much more efficient.

14:00

It is very clear that free issue can go on for only so long. I have not tracked this for some time now but it seems to me that this is such a public giveaway to private organisations that we should start to stop it. I would be interested to hear from the Minister how the Government see this free issue moving in the future. Will it decline every year? I think it will, which is excellent. I would be interested to understand when it is likely to get to zero.

On the UK ETS generally, there was originally a discussion about it having trading connections with the EU equivalent scheme that we came out of after Brexit. I think that was about liquidity concerns. I get the impression that liquidity is working quite well in the UK ETS. I would be interested to understand the Government’s current opinion of whether that market is working well enough that we do not particularly need to work with other emissions schemes, be it the Swiss or the European Union one.

The biggest problem for the aviation sector more broadly outside the EEA, Switzerland and UK domains is that we are stuck with some sort of carbon offsetting scheme in terms of more international and intercontinental travel. I would be very interested to understand what discussions the sector is having with the aviation industry to tighten up that system much more, as it needs to do.

Having said that, clearly, I welcome the fact that this SI has come forward and that flights between GB—hopefully Northern Ireland as well in future—and Switzerland will be subject to the emissions trading scheme. From that basis, I support this SI.

[Baroness Blake of Leeds (Lab)]

My Lords, I, too, thank the Minister for his full explanation of the SI before us today. I have a feeling that we will have many opportunities in future to discuss the success and progress of emissions trading schemes in general, and I am fairly certain that there will be a focus on this at COP 27 next week. I look forward with interest to seeing progress generally.

Obviously, the situation with Switzerland had to be resolved. I am pleased that this instrument has come before us today. I thank the Minister for his explanation about Northern Ireland and the impact of the impasse in the Assembly, including what effect that is having in this area. I have a couple of questions. What assessment has been made of the impact of flights to Switzerland not being included in the UK ETS during the period between leaving the EU and the start of next year, when this instrument comes into force? Is there any way that this could have been avoided? Hindsight is a wonderful thing, of course.

The impact on the public sector will be mainly in the form of additional revenues from the auctioning of land for these flights. Have the Government made an estimate of the value of that? Generally, are there any other, similar gaps that the Government are looking to close? Are they looking to develop the ETS by extending elsewhere in a similar manner? Obviously, this is a complex area for operators working in this space. Do the Government think that aircraft providers will need any additional guidance to make changes as a result of this instrument? If so, what steps are the Government taking to provide this?

In spite of those questions, I am pleased to see this measure in front of us today; I look forward to seeing it move forwards.

[Lord Callanan (Con)]

I thank noble Lords for their contributions. I am particularly grateful to the noble Lord, Lord Teverson, for sharing his holiday experiences with us all. I expect he will bring his photograph album next time. I was going to say that it would show him lying on the beach but, of course, there are no beaches in Switzerland; perhaps he will be lying on the lakeside in Switzerland. I am grateful to both noble Lords for their support for these proposals and their questions.

This Order in Council, as it will be, will enable the inclusion of flights from Great Britain to Switzerland within the definition of aviation activity and bring them within the scope of the UK ETS for the start of the 2022-23 scheme year. As I said, we will seek to include flights from Northern Ireland as soon as the Northern Ireland Assembly is functioning.

In response to the noble Baroness, Lady Blake, although UK-Switzerland flights amount to approximately a quarter of a megaton of CO₂, which is less than 0.2% of the UK ETS cap for the 2023 scheme year, this legislation will enable us to uphold our agreements with Switzerland and the UK Government’s commitment to the 2020 government response. Clearly the proposals will ] not have a significant impact on the costs of participating in the UK ETS for the vast majority of participants, although aircraft operators running flights between Switzerland and Great Britain will of course see a slight increase in their obligations as a result of the expanded scope.

As the noble Lord, Lord Teverson, correctly stated, to reduce the risk of carbon leakage, a proportion of UK ETS allowances are allocated to aircraft operators for free, which they can use towards their scheme obligations, and flights from Great Britain to Switzerland will be able to apply for a free allocation entitlement. In the Government’s response to the Future of UK Carbon Pricing consultation, we committed to reviewing the UK’s approach to free allocations to ensure that carbon leakage is appropriately mitigated. It supports the UK’s high climate objectives and preserves the incentive to decarbonise, which is what we want. The commissioned economic research on aviation carbon pricing found minimal risks of carbon leakage for the aviation sector under the current scope of the UK ETS, and the consultation proposed three potential phase-out trajectories of aviation-free allocation. The consultation also explored potential updates to the UK ETS free allocation methodology, including benchmarking and updating activity data and how we account for new operators.

Furthermore, as set out in the energy White Paper, the UK net-zero review and, most recently, the Developing the UK’s Emissions Trading Scheme consultation, which was published in March this year, the Government remain open to the possibility of linking the UK ETS internationally. Under the terms of the TCA, the UK and the EU agreed to co-operate on carbon pricing, including through giving consideration to linking our respective carbon-pricing schemes.

The noble Baroness, Lady Blake, asked what assessment has been made on flights to Switzerland not being included since leaving the EU and the instrument coming into force, and whether or not that could have been avoided. When establishing the UK ETS, our priority was to ensure, as far as possible, continuity of coverage. That included an agreement with the EU to cover flights between the UK and the EEA in the UK ETS and the EU ETS. The EU-UK Trade and Cooperation Agreement provided for coverage of the EU ETS for flights from the EEA into the UK and set a precedent for including departing flights without, at the time, a full linking agreement. We will follow this precedent for flights between the UK and Switzerland. Flights from the UK to Switzerland will indeed represent a very small proportion of the total flights and emissions within the UK ETS.

In addition, the noble Baroness, Lady Blake, asked whether the Government think that the aircraft provider will need additional guidance and what steps we are taking. In total, UK ETS auction revenue in 2021 added up to £4.3 billion. We estimate that the UK ETS will raise over £6 billion in 2022 if prices remain at or around the current level, which is an average of £80 a tonne for the first six months of 2022. Once the legislation is laid, the Environment Agency will get in touch with aircraft operators to clarify exactly what their new obligations are.

I think I have dealt with the questions noble Lords asked. I therefore commend this draft order to the Committee.

Motion agreed.