Greenhouse Gas Emissions Trading Scheme Order 2020

Lord Grantchester Excerpts

Tuesday 27th October 2020 Grand Committee

[Lord Grantchester (Lab)]

I thank the Minister for her introduction to the order and welcome her to the duties of responding for the Government on energy and climate change. As she explained, it is important that the UK continues with an emissions trading scheme, having left the EU scheme, as it covers 33% of UK emissions. It is an essential element of decarbonisation policies to encourage cost-effective emission reductions along the pathway to the net-zero target. I approve of the order very much on that basis, and on the basis that the clear preference is for the UK ETS to be linked to the EU ETS post the implementation or transition period. I am glad that the CBI agrees with that position, as outlined by the noble Lord, Lord Bilimoria. Paragraph 6 of the Explanatory Memorandum states this in terms of the Government being

“open to considering a link between a future UK ETS and the EU ETS … to establish a much larger carbon market”,

creating more opportunities for emissions reductions, greater cost efficiencies and increased flexibility.

As climate change and the ETS are devolved matters, the tussles of the scheme at EU level will be replaced with tussles to which any UK scheme may give rise with the devolved Administrations. Would the Minister care to comment on which set of tussles she considers may be the more intractable? I will not widen discussion into the dispute-resolving mechanisms of the common framework and how effective they may or may not be. However, the noble Lord, Lord Bradshaw, is correct to be anxious that dialogue with the devolved Administrations is constructive.

The subject gives rise to my first question regarding whether the UK will resolve the remaining difficulties in negotiations with the EU and include the preferred option of linkage with the EU ETS. Does the Minister have any important news on that? It is understood that the order envisages the UK emissions trading scheme as a fallback position, and that this will by and large shadow the EU ETS. Can the Minister say whether development of the UK’s ETS will take place with a view to future linkage, or will a carbon emissions tax be set up instead? Time is now becoming critical to provide leadership and credibility in the run-up to COP 26 next year. A separate carbon emissions tax would become more open to political intervention, and more institutional safeguards would be needed to ensure that pricing would remain consistent with the pathway to net zero. Can she now rule out the possibility of a carbon tax regime? I understand that the question still has to be settled with the Treasury. The noble Lord, Lord Moynihan, is also concerned with that continuing uncertainty.

Regarding the shape of the proposed UK ETS, there are some curious figures. In paragraph 7 of the Explanatory Memorandum, it is proposed that the initial cap

“be set at 5% below the UK’s expected notional share of the EU ETS cap for Phase IV of the EU ETS”.

First, is that 5% lowering of the cap ambitious enough? Secondly, are the figures that the Government calculate the correct ones? The figures given are that 156 million allowances be set for 2021. However, I understand that carbon emission reductions are progressing at a faster rate, and that 129 million allowances would be more likely as the expected figure. Can the Minister explain why the latest data is not being used?

We can agree that the moving target of reduction percentages remain in line with the EU scheme. However, as the Government concede that the cap progression will be assessed against the trajectory towards net zero as advised by the Committee on Climate Change and its sixth carbon budget, this could amount to quite a demanding correction, as the Government have not maintained compliance with the fourth or fifth carbon budgets. Given how important the climate emergency is, as the noble Baroness, Lady Bennett, explained, and how ambitious we must be in continuing to set the pathways to the future, why do the Government consider that they have the luxury of delaying the correction until at least 2023 or even January 2024? This may need to be considerably more than setting a cap lower than the 5% level, and with more realistic figures. Can the Minister explain more fully the rationale behind the proposals outlined, and commit to giving more urgency to the matter in the long-delayed energy White Paper?

The noble Baroness, Lady McIntosh, asked whether the UK emissions trading scheme would set any more net cost on consumers. My understanding is that it would not, but the Minister may know whether that answer will still be correct in relation to any emissions tax alternative, and whether the 5% cap below the UK’s share of the EU scheme would also be commensurate with that understanding. What more stringent level below the 5% would still be consistent with the same net costs to the consumer, should a more radical correction be required in either 2023 or 2024?

Many more elements still need further clarity, such as the amount of free allowances and details of carbon auctions, and I welcome any further detail that the Minister may be able to give the Committee today.