Draft Occupational Pension Schemes (Amendment) (Equal Treatment) (Northern Ireland) Regulations 2023
Draft Pensions (Pension Protection Fund Compensation) (Northern Ireland) Regulations 2023
Draft Pensions Act 2004 (Amendment) (Pension Protection Fund Compensation) Regulations 2023
Draft Pensions Act 2004 and the Equality Act 2010 (Amendment) (Equal Treatment by Occupational Pension Schemes) Regulations 2023
(6 months ago)
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The Parliamentary Under-Secretary of State for Work and Pensions (Paul Maynard)
I beg to move,
That the Committee has considered the draft Occupational Pension Schemes (Amendment) (Equal Treatment) (Northern Ireland) Regulations 2023.
The Chair
With this it will be convenient to discuss the draft Pensions (Pension Protection Fund Compensation) (Northern Ireland) Regulations 2023, the draft Pensions Act 2004 (Amendment) (Pension Protection Fund Compensation) Regulations 2023 and the draft Pensions Act 2004 and the Equality Act 2010 (Amendment) (Equal Treatment by Occupational Pension Schemes) Regulations 2023.
Paul Maynard
It is a pleasure to serve under your chairmanship, Sir George.
The regulations were laid in the House on 18 September 2023 and are compatible with the European convention on human rights. We have four instruments: two relating to the Allonby and Walker judgments, and a similar set of two relating to the Hampshire judgment. I must make it clear that Allonby is being restated in relation solely to the impact of guaranteed minimum pensions legislation from 17 May 1990 onwards.
The well-known Retained EU Law (Revocation and Reform) Act 2023 allows the UK to reassert the sovereignty of Parliament. Where required, the UK Government are now able more easily to amend, revoke or replace retained EU law. After 31 December, certain retained EU law addressed in the three court cases I mentioned will cease applying. Two of those cases, Walker and Allonby, are about equality law for pension schemes, and the other, Hampshire, is about pension protection for those who, unfortunately, find themselves in the Pension Protection Fund, which is a compensation scheme.
I have decided to restate the law addressed in those cases because two of them are about the effects of EU equality law for pensions schemes, and the other is about protecting people’s old-age benefits when they find themselves in the PPF. It is important that any ambiguity is removed for occupational pension schemes and that we ensure there is equality in the outcomes for pension benefits.
Let me go through the judgments as speedily as I can, without going into great detail. The first judgment, Allonby, is about the right to pension benefits paid on an equal basis between men and women, where discrimination has arisen in an occupational pension scheme because of legislation on guaranteed minimum pensions. The second judgment, Walker, is about the pension rights on which survivor benefits are based, where a member is in a same-sex marriage or civil partnership.
The Allonby amendments are relatively straightforward: they are about the right to equal treatment between men and women in the absence of a direct real-life comparator to show discrimination, where the discrimination has arisen in an occupational pension scheme because of legislation on guaranteed minimum pensions. How we get to that point requires some more explanation.
First, guaranteed minimum pensions are unequal for men and women. That can result in a different amounts of occupational pension benefits being paid because GMPs are paid to women at the age of 60 and to men at the age of 65. Secondly, the 1990 Barber judgment found that pension benefits must be paid to men and women on an equal basis for pensionable service from May 1990 onwards. That means that pension schemes are required to equalise pension benefits to correct the unequal effect caused by members having a GMP.
Thirdly, the European Court of Justice judgment in the case of Allonby in 2004 means that it is not necessary for someone who brings an equal pay claim to be able to point to a real-life comparator in relation to such discrimination. For example, a man who was employed as a dustman—a role predominantly performed in the past by men—would not now need to point to a real-life female comparator who was being treated differently to demonstrate that his pension should be equalised to take account of the unequal effect of the GMP rules. A notional comparator could instead be used to show whether he would have received a higher pension if he had been a woman, because of the GMP rules.
Until the end of this year, the Allonby judgment overrides the need for an opposite-sex comparator in our equality legislation, but we of course want and need schemes to equalise for the differences between men and women resulting from GMP legislation. That is why we are amending equality legislation to ensure that the requirement to equalise occupational pension benefits as a result of GMP does not fall away where there is no real-life opposite-sex comparator.
Continuing on the theme of equality, the Walker case was about equal treatment on the grounds of sexual orientation in occupational pension schemes. The Supreme Court ruled that the Equality Act could not permit Mr Walker’s scheme to restrict the survivor benefits payable to his husband to only those based on pension rights earned since December 2005—the date civil partnerships were introduced.
The restriction in the Equality Act had previously meant that a person in a same-sex marriage or civil partnership who had worked their entire working life and built up an occupational pension could leave their surviving spouse or civil partner survivor only benefits relating to pensionable service from December 2005—potentially only a few years of their working life.
