Financial Services and Markets Bill

Baroness Worthington Excerpts

Committee stage
Thursday 23rd March 2023 Grand Committee

Moved by

[Baroness Worthington]

241FC: After Clause 71, insert the following new Clause—
“Climate and nature offsets
In Schedule 2 to FSMA 2000 (regulated activities) after paragraph 9 insert—“Climate and nature offsets(9ZA) Selling, or offering or agreeing to sell, climate and nature offsets.””

[Baroness Worthington (CB)]

My Lords, I am grateful to the noble Baroness, Lady Sheehan, for lending her name to this amendment. I am not at all wedded to the exact wording of it. I would welcome discussions with the Government about approaches to this issue; however, I stress that this is a really important issue that needs regulatory approaches.

Currently, my amendment would add these activities to Schedule 2 to the Financial Services and Markets Act 2000:

“Selling, or offering or agreeing to sell, climate and nature offsets”.


This would make them regulated activities and enable the setting of minimum standards by the FCA, the regulator. By “off-sets”, I have in mind the voluntary carbon market and the nascent market in biodiversity, where an entity voluntarily seeks to compensate for the greenhouse gas emissions or loss of biodiversity arising from its activities by reporting an equivalent amount of emissions reduction or removal, or biodiversity gains, outside of its boundary that it has purchased through a credit or a financial mechanism.

There are more formal markets, particularly in carbon, where participants are required to participate. These are compliance markets. It is not my intention to focus on those, although there have been incidents in such markets, where there may well also be a need for more oversight. Despite the mandatory nature of the market, there have been examples of fraud and mis-selling. There is a lack of transparency even in these markets.

I return to the voluntary market. By making the trade in climate and nature off-sets a regulated activity, the FCA could make rules setting out principles, standards or regulated guidance that off-sets must then meet. I am not seeking to tie the FCA’s hands by setting out what rules it should make; it is a complex issue. It will need to invest in relevant expertise and be led by evidence, but it does need to invest in that expertise.

This amendment is supported by financial market participants. I put on record my thanks to Scottish Widows; Railpen—the Railways Pension Scheme; the Brunel Pension Partnership, which manages the assets for local government pension schemes in the south-west; and employees of the Environment Agency and the Church of England Pensions Board. These organisations collectively are responsible for more than £250 billion in assets; they have written to me in support of this amendment, and I am sure would welcome a meeting with government to discuss it further. They tell me that it is widely known that this market is not functioning well at the moment, and that the voluntary certifications and quality codes are not delivering the transparency, reliability and quality of off-sets for financing to flow freely into projects that could make a real difference in the fight against climate change and nature loss.

Given that, to achieve net zero, the majority of firms will have to rely on some form of tradable off-set or tradable credits for their residual emissions, which could be impossible to eliminate through actual investments, regulation of this market would serve the purpose of building trust for firms to allocate finance in this area—and I agree with them. Currently the market is relatively small, but it is growing and has increased fivefold since 2018, and many have called for it to scale further, including the former Bank of England Governor, Mark Carney. The Climate Change Committee estimates it to be a $2 billion a year market, accounting for 300 megatonnes of carbon dioxide per year—around 1% of global emissions and not far from the total contribution of the UK to the climate change problem, so it is not insignificant.

However, this market in climate mitigation or activities will not scale or endure without better regulated standards that can underpin confidence in the market. As the need to demonstrate a response to the growing climate risks increases, more and more companies and individuals will be tempted to buy their way to a cleaner carbon footprint or a cleaner reputation. Already, one-third of FTSE 350 companies include off-sets in their emissions reduction plans. Off-sets account for between 35% and 80% of their pledged emissions reductions—so it is a significant piece of financial architecture that people are relying on to get to net zero.

Companies will want to be seen to do the right thing, but this will be challenging. It is extremely difficult to assess whether emissions reductions being purchased are both real and durable. This offers an opportunity to unscrupulous providers to market poor-quality products to unsuspecting companies and investors. As I said, even the regulated carbon markets have seen examples of fraud and poor-quality off-sets entering markets. In the EU Emissions Trading Scheme, the Europe-wide carbon market, the market had to be closed to overseas investments in credits, partly in response to an oversupplied market but also partly due to persistent questions about the quality of the credits entering the market.

The potential for mis-selling in this market is high. Some noble Lords may remember that, in 2011, a listed company on the Canadian stock exchange, the Sino-Forest Corporation, went bankrupt after an investigation revealed that the company’s claims were vastly out of line with reality on the ground. The case related to a standard forestry offering; it is far easier to verify whether the land has been purchased and the trees are there than it is to verify whether those forests are actually absorbing or storing carbon—an invisible commodity that we are essentially turning into a tradeable commodity. Similarly, how much biodiversity the forest may hold is a far harder thing to verify.

The difficulties of verifying this market make it very attractive for unscrupulous actors and, as excitement and financial flows increase in this market, that attractiveness to potentially rogue actors will only grow. One UK-based carbon market ratings agency has already reported that it believes that only 30% of offsets on the market are high quality, and 25%—one-quarter—could effectively be classed as having junk status. The Swiss-registered offset provider, South Pole, one of the largest in the market, had the integrity of its offering called into question by an article in Tages-Anzeiger in February this year. This sent shock waves through the industry, and a lot of attention has now been placed on the question of integrity.

Most of the focus of the carbon market quality checks is on credits generated in the biosphere—so-called nature-based solutions. Trees are the most common product to which you will find financial instruments attached, but carbon is stored in other ways, too, and it is even more difficult to verify some of those other sources of carbon store because they are far harder to count and track. Below-ground carbon in soils is one example: it is notoriously difficult to get a handle on exactly what is happening in the carbon cycle in soils. It is even harder with below-water carbon—blue carbon—stored in sea grasses and other marine ecosystems, where you cannot even see the commodity being sold. These difficulties are pronounced.

The Minister may say, “Don’t worry; normal regulations against fraud and corruption will be sufficient to protect against outright fraud and corruption”, but these markets are uniquely complex. Often the problem is not that actors are wilfully seeking to do wrong but rather that there is an unhelpful lack of independent standards in the market to help determine what constitutes an additional or biodiversity benefit. In that uncertainty, it is not just investors who will potentially find that their investments are not delivering what they expected; the whole planet is being short-changed. This is because the sale of an offset permits the continued emission of greenhouse gases, minus the guilt; and, if the offset purchase is not genuine, atmospheric concentrations, already at dangerously high levels, will continue to rise. As we saw in the latest assessment report from the IPCC, this is starting to imperil us all.

Independent observers of the integrity of this market have highlighted concerns. A report published on this topic by IOSCO, the International Organization of Securities Commissions—the global standard-setter for investment securities—explains in detail the issues with the quality of carbon credits and the lack of a uniform definition of what constitutes high quality. I will not run through them; there are at least 10 reasons why this market is complicated.

At the top line, there are questions about additionality—whether this action is genuinely additional to what would have happened anyway—and about permanence and the risk of reversal. There are risks of leakage: you may be protecting something in one area, but that activity is just displaced to somewhere else and the emissions still occur. There are concerns about double counting, registry and transparency. There are potential conflicts in the market, and there is a lack of legal clarity, no standardisation, poor data and, overwhelmingly, a very large risk of greenwashing and, from that, legal risks and potential litigation cases. We are not in a good situation today. The market is small now, but it will grow, and it is really timely to be considering whether the Government should take powers now to regulate it.

This is a volatile market, as you can imagine, such is the uncertainty, with the mis-selling of fraud and the mistaken assumptions. There have been plenty of studies into why that might be the case. I will touch on an example of why regulations are needed: pension funds. In the UK, they are now investing in forest carbon offsets for the long term. This relates to both defined benefit offerings, where there are some protections for savers, but defined contribution schemes are increasingly entering this market too.

The long-term future of the biosphere in a changed climate is deeply uncertain and pension fund advisers and managers need better guidance. They simply should not have to determine whether something they are being sold is correct with no guidance from government and no regulation. There could be risks from litigation, as I mentioned: should vendors of these products be hit with legal claims or go bankrupt, savers will be hit by that outcome.

--- Later in debate ---

[Baroness Worthington (CB)]

I thank the Minister for her response and I am encouraged and reassured to know that those powers already exist. I will go away and consider that.

I am going to come back on a couple of points. It is true that some initiatives have been launched—I was involved in one—but they have no statutory basis at all. It is a group of individuals—business leaders and some academics—fighting it out with no governance or democratic representation. It will come out with standards, but the quality control over that process is not being led by sovereign nations. It was launched at COP 26, but there was absolutely no involvement of negotiators, member states or anything with public sector status. Although we look forward to their outcomes, something in that process may lead to less than favourable outcomes.

I ask the Minister: if we are to proceed internationally, which part of the architecture of the UN or any multilateral fora does she see acting as the holder of this important set of regulations? It cannot be left to industry to mark its own homework, nor to the voluntary sector, with its general lack of resources or certainty of funding. It needs to be led truly internationally, through member states and a multilateral process.

Perhaps the Minister would agree to write to me, because I am interested to understand how this can be done internationally. Individual member states have to lead; one or two progressive countries have to start the process, as we have seen with the green taxonomy: Europe started and now the UK has done ours. You do not always have to wait for a UN or international process, but can move forward and take leadership, especially if you are trying to make the City of London the centre of green finance.

Although I am encouraged, there are still some large questions to be answered about how we ensure quality, get the right standards, and involve democratic processes and member states—but I am pleased to withdraw my amendment.

Amendment 241FC withdrawn.

Financial Services and Markets Bill

Baroness Worthington Excerpts

Committee stage
Tuesday 7th March 2023 Grand Committee

[Baroness Worthington (CB)]

I will interject on behalf on the amendment I drafted, as the noble Lord has completely mischaracterised what we are attempting to do here and has narrowed the debate into a very narrow conversation about oil and gas assets. We are talking here about climatic risk across the whole economy. It is not just oil and gas operators; it is anybody who has any money wound up in any of the sectors that will be affected by the physical risk, the risk of transition and the societal risk when we finally realise that science does not negotiate with oil and gas companies, financial regulators or anybody who pretends to be able to predict the future. We have poor modelling, we have terrible risk assessments, and the PRA and the Government need to issue better guidance so that we can understand the risks we are facing. Let us not reduce this to a narrow discussion about oil and gas interests.

[Lord Lilley (Con)]

I read the amendment in the name of the noble Baroness. Proposed new subsection (1) refers to

“group undertakings engaged in existing fossil fuel exploitation and production … group undertakings carrying out new fossil fuel exploration, exploitation and production”.

If this is not about fossil fuel exploration, that is not very clear from her amendment. I am dealing specifically—

[Baroness Worthington (CB)]

My Lords—

[Lord Lilley (Con)]

Hang on, I must have the right to reply to the previous intervention before I take the next. I am not dealing with things other than fossil fuels. I am talking just about fossil fuels. It seems to me that the noble Baroness’s amendment is about fossil fuels, in large measure. My arguments have not been responded to because they are fundamentally logical. They are the whole basis of government and CCC policy. But I give way to the noble Baroness now.

[Baroness Worthington (CB)]

The amendment lists certain sectors which are likely to be most affected. It does not in any way say it is limited to those sectors, and I think it is egregious to assume that this is a narrow amendment when it is, in fact, a very broad amendment.

[Lord Lilley (Con)]

My remarks are narrow. The noble Baroness’s amendment may be broad. Can we agree on that and deal with the aspect of fossil fuel investment?

[Baroness Worthington (CB)]

Yes.

[Lord Lilley (Con)]

We ought to allow the industry to invest as long as we are phasing out demand. If it invests too much, it is its problem. If it invests too little, it is our problem.

--- Later in debate ---

[Baroness Penn (Con)]

The Government understand and agree with those points. That is why we are also seeking to find a way forward on this work and have driven considerable work at a global level to try to tackle deforestation. I hope noble Lords can take some heart from our commitment on that.

On Amendment 232, also from the noble Baroness, Lady Sheehan, my noble friend Lord Naseby will be pleased to hear that NS&I’s retail green savings bonds, which I think have been available for a couple of years, are integral to the continued successful delivery of our green finance programme. We clearly have more work to do in promoting them, so the NS&I will continue to promote them and encourage retail investors to help finance the fight against climate change and other environmental challenges.

The Government committed to publishing a biennial impact report by September 2023, which will detail the environmental impacts and social co-benefits of the green financing programme’s spending. This will include available reporting on greenhouse gas emission reductions of projects financed by the green savings bonds and green gilts. The upcoming impact report will complement the programme’s first allocation report, published in September 2022. These annual allocation reports detail how funds raised from sales of green gilts and green savings bonds contribute to different green priorities such as clean transport and renewable energy.

Amendment 232 proposes publishing an assessment of the scope for future green financing. Decisions on future green financing ambitions are based on eligible green spending commitments and will be taken each financial year as part of wider decisions for the Treasury’s budget. Financing decisions are also influenced by gilt and retail savings market conditions and consultations with investors. Reporting on the future scope of green financing in advance, rather than at the beginning of each financial year, could create the risk that future spending requirements and conditions in the gilt and retail savings market are disregarded. That would make the successful delivery of the green financing programme more challenging.

