Greenhouse Gas Emissions Trading Scheme (Amendment) (No. 2) Order 2024

Monday 2nd December 2024 Grand Committee

Considered in Grand Committee

15:49

Moved by

[Lord Hunt of Kings Heath]

That the Grand Committee do consider the Greenhouse Gas Emissions Trading Scheme (Amendment) (No. 2) Order 2024.

[The Minister of State, Department for Energy Security and Net Zero (Lord Hunt of Kings Heath) (Lab)]

My Lords, the draft order was laid before Parliament on 22 October. 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, otherwise known as the 2020 order, as a UK-wide greenhouse gas emissions trading scheme 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. Our aim is to be predictable and responsible guardians of the scheme and its markets.

We have brought forward this SI to enable several important changes and improvements to the scheme. It resets the UK ETS cap to be in line with the top of the net-zero consistent range. The cap sets a limit on how many allowances can be created over the trading period, which runs from 2021 to 2030, and in each year. That level reduces over time to drive down total emissions. When this scheme was established, the cap for the legislated period of the UK ETS, from 2021 to 2030, was set at 5% below the UK’s expected notional share of the EU ETS cap for the same period. However, this was not consistent with the UK’s net-zero trajectory for the traded sector. This instrument brings the overall UK ETS cap in line with our net-zero target and carbon budgets under the Climate Change Act.

This statutory instrument also reduces the industry cap, which is the total number of allowances which can be made available to existing installations for free, if no cross-sectoral correction factor mitigation is applied. This SI reduces the absolute level of the industry cap while increasing its proportion of the overall cap. While the share of allowances set aside for this purpose will increase from 37% to 40%, the reduction in the overall UK ETS cap means that the industry cap will fall. That will help to mitigate the risk of carbon leakage across participating sectors while maintaining an effective incentive to decarbonise.

The statutory instrument creates a flexible reserve of allowances for maintaining market stability and sufficient carbon leakage mitigation. In addition to allowances specifically created for this reserve, unallocated free allowances from the industry cap and designated free allowances that are returned by operators due to changes in participant eligibility or activity level reductions will also stock the flexible reserve. The flexible reserve can be used to increase allowance supply for market stability purposes, if the cost containment mechanism is triggered. The flexible reserve can also mitigate application of the CSCF through a uniform reduction to all eligible existing participants’ free allocation if the eligibility for free allocation exceeds the industry cap.

Under current legislation, carbon dioxide released through flaring in the upstream oil and gas sector is included in the UK ETS, as it is within the scope of the regulated activity of combustion. This SI introduces CO₂ released through venting in the upstream oil and gas sector into the scope of the UK ETS for installations already covered by the scheme. That means that such emissions will also be subject to a carbon price.

The controlled processes of venting and flaring can sometimes be essential for safety purposes. They are also used in more routine situations where the oil and gas hydrocarbons are unable to be used, exported or reinjected without the CO₂ being removed. The removed CO₂ can then be released in the process of flaring, when waste gas—including the stripped-out CO₂, as well as combustible elements—is ignited, or venting, where unignited gas is released through a vent. The legislation will remove a perverse incentive whereby operators could routinely vent gas that contains carbon dioxide without it being subject to a carbon price, even though it would, if flared, constitute reportable emissions for the purpose of the scheme.

In line with the original policy intent, the instrument extends legislative amendments made by the Greenhouse Gas Emissions Trading Scheme (Amendment) (No. 2) Order 2023 to Northern Ireland. The amendments include capping aviation free allocation at 100% of emissions, clarifying the treatment of carbon capture and storage plants, and amendments to free allocation rules for electricity generation.

In 2022, a memorandum of understanding between the UK Government and the Swiss Government was signed, setting out the intention to include flights from the UK to Switzerland in the UK ETS. Flights from Great Britain to Switzerland were brought into the scope of the UK ETS on 1 January 2023 by the Greenhouse Gas Emissions Trading Scheme (Amendment) (No. 3) Order 2022. The statutory instrument before us extends the scope to cover flights that depart from an aerodrome in Northern Ireland and arrive at an aerodrome in Switzerland.

On enforcement and penalties, scheme regulators are responsible for enforcing compliance, including operational functions such as issuing penalties. The statutory instrument makes a number of amendments to the levels of scheme penalties to ensure consistency and proportionality of enforcement for all operators. It also introduces a new deficit notice, with an associated penalty, to strengthen enforcement of the fundamental scheme obligation to surrender allowances equal to an operator’s annual emissions.