For example, someone in a civil partnership who retired in 2015, having built 45 years of occupational pension rights, could find that their surviving civil partner was entitled to only 10 years of survivor benefit rights. Mr Walker challenged that unequal treatment and won.
The changes we are making will mean that legislation will not allow schemes to restrict the pension rights that are used to provide survivor benefits for survivors in a same-sex legal relationship to only those earned after December 2005. Survivor benefits are important to so many people and help provide reassurance that a member’s survivor will be provided for, should the worst happen. That is why it is important that we reflect the Walker judgment in the Equality Act.
Moving on, the Hampshire judgment provides protection in the event of employer insolvency. The regulations retain the effects of the judgment in domestic legislation and remove redundant references to the Pension Protection Fund compensation cap from it.
Briefly, by way of context, Mr Hampshire took legal action in the domestic and European courts against the Pension Protection Fund, because under the PPF’s rules, his benefits were substantially reduced. He was under his scheme’s normal pension age when his employer became insolvent. The European Court ruled that former employees must receive at least 50% of the value of their pension rights in the event of their employer’s insolvency.
There was further litigation in the domestic courts—the Hughes judgment—which concluded with the UK’s Court of Appeal upholding the High Court’s ruling that the cap on Pension Protection Fund compensation constituted unlawful age discrimination. The cap previously applied to individuals below their scheme’s normal pension age when their employer became insolvent.
The Pension Protection Fund is now identifying its members and members of the financial assistance scheme affected by the Hampshire judgment, increasing their payments and paying arrears, where appropriate, to comply with the terms of the judgment. It is also uncapping the compensation payments of its affected members and backdating arrears.
In practice, most PPF members already receive more than the 50% minimum established by the Hampshire judgment and few were affected by the compensation cap. As a matter of fairness, however, the Government have decided to retain the effects of the Hampshire judgment beyond the sunset date. That means that all members of eligible pension schemes affected by the judgment—not just those with an entitlement before the sunset date—can be reassured that they will receive at least 50% of the value of their original pension benefits in the event of their employer’s insolvency. To tidy up the legislation, the regulations also remove redundant references to the Pension Protection Fund compensation cap, which no longer exists. That will improve the legislation and reflect the High Court’s ruling.
The regulations will give reassurance to the pensions industry and to members of defined benefit occupational pension schemes from 31 December. In practice, nothing will change in relation to the Allonby, Walker and Hampshire judgments. It is important that pension scheme members are treated fairly and equitably, regardless of sexual orientation, sex or age. I commend the regulations to the Committee.
Gill Furniss (Sheffield, Brightside and Hillsborough) (Lab)
It is a great pleasure to serve under your chairpersonship, Sir George. I thank the Minister for his explanation of the statutory instruments and welcome him to his place. I look forward to working collaboratively with him on issues where there is cross-party consensus, and I believe there is much we will agree on in regard to pensions.
Today’s statutory instruments are wholly necessary to maintain the same legislative framework following the expiry of certain EU laws on 31 December, so we will not oppose them and my speech will be short. Action is needed given that, under section 4 of the European Union (Withdrawal) Act 2018, the principles of EU law will sunset at the end of this year. The purpose of the regulations is to ensure that the effects of the Hampshire and Hughes judgments will be preserved in domestic legislation. I would be grateful if the Minister confirmed that the regulations are intended to ensure only that everything stays in its current state after the relevant EU laws are sunsetted. Will any businesses need to make any adjustments?
I also want to note some concern that the regulations are being brought forward only weeks away from 31 December, when the relevant EU laws cease to apply. Has all the necessary EU legislation within the Minister’s brief now been enacted in domestic law ahead of that deadline?
As I said at the outset, the regulations are necessary and we will not oppose them. It is my understanding that they ensure simply that there is no ambiguity in this area when the equivalent EU laws are sunsetted at the end of this year. However, I will be interested to hear the Minister’s response to the specific points I have raised.
Paul Maynard
May I also welcome the hon. Member for Sheffield, Brightside and Hillsborough? I am sure I will enjoy working with her. She made three points, and I am hoping that a note about the third might be coming my way—time will tell. She is right that the changes are quite distinct in and of themselves. They apply already, so the sector does not have to do anything new to reflect them. It has already been reflecting them since the judgments, quite some time ago.
On the timing, one of my first observations in this role has been the absolute avalanche of evidence—calls for evidence, consultations and consultation responses. The pensions industry is swamped, and finding people to respond to these things must be a growth industry. The hon. Lady is right that it has taken some time for the judgments to come to the House. Many of the judgments, of course, took place way back last decade, but the court system itself takes quite some time. When their final application is eventually decided, we have to start consulting on how to apply them within the private pensions industry that we have to rely on to deliver them; it is not a matter of pressing a button at the Department for Work and Pensions.