I turn to Amendments 233, 235 and 236 from the noble Baronesses, Lady Wheatcroft and Lady Hayman, which concern sustainability disclosure requirements, green taxonomy and transition plans. Sustainability disclosure requirements—SDR—are designed to provide an effective and co-ordinated reporting framework for sustainability information. This is already being taken forward at pace. The FCA recently consulted on new sustainability-related disclosure requirements for all regulated firms and more detailed rules for asset managers and asset owners.

The Government’s 2021 road map made it clear that disclosure of transition plans will be a part of SDR. The Government launched the independent Transition Plan Taskforce in April 2022 to develop a gold standard for transition plans. The task force has since made huge progress, having just consulted on its recommendations, framework and guidance, with the final framework and guidance to be published later this year, alongside additional sectoral guidance.

The FCA has already implemented the guidance from the Taskforce on Climate-Related Financial Disclosures for transition plans for asset managers and asset owners, on a “comply or explain” basis. It is continuing to work closely with the Transition Plan Taskforce to develop and implement its recommendations.

As I reaffirmed to noble Lords in a previous debate, the Government are committed to implementing a green taxonomy as part of their sustainable finance agenda and, as I set out in my Written Ministerial Statement to the House on 14 December 2022, the Government will provide an update as part of the green finance strategy. We are clear that the value of a taxonomy rests on its credibility as a practical and useful tool for investors, companies, consumers and regulators in supporting access to sustainable finance.

Noble Lords have only to look at the implementation challenges the EU is facing, including on data availability and reporting, coherence with regulatory frameworks, and international interoperability, to see that this is a complex exercise. We have been clear in the UK that, with the support of our Green Technical Advisory Group and with public consultation, we will take the time to get the taxonomy right to ensure that it is usable and effective.

On Amendments 201 and 237, the Government and regulators are taking steps to improve the UK’s regulatory framework to support more effective stewardship. We have already discussed in Committee the Financial Reporting Council’s world-leading Stewardship Code 2020. This asks trustees and managers to disclose how they have considered environmental and social factors, including climate change, in their investments. The Department for Work and Pensions’ recent stewardship guidance for pension scheme trustees came into effect last October.

In addition to these existing initiatives, the DWP, along with the FCA, the Pensions Regulator and the Financial Reporting Council, has already committed to a review later this year of the regulatory framework for effective investment stewardship, to ensure that it is consistent across market participants and financial products. I recognise that this is a complex issue and recognise the concerns raised by the noble Lord, Lord Davies of Brixton, about the specific framing of the amendments. This is an issue that would warrant further discussion before Report.

On Amendment 241A, tabled by my noble friend Lady Altmann, UK pensions have been at the forefront of tackling climate risk and will undoubtedly continue to play a crucial role. The Government are working hard to drive consolidation among pension schemes so that they deliver increased scale, better value for money and improved access to investments such as green infrastructure. As part of this drive, the DWP recently published a consultation on a value for money framework for defined contribution pension schemes. Furthermore, the pooling of Local Government Pension Scheme assets, from the 86 funds into eight asset pools, has already led to £380 million in net savings to March 2022; these are projected to exceed £1 billion by March 2025.

We are also working hard to lower the barriers for individual pension schemes to invest in green. The DWP is reforming the treatment of performance-based management fees to enable individual pension schemes to invest more easily in assets such as green infrastructure.

Finally, when it comes to the noble Baroness’s amendment, we are aligned in wanting to see more of this pool of capital able to be directed in the way we have discussed in this Committee. It is important that we lower barriers to such projects and solutions. We do not see the benefit in creating a distinct, lighter-touch regulatory regime to support pooled investments in green projects. There may be risks in reducing regulatory oversight in this way.

The UK’s world-leading regulatory standards are important in providing market participants with the confidence to invest and we should be cautious about changes that could undermine that confidence. I say to my noble friend Lady Altmann and the noble Baronesses, Lady Hayman and Lady Drake, that we want to think about how we can make progress in this area. While the specific amendments suggested might not be the right way, we should continue to put our thinking caps on when it comes to how we can guide progress in this area.

With that, I hope that, for now, the noble Baroness, Lady Worthington, is able to withdraw her amendment and that other noble Lords will not press their amendments when they are reached.

[Baroness Worthington (CB)]

My Lords, I am grateful for the Minister’s reply to this varied group of amendments covering a range of issues that fundamentally speak to the need for the financial sector to take a more serious look at how it can help prevent the exacerbation of environmental challenges, including climate change, and invest in solutions at scale.

I was encouraged to hear that the Government are about to produce their green finance strategy. I wonder whether it might have been a good idea to have done that before the Bill, as then we might have had—

[Baroness Penn (Con)]

We produced our green finance strategy in 2019 and we provided a green financing road map in 2021. I very much hope that before we reach the end of the Bill noble Lords will have sight of the refreshed green finance strategy.

[Baroness Worthington (CB)]

That is great, but my point still stands. It would have been good to have had the refresh before the legislation so that we could have incorporated any findings into the Bill.

On my amendment on the assessment of risk in relation to capital requirements, it is not the case that everything is fine in the world of climate modelling. It really is not. If you spend time with climate scientists who are empirical scientists out in the field witnessing the impact of climate on the natural world, they will tell you that the models are not in line with what they are witnessing. That tells you that we have not got a handle on the speed and pace of change in the physical world thanks to decades of unmitigated emissions of greenhouse gases and the never-ceasing increase in concentrations of greenhouse gases in the atmosphere.

The noble Lords, Lord Lilley and Lord Naseby, may well say that it is fine and that we are just going to look at demand. We have been doing that for about 30 years. It has not made a jot of difference. The reason for that is that we have an economic system based on an incumbent power that is very adept at keeping demand for its product healthy and at finding new sources of demand for its product, so we absolutely need to cut with both sides of the scissors. We need constraints on demand and constraints on supply; otherwise, we will carry on with this merry dance and the emissions in the atmosphere, which are what matters, will continue to rise.

I believe that the finance sector is not the place to solve this. We need political will across all member states to pass the legislation necessary to drive capital into solutions and to stave off the continued licensing of extraction. That will take time, but it needs to be done.

In the meantime, if we walk into believing that the finance sector has got this—“Don’t worry; the models are all fine”—we will be making a grave error. These models are not sufficient; they do not take a whole host of measures into account. The noble Lord, Lord Stern, is not here, but he is an expert in these matters and he will tell you how flawed these models are. How can they be sufficient when many of them conclude that a global increase of around 3 degrees will take roughly 5%, 10% or 15% from GDP? That is ludicrous. Do not forget that an average global increase of 3 degrees means warming at the poles at three times that rate and hugely different regional impacts. That is not a safe place to be.

Financial Services and Markets Bill

Baroness Worthington Excerpts

Committee stage
Wednesday 1st March 2023 Grand Committee

Moved by

[Baroness Worthington]

168: After Clause 50, insert the following new Clause—
“PRA dutiesReview of capital adequacy requirements risk weights and solvency capital requirements
(1) Within six months of the day on which this Act is passed the PRA must complete a review of the risk weighting and capital requirements applied to loans, guarantees or investment via shares or securities in—(a) group undertakings engaged in existing fossil fuel exploitation and production,(b) group undertakings carrying out new fossil fuel exploration, exploitation and production, and(c) group undertakings otherwise at significant risk from the low carbon transition, including but not limited to those engaged in fossil fuel-based power generation, agriculture, automotive engineering, aviation and heavy industry.(2) In conducting this review, the PRA must have regard to—(a) the full implications of climate change for the risk of investments including physical climate risks, transitional climate risks and climate liability risks,(b) the likelihood of assets becoming wholly or partially stranded before the end of their normal cycle,(c) the impact of climate change and climate change-related disruption on financial stability, and(d) the advice of the Climate Change Committee.(3) The Treasury must lay before Parliament the outcome of this review within one month of its completion.”Member’s explanatory statement
This amendment requires the PRA to complete a review of the risk weighting and capital requirements of banks and insurers in relation to firms engaged in financing fossil fuel exploration, exploitation and production alongside other climate-risk exposed sectors, taking account of the climate risk on those investments and on financial stability, the likelihood of the assets becoming stranded, and the advice of the climate change committee.

[Baroness Worthington (CB)]

My Lords, moving on to a different set of topics, Amendment 168 is in my name, and I am grateful to the noble Baronesses, Lady Sheehan and Lady Drake, for lending their support. This is the only amendment in the group which has my name on it but I am broadly supportive of many of the others in it, as they seek to address a broad range of questions relating to how risk is taken into account in financial services regulation, with a specific focus on climate risk, as in my amendment.

Amendment 168 is about the risk weighting of assets for the purposes of capital adequacy requirements, in the case of banks, and solvency capital requirements, in the case of insurers. It is not a terribly prescriptive amendment. It would require the PRA to complete a review of these matters in relation to loans, guarantees or investment in firms engaged in new and existing

“fossil fuel exploration, exploitation and production”

and other sectors which are particularly exposed to low-carbon transition and climate risks

“including but not limited to those engaged in fossil fuel-based power generation, agriculture, automotive engineering, aviation and heavy industry”.

Proposed new subsection (2) sets out a number of matters to which the PRA should have regard, including the different types of climate risk and the risks to both individual stranded assets and wider macroeconomic financial stability. It also requires it to take advice from the Climate Change Committee. I have referred to loans, guarantees and investments in relation to the group undertakings to capture particular climate risks in the wider groups of firms. A loan to a firm engaged in clean technologies is still exposed to financial risk if it is a wholly owned subsidiary of a firm which is significantly exposed to low-carbon transition, or if the firm itself owns firms which are.

To be clear, I am seeing this through the lens of financial risks to firms. I have noted that Sam Woods, the chief executive of the PRA, has said that the organisation should not seek to pursue a climate policy in stealth mode or on the quiet, as a second Government, unless government gives it that duty. He says that the PRA and Bank of England remits are currently to pursue financial stability and accordingly to manage climate risk, which has the potential—I go so far as to say the likelihood—to constitute a huge risk to financial stability. I agree with him, but I do not believe that, for the management of these risks, the tools that the bank has deployed to date are sufficient; in fact, they include methodological issues that are disastrously understating the financial risks.

Before I turn to that issue, I should address one other point. During the passage of the Financial Services Act 2021, an amendment in relation to capital risk requirements was tabled by the noble Lord, Lord Oates. In response, some Peers said that there was no emergency embedded in banks’ balance sheets, as corporate lending in short to medium-term in nature. However, I need to emphasise that significant impairments are possible in both the short and medium-term.

This is not only as a result of more unpredictable and extreme weather—more particularly, it is as a consequence of technological and societal change. Global investment in low-carbon technology has increased by 20% a year in the past five years alone, and has now overtaken global fossil fuel investment. There is a whole economy change under way. It is not about a few companies and discrete sectors that have failed to take into account incremental improvements but about whole sectors exposed to broad-based technological change, increasing the rates of company failure, and the rapid shrinking of some industries, accompanied by the expansion of others. Banks and insurers that have not taken account of such changes face much higher impairments and, given the systemic risks of allowing them to fail, socialised public bailouts. It is right that the PRA should assess that these risks are being adequately managed and that the banks and insurers participate in supporting that review. It is about investing a little now to avoid spending a lot further down the road.

How are these risks being managed? Currently, through the climate biennial exploratory scenario, or CBES. In this exercise, the PRA offers up sample temperature rise scenarios and underlying assumptions of the implications for different assets, and firms plug in their portfolios to get the impairment data out as a result. This all feels safe and precise, but the climate is something that cannot be predicted specifically in those ways with any degree of accuracy. It is about the extent and nature of the risks that must be taken into account. This whole streamlined, reassuring and seemingly precise approach is hopelessly wrong in the face of climate risk.

A paper by the noble Lord, Lord Stern, of this House highlights that the methodologies employed by such climate risk models rest on flawed foundations, with huge error bars and unknown unknowns. Critical methodological problems have led to perverse outcomes, such as the suggestion that a 3 degree temperature rise, global average, offers the optimal balance of benefits and costs. That is more or less what we get from CBES. Where temperature rises are limited to under 2 degrees or rise to more than 3.3 degrees, the drag on company profits is predicted to be at around 10% to 15% on average. I have no idea how any model could reach that conclusion that had any bearing with what is actually happening to our physical climate.

Let us remember that the economy and the financial markets are a wholly owned subsidiary of our natural environment, and we are now in a destabilised climatic environment. This same 3 degree rise, which is the global consensus, involves steep drops in food production, dire water shortages, a sharp increase in urban heat waves, forced migration and mass extinction events. An increasing body of literature sets out why the models do not work. The former chief economist of ING Group in a Policy Exchange publication concludes that central bank scenarios have so far been based on assumptions and models that ignore or downplay crucial evidence of climate risks—notably the rising frequency of extreme weather events and critical triggers, tipping points and interdependencies between the climate, the economy, politics, finance and technology.

