Emission Reductions and Low Carbon Investments

Alan Whitehead Excerpts

Monday 12th December 2016 General Committees

[The Chair]

We now have until 5.43 pm for questions to the Minister. May I remind Members that questions should be brief? It is open to a Member, subject to the discretion of the Chair, to ask related supplementary questions.

[Dr Alan Whitehead (Southampton, Test) (Lab)]

I note that the Minister has set out the UK’s position on phase IV of EU ETS in a document supplied for the Committee’s attention this afternoon. In that document, mention is made of the overhang of allowances that the Minister said will remain within EU ETS, but no mention is made of any Government position concerning what might be done about that overhang as we go into phase IV. Does the Minister any views on that and does he think there should be a Government position on it?

[Mr Hurd]

Yes, we do. What we have argued for is what is called a volume-based approach. This is our second crack at this issue. In the 2014 initiative, we were instrumental in setting up the market stability reserve, which is basically a mechanism for taking surplus allowances above a certain threshold out of the system.

What we suggest this time around, and it seems to be gathering some support, is that we should accelerate that process, in terms of both scale and time. As the hon. Gentleman will know from his deep experience of tracking the ETS, that is because the fundamental problem is a structural imbalance of demand and supply allowance. Our proposal is a volume-based approach, which is seeing whether can we accelerate the mechanisms for taking this surplus out of the system.

[Dr Whitehead]

I thank the Minister for that reply. However, the question of taking surpluses out can be done by means of the market stability reserve, which will be completely transported from phase III to phase IV, with all the surpluses, as things appear to stand at the moment. That means that, because the system is currently trading at about 200 million allowances below the capped level, there will be increased surpluses coming into phase IV, in addition to those in the market stability reserve and those carried over. The suggestion that might be put is that those should be forcibly retired in phase IV. Does the Minister have any views on that?

[Mr Hurd]

We are open to mechanisms and discussion about the how. The point that we are trying to make is that we need to accelerate the process of taking surplus allowances out. We think the MSR continues to be the right primary tool for doing that; the issue is the pace at which it is done. We are trying to gather support for doing that on a bigger scale at a faster pace.

--- Later in debate ---

[Mr Hurd]

We are talking about negotiating the principal elements of the reform of the emissions trading scheme. As far as I can see—it is a fairly opaque process—that is due to be completed by the end of 2017. That is when the base of the agreement is likely to be reached, and work can then begin on underpinning the implementation. That is well within the Brexit timeframe. Our view, therefore, is that we should continue to be a very constructive, positive, inquisitive voice at the table to ensure that the next phase of the emissions trading scheme—I would argue that it is in one of the most critical phases in its history—is structured in the right way.

[Dr Whitehead]

Pursuant to whether we will be a member of the EU when the fourth phase comes into operation, the Minister of course knows that a number of non-EU members are already in the EU ETS. First, does he have a model in mind of what our relationship with the EU ETS might be, bearing in mind that there are already non-EU members in the EU ETS?

Secondly, does the Minister have any views on the recent announcement in the autumn statement that there is no definite commitment to extend our carbon floor price mechanism beyond 2020-21? As was said in the autumn statement, it is possible that the EU ETS level will coincide with our carbon price support in the middle of the next decade, which strongly implies a relationship, whether we are in the EU or not, between the EU ETS and our carbon price support mechanism.

--- Later in debate ---

[Dr Whitehead]

We have had a good session, and the Minister was asked number of pertinent questions. They focused, first, on whether we are actually going to be there to influence the EU ETS in any way in the future, and, secondly, even if we are not there to influence it, on the extent to which it will continue to have a substantial influence on us, however it is sorted out in the absence of the UK as a member of the EU.

I suggested that it is worth examining the EU ETS’s structures in respect of the countries that fully participate in it but are not EU members. There are particular regulations relating to that, but those countries participate fully in the EU ETS and are not just observers at the table. They are bound by what happens in the ETS, but they are active participants in shaping it. I hope at the very least that, in our future relationship with the EU ETS, we aim to be a full member and sit round the table, even if we are not a member of the European Union, so that the fact that the development of the EU ETS reflects our country’s priorities for the decarbonisation of our industries and for climate change is fully taken into account.