Finally, the hon. Lady asked whether there were any more retained EU laws to deal with. My understanding is that we have now completed our trawl, and I do not expect any more to come my way. Should the situation turn out to be any different, I will write to her. But I think I am right—I would have been tapped on the shoulder if I had been wrong.
I thank the hon. Lady for her comments. We have had a useful and helpful initial interchange. As I said in my opening speech, these are important equality protections. We do not want them to disappear because of sunsetting. They are important and came about for good reason in the first place. I hope all Members will be happy that we are to retain them.
Question put and agreed to.
Draft Pensions (Pension Protection Fund Compensation) (Northern Ireland) Regulations 2023
Resolved,
That the Committee has considered the draft Pensions (Pension Protection Fund Compensation) (Northern Ireland) Regulations 2023.
Draft Pensions Act 2004 (Amendment) (Pension Protection Fund Compensation) Regulations 2023
Resolved,
That the Committee has considered the draft Pensions Act 2004 (Amendment) (Pension Protection Fund Compensation) Regulations 2023.
Draft Pensions Act 2004 and the Equality Act 2010 (Amendment) (Equal Treatment by Occupational Pension Schemes) Regulations 2023
Resolved,
That the Committee has considered the draft Pensions Act 2004 and the Equality Act 2010 (Amendment) (Equal Treatment by Occupational Pension Schemes) Regulations 2023.—(Paul Maynard.)
Draft Aviation (Consumers) (Amendment) Regulations 2023
(6 months ago)
General CommitteesRead Full debate Read Hansard Text Read Debate Ministerial Extracts
The Parliamentary Under-Secretary of State for Transport (Guy Opperman)
I beg to move,
That the Committee has considered the draft Aviation (Consumers) (Amendment) Regulations 2023.
It is a pleasure to serve under your chairmanship, Mr Twigg. The regulations were laid before the House on 16 October. The Under-Secretary of State for Transport, my hon. Friend the Member for South Cambridgeshire (Anthony Browne), who is responsible for aviation, sends his apologies. He is attending a sustainable aviation conference—please, no jokes about his taking flights. I hope to be an able stand-in.
The purpose of the instrument is to restate, under the Retained EU Law (Revocation and Reform) Act 2023, the key principles of retained EU case law relating to regulation No. 261/2004. It will help aviation consumers to receive the same protections and rights to compensation that they currently have when they experience flight disruption. Regulation No. 261/2004, which will become assimilated law at the end of the year, sets out the full rules on compensation and assistance for air passengers in the event of their being denied boarding, flight cancellation or long delay. Without the draft regulations before the Committee today, important principles that protect consumers in the UK would clearly be lost.
The territorial application of the statutory instrument is England and Wales, Scotland and Northern Ireland, as civil aviation is a reserved matter. The Joint Committee on Statutory Instruments has considered this instrument and did not report it to the House at its meeting on 25 October. Under article 438, paragraph 3, of the trade and co-operation agreement, the UK and the EU
“shall consult each other on any matter related to”—
aviation—
“consumer protection, including their planned measures”.
The Department for Transport consulted the EU on the provisions of the instrument, and I am pleased to say that the EU had no comments on it.
I hope the Committee understands the need for and the importance of this instrument, and I commend—
Sir Greg Knight (East Yorkshire) (Con)
The regulations and the explanatory memorandum refer to the tariff payable in compensation. Is that automatically uplifted with inflation, or will further recourse have to be made to Parliament to secure any inflationary increase?
Guy Opperman
That is an outstandingly good question, in reply to which I am delighted to say that I propose to get the aviation Minister to write to my right hon. Friend in quite a lot of detail on that point. If he bears with me, however, I might be able to respond to his question in my closing comments.
I commend the instrument to the Committee.
Mike Kane (Wythenshawe and Sale East) (Lab)
We may be footballing rivals at the weekend, Mr Twigg, supporting Liverpool and Manchester City—I feel my hon. Friend the Member for Liverpool, West Derby breathing down my neck as well—but it is always a pleasure to serve under your chairmanship.
I welcome the Minister to his place and to the active travel brief. I had the great pleasure of cycling the sea-to-sea coastal route from Carlisle to Newcastle, through his beautiful constituency, just recently. I saw the sycamore tree in the gap literally days before it was felled, so I get to have it recorded in Hansard how sad I was about that. I know the tree is not technically in the Minister’s constituency.
I welcome the fact that aviation is back on the Green Benches and no longer on the Red Benches. We have a world-class aviation sector, and it is important that it is represented in the Commons. Unfortunately the Under-Secretary of State for Transport, the hon. Member for South Cambridgeshire—my sixth opposite number in government—is not here today, but as Woody Allen said, 80% of success is turning up, so I am glad the hon. Member for Hexham is here to represent the other 20% today.