That is true for the CBES model. The underlying assumptions in the CBES paper highlight minimal economic impact from inaction on climate change over the next 25 years and a reduction in GDP growth of only 0.12% in 2050—another ludicrously precise number, given all the future uncertainties that lie ahead of us. That is very poorly aligned with the scientific consensus. Other academics have identified dangerous underlying assumptions in the functions that feed into those used by CBES, including that 90% of GDP will be unaffected by climate change because it happens indoors, and using the relationship between temperature and GDP today as a proxy for the impact of global warming over time, ignoring any possibility of cascading climate feedbacks and tipping points.

Energy Profits Levy

Baroness Worthington Excerpts

Tuesday 7th February 2023 Lords Chamber

[Baroness Penn (Con)]

I simply cannot agree with the noble Baroness’s interpretation of things. Many renewable electricity generators generate their electricity under contracts for difference, to which that regime does not apply. It applies only to exceptional profits related to the price of gas, and is nothing to do with the cost of investing in renewables. I can agree with the noble Baroness on the importance of investing in renewables, something on which we have a consistent track record. We have the largest wind capacity in Europe, and we are the second-largest deployer globally, behind only China. We have a lot more to do, but we have a strong track record on which to build.

[Baroness Worthington (CB)]

My Lords, in retrospect, would it not have been more sensible to have negotiated with the providers of those resources from the North Sea to our domestic consumers and capped the price? Instead, we have allowed prices to rise, with no underlying rise in the cost of production, to the cost of the consumer. The tax may be coming in, but is it going back out to the people in need? I very much doubt it.

[Baroness Penn (Con)]

I would like to reassure the noble Baroness on that second point. We have the energy price guarantee in place and specific support going to the most vulnerable households. It is at the forefront of our minds that people have faced a difficult winter and that energy prices will remain elevated for some time. We are also putting support into improved energy efficiency and insulation to help bring down bills.

Financial Services and Markets Bill

Baroness Worthington Excerpts

Committee stage
Wednesday 25th January 2023 Grand Committee

Moved by

[Baroness Worthington]

21: Schedule 2, page 124, line 12, leave out paragraph 45
Member’s explanatory statement
These amendments maintain the duty for FCA to set position limits on commodity derivatives and over the counter equivalents, and the associated powers to request information and intervene, whilst onshoring the power to set limits which are appropriate for the UK.

[Baroness Worthington (CB)]

My Lords, I am very pleased to speak to this group of amendments this afternoon, having sadly been unable to make Second Reading. I declare my interest as a co-chair of Peers for the Planet. I also declare my relative ignorance of this topic, as I am not steeped in the details of financial services. I very much approach this issue from a layperson’s perspective, guided by common sense. Much of my efforts here are to apply parliamentary scrutiny to this very complex issue and to seek reassurances from the Minister.

As we debated in the previous group, it is vital that we have proper scrutiny of proposed changes to laws and regulations governing financial markets. Potentially poorly regulated markets could have significant negative real-world consequences, as we have seen in the past. Complexity is now endemic in this sector and can catch regulators, and indeed parliamentarians and Ministers, out. Derivative markets are particularly complex and require especially careful scrutiny.

My Amendments 21 to 25 and 41 concern the proposed future regulation of trading in commodities and their derivatives. Many noble Lords will be aware of this, but to give some background, derivatives are used in the financial markets and the wider economy to hedge exposure to commodity prices in the future. However, this opens up the opportunity to speculate and seek profit from volatility. Roughly two-thirds of commodity trading relates to commodities in the energy and food markets. Therefore, unchecked speculation and poor regulation in these markets can have very real-world consequences. Some types of commodity derivative investment are of course socially desirable. For example, soft commodity or energy producers seeking to insure themselves against future risks arising from such things as weather and an unstable climate are making a necessary hedge to keep products economic. However, there are dangerous aspects of this as they relate to food and energy, which affect people’s lives and the affordability of living.

Momentum-based trading strategies can exacerbate steep price rises and the cornering of markets, by which I mean taking large positions that are disproportionate to your genuine participation in the market, which could force unnatural or artificial scarcity into the market and raise prices. More generally, increasing volumes of capital being tied up in future derivatives removes money from the real economy today, where it could be delivering much greater real-world impacts.

There is overwhelming evidence that unchecked speculation produces price bubbles. I do not intend to go into this in detail, but in relation to oil, a 2021 piece in Resources Policy looked back at a whole host of research dating back to 2009 in highly cited journals. So firm is the consensus that there is now a whole body of techniques dedicated to measuring and modelling bubbles. We are well past the point of discussion of whether there is a risk; it is now about how we manage it and its impacts.

The co-author of last October’s UN Conference on Trade and Development—UNCTAD—trade review said that a ratio of around 70% real hedging and 30% speculation might be seen as “healthy”. However, he added that what we see in the market today indicates that the ratio has been reversed: 70% speculation and 30% real hedging. The same report warned of a policy-induced global recession. The report said that insufficient attention has been paid to the “betting frenzies” on future markets in the current crisis and called on Governments to tighten rules on speculation. However, with this legislation we seem to be doing the opposite.

EU legislation on commodity derivatives was introduced, and it was not simply pointless bureaucracy. There was clear evidence in the run-up to and during the financial crash of 2008 that food and energy prices were being driven upwards not by shortages but by fevered speculation, so action was taken. Investment banks were seen to be profiting by around $16 billion a year from commodity trading. Thanks to these new approaches, we have seen that profit-making fall by around three-quarters, according to analysis from the research firm Coalition. So there was a reason for the EU regulations that we are seeking to modify as we translate to post-Brexit financial regulation.

The general point is that we should be seeking to allow the socially beneficial, but not allowing bubbles to be created in this market. We should not be making it easier to do that but keeping a careful eye and tracking trends, while requiring clear data and better disclosure. You could argue that the EU perhaps overreached or did not get it exactly right, and that we should seek to take our own approach, but I have some questions about the Government’s proposals in the Bill.

It appears to me, and I seek reassurance from the Minister on this, that Schedule 2 is handing the power of setting appropriate position limits and controls—and the maximum position any firm can take on trading on a commodity—to financial exchanges, or certainly taking the power to do so. But are those exchanges not incentivised commercially to maximise liquidity and volumes of trade, so does this not create something of a conflict if they are also setting their own limits?

These new arrangements would see the FCA retaining backstop powers to give directions, but only in certain fairly narrowly defined circumstances. It can request information and intervene, but the drafting suggests that the exchanges would be free to set their own limits. Is this the case and, if so, how does the Minister expect them to handle this potential conflict between their commercial interests and a more cautious approach to the prevention of harmful speculative bubbles?

There is also the question of what will be regulated in future. The current rules cover both over-the-counter trades and exchange trades but, as I understand it, this new approach is about simply deciding not to continue to seek oversight of over-the-counter trades. From what I have been able to read, this seems to be based on the fact that those consulted said it was too difficult to do. That does not seem a good enough reason to remove the oversight of OTC trades and focus simply on exchange trades.

There is also the point about exchanges having less oversight of systemic risks building up in the global market. Whereas the FCA engages via the IOSCO, the International Organization of Securities Commissions, and the FSB—

--- Later in debate ---

[Baroness Worthington (CB)]

I shall seek to remember where I was in my speech. I was talking about international co-ordination and how the FCA currently is part of a global network of regulators, and therefore has a more effective chance of spotting systemic risks building up in the global markets, and that the exchanges would not be plugged in at the same level of international co-operation and co-ordination. The FSB warned, in the aftermath of Russia’s invasion of Ukraine, that

“prices have swung wildly, with liquidity temporarily evaporating in some commodity derivatives market segments and a number of traders coming under strain”.

So I ask the Minister: in these uncertain times, how certain are we that UK exchanges can be patched into that wider market scrutiny and regulatory infrastructure, which the regulator currently has the power to do?

The powers retained by the FCA are limited to intervening on operational objectives and, most relevantly here, consumer protection and integrity, but I am concerned that that definition of consumer may be rather too narrow. It could refer, as it does in Section 1 of the 2000 Act, to the investor, rather than the man or woman on the street. I worry that “integrity” could simply refer to soundness, stability, orderliness and lack of crime. I would welcome the Minister’s view on how this maps on to the existing grounds for regulation that are to be revoked, which are much broader and relate to preventing market abuse and market distortion and try to ensure that there is no artificial inflation of commodity prices.

My concern is that we can have a sound and orderly market which works very well for investors but inflates prices for consumers and businesses and adds extra costs on to essential commodities. I believe the FCA should retain the power to intervene in these cases, and that the definition of grounds for intervention should be as broad as it is currently.

I mentioned the over-the-counter derivatives no longer being covered in regulation. I was rather worried to read in the Treasury’s consultation on wholesale markets that:

“The objective of including them as part of the regime was to prevent market participants from circumventing regulatory requirements that are applicable to exchange traded commodity derivatives by dealing in lookalike OTC contracts. However, in practice, identification of these contracts has proven difficult, and they have only been reported in a very small number of instances.”


Therefore, the Treasury concluded that

“the inclusion of these contracts and uncertainty about the scope of this requirement imposes increased legal risk and potential compliance costs for firms.”

To me, that sounds as though something important is proving difficult and, rather than seeking to solve it, make it easier and provide clearer guidance, we have decided to drop it altogether.

The consultation goes on to say:

“to ensure market integrity, the government proposes that the FCA and trading venues should continue to take account of relevant OTC contracts when monitoring markets.”

But amendments to Regulations 27 and 28 take away the power from the FCA to do this and to request information on these contracts. That is my reading of it, but I look forward to reassurance or clarification from the Minister. If the FCA is not able to monitor these transactions, how can we oversee them? Would it not be more desirable to have the FCA retain the powers it has?

I am grateful for the support of the noble Baroness, Lady Bennett of Manor Castle, for my amendments. Essentially, they seek to unhook the legislation from the EU but continue to require the FCA to maintain the same powers to set position limits and to intervene as widely as possible to ensure proper consumer protection and maintain international co-ordination, which is so essential in these markets.

Amendment 41 requires the FCA to make rules requiring listed companies to publish the revenue and earnings attributable to trading commodity derivatives and economically equivalent over-the-counter contracts. I think this is important because I have personal experience—and there is plenty of anecdotal evidence—of firms that are operating very significant trading activities but hiding their profits in their financial statements and in other parts of their accounts, because to disclose quite how much was being made from trading would bring a lot of questions about the nature of those companies. I am specifically talking about energy companies, which have very significant trading activities and are not, at the moment, required to disclose in their accounts the level of profit they are making from those activities.

This is important because it materially affects the ability of financial services to assess the health of these companies. If we are not seeing the extent to which they are engaged in these derivative-trading activities and we are unable to see where the profits are being made, how can we make fair and open assessments about the nature, success and propriety of their business? It is important that we give ourselves the transparency to see exactly how much of this is happening and the degree to which it is altering the balance sheets of companies in these sectors, which are so essential to maintaining our standard of living and, in the case of energy and food companies, have such a material impact on our environment and global climate.

I am sorry that that was a very long speech, but I look forward to hearing the Minister’s responses and to continuing the debate.

[Baroness Noakes (Con)]

My Lords, I will speak to the amendments from the noble Baroness, Lady Worthington. I do not support them, because I think that what the Government are trying to do in this Bill is moving in the right direction.

We have to remember that derivatives are basically a success story. It is a huge financial activity. The total value of derivative trading is sometimes estimated to be a multiple of global GDP. Of course, commodity trading is only a relatively small part of that, but it is important because the advantages of trading allow effective risk management, price discovery and market efficiency. Those are the sorts of things that actually help consumers, at the end of the day, so we must be very wary of trying to interfere in what is fundamentally a successful part of our financial infrastructure.

Of course, speculation is involved in derivatives, there is risk for some counterparties—and sometimes systemic risk—in derivatives, and sometimes they are extremely complicated as individual instruments, even to understand. But they are part of and underpin something that works well for markets overall. We should intervene in that only if absolutely necessary.

My own view is that the changes in the Bill probably do not go far enough to take the dead hand of EU prescriptive regulation away, but they are a solid move in the right direction. As the noble Baroness, Lady Worthington, pointed out, they replace a mandatory regime with a permissive one that allows the rules to be designed for the particular markets. In particular, the changes in Schedule 2 will allow the FCA to transfer responsibility for setting position limits to trading venues, if indeed position limits are needed. For some time now, the FCA has not been enforcing excesses on position limits in respect of the majority of contracts, and the world has not come to an end.

I think Amendments 21 and 22 are a step backwards in trying to preserve a mandatory EU regime. So too is trying to drag over-the-counter derivatives into that regime, because—as the noble Baroness pointed out—it has been found that they are extremely difficult to identify. Their removal from the regime was almost universally supported in the consultation that the Government carried out on changes to the derivatives regime.

Amendment 41 from the noble Baroness, Lady Worthington, is about putting additional information in annual reports and accounts. There are already obligations on companies to report things that are material to an understanding of the financial position of those companies. They are required to describe their trading model and the operating segments that are relevant to them, but they are not required to identify income streams from particular instruments that they operate. There is a good reason for that. Annual reports are already very long, complicated and difficult to understand, and the noble Baroness is asking for information that in very many cases will be wholly irrelevant to an understanding of the financial position or operations of the companies that involve some trading. For many, it is embedded in their marketing activities for the products they engage in. I do not support any of the amendments put forward by the noble Baroness.