Finally, this instrument makes several corrections and clarifications to existing legislation. The changes follow appropriate and comprehensive consultation with stakeholders. In the Developing the UK Emissions Trading Scheme (UK ETS) consultation in 2022, the UK ETS Authority considered proposals on changes to the rules for sectors covered by the UK ETS to ensure that more greenhouse gas emissions were covered by the scheme, along with changes to the cap.

The authority’s response to this consultation was published in two parts: in August 2023 and July 2023. A majority of respondents agreed with the UK ETS Authority’s proposals on creating a flexible share reserve of allowances; on bringing venting in the upstream oil and gas sector into the scope of the ETS; and on the addition of a new penalty and deficit notice. Several respondents expressed concern regarding the reduction of the cap and the changes to the industry cap.

An assessment of these responses informed the decision to set the cap at the top of the net-zero consistent range. Between 23 February 2024 and 8 March 2024, the UK ETS Authority ran a targeted consultation on the minor penalty amendments. The responses to this consultation were in broad agreement with the proposals or noted that they were not affected by them. The authority’s response to this targeted consultation has been published in advance of the laying of this statutory instrument.

In conclusion, the changes in the draft order will deliver on commitments made by the UK ETS Authority and improve the operation of the scheme. The 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 extend and improve the scheme where necessary. I beg to move.

[Baroness McIntosh of Pickering (Con)]

My Lords, I thank the Minister for setting out the contents of the instrument so concisely but comprehensively. I support it but have a number of questions. Obviously, the issue of flaring would arise if the Government were to introduce a policy of fracking—hydraulic fracturing. Can the Minister confirm that the Government have a moratorium on fracking? It was a very real issue in North Yorkshire when I was still a Member of Parliament there; it caused real concern among the locals. It would be interesting to know the answer because flaring would be an issue there.

Secondly, I see that an impact assessment has not been prepared on this occasion because it is not a regulatory provision, but in fact one was done already in 2023, and before that in 2020. Can the Minister confirm that the costs in light of the change to the cap will not be deemed wildly different from the results of those impact assessments in 2020 and 2023, which I understand were different in nature in each case?

It is interesting that the Minister, the instrument and the Explanatory Memorandum refer to the amendment to include flights from Great Britain to Switzerland within the scope. Why was this excluded in the first instance? Were there no flights from that airport? Have they suddenly increased in capacity? Out of interest, which flights are included? In the normal scheme of things, would all major airports and flights to the European Union and Switzerland be included? I imagine they would be, but it would be helpful if the Minister could confirm that.

16:00

There is a lot of talk about methane escaping, and the farmers come under the cosh because of livestock production. But I imagine that most of the methane escaping in the form of emissions comes from landfill. To what extent does the order before us cover aspects of landfill? How do the Government propose to reduce methane escaping from landfill or to capture it and use it as a resource?

Decarbonisation is covered in the order. Can the Minister confirm that the Government are not looking to include offsetting as part of emissions trading and the decarbonisation process in a way that could be very harmful for farming? I am thinking in particular of the building of solar panels. I know we have discussed that, but the debate will not stop; this is only the start of the debate. I would extend it so that, for productive farmland of grades 1 and 2, it should not be tolerated to have solar panels on such land, and neither should there be the planting of trees in inappropriate places. This is happening now.

We raised with the outgoing Minister in the Conservative Administration the issue of bid money being spent through capital investment from finance houses, and potentially oil companies, to offset their carbon. Technically this is decarbonisation, but, particularly in the north of England, it is having profoundly worrying impacts on land use and land production.

I am keen to see the order pass, but answers to these questions would help with my greater understanding of the background.

[Earl Russell (LD)]

My Lords, in the main, I support the changes that this statutory instrument enables to the previous scheme. It resets the UK ETS cap to be in line with the top of the net-zero consistent range. The cap is the limit on how many allowances can be created over the trading period, which runs from 2021 to 2030, and in each year. The cap is set to reduce over time to drive down total emissions. When the scheme was established in 2020, the cap was set at 5% of the UK’s expected notional share of the EU ETS cap. The statutory instrument now brings the overall ETS cap in line with our net-zero target and carbon budgets under the Climate Change Act.

I was a little confused on one point. Why has the previous scheme come to be so out of line with the UK net-zero trajectory for the traded sector? Was it really a question of our leaving the EU and its schemes and setting our own national standards, or is there something else going on? An explanation on that would be appreciated.