The draft regulations aim to establish commonality and clear rules on compensation and assistance for passengers in the event of denied boarding, cancellation or long delay of flights. These have often been legally challenged, so clarification is necessary for that reason alone. A cancellation is defined as a flight being axed within 72 hours of its scheduled departure time. According to a recent report I read, in the first six months of this year, a staggering 6,665 UK flights were cancelled within that timescale. It is vital that we beef up protections for passengers who in good faith book tickets for business, for leisure and holidays, or to be reunited with family, only to find that they are not able to travel. The statutory instrument is designed to maintain the status quo and clarify the safeguards on consumer rights in the UK aviation industry.
The financial cost is often incidental to travel. What is important is the time taken in wasted annual leave, the dashed expectation and the disruption to life of many thousands of travellers when flights are cancelled. We have yet to develop a means to compensate them for the time and emotions expended in missed weddings, business meetings and family reunions. It is right that we ensure that the financial recompense is, at the very least, sufficient, clear and easily accessed by consumers.
When flights are cancelled or there are lengthy delays, airlines are required to assist passengers by providing information on their rights, and providing care and assistance during the disruption. The assistance includes, but is not limited to, providing meals during the delay, allowing passengers to communicate messages, and providing hotel accommodation. Airlines must also provide transfers to and from hotels for overnight delays, and passengers must be offered the choice of a refund, rerouting on alternative flights as soon as possible. It is important that airlines assist passengers by clearly setting out the options available to them.
It is also open to airlines to offer incentives to passengers to encourage them to fly at a later date—for example, by providing vouchers of a higher value. Last year, however, certain airlines sat on hundreds of millions of pounds of consumers’ money, having issued vouchers which in many cases were time limited. A report in the consumer press last year reported that some vouchers had just six months left on them. That “use it or lose it” element is bizarre and cannot be fair. Consumers should not be left having to fight for refunds, or go through an alternative dispute resolution process to find out how they can get their money back.
Furthermore, if passengers are given a credit note, the vouchers are not protected by the air travel organisers’ licence, so if the airline goes bust, their money is lost. With the lack of support given to the aviation sector by the Government over the past few years, during the pandemic, it is not beyond the realms of possibility that airlines will go to the wall, leaving consumers out of pocket again.
EU regulation No. 261/2004 provided for fixed sum compensation in some circumstances, but that does not apply to cancellations more than two weeks in advance, or where a cancellation or long delay is due to “extraordinary circumstances”. The draft SI restates the key principle and provides clarity on the rights of the passenger, but the industry has been clear that airlines are not responsible for delays and cancellations caused by circumstances outside their control, particularly when they have taken reasonable steps to avoid the delay or cancellation. The industry has also called for a clearer definition of extraordinary circumstances, and I agree. What is an extraordinary circumstance?
On 28 August this year, a technical issue caused many hundreds of flights to be delayed or cancelled. I know a UK Civil Aviation Authority investigation is under way and do not want to pre-empt its findings, but I am concerned that, at the time this happened, the Government stated that it was a one in 15 million chance and would not happen again. It struck me that, to arrive at that figure, someone had looked at the total number of flightpaths handled within the automated system—about 15 million—and decided that, because it happened only once, that made the occurrence a one in 15 million chance. Is that an extraordinary circumstance?
I know the independent review panel is considering, among other things, the immediate causes of the incident and how to prevent a repeat occurrence from happening in the future. It is also looking into airlines’ and airports’ costs of providing care, assistance and rerouting to customers. It is clear that, for some time, there has been a significant gap in the guidance. I hope the draft instrument will clear up the confusion and avert further legal challenge.
Michael Fabricant (Lichfield) (Con)
I am very much enjoying the hon. Gentleman’s speech. Has he looked at the United States Federal Aviation Administration and the protections it offers, and considered how they compare with those of the EU/UK legislation?
Mike Kane
The hon. Gentleman has a beautiful constituency and a beautiful cathedral, and I got to see the Staffordshire hoard when I stayed overnight there. I shall escape from this Committee room and run to the House of Commons Library, where I promise to look up the federal regulation—
Mike Kane
Sorry, but I have to be on the other side of a general election before that would be worthwhile. We will see though; that is not hubris.
Returning to the definition of extraordinary circumstances, is an outbreak of sickness among the crew extraordinary? Bird strike? I do not know the answer, and I wonder whether we all need clearer guidance on what constitutes an extraordinary circumstance. As I said, the industry feels strongly that airlines should not be held responsible for delays and cancellations caused by circumstances outside their control and where they have taken reasonable steps to avoid the disruption. They argue strongly that changes to compensation should not remove the current approach, but should keep the status quo. The industry also called for clarification of the definition of extraordinary circumstances.