--- Later in debate ---

[Baroness Penn (Con)]

There is no sunset clause on this power, just as there is no sunset clause on the powers in Clauses 3 and 4, so it is consistent with the approach we have taken with those other powers.

I thank the Committee for allowing me to address those points in this group. With that and the further information I shall deliver to the Committee on some of the questions from the noble Baroness, Lady Worthington, I hope that she will withdraw her Amendment 21 at this stage and will not move her other amendments.

[Baroness Worthington (CB)]

My Lords, I am genuinely grateful to the Minister for her response, which was very helpful and contained information about which I was not aware—I thank her for that. I will read Hansard in great detail. In her letter, can she explain a little more about those 18 contracts that will be covered and the retained powers? I would find that very interesting, although I am sure I can also google it.

I will now sum up. I am very grateful to the noble Baronesses, Lady Bowles and Lady Kramer, for their contributions. Returning to the statements by the noble Baroness, Lady Noakes, I am sure it is seen as a great success that we have this $600 trillion market in stuff that exists in the future, which is hugely complex and can crash the global economy. Some people will have benefited hugely from it; I have no doubt that some of those people may be in this Room. The point is that there is someone paying at the other end of that profit, and often it is the people at the very end of the chain who are trying to buy food in supermarkets or heat their homes. If a bubble in that market is definitely benefiting some—even maybe benefiting the Government, if they are receiving revenues from it—it comes at a cost, so we should be very mindful of the need to regulate that market. There is evidence after evidence of these bubbles forming because, quite frankly, the incentives to make cheap money are huge. Compared with the real economy, where you actually have to do things, build things, sell things and employ people, the desire to make money fast is overwhelming, and I do not want the UK to become the home of ever more exotic derivatives that allow us to make money the quick and easy way. Let us make banking and the financial markets boring again by getting them back to basics: using money to further society’s aims. If we cannot do that individually, we should do it collectively. I do not want to get on my soapbox, but the fact that we are exiting Europe makes that more difficult, so even more scrutiny needs to be applied now that we are setting our own rules.

I am grateful for the responses. I will end by saying that I had the pleasure of meeting a gentleman who worked in a bank that was more than 500 years old. I asked him about its ESG policies, and he listed them. They started with, “We will make no profit at all from soft commodities”, then went on to the usual checklist about arms and whatever else. I asked him where that came from, and he said, “Oh, we can’t remember”. Because it was such an old-fashioned concept—that we should take a moral position that we will not engage in profiteering from soft commodities—it sort of lapsed into the history of time.

Banking was moral once. I am not saying it is immoral now, but it is incredibly complicated. The incentives to make money in ever more novel ways are always there. Even the noble Baroness, Lady Noakes, alluded to the fact that systemic risks exist. They have existed in my lifetime and I am sure they will come again.

I am glad that we are here to do this scrutiny and very glad of the Minister’s offer to write. I hope that we will revisit some of these questions, and I will end on Amendment 41. I have personal experience of how energy companies are loath to disclose how much of their profits rest on trading. If that is the case, the markets should care about it and disclosure is the most obvious step to address it. With that, I beg leave to withdraw.

Amendment 21 withdrawn.

Queen’s Speech

Baroness Worthington Excerpts

Thursday 4th June 2015 Lords Chamber

[Baroness Worthington (Lab)]

My Lords, I rise to speak in the debate having listened with interest to the learned and wise contributions of so many distinguished noble Lords, including the most excellent maiden speeches of the noble Lords, Lord O’Neill and Lord King. As ever, the House has today eloquently demonstrated the depth of knowledge and breadth of experience we are so fortunate to embody.

My own contribution to the debate will focus on an important area of the economy which I fear is neither properly understood nor accorded the right level of respect and attention by the Government that it deserves: energy and climate change. Here we sit on our islands, home to a modest population with limited space and no great abundance of natural resources, and yet over the course of history our impact on the globe has been remarkable. As I am an optimist, I see no reason to doubt that we cannot continue to do so in the future, for we live in interesting times. We are buffeted by the winds of globalisation, with increasing interconnectedness and complexity being a part of our daily lives, and we must respond to these challenges.

How might we achieve this? Many noble Lords have spoken of addressing our productivity challenge, stabilising our economy, and equipping our citizens with the skills they need to thrive in this world. The Government’s recipe for success appears to be clear: reductions in business rates, freezing taxes, slashing red tape, slashing welfare in as yet undisclosed ways, and smashing the unions. So far, so much ideology. However, the key question is whether the Government can engender one of the most important elements needed for investment and growth in the economy: confidence. Will people and companies feel confident enough to spend money and to spend it here? So far, the evidence is not reassuring. The Government cling to a simple idea that the market knows best and, rid of interfering Governments, that it will deliver all that we might seek of it. That is of course nonsense—Governments have always and always will have a strong role to play in guiding the hand of the market and, in times of economic insecurity more than ever, they must apply a steady hand on the tiller. That steady hand should be manifest in sensible, well-constructed policy-making and regulation, of which there is too little evidence in the Government’s plan.

The northern powerhouse we have heard so much about remains, sadly, a slogan, without yet any appreciable sign of how it will be delivered—although we might look forward to seeing some detail. The one piece of legislation in the gracious Speech that related to infrastructure was the HS2 Bill, which can hardly be described as new, having been the subject of seemingly interminable debate in this House and the other for many years. The energy Bill contains not much more than a dog-whistle response to a vocal minority who oppose proven, clean, cheap onshore wind, reducing investor confidence when we should be boosting it. That is coupled with another attempt to reassure investors in the North Sea, as if searching to return to the golden era of the 1970s. We cannot evade the truth that in a world of excess capacity, reduced demand and low oil prices, the cash cow that we once relied upon to fill our coffers may be about to be extinguished.

To return to growth we must play to our future strengths, not try to replay our greatest hits, and we must also once again connect the financial world with the real economy, not rely on property price bubbles and financial derivatives that deliver no net gain to the global economy. We were once a nation strong in engineering excellence and infrastructure and we can be again; our infrastructure needs renewing to adapt and respond to the growing risk of climate change in particular.

The UK is fortunate to have a world-leading Climate Change Act, which creates the framework for a new industrial revolution in energy. Rather than pursuing fading hopes in the North Sea, the Government should seek to properly back a wide range of alternative sources of energy: renewables, nuclear, and coal with capture and storage, as well as converting transport to run on electricity and giving industrial sectors much-needed support to develop novel processes, electricity-based solutions and carbon capture and utilisation so that they can thrive in a carbon-constrained world. Solutions developed here in the UK will be in high demand, as every country is now waking up to the threat of climate change and pledging to act. There are few areas of our economy where we enjoy a positive trade balance with China; our environmental services is one. We should pursue it more.

As the Minister knows well, growth in the Chinese economy is delivered through a five-year plan, followed by instructions to state banks, which makes capital available and which results in infrastructure being conceived, financed and delivered with alacrity. This is not how things work here. We seem to have to guide, cajole, regulate and incentivise the private sector to commit investment. Monetary policy in this regard appears to have reached its limits. Government must step in and apply their guiding hand.

The gracious Speech included a Bank of England Bill. That is welcome, but the Government could and should be doing much more to improve the Bank’s capabilities to identify and respond to potential sources of instability. For example, it could require the Bank to extend its risk assessment horizon to include longer-term risks such as climate change. The issue that Mark Carney refers to as the “tragedy of horizons” prevents us properly assessing the risk that this great threat poses to our economy and to our society more generally. The Bill could also give the Bank greater powers to take action to address potential asset price bubbles—including, for example, those potentially overvalued fossil fuel assets that we may not be able to extract and burn in the way that we currently imagine we will. I will seek to promote that as the Bill makes its way through the parliamentary procedure.

I would like to end by briefly commenting on the distinctly odd tax Bill. I, like many noble Lords who have spoken before me, find it slightly strange and potentially a great waste of parliamentary resources. In the Government’s zeal to outlaw various tax increases, does this now mean that, to balance the books, the Treasury will embrace progressive green taxation, increases in which are not limited? Can the Minister confirm that? For example, might we look forward to the introduction of a comprehensive climate change levy—call it climate insurance, if you will—the proceeds of which could be spent on the research and development of clean energy and its deployment?

It has been a privilege to take part in this debate, and I look forward to our continued discussions of these topics in the coming months and years.

Autumn Statement

Baroness Worthington Excerpts

Thursday 4th December 2014 Lords Chamber

[Baroness Worthington (Lab)]

My Lords, I congratulate the noble Lord, Lord Rose, on his excellent maiden speech, and in particular I congratulate him on his work at Marks & Spencer and his Plan A campaign, based on the very important principle that there can be no Plan B when we have a single planet.

Listening to the Chancellor’s speech yesterday, one could be mistaken for thinking that all is well and he has not in fact missed his targets or had to make a U-turn on the main elements of his economic plan. We are told that the UK’s economy is growing and that the plan, if it is not quite working as expected today, will definitely do so tomorrow. Whether people feel that this is indeed the case will be a big factor in deciding the next election. My concern relating to the Statement is the extent to which the Government’s management of the economy is sustainable.

If our measure of success is based on shaky foundations, the indiscriminate slashing of public spending and tinkering with tax cuts, the plan will not work. If we tell ourselves that all is well, but in reality our measurements of growth do not reflect external realities, it will not work and cannot work. If, as it appears, we are relying on growth based on another bubble in the housing market, on household, debt-based consumption at the expense of savings, on imports rather than domestic manufacturing, on receipts from oil and gas extraction rather than from clean energy and increased efficiency, on using fines from corporate malpractice to fund essential services and on relying on increases in population to spur growth but not investing in the infrastructure that that increased population must rely on, the plan can never work.

The noble Lord, Lord Skidelsky, in his characteristically concise and powerful speech, used the word “delusional” to describe the Statement, and I have to say that I agree with him. This is a document about a fantasy world and it is out of touch with the modern challenges of today. The Chancellor seems to inhabit a world where he believes that we can continue to rely on the past to prop up our economy and to have an almost delusional faith in future, as yet unproven, fanciful sources of growth—anything rather than face today’s reality. Blinded by a poorly defined “small government” ideology, the Government appear unable to grasp that state investment can be a spur to growth, boosting income and helping to pay down debt faster. Instead of delivering real growth in investment, the Chancellor appears to be relying on the old trick of changing the goalposts to hide the weak fundamentals—reclassifying business investment to include R&D and reclassifying public investment to include single-use military expenditure. These may have helped the figures look better than they really are but do not signify a big change or indeed a sustainable future.

The reason real investment is not happening is because the Government are relying on a strategy of enticing the private sector to invest, where the state could do so at lower cost and with a higher degree of certainty of delivery. We see this in the Chancellor’s inadequate and implausible flood defences plan. We see it too in energy. Over half of the projects in the Infrastructure UK pipeline relate to energy but the Government’s approach to securing this investment is confused and confusing. We can be grateful at least that the Chancellor has been persuaded to drop his damaging anti-renewable energy rhetoric and false boasts about not going further or faster than Europe in tackling climate change, but the lack of a logical plan is still frighteningly clear.

Not so long ago the Government were trumpeting their successes in reigniting investment in the UK nuclear industry. Obviously this involved the destabilising of the rest of the energy market but that seemed not to matter at the time. It has been suggested that Hinckley Point C is going to be the single most expensive infrastructure project ever built in the UK, yet it warrants not a mention. Could this be because the Chancellor is learning that leaving things entirely in the hands of the private sector—even a foreign state-run company masquerading as the private sector—is not a reliable strategy? You have to overpay and overincentivise, and you have no guarantee of delivery.

On renewables, the Chancellor has at least discovered two technologies he seems happy to mention: offshore wind and now the promise of tidal lagoons. The problem is that these are currently the most expensive possible options. Onshore wind, the cheapest source of clean power—which still has much room to grow if handled sensitively—is ignored. So are solar power and renewable heat—two technologies that enable individuals and businesses to join the energy generation market. Clearly, the widening of the number of players in the energy market is still not high on the list of the Chancellor’s concerns.

The Chancellor prefers to rely on the old industries, desperately hoping that even as oil prices decline we can somehow rely on the North Sea to keep providing us with income. If there is a plan to address the falling receipts that are inevitable, it is based on a fantasy—shale gas and the much hyped creation of the sovereign wealth fund for the north on the back of the receipts. This is not credible. It is likely that revenues will not be generated for at least 10 years and any wealth fund will need to wait another decade to be able to spend any interest on the money that has accrued—if it has indeed accrued. Why the sudden interest in the north? Perhaps close family members have pointed out that the desolation there makes it ripe for oil and gas exploration.

Finally, I will say a word about stamp duty, which of course has caught the headlines and been a very popular measure. The changes announced are clearly sensible and long overdue. However, an important opportunity to boost investment in the efficiency of our housing stock by reducing fuel bills and linking this to stamp duty has been missed. This is not surprising as the Chancellor shows no understanding of the benefits of increasing efficiency to boost our economy. The Statement was, in one sense, a triumph of fantasy over reality. Thankfully, the public live in the real world and, I am sure, will vote out this Government.