The SI reduces the industry cap, which is the total number of allowances that can be made available to existing installations for free. The SI reduces the absolute level of the industry cap while increasing its proportion of the overall cap. The share of allowances set aside for the purpose increases from 37% to 40% but the reduction in the overall UK ETS cap means that the industry cap will fall. It is argued that this will help to mitigate the risk of carbon leakage across participating sectors, while maintaining an effective incentive to decarbonise.

We welcome that this SI expands the scope of the ETS to the venting of CO₂ in the upstream oil and gas sector for installations already covered by the scheme. This means that such emissions will also be subject to a carbon price. The SI removes what is described as a perverse incentive whereby operators could routinely vent gases that contain carbon dioxide without being subject to a carbon price, even though they would, if flared, constitute reportable emissions for the purposes of the scheme. It also extends the scope to cover flights departing from aerodromes in Northern Ireland to arrive at one in Switzerland. My understanding is that this change reflects the return of the Northern Ireland Assembly and its ability to consider legislation.

The SI makes a number of amendments to the levels of the scheme penalties to ensure consistency and proportionality in enforcement for all operators and introduces a new deficit notice. It makes several corrections and clarifications to existing legislation following consultations in August 2022 and July 2023, mainly on small penalty amendments. It also reflects a reduction in the cap on allowances and strengthens enforcement and penalties for non-compliance, including by introducing a deficit notice. It accounts for a reverse price for stability during excessive market volatility.

What actions are the Government taking to improve the monitoring of venting and flaring? Do they hope to bring forward plans to move that forward or are they sticking with the date previously announced? What estimates do they have of the associated costs of upstream venting and flaring that this SI might impose? While we welcome that the proposed changes will bring in a cap consistent with net zero, we call on the Government to do more to support a just transition, particularly for the North Sea oil and gas sector, to ensure that companies have adequate resources and help, particularly training, for their staff to transition to other industries.

What other industries and sectors are the Government considering bringing under the ETS and what are their plans to do so? Are there any plans for further convergence with the EU ETS on carbon leakage? Do the Government feel this could help stop further carbon leakage? Finally, I note that there was no impact assessment for this SI, though I understand that the Government conducted a number of consultations. Can the Minister say why?

[Lord Offord of Garvel (Con)]

My Lords, I support this instrument. This order will expand the scope of the UK Emissions Trading Scheme to include carbon dioxide venting in the upstream oil and gas sector. It will introduce deficit notices to allow regulators to penalise operators for failing to surrender allowances by a set date and makes technical changes to penalties. There is no doubt that climate change is an issue that any Government need to take steps to tackle. That is why the Conservative Government introduced the UK ETS, to ensure that businesses monitored, reported on and surrendered allowances in respect of their greenhouse gas emissions. We are glad that the Government recognise the benefits of the scheme and are taking steps to continue to use it.

However, this Government have prioritised their climate policy above financial and economic concerns. While we understand that there must be trade-offs to reach our net-zero targets, I caution them on raising taxes consistently on the North Sea oil industry—they are now running at 78%. This could put significant costs on companies already navigating a complicated regulatory environment. We must remember that net zero by 2050 does not mean zero hydrocarbons. We will still have about 25%. However, as this ETS will provide support by removing venting and flaring, we can have clean hydrocarbons. We must also consider the impact of the hydrocarbon companies in investing in renewables and the people required in the transition to net zero.

With that being said, I will ask the Minister one question that was left largely unanswered in the other place, to do with the impact of the carbon price rise to £147, as highlighted by NESO. What will the impact be on employment, industry and households, and will there be an impact assessment on those key areas?

[Lord Hunt of Kings Heath (Lab)]

My Lords, I thank noble Lords for their general support for the order, which is much appreciated. I will seek to respond to the points raised but will follow up if I am unable to answer everything.

Clearly, the emissions trading scheme is a key pillar of our climate and net-zero policy regime. It sets a cap on emissions in the sectors covered—currently around a quarter of the UK’s emissions. In doing so, it guarantees that the sectors will reduce their emissions in line with our net-zero target. We see maintaining a strong UK ETS playing a key role in making Britain a clean energy superpower, delivering our mission of secure and clean electricity by 2030, and having a positive impact on bills.

I very much take the point about the impact on industry. In relation to the North Sea, in particular, I understand that noble Lords are concerned to make sure that the transition is as effective as possible—something that we are very much committed to doing.