Regarding the consultation on the instrument, I note that there was no external consultation. The explanatory memorandum states that
“Department for Transport Ministers and officials have regular engagement with the aviation industry. The Department also works closely with the CAA”
and the EU. I understand very well why there was no external consultation on the instrument, as it merely replicates and clarifies existing legislation, but I have questions about the responses on consumer rights and how to ensure that in future consultations are more widely promoted.
The Government consultation last year on consumer reform garnered only 65 responses, with only 29% of them coming from individuals. I find it very hard to believe that fewer than 19 people in total have an opinion on such matters. It may be because I have an airport in my constituency, or because of my shadow ministerial role, but I receive more casework than that every year. How was the consultation promoted? Which advocacy and support groups were informed of the consultation? How many of the respondents were elderly people or people with disabilities? The Opposition will not oppose the statutory instrument today, but we ask for wider consultation on such measures.
Guy Opperman
I shall attempt to answer the hon. Gentlemen’s questions, but I will start with the fact that Hadrian’s Wall and the sea-to-sea route are in part in my constituency, as is “Sycamore gap”—or it was, until someone who we sincerely hope will be caught and sent to prison decided to use a chainsaw to cut it down.
The hon. Gentleman said there was a lack of support for airports during covid. With great respect, I have to push back on that. I have the privilege, with the hon. Member for Newcastle upon Tyne North (Catherine McKinnell), to represent Newcastle Airport. I know, because we meet regularly, that the airport was given huge amounts of taxpayer support during covid. It would have genuinely struggled without that support from the Treasury, as would many other businesses.
The hon. Gentleman talked about the NATS failure on 28 August. Clearly, that is a matter for an independent investigation, and like him, I await the results.
As for consultation, the consumer policy was consulted on in January 2022 and responded to in June 2023. Industry and consumer groups were engaged with in an ongoing series of workshops. I think a large number of consumer groups were involved, but I will get the aviation Minister to write to the hon. Gentleman giving chapter and verse on that—when one is not the Minister, one is always keen for others to write.
I shall endeavour to answer the question posed by my right hon. Friend the Member for East Yorkshire. The rates are not uprated with inflation or downrated with deflation; however, the ongoing consultation on regulation No. 261/2004 might consider that matter, and I will ensure that the details are sent to my hon. Friend the aviation Minister.
Question put and agreed to.
Draft Greenhouse Gas Emissions Trading Scheme (Amendment) (No. 2) Order 2023
(6 months ago)
General CommitteesRead Full debate Read Hansard Text Read Debate Ministerial Extracts
The Minister for Energy Security and Net Zero (Graham Stuart)
I beg to move,
That the Committee has considered the draft Greenhouse Gas Emissions Trading Scheme (Amendment) (No. 2) Order 2023.
It is a great pleasure to serve under your chairmanship, Sir Gary, and to be with colleagues from across the House on this clearly brilliantly whipped Committee.
The UK emissions trading scheme—the UK 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 net zero goal. The scheme is run by the UK ETS Authority, a joint body comprising the UK Government and the devolved Governments—we are all in this together. Our aim is to be predictable and responsible guardians of the scheme and its markets. In so doing, we will ensure that the scheme remains a cornerstone of our ambitious climate policy.
Shailesh Vara (North West Cambridgeshire) (Con)
My right hon. Friend mentions that the UK Government are working with the devolved assemblies. Given that the Northern Ireland Assembly is not working at the moment—or not sitting, anyway—are there other mechanisms in place to ensure that the civil servants in Northern Ireland are dealing with this matter and co-operating so that we can move forward as four nations?
Graham Stuart
My right hon. Friend, with his customary acuity, will have noticed that the draft order does not apply to Northern Ireland. As it happens, there are not counterparties in Northern Ireland to which these particular provisions apply, but energy in general is devolved to Northern Ireland, and it is up to Northern Ireland to take care of it.
The statutory instrument will implement a number of necessary changes and improvements to the UK ETS. The changes relating to aviation free allocation rules and to the treatment of electricity generators follow the announcements made by the UK ETS Authority in July, in our response to last year’s consultation on developing the UK ETS. The final change remedies an inconsistency with free allocation and carbon capture at UK ETS installations.
On aviation, the SI will cap the total amount of aviation free allocation that operators are eligible to receive at 100% of their verified emissions.
The SI makes technical changes to free allocation rules regarding the electricity generator classification for industrial installations—a minority sport, if ever there were one. It will amend the electricity generator classification to consider only electricity exports in the baseline period, instead of all electricity exports since 2005, allowing operators to change their installation’s electricity generator classification if they have put a stop to the export of electricity. Electricity exports representing no more than 5% of the total produced will also be excluded from consideration in this classification.