Infrastructure Bill [HL]

Baroness Worthington Excerpts

Monday 10th November 2014 Lords Chamber

Moved by

[Baroness Worthington]

113A: Clause 30, page 31, line 8, after “petroleum” insert “and the co-ordination of the transportation and storage of CO2”

[Baroness Worthington (Lab)]

My Lords, it is a pleasure to speak to the energy parts of the Infrastructure Bill on Report. We hope that these amendments will introduce a level of co-ordination into government policy, specifically with regard to the use of enhanced oil recovery for the furtherance of extraction of oil and gas reserves from the North Sea—and, in doing so, will join up with a policy on carbon capture and storage and the pursuit of carbon capture and storage. We on these Benches are clear that we must pursue a range of technologies if we are to meet our challenging greenhouse gas targets and, more specifically, if we are to decarbonise both our power sector and, importantly, our industrial sector. When we look at the industrial sector, it seems clear that CCS will have to play a considerable role.

Unfortunately, we have not yet seen the ground being broken on any CCS projects in the UK. We have seen CCS start to operate on a commercial scale in Canada and we will see a plant opening in the US. We are also told that commercial-scale projects are expected to be commissioned in China. Therefore, we have slightly fallen behind the curve in terms of leadership on this. Nevertheless, our geographic advantages in the UK are such that we can be a very fast follower. We can take the great learnings that we are seeing in other parts of the world and apply them here to become a leader in Europe in the application of carbon capture and storage.

We have two projects under consideration: in Peterhead in Scotland, and the White Rose project in the north of England. Both could help to establish a considerable infrastructure that would help CCS to be deployed in other sectors and at other power stations. In the creation of this infrastructure it is likely that we will see enhanced oil recovery playing a part, particularly in the Scottish project. The purpose of these amendments is to probe the Government on the degree to which CCS and enhanced oil recovery will be incorporated in this new approach to getting economic advantage and economic development in the North Sea. We understand that the Government have tabled amendments with a view to establishing a new regulatory body, following on from the recommendations of the Wood review, which mentioned CCS and EOR specifically. Recommendation 4 states:

“The new Regulator should work with Industry to develop and implement strategies”,

which include looking at CCS and enhanced oil recovery. Unfortunately, as tabled, there is no explicit reference to those strategies in the clauses that we are here to debate this afternoon. My two amendments seek to address that. I look forward to the response of the noble Baroness. I beg to move.

--- Later in debate ---

[The Parliamentary Under-Secretary of State, Department of Energy and Climate Change (Baroness Verma)]

My Lords, I thank the noble Baroness, Lady Worthington, for proposing these amendments and all noble Lords who have contributed to the debate. It gives me the opportunity to respond in full to both amendments in the group. They seek to extend the maximising economic principle objective to include,

“co-ordination of the transportation and storage of CO₂”,

and would require,

“the establishment of a strategic vision for the permanent storage of CO₂ in depleted fields”.

I reassure noble Lords that the UK has one of the most comprehensive programmes on CCS anywhere in the world in order to support the commercialisation of the technology and develop the industry. The programme includes a competition with up to £1 billion capital plus operational support for large CCS projects and a £125 million research, development and innovation programme. In addition, the Government set out how we are supporting the carbon capture and storage industry in a policy scoping document published in August. The document sought evidence and views from experts and stakeholders on a range of issues affecting the CCS industry going forward, including CCS with enhanced oil recovery. The deadline for submitting those views passed just over two weeks ago. Given that we are analysing the responses we have received and are in discussions with HM Treasury over its review of the fiscal regime for oil and gas, it would seem premature to make provision in primary legislation at this time.

The Government recognise that captured carbon dioxide could play a role in enhanced oil recovery, and likewise that enhanced oil recovery could play a role in the UK’s carbon capture and storage industry going forward, but the extent of any interaction between the CCS industry and the concept of maximising economic recovery of petroleum is not yet clear. Carbon dioxide transport and permanent geological storage is a nascent industry, so although it is important to promote the industry where possible it would be wrong to be too prescriptive now. That point was made eloquently by my noble friends Lord Jenkin and Lord Caithness. Further discussions with industry and the relevant trade associations are needed before we can say with certainty how the MER UK principle should apply to areas such as CCS.

The Oil and Gas Authority will have a significant function in considering the role of CCS when determining whether companies are operating in line with the maximising economic recovery strategy. The OGA will issue carbon dioxide storage site licences and approve carbon dioxide storage permit applications. It will also have responsibility to ensure that CCS is considered as part of a proposed decommissioning plan and will take into account the viability of utilising captured carbon dioxide in enhanced oil recovery projects. In addition, the transfer and storage of carbon dioxide is an important technology, which is why it is likely to form a key element of the technology and decommissioning sector strategies that will be developed by the OGA, in consultation with industry. These strategies will help to underpin the overarching strategy related to maximising economic recovery.

The right reverend Prelate the Bishop of Chester asked how this would help us to meet our emissions reduction aims as set out in the Climate Change Act 2008. Implementing recommendations contained in the Wood review will be done in a way compatible with the legally binding climate change targets. Our overarching energy strategy seeks to underpin secure and diverse energy supplies, including renewable, nuclear and indigenous resources. The carbon plan has shown that Britain will still need significant oil and gas supplies over the next decades while we decarbonise our economy and make a transition to a low-carbon one; projections show that in 2030 oil and gas will still be a vital part of the energy mix, providing around 70% of the UK’s primary energy requirements as we seek that transition.

The right reverend Prelate also asked about the costs of carbon capture. If he and noble Lords would allow it I would like to write to him and ensure that the Committee gets sight of the letter.

Having given those reassurances and demonstrated that the Government see that carbon capture and storage will be a part of our strategy in the future, though we are still at an early stage, I hope that the noble Baroness can be persuaded to withdraw her amendment.

[Baroness Worthington]

I thank the Minister for her response and for the comments of noble Lords. I am encouraged to hear these explicit references to the work of the OGA in relation to CCS and EMR. It is not unnecessarily prescriptive to add it to this part of the Bill. As we go forward and if the Government come forward with other legislation to transfer the OGA from an executive to a private company, we may have a chance to revisit this. We are in a world where CCS is being taken seriously and EMR is often associated with that. We are also in a world where offshore oil and gas fields are running down. If CCS can achieve the double aim of reducing our carbon emissions and helping to maximise economic recovery, that should certainly be pursued. I do not see why it cannot be explicitly stated, as it seems such an obvious win-win, but I am happy to withdraw my amendment.

Amendment 113A withdrawn.

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Moved by

[Baroness Worthington]

113G: Before Clause 32, insert the following new Clause—
“Underground access: environmental protection
(1) All sites extracting petroleum under the provisions of section 32 must—
(a) carry out an Environmental Impact Assessment,(b) ensure that independent inspections are carried out of the integrity of wells used,(c) publicly disclose the chemicals used for the extraction process, and the proportions in which they are used on a well-by-well basis,(d) consult with the relevant water company, and(e) carry out monitoring over the previous 12 month period.(2) The Secretary of State must by regulation specify what data shall be required under paragraph (e).
(3) Regulations under subsection (2) must specify as required data the levels of methane in the groundwater and ecological studies, that data shall include but is not limited to levels of methane in the groundwater and ecological studies.
(4) Regulations under subsection (2) must be made by statutory instrument and may not be made unless a draft of the instrument has been laid before and approved by a resolution of each House of Parliament.”

[Baroness Worthington]

My Lords, I shall speak also to Amendment 115A. These two amendments have been tabled to address what I think will prove a major oversight on the part of the Government. They would ensure that hydraulic fracturing for oil and gas in the UK could get off to a good start with the confidence of the general public. The oversight that I refer to is that there has been no word from the Government on the need for regulations to enhance environmental protection in light of this new activity.

Obviously, we have been used to extracting oil and gas from offshore in the UK for many years. However, the advent of fracking, as has been seen in the US, brings with it a unique set of circumstances and a unique set of potential risks. It seems odd that the Government have not seen fit to come forward with a comprehensive review of the current environmental regulations that would apply to this industry and have sought only to introduce a limited set of clauses to the Bill, which we will come on to debate, relating to trespass laws.

As I have said, fracking is a novel process which contains a number of different stages all of which will be subject to some forms of environmental regulation—let us be clear about that. However, the Economic Affairs Committee of the noble Lord, Lord MacGregor, in its thorough and detailed inquiry and recent report, clearly highlighted the need for a review of the existing regulations not only to simplify and clarify but to ensure that any potential loopholes are closed. Two in particular were mentioned by the noble Lords who were the authors of that report, one being the need for genuine independence of inspectors and the other—here, they cited a recommendation of Professor David MacKay—the need for baseline and ongoing monitoring of fugitive emissions. Our amendment puts forward those requirements as part of new regulations. We have also included two or three other issues.

We propose our amendments not out of any desire to see fracking held back or delayed but to give it the best possible chance of moving forward on the right foot from the outset. Just last week, a town in Texas, Denton, voted against allowing fracking to continue within the confines of the town. This is right in the heart of the oil and gas boom that has been brought about by shale gas in the US. The reason cited for passing the ban was that people had become tired of industry trying to work around environmental protections and environmental regulations.

Our aim in tabling the amendments is to ensure that we do not have that outcome here in the UK. We should take the time now to introduce a proper regulatory framework that enables the industry to get off to the right start and to learn from some of the mistakes that we have seen in the US, where patchy regulation has led to a number of pernicious scare stories being in the public mind when it comes to fracking. Once such stories have seen the light of day, they are very hard to root out. It is our contention that the Government have not done enough to go forward with a sensible and balanced approach to fracking in the UK—hence these amendments.

As I have said, in thinking about amendments, we read with great care the recommendations of noble Lords on the Economic Affairs Committee. I am pleased to say that we have taken forward the two recommendations that I mentioned, on independence of inspectors and in relation to the monitoring that is needed to establish a baseline. We can have a discussion about how that baseline should be established, but it would be in the interests of the industry to have baseline monitoring because what we do not want is for stories to keep abounding about shale gas having higher emissions than coal simply because we lack the data. It would be a shame not to put in place the adequate protections so that we can have access to those data and can refute such claims, and to show that fugitive emissions do not undermine the environmental case for fracking.

As I said in my comments previously on CCS, on our side we are committed to bringing forward a whole range of low-carbon technologies and fuels to enable us to decarbonise our economy. Shale gas can play an important role in that. I would far rather that we use homegrown gas than imported Russian coal. For that reason you will see that we are, in general, supportive of the Government’s moves to change the laws and the legal loopholes that we will debate today. However, we have tabled this amendment because this is a very serious issue. We need to get public support and public confidence and ensure that our regulators have every possible chance to ensure that this industry gets off to a good start.

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[Baroness Verma]

I am extremely grateful to the noble Lord, Lord Young. He is absolutely right to point out that exploration is immediately stopped once the level of 0.5 is reached. However, I will clarify the point and write to him, and put a copy of the letter in the Library.

With these reassurances, I hope that I have been able to convince the noble Baroness to withdraw her amendment.

[Baroness Worthington]

My Lords, I am grateful to the Minister for her comments and to noble Lords on all sides of the House who have spoken in this illuminating debate. As is characteristic of this place, it has been based on fact and has reflected the care and understanding that is always applied to these issues. However, having listened to the noble Baroness’s response, I have to say that she has not reassured me that the Government are listening on the very important issue of the need, for the industry’s own sake and for the economic benefit of this country, to be absolutely certain that, while we have a world-class regulatory system in place today, we will not see it become overwhelmed as the use of this form of extraction of the UK’s natural resources expands. There is an absolute and clear link between requirements in statute and the resources that are made available to meet those legal standards. I think it was the noble Baroness, Lady Young of Old Scone, who pointed out that it is imperative that we have a clear and transparent regulatory system so that we know what is required of everyone and so that adequate resources are made available to ensure that, in the future, fracking has the best chance of proving to its detractors that it can be done safely. It is not correct to say that everything is in place for a world-class regulatory system today. There are loopholes and, while the noble Baroness has sought to give us some reassurances on independent inspection, I do not believe that she has addressed all the questions that have been raised in the debate. On that basis, I will not withdraw the amendment and I seek to test the opinion of the House.

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[Lord Whitty (Lab)]

My Lords, those who oppose these amendments are missing the point. The amendments may well be in the wrong place; they may well be too wide. I did not intervene in the previous debate because I thought that it was becoming far too polarised. Public opinion on the issue of fracking is polarised, but public opinion is not polarised in relation to the protection of our national parks and our areas of outstanding natural beauty. Unless the Government in some way recognise within the overall approach to fracking that there are certain sites which have to be protected—whatever provision exists elsewhere in terms of general planning law and so forth—the outcry against fracking will grow rather than be reduced.

The Government should at least have the grace to recognise that that is a reality. In terms of public acceptability of fracking, protection of our protected areas is an important element which needs to be in the regulations and in the Bill. Whether the amendments in the name of the noble Baroness are technically in the right place or not, the politics and the PR for fracking need to make that point. If they do not, the 25% of people who fundamentally oppose fracking will grow in number. The Government have the opportunity to ensure that that does not happen. I hope that, if not now then in the process of this Bill through the Commons, the Government will put that right.

[Baroness Worthington]

My Lords, I am grateful to noble Lords who have contributed to this debate, which has been another interesting exchange of views on how best to get the fracking industry off on the right foot and to minimise the degree of public opposition that might arise.

