Greenhouse Gas Emissions Trading Scheme Order 2020

Lord Bilimoria Excerpts

Tuesday 27th October 2020 Grand Committee

[Lord Bilimoria (CB) [V]]

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

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

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

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

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

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

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


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

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

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

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

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

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

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

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