The SI will amend the electricity generator definition to exclude installations that have produced electricity for sale if that electricity was produced by means of a high-quality combined heat and power plant operating as part of an operator’s industrial activity. That will limit reductions in free allocation entitlements and provide further encouragement for industrial operators to achieve improved efficiency for their combined heat and power plants.
The SI makes an operational amendment to the electricity generator classification to allow electricity generators to be eligible for free allowances after the application date if they can demonstrate that they produced measurable heat by means of high-efficiency co-generation during the allocation period.
The SI remedies an inconsistency in legislation to make it clear that carbon capture and other types of regulated activity may be carried out on the site of the same installation. It will allow provision of free allowances to industrial installations at the same site as a carbon capture plant.
As the Northern Ireland Assembly is not sitting and cannot consider affirmative legislation, the SI covers only Great Britain. Officials in Northern Ireland have agreed that none of the provisions currently affects operators in Northern Ireland.
These changes will deliver on commitments made by the UK ETS Authority and improve the operation of the scheme. For aviation, the SI will ensure that free allocation is distributed appropriately until full auctioning for the aviation sector begins in 2026. That follows the decision announced in July that aviation free allocation will be phased out by 2026.
On free allocation technical changes, the SI will ensure that installations classed as electricity generators, whose eligibility for free allocation is limited, are able to change their classification if they are no longer exporting electricity. The SI will also ensure that industrial installations with high-quality combined heat and power plants that export excess electricity to the grid are not classified as electricity generators, in order not to limit their eligibility for free allowances.
On the electricity generator operational amendment, the SI will ensure that electricity generators can become eligible for free allowances during an allocation period if they meet the eligibility criteria.
On free allocation rules for carbon capture, the SI will prevent industrial installations from being disqualified from receiving free allowances because they are on the same site as a carbon capture plant—a situation that would pose a risk of disincentivising the uptake of crucial carbon capture technology.
These changes either follow appropriate and comprehensive consultation with stakeholders or did not require consultation. In the “Developing the UK ETS” consultation in 2022, the UK ETS Authority considered what technical improvements could be made to the current aviation free allocation methodology until aviation free allocation is phased out. The responses to the consultation called for an end to over-allocation. The policy intent of aviation free allocation is to mitigate the risk of carbon leakage, and the policy did not intend for aircraft operators to receive more allowances than their verified emissions. To that end, in July the UK ETS Authority announced the decision to cap aviation free allocation at 100% of verified emissions.
In the “Developing the UK ETS” consultation, we considered technical changes to free allocation rules regarding the electricity generator classification. The majority of respondents agreed with our suggested amendments, and the UK ETS Authority announced that it would proceed with changes to the electricity generator classification.
A consultation was not carried out for the CCS free allocation amendment as that is a clarification of existing policy intention and not a change to the policy.
Richard Fuller (North East Bedfordshire) (Con)
Would the Minister, either now or in summing up the debate, explain a bit about the phrase “free allocation”? On the face of it, if free allocation is to be set at 100% of the sector’s verified emissions, it does not sound like there is a lot of free space. He mentioned that free allocation was originally set at 127% because of concerns about carbon leakage. What has changed so that the Government are now satisfied that cutting it to 100% will not result in carbon leakage?
Graham Stuart
Fundamentally, due to the way the scheme was brought in, the airlines have had more free allocations than their actual emissions. The scheme was designed to cover their emissions until we phased out those allocations, as we are now doing, but they were being over-compensated, based on historical figures that no longer apply. These provisions will ensure that the airlines are not being given free allocations with a commercial value on the market over and above that which they need in order to operate. I hope that answers my hon. Friend’s question.
These alterations to the UK emissions trading scheme will support its role as a key pillar of the UK’s climate policy. They show that we will take action to improve the scheme where necessary, and they continue our record of delivering on our commitments. I commend the draft order to the Committee.
Dr Alan Whitehead (Southampton, Test) (Lab)
It is a pleasure to serve under your chairmanship, Sir Gary. Like the Minister, I commend the Committee for the huge turnout this afternoon to consider the SI. I am sure that is because everyone wants to hear at some length the Minister’s comments and, indeed, some of mine, but in case anyone is here because they think there might be a Division, I can assure them—I hope they do not leave now—that there will be no Division. Broadly speaking, we very much agree with these changes to the operation of the ETS. However, I have a number of questions about the detail of those changes, and I would like to put the SI in a bit of context. I am disappointed that that context is not better represented in the SI.
The context is not just that the UK ETS is up and running and requires minor amendments, but that it is rapidly diverging from the EU ETS. The divergence is such that, in October prices, the permit cost per tonne is £87 in the EU ETS, but £40 in the UK ETS. The EU-UK trade and co-operation agreement, which the UK freely signed, states:
“The Parties shall cooperate on carbon pricing. They shall give serious consideration to linking their respective carbon pricing systems in a way that preserves the integrity of these systems and provides for the possibility to increase their effectiveness.”