I recently visited the Lake District, which is one of my favourite parts of the country. I visited a mining museum and, in doing so, I realised that we often see such parts of the country as having a great value now in terms of tourism, wildlife and appreciation of scenic beauty, but that they have in previous times been quite diversely economically active and been able to accommodate different activities within the boundaries of the parks as we know them today. Therefore, I for one am not of the opinion that these special places need to be preserved in aspic but that it is about achieving the right level of balance.

That said, it is absolutely clear that, when you have a Government who say that they are all out for fracking and that it will be the silver bullet that solves all our energy needs, and slightly overhype it, you can see why people get nervous that all due consideration and care are not being taken. I shall be interested to hear the Minister’s responses to the two amendments. The second of them, Amendment 115, points to something of an inconsistency, with planning guidance having been issued for national parks and AONBs but not for other nationally significant sites. Such sites, because they tend to be smaller, more fragmented and under considerable pressure from a wide range of economic activities already, arguably deserve even greater levels of protection than those larger national parks and AONBs, which I think can accommodate economic activity within them and generate jobs and economic benefits. I look forward to hearing the Minister’s response.

[Baroness Verma]

My Lords, I welcome the commitment of the noble Baroness, Lady Young, to protected areas and was grateful for our meeting prior to today. Such areas are nationally and internationally important in terms of their environment, and all noble Lords who have contributed today, from whichever perspective, have highlighted their significance.

As the noble Baroness made clear in Committee, these areas are the jewels of our country and we agree that they need to be accorded appropriate protection. While I recognise the intent behind the noble Baroness’s amendments, which is to ensure the necessary protection for habitats and species in or near to protected areas, I assure her that such areas are already offered a high level of protection derived from EU directives transposed into domestic policy and through the planning system, as noble Lords have alluded to today. The National Planning Policy Framework, the supporting planning guidance and a government circular on biodiversity and geological conservation all recognise that there are areas designated for natural conservation and biodiversity value, including sites of special scientific interest, special protection areas, special areas of conservation and Ramsar sites, and that they should be given a high level of protection. They are clear that protected areas need to be fully and appropriately considered by mineral planning authorities when exercising their planning duties, both in preparing local plans and determining planning applications.

The planning authorities assess each application for shale and geothermal development on a case-by-case basis. For example, the National Planning Policy Framework makes it clear that development should not normally be permitted if, either individually or in combination with other developments, it is likely to have an adverse effect on a site of special scientific interest. That applies even if the development is outside site of special scientific interest boundaries.

The Conservation of Habitats and Species Regulations 2010, which transpose the EU habitats and wild birds directives, ensure strict controls on any plan or project that might affect European sites such as special protection areas and special areas of conservation. Development cannot occur on or near such protected areas unless it can be shown to a high degree of scientific certainty that there will be no adverse impact on the integrity of the site. This is a very high bar for securing development in such areas. In addition, the Natural Environment and Rural Communities Act 2006 and the Nature Conservation (Scotland) Act 2004 place a duty on all public authorities, including the Secretary of State for Energy and Climate Change, when exercising their functions, to have regard to the purpose of conserving biodiversity. Public bodies also have comparable duties relating to national parks, areas of outstanding natural beauty and sites of special scientific interest.

It is important to note that the regulatory system in the UK fully recognises these protections. Before any oil or gas operations can begin, operators must gain a permit from the environmental regulator, the Environment Agency or an equivalent agency. The Department for Environment, Food and Rural Affairs is currently preparing revised guidance on protected wildlife sites as part of a wider project to make all the department’s guidance quicker to use and easier to understand—the noble Baroness raised that when we had our meeting the other day. This will help ensure that these requirements are clearly communicated to developers and regulators.

The noble Baroness, Lady Worthington, said that the Government looked on shale as being a silver bullet. We have always maintained that we do not see it as a silver bullet but that we see its potential for ensuring that we have home-grown supply and energy security and for helping drive down costs to the consumer. The debate should be in that context rather than shale being taken out of context in the wider arena.

In drawing the attention of the noble Baroness, Lady Young, to the robust regulatory regime that is already in place and the full recognition that the planning system already gives to protected areas, I hope that she is reassured that such areas are already accorded significant protection and, on that basis, will withdraw her amendment.

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[Lord Teverson]

My Lords, I do not want in any way to suggest that Wales should not have its own authority over this area. As a citizen of Cornwall, I absolutely agree with the noble Lord—though I do not know enough about what the relationship is here.

On the attack on fracking, down in Cornwall our geology does not support shale gas but it does support deep geothermal, in which fracking plays an important part. I think that the noble Lord spoke on the whole about fracking in relation to shale gas, but there are issues around fracking for whatever purpose, and seismic events are one of those. In one of the early EU-funded geothermal tests in Alsace, there were seismic events and a lot has been learnt from that. There were also events in Blackpool, but as I understand it the industry is able in the right locations to make sure that such matters are very well controlled.

I make the point that fracking can be good. It can be good for renewables. I hope that in the longer term fracking will be available for deep geothermal in terms of power generation. At the moment, it looks like we will go through a heat revolution with not quite so deep geothermal, but in the long term we may get to generate baseload electricity through deep geothermal. I wanted to make that point, because fracking is not just around shale gas; it has those other benefits as well.

However, Wales should be able to steer its own course.

[Baroness Worthington]

My Lords, I rise briefly to ask the Minister for her comments on the issue of devolution and fracking. I am particularly interested in the Scottish question raised by the noble Lord, Lord Wigley. As I understand it, Holyrood already controls planning permission and the permitting regime, so it would not be a huge step to devolve this aspect of the control of fracking and rights of access. I just ask that question.

I am also grateful to the noble Lord, Lord Teverson, for drawing the attention of the House to the fact that, when we talk about these provisions and rights of access, they apply to more than just the extraction of petroleum. Indeed, they apply to deep geothermal, which arguably needs the loophole to be changed more urgently than in the case of fracking for oil and gas. It may change the view of the noble Lord, Lord Wigley, on this that you can frack for coal as well. Fracking of deep-mine coal might bring a degree of economic development back to Wales. I am not saying that that is the only way that Wales should develop; I am much more interested in some of the marine technologies, biomass and wind in a Welsh context—those seem to have huge potential. However, I would never rule out the idea that deep coal mining could come back as an economic activity if done in combination with carbon capture and storage.

In summary, these clauses potentially relate to more than just oil and gas extraction, and I am interested in the noble Baroness’s response on the Scottish question.

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[Lord Judd]

My Lords, I have been glad to put my name to this amendment, which is very wise and prudent. It has been suggested in recent years that the interpretation of welfare capitalism has changed. The original concept was that capitalism had a social responsibility that it should discharge for the well-being of society as a whole. It seems that quite a lot of people have come to believe that perhaps welfare capitalism is about ensuring that while wealth generation and profit is privatised, risk is nationalised and is the responsibility of the taxpayer. The point in the amendment that is particularly important in this context is what happens in the case of insolvency, when all the best predictions can be blown away in the wind in the chaos that follows.

If a scheme is put forward and is being properly costed, the cost of dealing with potential damage, closure or the consequences of that is an essential element in the calculations. We are concentrating today on this new and exciting aspect of shale development but we are beginning to see infrastructure across the country in connection with power generation and its distribution that is no longer required. We need to be very careful that we are ensuring that any adverse results of that are not left just for the taxpayer to settle, but that they are the responsibility of the people who, while they are operating, are receiving the profits that come from that.

[Baroness Worthington]

My Lords, I am grateful to my noble friend for tabling his amendment and for continuing the discussion that we started in Committee. I am sympathetic to the intention behind these amendments and am particularly interested in the aspect of liability arising from orphaned sites. We are talking about a potential new industry that will see a large number of distributed sites developed. We may well see smaller companies that perhaps do not have the assets or deep pockets of more traditional extractive companies, and there would be considerable potential for orphaned sites. I am very interested to hear from the Minister how we would address any liability arising from such orphaned sites.

I think my noble friend Lord Whitty said that he is seeking for the Government to demonstrate foresight. It strikes me that the Government are demonstrating foresight in some respects of fracking, in imagining the future benefits and future economic wealth that will come. Over the weekend, we even heard comments about the imagined spending of all this great tax revenue. We shall debate that aspect shortly. That foresight is possible, but perhaps we should apply it in the slightly more realistic context of learning from previous experiences of extractive industries in trying to plan for what happens if everything does not go according to plan. I would have thought that companies would be able to take out insurance against some of these liabilities. Again, I would be interested to hear from the Minister about what type of insurance she might expect companies to undertake and what liabilities would be insured. We are entering uncharted territory in the types of company, the types of project and their distribution across the country. It is right that we should proceed with caution.

There is a lot of merit in the amendments tabled by my noble friend Lord Whitty. He started by saying that he was trying to help out the Government. A number of us have tried to help out the Government during tonight’s debate. However, I suspect that the Government are not listening and do not want to be helped out, but there we are. I look forward to the comments from the Minister in response to this amendment.

[Baroness Verma]

My Lords, I am always grateful to the noble Lord, Lord Whitty, for trying to help out the Government. I have listened very carefully and of course I recognise his concerns and those raised by the noble Lord, Lord Judd. However, as my noble friend Lord Jenkin very eloquently put it, there is already a lot in place that addresses the concerns raised by the noble Lord, Lord Whitty. The existing regulatory system covering onshore oil and gas is robust. We already have more than 50 years’ experience of regulating the onshore oil and gas industry. There are controls and regulations in place to ensure on-site safety, prevent water contamination, mitigate seismic activity and minimise air emissions.

While the Government are keen for shale and geothermal exploration to go ahead, shale gas development must be safe and environmentally sound. I agree with noble Lords that we need to be sure that we are responding robustly to the perceived concerns that the public raise. One of the central aims of the current regulatory framework is to ensure that wells are appropriately designed and operated, and that when operations cease they are properly decommissioned.

A petroleum licensee cannot search for, bore for or get petroleum without a petroleum exploration and development licence, the terms of which are in the model clauses set out in secondary legislation. All drilling or production operations, and the abandonment of any well, require the consent of the Secretary of State. In addition, there are regulators and controls that can be relied on to minimise risk and any impacts associated with oil and gas activities. Those controls include conditions attached to environmental permits issued under the Environmental Permitting Regulations 2010 in England and Wales and the equivalent regime in Scotland, as well as safety scrutiny by the Health and Safety Executive.

The current regime, as it applies to shale gas, includes the management of mining waste and naturally occurring radioactive minerals, the scrutiny of well design and construction, the suitable restoration of sites, the protection of habitats and 10 different EU directives addressing environmental concerns. In addition, the Environmental Protection Act 1990 and the domestic Environmental Damage (Prevention and Remediation) Regulations 2009 provide for the remediation of contaminated land and serious environmental damage. This regime, together with the operators’ responsibilities under their licences and permits, is sufficiently robust to ensure that operators are required to remediate any damage or pollution to the environment.

If, for any reason, these controls were not enough—we have no reason to think that this would be the case because the UK has a well developed and very strong regulatory regime—and if any damage were to occur, in accordance with statutory requirements and government policy, remediation of the damage would be dealt with under the main regimes for dealing with contamination. These regimes are sufficiently robust to ensure that, if a company causes damage, harm or pollution to the environment, operators can be required to remediate the effects and prevent further damage or pollution. This is the same approach that applies to other industries, and we believe that the existing law is robust.

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[Baroness Worthington]

My Lords, I am grateful to the Minister for speaking to her amendments. As she said, there are three aspects to this group. The first is the potential for somebody other than Ofgem to administer the RHI. I am intrigued by this aspect and I wonder whether we may be creeping towards a bit more joined-up government in terms of renewable energy. There is always a tendency to equate renewables with electricity, whereas under the EU mandatory targets agreed for 2020 we are required to move forward on renewable energy, which means electricity, transport and heat. There has been rather a stop-start process of renewable transport fuel support, and a separate body oversees that. Under the RO the renewable electricity side has been the responsibility of Ofgem, and it is now moving to the department, for the Secretary of State specifically to oversee, while Ofgem has been given the RHI to look after. It would seem sensible to me to have one consolidated agency to deal with all renewable energy, so that we could properly assess the best application of our renewable resources to the different markets.

If we apply a biomass unit of energy to the generation of heat we get far more efficiency and far more displacement of carbon in the heat market than we would by going into electricity—or, indeed, into transport fuels. We need a bit of joined-up thinking on our various ways of supporting renewable energy. I wonder whether this gives us an opportunity to have a look at the regulatory framework.

On the second part, about third-party payments, I am very supportive of the amendment. It will help to overcome a barrier about which people have personally petitioned me, and said how much of a barrier it is.

On the third point, however, I am afraid that I am not quite so supportive. I do not want to detain us too long, but the Minister and I have spent many a pleasurable afternoon in Committee discussing the RHI. It has not been unnecessarily time-consuming or difficult—we generally tend to get through SIs quickly—but it gives us an opportunity to revisit the RHI and see how it is doing. It would be a shame if we were to create any uncertainty in the industry by moving to the negative resolution procedure. I seek clarification from the Minister. She speaks of uncontroversial straightforward changes and describes them as technical. If that group of potential changes included changes to the subsidy levels for different technologies, that might cause alarm for some people in the sector—particularly if they felt that they would not have the opportunity to petition Members on both sides of the House, to discuss and to raise concerns.