On the point of the noble Earl, Lord Russell, regarding ETS expansion, we see the scheme continuing to remain a key driver of decarbonisation. Our intention is to expand it further. We have recently consulted on proposals to expand the scheme to energy from waste incineration. We are also currently consulting on expansion to maritime operators and on a regulatory framework for integrating non-pipeline transport for carbon capture, usage and storage. We are exploring options to build the UK ETS into the world’s first integrated market for carbon emissions and carbon removal; subject to consultation, our intention is to include engineered greenhouse gas removals. We see that as supporting the new technologies we will need to meet net zero while providing a sustainable path for industry to decarbonise and to encourage that process.

To refer to the impact assessment and the question from the noble Baroness, Lady McIntosh, I think I can reassure her on fracking. We have no intention to permit fracking. As for the impact assessment, it was published alongside the decisions in the response to the report on developing the UK ETS authority. We stand by that assessment as the best assessment of the implications of our policy changes, and therefore we do not think it necessary to do any further work in that area.

The noble Earl, Lord Russell, was right that, in the absence of the Northern Ireland Assembly, it was not possible to make changes to the UK ETS order that extended to Northern Ireland using an affirmative procedure. It is a very good thing that we have made progress in Northern Ireland and are now able to make that provision.

I should say too that the UK ETS authority agreed that the UK Government should amend the UK ETS auctioning regulations to give partial effect to the agreed policy of reducing the cap, and that the authority would pursue a legislative programme in line with the decisions and intentions made in the main UK ETS authority response, including for the cap, set out in the response for 2026 and beyond. As stated there, the authority is now taking the necessary steps to finalise that legislation, and the IA is being relayed alongside that legislation to support parliamentary scrutiny.

16:15

On the detail of the flights from Northern Ireland to Switzerland, this instrument extends the scope of the UK ETS to cover flights departing from an aerodrome in Northern Ireland and arriving at an aerodrome in Switzerland.

The expansion of the UK Emissions Trading Scheme’s scope to include methane from the upstream oil and gas sector is also being considered by the UK ETS Authority. We see this as a further incentive to reduce methane emissions from upstream oil and gas production by levying a carbon price on such emissions. In July 2023, the UK ETS Authority shared publicly in the government response to the developing the UK ETS consultation that this is under active consideration.

I say to the noble Earl, Lord Russell, that when the scheme was established, the cap for the legislated period of the UK ETS—2021 to 2030—was set at 5% below the UK’s expected notional share of the EU ETS cap for the same period. However, this was not consistent with the UK’s net-zero trajectory for the traded sector, so this instrument brings the overall UK ETS cap in line with our net-zero target and carbon budgets under the Climate Change Act. I know that he would not want to hold me responsible for what happened under a previous Government. Given the new commitment we have made to 2035, we will have to see how this relates to the scheme and, obviously, make changes if necessary.

The noble Baroness, Lady McIntosh, raised an important issue around waste. The UK ETS Authority has previously announced its intention to expand the scope of the UK ETS to waste incineration and energy from waste from 2026. This includes a two-year monitoring, reporting and verification transitional period from 1 January 2026 to 31 December 2027.

On the monitoring of flaring and venting, the legislation provides for a measurement-based approach for larger installations which will be able to keep track of vented CO₂ emissions as and when they occur. For smaller installations, it provides for a calculation-based approach which enables operators to use samples to calculate the amount of CO₂ being removed from the extracted oil and gas at different parts of the process; these can then be analysed on at least a weekly basis.

We estimate the associated costs for upstream oil and gas, because of the scale of emissions at 0.4 MTCO₂, to be minimal. We do not think it will place any organisation in financial difficulty. We have collaborated with the North Sea Transition Authority, which holds information about the financial status of oil and gas companies. My understanding is that all parties are satisfied that this policy will not have an impact on domestic supply.

On carbon leakage, a higher industry cap proportion will ensure flexibility over future decisions on the distribution of free allowances in the second phase of the free allocation review.

On alignment with the EU ETS, the UK recognises the importance of international co-operation on carbon pricing. As we transition to net zero, it is clearly important that we work across international borders to drive climate ambition, maintain competitiveness and minimise the risk of carbon leakage. Under the terms of the trade and co-operation agreement, the UK Government and the EU agreed to consider linking our respective carbon pricing schemes and to co-operate on carbon pricing. Noble Lords will know that, on his recent visit to Brussels, the Prime Minister made a joint statement with President von der Leyen. We will take this strength and co-operation forward; I am sure that this measure could be part of that. As market convenors, we do not comment on carbon prices.

I hope that I have responded to most of the points raised; I will follow up with noble Lords if I have not done so. I am grateful for their support.

Motion agreed.