No action has been taken so far—[Interruption.]
Graham Stuart
Bringing uniquely to a conclusion the hon. Gentleman’s words.
Dr Whitehead
I am afraid not. I distinctly detect that that was part of an overture, not a final movement.
As I said, the agreement states that
“the Parties shall cooperate on carbon pricing”,
but there is no evidence of such co-operation. Not only that, but the two systems are diverging significantly. Hon. Members may ask whether that matters. It matters a lot in view of what is happening in the EU on the development of carbon border adjustment mechanisms.
The Chair
Order. Minister, sedentary interventions are never helpful. May I just ensure that we are talking about the order that the Committee is considering and not the issue generally?
Dr Whitehead
The carbon border adjustment mechanism, which is in its first month of operation in the EU, is in danger of pricing our materials—iron, steel, aluminium, fertiliser, electricity, hydrogen and so on—as if they were outside it and should therefore be penalised, unless there is some convergence between the EU ETS and the UK ETS in future. That is a real issue. What plans has the Minister to seek greater convergence between the UK and EU schemes? That is important in the context of the SI.
Dr Whitehead
I am making the point that there should be some mention of those particular circumstances in the order. For example, the substantial divergence between UK prices and EU prices will potentially have a real effect over time on aviation in Europe and the UK. The order ought therefore to be looked at in that light.
As the Minister has said and paragraph 7.4 of the explanatory memorandum explains, at 2021 prices, the free allowances set out for aviation represented 127% of the allowances that ought to have been made. In those circumstances, aviation has had something of a windfall. It has been able to take those free allowances, sell off the difference between 100% and 127% and make the actors in the industry between £50 million and £100 million. I welcome the fact that the allowances are to be capped at 100%, but I worry a little about whether the divergence between UK and EU ETS prices might lead the aviation industry to come back to us in the not too distant future and ask for some of those over-allowances back. We have to work together on the arrangements between boundaries for the UK ETS and EU ETS.
Was the over-allocation by accident or design? If it was by accident, are there any measures under way to try to restore some of the profits that have been made by aviation as it has put those substantial over-allowances into its pockets through trading, or is the Minister content to say that because it is now 100%, it is okay for the future and we will write off the past?
There is a similar issue of potential misallocation in the reclassification of companies that have not exported electricity for quite a while. As the Minister said, they continue to be classified as exporters even if they might not have exported electricity for quite a long time. Clearly, some long-term issues related to that misallocation will effectively be brushed over by the order, but I would like to know whether that has also resulted in free allocations being misapplied to the industry and whether the companies that have halted electricity exports but have been classified as exporters for quite a long time have benefited in an inappropriate way from that misclassification. If so, to what degree?
Although Labour supports getting the classifications right in the order, questions remain about why and how the misclassifications occurred and what action, retrospective or otherwise, the Government will take to ensure that the harm or benefit of them is as small as possible.
Having posed those three questions for the Minister, I confirm that we will not oppose the SI. Indeed, we welcome its clarification of how the UK ETS will move forward.
Stella Creasy (Walthamstow) (Lab/Co-op)
It is a pleasure to serve under your chairmanship, Sir Gary. I rise only to ask a few questions, simply because the Minister was so sterling in directing what he was running through that he did not allow me to catch his eye to intervene at the point that his colleagues did. I am sure that was an oversight on my part and that I did not signal strongly enough.
Emissions do not stop at borders, so it is of concern to many of us that the Minister has set out what the SI might do but not clarified how it might interact with other emissions trading schemes, and in particular what the European Union is doing. My hon. Friend the Member for Southampton, Test, was much more eloquent and patient than I will be about the fact that the EU has its own system of trading and that, clearly, whatever we do will interact with that. Could the Minister set out how those two systems, in particular, will interact? What progress has been made on the commitment in the 2019 TCA that “serious consideration” would be given to linking them? Has he been serious? Has he considered it? The SI does not suggest that, but that does not mean he is not having conversations. Surely he could set that out.
More fundamentally, I wish to speak up for British steel, which will be directly impacted by this legislation; indeed, it has called for the Government to answer questions arising from the SI. I hope that I speak for all of us in the room in saying that we recognise the value to our national security and our climate change objectives of having a national steel industry. I understand the industry’s concerns about this legislation and the fact that, without support, the free allowances will not lead to the sustainability of the British steel industry. I hoped that we might hear some answers today, but the Minister did not mention the word “steel”. I am sure he will wish to correct that in responding to the debate. The industry thinks it will take nine years to decarbonise British steel at this rate; without support, the 2026 deadline could lead to the end of British steel and all the concerns that might arise from that.