This is an industry that has seen quite a lot of changes, and is subject to rigorous derogations and price control mechanisms. They are incredibly complex, and I do not really want to spend any more afternoons debating them—but I would do so if that would give comfort to the industry. It is a new and growing industry, and we are not quite on track yet for meeting our targets. We need to see considerably higher growth in renewable heat if we are to meet the challenging targets that we have set ourselves. I am seeking reassurances from the Minister that these negative resolution procedures will not increase uncertainty in an industry that we need to see getting stuck into the job of delivering and putting us on a strong footing with regard to our EU targets.

[Baroness Verma]

My Lords, I agree completely with the noble Baroness that we must ensure that there is proper parliamentary scrutiny. I assure her that the amendment aims to achieve greater flexibility while retaining appropriate parliamentary scrutiny. The amendment stipulates that some use of the powers is important in areas that remain subject to the affirmative resolution procedure. We will not move away from that where there is cause for it. Where we just want to make some minor, technical changes is where it is probably more likely that we would wish to use the negative resolution procedure.

[Baroness Worthington]

Will the noble Baroness write to me? What I am most interested in is change to the level of subsidy given to different technology bandings.

[Baroness Verma]

I of course undertake to write to the noble Baroness and place a copy in the Library.

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Moved by

[Baroness Worthington]

119A: After Clause 38, insert the following new Clause—
“Application of duty to limit emissions
(1) The Energy Act 2013 is amended as follows.
(2) In Schedule 4 (application and modification of emission limit duty), after paragraph 1(1)(b)(ii) at end insert—
“(iii) substantial pollution abatement equipment dealing with oxides of sulphur, oxides of nitrogen, heavy metal emissions or particles is fitted to the generating station.””

[Baroness Worthington]

My Lords, a number of noble Lords may recognise this amendment, because this is not the first time we have had this discussion. I am afraid that I do not intend to apologise for retabling it; I shall keep retabling it until the issue is resolved. At the moment, whether because of a lack of joined-up thinking or because it is the Government’s intention, we are seeing perverse effects arising from their energy market reforms, leading to a reinvestment in old coal.

I said earlier that I would far rather we used home-grown gas to generate electricity than see imported Russian coal being burnt in stations built in the 1960s and 1970s that are now well past their use-by date. When I tabled this amendment in Committee, the Minister’s response was to say that she agreed neither with my analysis of the current position nor with my prediction of the future, and was not convinced that the amendment, which, essentially, would bring in a backstop power to enable us to limit the operating hours of old coal, was needed.

Last week Eggborough, one of the coal-fired power stations built in the 1960s that is seeking a three-year contract to extend its life under the capacity payments mechanism, was sold to a Czech energy company which, in addition to running power, heat and energy provision services in the Czech Republic, is also the third largest coal producer in Germany. This is its first entry into the UK market. The company is EPH, whose spokesperson, Daniel Castvaj, said that there were obviously questions over the long-term operation of the plant but that the company intended to run the existing units for as long as possible.

Today a report was released by WWF with the help of Imperial College London. It made the point that I have continually been seeking to make to the Minister and the Government that just wishing old coal away is not going to work. If we want coal to come off our system and be replaced by cleaner, more efficient infrastructure, we will have to regulate to make that happen. We were told during the passage of the Energy Bill that this would be achieved by financial measures, through the introduction of a carbon price floor, which was in the Finance Bill, and that that would see an end to coal. No sooner did that Bill pass into law than that financial provision was frozen. The escalator, intended to drive off coal, was removed.

Everything that the Government told us during the passage of the Energy Bill has changed since it passed into law. More information has now come to light on the impact of the capacity mechanism. That was intended to enable investment in new infrastructure—to bring forward cleaner infrastructure and make sure that the lights stay on. However, the Government’s choices in how they have implemented that measure have meant that there is now a real possibility that we will not see the capacity mechanism bringing forward investment in new gas infrastructure. If we do, it will be on a very small scale. Instead there will be reinvestment in old coal.

Overall, the capacity mechanism and the people who have bid into it demonstrate that we have more than sufficient plans for infrastructure and supply than is demanded by the capacity mechanism. In fact, it will come down to a straight choice between investment in old coal and investment in new gas. The costs of that are such that it is my expectation—we will find out in December whether this is the case—that it will be old coal that wins and new gas will not. Essentially, the capacity mechanism favours short-term investments by allowing coal plant to continue operating unconstrained, at high load factors but lower efficiencies, than if there were investment in cleaner gas.

I am sure that I will hear from the noble Baroness that she disagrees, but the Imperial College study launched today and commissioned by WWF said:

“Imperial College’s economic modelling shows that it is unwise to simply assume that coal-fired power stations will all close in the 2020s. If government wants old coal stations to close it needs to ensure that happens through legislation. We modelled a variety of scenarios and, with the UK’s existing suite of energy policies, in every instance coal still played a role in generating electricity and 2030 emissions targets were missed”.

That was picked up today by the Independent, which went one step further and said that this really showed that the coalition’s commitment to being a green Government was in tatters and that it did not have credibility in its comments on moving to a decarbonised electricity system.

I saw the noble Lord, Lord Turner, here earlier but he is obviously not in his place now. He commented on WWF’s report and I shall take the liberty of quoting him. He said:

“"The Intergovernmental Panel on Climate Change’s latest report update on climate change science makes it unequivocal that we must reduce carbon emissions dramatically to avoid major harm to human welfare. And we cannot achieve the required cuts unless we eliminate unabated coal from the electricity generating system”.

At the end of an extensive comment, he concludes:

“A clear commitment to get unabated coal out of the UK generation system is needed to provide certainty against which businesses can invest”.

The amendment has been tabled a number of times and I make no apology for that. I will keep tabling it, probably until I run out of breath, because I care passionately about achieving decarbonisation at least cost and by keeping our energy supplies secure. It is a very short-term attitude to think that if we patch up old coal and keep it running at high load factors it will somehow be beneficial for the country as a whole. Yes, it may make a small difference in the short term, but in the longer term it will be wasted investment. If we are to hit our targets, we need to get our electricity systems almost fully decarbonised by 2030. We need unabated coal to come off. These stations are old, inefficient and highly polluting. If we do not phase them out, using measures such as the EPS, we will simply see ourselves running very fast to stand still. Every coal station that stays open emits twice as much as a gas station. More renewables and nuclear have to be built to compensate for those extra emissions, at a greater cost. This is really not that difficult to work out: old coal should come off first. It is the most polluting and we are wrong to set in place a capacity mechanism that keeps it going a moment longer than it needs to.

I hope that at some point the Government will see the logic of my argument and accept that something needs to be done if we want to get these coal stations out of our system early in the 2020s. I beg to move.

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[Baroness Verma]

My Lords, I thank the noble Baroness, Lady Worthington, for yet again bringing this subject to the attention of the House. As my noble friend Lord Caithness eloquently said, we debated this amendment during the passage of the Energy Bill less than a year ago. Noble Lords will recall that, after careful consideration, this House and the other place decided that it should not be adopted. I do not propose to set out in detail again the reasons why the Government did not support this amendment when it was last considered. However, noble Lords will recall that the Government’s main concern was that it could lead to circumstances where existing coal plants closed prematurely, leading to a need for more generation capacity to be built earlier than would otherwise be necessary, and resulting in totally unnecessary and avoidable cost to consumers.

I want to address the points made by the noble Baroness that developments since we last considered this amendment make it necessary to reconsider the conclusion we reached at the time. It is true that there have been a number of developments over the course of this year. We have set about implementing our electricity market reforms, which include taking the actions that are delivering new investment and our plans for a secure, affordable and low-carbon electricity system. That is well demonstrated by the allocation in April of the first contracts for difference to eight renewables projects. These projects include offshore wind farms and coal to biomass conversions, which alone will provide up to £12 billion of private sector investment by 2020, supporting around 8,500 jobs and providing a further 4.5 gigawatts of low-carbon generation capacity to Britain’s energy mix.

The noble Baroness pointed to the capacity market and the fact that four of the 11 remaining coal plants are seeking a three-year capacity agreement to refurbish their plant. She said that that is evidence that these plants will upgrade to comply with the industrial emissions directive allowing them to continue operation long into the future and generating at levels inconsistent with our decarbonisation plans. She also pointed out that the freezing of the carbon price floor improves the economics of continuing to operate coal-fired power stations. The fact is that neither of these developments is expected to have a significant impact on the overall future outlook for coal.

The Government’s latest projections, which take into account recent changes to the carbon price floor, suggest that virtually all coal will have retired by the end of 2025. Only one of the four plants seeking a three-year capacity agreement has fitted the equipment needed to comply with the directive and operate without constraint when it comes into force on 1 January 2016, as my noble friend Lord Caithness rightly said. We are not aware of evidence that any of the other plants will be compliant with the directive at the time it comes into force.

Even were these plants to achieve compliance at some point in the future, our assessment remains that overall levels of generation from coal will decline over time as multiple factors, including age, environmental regulation, increasing levels of low carbon generation and a strengthening carbon price, act to reduce coal generation, although the additional resilience to our energy system that comes from a small number of compliant plants while they are still economic to operate would not be unwelcome.

The risks that would be created by this amendment are also more immediate. I would like to draw the attention of noble Lords to the first auction under the capacity market that will be held in December, which is our response to ensuring security of supply at the least cost to the consumer. A potential impact of this amendment is to constrain the ability of plants to generate when it is otherwise economic for them to do so. Accepting this amendment will therefore create a significant regulatory risk to those plants seeking refurbishment contracts in the capacity market. Their response may therefore be to seek a higher capacity clearing price to compensate for this possible reduction in electricity market revenue, particularly in the years preceding the first delivery year in 2018-19. Alternatively, these investments may not go-ahead. Neither scenario is desirable, with the risk that the cost of the capacity market is pushed upwards with no accompanying benefit to security of supply.

We should also consider what sort of signal it sends to investors of all types of generation, not just coal, now and in the future. They will interpret this as further intervention of a measure that has already been rejected by this House and so close to the first capacity market auction where we will be seeking competitive commitments from over 48 gigawatts of capacity to ensure continued security of our electricity supplies over the course of this decade. It is also important to remember that over 10 gigawatts of new gas has come forward to participate in the December auction, highlighting that we have the right incentives in place to ensure security of supply at the least cost to consumers and to encourage competition through new investment. As we discussed last year, I will oppose an amendment that has the potential to increase consumer bills and increase the risks to security of supply.

There is an almost unanimous consensus on the need to substantially decarbonise our electricity system on the pathway to cutting our greenhouse gas emissions by at least 80% by 2050. There is a similar consensus that it is only with carbon capture and storage that coal will continue to play a role in that future. The measures we agreed last year to reform our electricity market are already bringing forward the investment needed to achieve this cost effectively and securely. Against this background we continue to believe that applying the EPS as proposed by this amendment is a potentially risky intervention in the market.

I hope I have gone half way to convincing the noble Baroness that the developments since the Energy Bill was before this House less than a year ago are unlikely to have the impact she assumes and I hope on that basis she will be willing to withdraw her amendment.

[Baroness Worthington]

My Lords, I thank the Minister for her response. It may well be true that up to 10 gigawatts has bid into the capacity market but my point is that not one of those apart from Carrington, which is already under construction, will successfully be awarded a capacity mechanism contract. They are going to be frozen out by contracts that will be given to existing coal. It is pointless telling me that lots of people out there want to build gas if in reality we are going to keep coal open at the expense of those investments in cleaner, more efficient technology.

We have spent the largest part of this evening talking about fracking rather than the need to develop the resource of gas so that we can use it as a bridging fuel. There is absolutely no point us investing in that if there are not going to be any stations in which we can burn it efficiently. The losers in this capacity mechanism at the moment are the operators of existing gas stations and those who wish to build new ones. That is because we continue to tell ourselves that the lights will go out if we constrain coal and that that will necessarily force a higher price on to consumers. The money we are spending on propping up old coal is going to be money wasted—we will have to shut these stations anyway at some point. Why we seem to be perpetually telling ourselves that we cannot do without these ageing dinosaurs in our electricity system is beyond me.

I do not intend to detain the House any longer at this stage and I will, of course, withdraw my amendment. However, I reiterate the words of Dr Gross from Imperial College that we will not see the end of old coal without government intervention. If this Government refuse to do it then it will fall to another Government. There is a future for coal; it is with CCS and only with CCS. Unabated coal is simply not something we should be sustaining through the 21st century and no end of anyone telling me otherwise is going to persuade me. However, I will withdraw this amendment now.

Amendment 119A withdrawn.

Budget Statement

Baroness Worthington Excerpts

Thursday 27th March 2014 Lords Chamber

[Baroness Worthington (Lab)]

My Lords, it is a pleasure to speak in this debate, which is my third successive Budget debate, and I am sure it will come as no surprise if I focus much of my attention on the parts of the Budget that relate to energy and the environment. However, if noble Lords will bear with me I will begin with a more general observation.