The Minister made it clear that the Government’s aim in the discussions was to ensure that the allocations were retired or removed from the system at an accelerated pace. I very much concur with that aim, because we need to understand where the EU ETS stands at the moment and where it might position itself relative to our carbon price support mechanism in the future. We are coming to the end of phase III, but particularly because of the recession and crisis of 2008-09, the number of allowances that are being generated in the system—we have already achieved the targets that the EU ETS requires us to meet by the end of phase III—means, as I mentioned in questions, that we are not retiring or reducing allowances at the moment, but creating 200 million additional allowances before the end of phase III. The proposal for dealing with that—the market stability mechanism—effectively loads those allowances, which have been placed in quarantine, as it were, into the beginning of phase IV, in addition to the new allowances.

Unless we do something about rebasing where we start from in 2020, we have the prospect of a continuing overhang of emissions through the whole period of phase IV of the EU ETS. My first proposition, which I suggest the Government ought to look at in their continuing engagement with the outcome of this—although, as the Minister said, it will be on a vastly accelerated scale to that which was previously the case—is that the 2020 starting point for phase IV should be rephased so that it is based on actual emissions in 2020, rather than the trajectory that they have been on hitherto, which would mean that the 2020 figure did not reflect real emissions and therefore institutionalised the overhang of allowances in the system into the fourth phase.



This afternoon the Minister said that there is not a great deal of support for the linear reduction factor to rise from the proposed 2.2% per annum. Again, however, when it comes to attacking those outstanding allowances, some figure higher than 2.2% would be very helpful and important. Considering whether it could go up to something like 2.4% would be a useful addition to the fight to shape the EU ETS, so that it is fighting fit and combative over the next period, regarding what it is trying to do not only about the overall capping of emissions but having a reasonable price level for allowances. Of course, that is the big question over the next period—whether those allowances get that price, which can only be really achieved by the cap and those allowances decreasing, and their coming together to keep the price up to a good level.

I take the Minister’s point about energy-intensive industries and the aim during phase IV of reducing allocated allowances from 80%—I think—to 23%, and therefore concentrating those allowances particularly in relation to energy-intensive industries and making sure the carbon leakage is properly accounted for over the next phase. I fully support that.

However, the Government’s present position regarding what the EU ETS will look like in phase IV is not sufficient, particularly in the context of what we have said about the future of our own carbon price support system. It is not sufficient at the moment to secure that convergence, which is potentially so important regarding what we do about the future of our own carbon price support system.

We have two possible ways forward. We either commit ourselves now, at an early stage, to saying that we think the EU ETS, in whatever form it is going to be in, will have, a respectable-ish price for allowances, but because we will not have solved the overhang problem, we will never get to the right amount so that we can confidently say that our own carbon price support system will at any stage start to align with whatever that price is in the mid-2020s. In that case, we presumably need to say, “Well, we act now to secure our own carbon price support system for the long term and we take a decision on that fairly early”, or we press for proposals that are quite a bit more radical within the EU ETS, so that it can achieve that particular level.

To my mind, that means, first, that we need mechanisms that do rather more than the market stability reserve to retire allowances, and have them permanently retired and not quarantined for future reference—actually taken out of the system entirely over phase IV—and, secondly, that we have a realistic starting point for phase IV, so that it allows those retiring allowances to have maximum effect on price over the next period.

Without looking at those particular aspects of EU ETS over the next period, we will almost certainly have a level of crisis in EU ETS over the next decade similar to that we have at the moment, as that overhang of allowances takes its toll on the good intentions of EU ETS.

I would appreciate hearing any thoughts that the Minister has on that particular way of going about things, which I think is important. I know that he cannot say too much about this, but a small nod and a wink in the direction of saying that we are pretty committed to staying in the EU ETS, although we cannot actually say so right now, would be very helpful for future discussions.