In particular, the industry perceives a lack of leadership on the European carbon border adjustment mechanism and how it interacts with the ETS. The Minister did not mention Europe at all. I am sure that was an oversight rather than a deliberate omission. As I said, he did not mention steel either. Again, I am sure that was an oversight rather than a deliberate omission. Will he address both those issues and reassure us that he stands proudly with British steel, just as he recognises that emissions do not stop at borders?
Graham Stuart
I thank hon. Members for their contributions to this debate on pretty technical adjustments to the ETS.
By capping aviation free allocation, we are ensuring that it is distributed appropriately until full auctioning in 2026. The current situation is not deliberate; the policy did not intend for aircraft operators to receive more allowances than their verified emissions. It is noteworthy, though, that those allowances meant that operators were doubly encouraged to invest in cleaner operations, since they were incentivised not only by any savings from investment in more fuel-efficient aircraft, for instance, but by the credits that they received within the ETS. The Government have no plans to claw any of that back.
On the overall position of the UK carbon market, the UK ETS is of course a market mechanism. The price of carbon allowances in the UK ETS is set by the market. In line with the net zero cap we announced in July, the supply of emissions allowances entering the market will fall significantly every year from 2024. We are committed to continuing to deliver on these changes, as we have shown, by legislating to amend the supply of allowances over the coming years and publishing an auction calendar.
The hon. Member for Walthamstow mentioned the CBAM. We are closely following developments on the EU CBAM and engaging with the Commission on technical considerations that are relevant to UK manufacturers. As the hon. Lady will know, EU CBAM charging does not start until 2026.
I am nervous of opening up wider matters, although you have been generous, Sir Gary, in allowing discussion of issues that are broader than the technical amendments that the SI makes. If Members want a broad debate on the ETS and its interaction with Europe, there are many opportunities in the parliamentary calendar to do exactly that.
Dr Whitehead
Given that the Minister has mentioned the CBAM in response to the inquiry of my hon. Friend the Member for Walthamstow, I want briefly to record that iron and steel are in the first phase of the EU CBAM, and that that may affect UK iron and steel negatively. They could be treated as if they were imports to the EU, similar to iron and steel from India or other parts of the world. That should give substantial pause for thought about how we proceed with the UK ETS.
Graham Stuart
The hon. Gentleman is right about that being a substantial prompt for thought, but not on the particular order that the Committee is considering. As hon. Members will know, we ran a consultation earlier this year on domestic measures to mitigate carbon leakage, including consulting on a potential UK CBAM and mandatory product standards.
In answer to the point that the hon. Member for Walthamstow made, our commitment to the UK steel sector is clear. We continue to work closely with industry, including British Steel, to secure a sustainable and competitive future for the sector and its workers. We will continue to fulfil that commitment.
As I said, the UK ETS is a market mechanism, and the price of carbon allowances is set by the market. That continues to be our position.
The UK ETS is a cornerstone of UK climate policy. It is worth noting, to look momentarily at the bigger picture, that since 1990, the UK has cut its emissions by more than any other major economy on the planet. The Government put net zero into law for the first time, and the former Conservative leader, now the Foreign Secretary, was the first leader of a major party to call for a climate Act, which was introduced in 2008. I was proud to serve on the Joint Committee on the Draft Climate Change Bill under the excellent chairmanship of Lord Puttnam.
Graham Stuart
Yes. The SI sets a cap on emissions in the sectors covered—currently a quarter of the UK’s emissions. In doing that, it guarantees that those sectors will reduce their emissions in line with our world-leading net zero target,
Only yesterday, I was in The Hague, not, as some members of the Committee might have thought or hoped, answering for my crimes, but meeting Energy Ministers from the North Seas Energy Cooperation and Kadri Simson, the European Commissioner for Energy. I called for the full implementation of the energy chapter of the TCA and urged the EU to put the same energy into it as we are determined to show. We want the chapter to be fully implemented because, as the hon. Member for Southampton, Test said, we signed up to it in all solemnity.
In July, the UK Government and the devolved Governments, as the joint UK ETS Authority, set out a comprehensive package of reforms to the scheme. It increased the ambition of the UK ETS and set it on a path to net zero. As that package set out, a wide range of changes is required to ensure that the UK ETS remains a key part of the UK’s approach to achieving net zero.
We can be proud of our record to date: cutting more emissions than any other major economy on Earth and having the most ambitious nationally determined contribution up to 2030—a 68% reduction on 1990 levels —of any major economy on the planet, far ahead of the EU at 55%, as you will have noted, Sir Gary.
With that, I have probably said enough. I commend the order to the Committee.
The Chair
I can confirm that you have said enough.
Question put and agreed to.
Resolved,
That the Committee has considered the draft Greenhouse Gas Emissions Trading Scheme (Amendment) (No. 2) Order 2023.