I watched the Chancellor of the Exchequer last week and have listened to the Minister this afternoon, and I congratulate them both on eloquently presenting a very seductive argument: “We, the Government, have been making the hard decisions to get us to live within our means and so reduce our deficit, grow the economy and give everyone a higher standard of living as a result”. How appealing—what Government would not wish to try to achieve those aims? The problem, as the noble Lords, Lord Hollick and Lord Myners, have eloquently pointed out, is that it is easy to say one thing but then do something else. This Government have shown that they have not learnt from past mistakes and are instead relying on sleight of hand to boost the economy, creating another unsustainable housing bubble, increasing government debt and shifting borrowing on to the private sector, where it will necessarily cost more. The Government have also avoided making the tough decisions needed to make our economy resilient for the future. That is nowhere more evident than in the case of energy policy.

The truth is that most people’s judgment of how well they are faring is not measured by one simplistic GDP growth metric. Their sense of security and optimism for the future is determined by a complex mixture of factors, including the extent to which social capital and cohesion are being maintained and how much they believe that the Government are standing up for their interests, now and in the future. That our economy is finally clawing its way back to good health despite, rather than because of, this Government’s actions is good news. However, there is a huge way to go before that will be felt by everyone, up and down the country, and an even longer way to go before the Government can claim to be tackling the really big challenges facing this country.

A good example of the Government’s, and in particular the Treasury’s, failure to accept and tackle big challenges is provided by the response in the Budget to the dreadful floods that we experienced this winter. By necessity, this Budget included a £140 million fund for repairs to flood defences and a further £200 million for pothole repairs—a problem exacerbated by the extreme weather that we experienced. We can expect these sorts of cost to increase over time as the impacts of climate change become more apparent.

However, until recently, spending under this Government on flood defences was in decline. At the time of the floods, the Prime Minister acknowledged that climate change was one of the most significant threats we face. However, in this Budget, in which a whole section is devoted to risk, there is scarcely one mention of climate change and none at all of the singularly high exposure of the UK Stock Exchange to international coal assets that risk becoming stranded assets, significantly devalued as the world collectively starts to take action to reduce its emissions of greenhouse gases. Taken overall, this appears to be one of the least green Budgets produced in recent times, from the supposedly greenest Government ever. Is it perhaps the case that the Prime Minister and the Chancellor do not see eye to eye on this issue? If this is so—and I believe it is—is it therefore any surprise that investors have no idea what they should believe or trust in when making their investment decisions?

As graciously acknowledged by the Minister, 12 months ago the focus of my speech was on the fact that the Chancellor had failed to mention a new inflationary tax on electricity, which began in April last year and was set to double year-on-year, raising the Treasury around £4 billion from electricity bill payers over just three years. This year, this almost universally disliked policy did warrant a mention, only for it to be announced that, less than a year after it started, the policy has been changed and the tax frozen. The curious thing is that the Chancellor now appears to be seeking credit for reducing the impact of a tax that he introduced which distorts competition against our European neighbours and, even in its frozen state, will still add around £9 per megawatt hour, taking an estimated £1.5 billion per annum off bill payers for no obvious purpose other than revenue raising. Attempts have been made to justify this tax on the basis that it will encourage investment in low-carbon infrastructure. The fact that it is has already been so drastically altered, and that this was always likely to be the case given how poorly thought through it was, simply serves to confirm that no investor worth his salt would put any store by it at all.

Given the pressure the Government were under before the Autumn Statement to reduce electricity bills, I am also curious to know why the announced change was not trailed at that time. I can only conclude that it was because the Government’s Energy Bill was still being debated in this House. The one purpose it could be argued that this tax—known as the carbon price floor—was performing was to help return gas-fired power stations to a state of profitability relative to coal stations. The plight of gas and the roll back to old unabated coal was repeatedly raised as a concern in this House. With the carbon price support now frozen, the roll back to coal is much more likely. A cynic might argue that, because of this tax, the Treasury now has an incentive to protect the rich revenues being generated from our ageing and inefficient coal stations. It is now in the Treasury’s interests to maintain them for as long as possible in a state of suspended animation. Perhaps this explains the expunging of any real mention of climate change from this Budget.

The problem is that, in addition to being huge contributors to climate change, unabated coal stations also contribute massively to poor air quality and diminished human health and so are rightly subjected to regulations requiring that they be cleaned up. Meeting these regulations would require investment over the next few years that will only ever patch up these stations for another decade or so at the expense of more long-sighted investment in low-carbon alternatives, which will last for many decades. This kind of short-term investment will deteriorate our productivity by decreasing the efficiency of our electricity fleet still further—more inputs of coal but fewer outputs of kilowatt hours. How will this help address our productivity challenge? Thanks to the frozen carbon price support, the investment will not even ensure prices are lower, since the big six can happily pass the costs of this tax on to the consumer for as long as they remain vertically integrated. There we have it: the Government’s ideology in a nutshell—failing to make the difficult decisions, failing to stand up to vested interests and favouring a short-term quick fix over doing the right thing in the longer term.

If this stop-start policy on energy were affecting only gas and coal investments that would be bad enough. However, the change of heart will also have an impact on investment in renewables and nuclear. The Energy Act, which we worked so hard to try to improve last year—to no avail—introduces new support mechanisms for these technologies but the level of that support is capped by the Treasury through the levy control framework. The level of that cap was set on the assumption that this electricity tax would proceed as announced last Budget. This is no longer the case. Therefore, the cap is very likely to be insufficient to support the level of investment needed to meet our targets. Can the Minister reassure the House that when it states in the Budget that,

“the buying power of the Levy Control Framework will be unaffected by other Budget decisions”,

this means the basis on which the framework was calculated will be revised? If this is true, when might we hear from the Treasury what that new level will be? If it is unchanged, I fear we will have wasted a great many hours of parliamentary time last year labouring under false pretences. An unchanged cap on the amount of support for energy market reforms will inevitably lead to the cannibalising of one low-carbon technology by the other, with existing coal stations carrying on unaffected, paying into the Treasury coffers but damaging our resource efficiency, our climate and our health.

There are signs that this is already happening, with plans to convert Eggborough, a coal station, into biomass having been derailed and a dedicated biomass plant being dropped. Despite the welcome announcement from Siemens this week that it will build a manufacturing plant for offshore wind in Britain, even offshore wind farms are being discarded. Meanwhile the great white hope of Hinkley Point nuclear power station—a project the Minister is well acquainted with—has run into state aid problems, potentially causing the construction timeline to slip even before it has begun. The most depressing aspect of all of this is that had the Treasury and DECC listened to the debate in this House and accepted more amendments, including the one that was won here to introduce a more cost-effective policy to constrain unabated coal and boost investment in all alternatives, we would not be in this predicament.

Rather than showing that this Government are up to the task of tackling the long-term challenges facing this country, this is a Budget based on short-term thinking and a misreading of where our future prosperity lies. Rather than learning from the past, they appear to trying to reproduce it by fuelling another dangerous housing boom, pursuing the chimera of growth based on oil and gas—that is clearly no longer cheap or easy to extract—and failing to understand that we are stronger as a country when we acknowledge and face up to the real global challenges ahead of us that we cannot escape. I hope that before this Government leave office, which, given their short-term thinking, they seem to have accepted is likely to be very soon, we will see a Budget that is genuinely sustainable and wholeheartedly embraces the benefits brought by the low-carbon industrial revolution that we are now embarked on, as we lead the world in tackling climate change.

Budget Statement

Baroness Worthington Excerpts

Thursday 21st March 2013 Lords Chamber

[Baroness Worthington]

My Lords, yesterday’s Budget speech by the Chancellor contained a number of tax break announcements that are intended to stimulate our economy. These included measures for business, such as reductions in national insurance payments and a cut in corporation tax, and measures for individuals, such as an increase in the tax-free income allowance and tax relief on childcare.

However, hidden in the detail of the Budget but not mentioned by the Chancellor was an announcement relating to a Treasury electricity tax that could significantly undermine money saved by those measures. The carbon floor price was announced in 2011 and will start to be added to electricity bills from 1 April this year. The logic of the tax is to increase the cost of carbon pollution to provide a benefit for lower-carbon sources of electricity. It is claimed to be necessary because the market price for carbon, set by the balance of supply and demand for carbon emissions at a European level, has crashed to very low levels, failing to incentivise investment. To address this, the Treasury has invented a top-up tax, which is intended steadily to increase the cost of carbon pollution over this decade.

Starting in April, UK electricity companies will be required to pay a £4.94 per tonne carbon top-up tax, which is roughly equivalent to adding £2.50 per megawatt hour to wholesale electricity prices. A year later, the level will double to £9.55 a tonne or £4.77 a megawatt hour and in 2015-16 the level that was announced yesterday—or, rather, was not announced—doubles again to £18 a tonne or £9 a megawatt hour. Over the next three years, this single policy will raise the Treasury an estimated £4 billion to £5 billion in revenue. Yet the Chancellor forgot to mention it.

I am not against polluters paying for pollution: in fact, I am all for it. However, in the fight against climate change it is absolutely imperative that when we impose costs on the economy, we do so for very good reason. Sadly, in this case it is so badly thought through that this policy risks holding back recovery, increasing inflation and giving carbon pricing a bad name, undermining our ability to introduce more sensible policies later.

The reasons why the Government’s carbon floor price is such a bad idea are numerous and have been pointed out repeatedly since it was first mooted. Opponents include business groups, consumer groups and green groups. Everyone appears not to like this policy. The first obvious problem is that the tax fails to do anything for the environment. It does not deliver any additional environmental outcomes. The emissions it targets are already capped at an EU level and simply doing something here means that our emissions saved will be traded away across Europe.

The second, blindingly obvious, problem is that being unilateral it damages UK competitiveness at a time when we need to be boosting our competitiveness. Electricity prices are an essential input to virtually all economic activity. Steep rises in prices increase everyone’s costs and are inflationary. It is no wonder that the Budget yesterday appeared to be indicating to the Bank of England to go soft on meeting the inflation target. But the effect of this policy is likely to make it harder than ever to bring it under control.

The third problem is that rather than paying electricity companies when they invest in new low-carbon projects that come on stream, as the renewables obligation does and as the contracts for difference will, the carbon tax simply pushes up wholesale prices of electricity for everyone, rewarding those who have already invested for doing nothing new. It is a huge windfall for projects that have already received generous subsidies, be they existing wind farms or old nuclear power stations. This is of course good news for some generators but bad news for industry and consumers, who are paying twice for no good reason. The floor price is intended in a not-very-clear way to give investors confidence. However, being a finance Bill measure, no investor worth his salt is going to place any confidence in this policy lasting, especially since it has been implemented so appallingly.

Recognising that increases in electricity prices will be damaging to industries which rely on it, the Treasury has pledged to make around £250 million available to certain sectors to compensate them. That is a fraction of the revenue that the policy will raise. However, there is nothing in the Budget to compensate consumers and this comes at a time when public money to help poorer families cope with higher energy bills is at an all-time low, having been slashed by this Government.

Some may argue that the main purpose of the carbon floor price is to disincentivise the burning of coal in existing stations, which would be a noble endeavour. However, this policy is the equivalent of taking a sledgehammer to crack a nut and even then it may not be successful. Coal is experiencing something of a reversal of fortunes thanks to lower global prices as unused coal from the US enters the market. This, combined with high European prices for gas, is causing us to burn more coal. The disparity between the two fuels is so great in cost that even the hefty carbon floor price may not be enough to switch us out of it. It requires something in the region of a £30 a tonne carbon price for us to do that.

What would Labour have done differently? First, we know that investors in low-carbon electricity infrastructure are absolutely necessary for getting this country back to growth. They need policy certainty, which is why we are committed to introducing a decarbonisation target for the electricity sector. The Government have failed to acknowledge this and are proposing to wait until 2016 before doing so. We would also use simpler policies, such as the energy performance standard to secure the steady phasing out of unabated coal and usher in carbon capture and storage. That is simple to understand and unambiguous, and provides the clarity investors need to commit to new projects.

We would also work around the clock to achieve a solution to the low carbon price at an EU level, which is the only level where it matters. Fortunately, we still have some credibility in Europe, unlike the Tories, and we are able to control our MEPs. As we speak, the Conservative MEPs in Brussels are mustering to rebel in a vote in April that would help to rebalance the European carbon market—doing precisely what this heavy-handed policy is intended to do. The Government line is to support it. Yet, disgracefully, the party is not able to persuade its members to vote that way in this forthcoming vote.

In the short time available I have focused exclusively on one measure in the Budget. However, I have done so consciously in order to try to compensate for the Chancellor’s grave and negligent error in omitting to mention it at all. As companies and families sit down this week to try to work out how the Budget will affect them, the hidden electricity tax is unlikely to feature in their assessments. Indeed, it features in scarcely any of the mainstream media’s assessment of the impact of the Budget. Yet it is raising large sums of revenue and has a very material impact on costs.

This makes me fear that either the Chancellor simply is unaware of the detail of his Budget or he is purposefully trying to hide a significant additional cost to the consumer. Will the Minister inform the House what the Government’s assessment of the impacts of this policy are on inflation, competitiveness and the poorer households which currently are struggling to pay their electricity bills?