Draft Greenhouse Gas Emissions Trading Scheme (Amendment) (No. 2) Order 2023

Alan Whitehead Excerpts

Tuesday 21st November 2023 General Committees

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

It is a pleasure to serve under your chairmanship, Sir Gary. Like the Minister, I commend the Committee for the huge turnout this afternoon to consider the SI. I am sure that is because everyone wants to hear at some length the Minister’s comments and, indeed, some of mine, but in case anyone is here because they think there might be a Division, I can assure them—I hope they do not leave now—that there will be no Division. Broadly speaking, we very much agree with these changes to the operation of the ETS. However, I have a number of questions about the detail of those changes, and I would like to put the SI in a bit of context. I am disappointed that that context is not better represented in the SI.

The context is not just that the UK ETS is up and running and requires minor amendments, but that it is rapidly diverging from the EU ETS. The divergence is such that, in October prices, the permit cost per tonne is £87 in the EU ETS, but £40 in the UK ETS. The EU-UK trade and co-operation agreement, which the UK freely signed, states:

“The Parties shall cooperate on carbon pricing. They shall give serious consideration to linking their respective carbon pricing systems in a way that preserves the integrity of these systems and provides for the possibility to increase their effectiveness.”

No action has been taken so far—[Interruption.]

[Shailesh Vara]

Apologies, Sir Gary.

[Dr Whitehead]

That was a particularly stirring ringtone.

[Graham Stuart]

Bringing uniquely to a conclusion the hon. Gentleman’s words.

[Dr Whitehead]

I am afraid not. I distinctly detect that that was part of an overture, not a final movement.

As I said, the agreement states that

“the Parties shall cooperate on carbon pricing”,

but there is no evidence of such co-operation. Not only that, but the two systems are diverging significantly. Hon. Members may ask whether that matters. It matters a lot in view of what is happening in the EU on the development of carbon border adjustment mechanisms.

[Graham Stuart]

None of which is covered by the order.

[The Chair]

Order. Minister, sedentary interventions are never helpful. May I just ensure that we are talking about the order that the Committee is considering and not the issue generally?

[Dr Whitehead]

Yes indeed, Sir Gary.

[The Chair]

I am reassured. Thank you.

[Dr Whitehead]

The carbon border adjustment mechanism, which is in its first month of operation in the EU, is in danger of pricing our materials—iron, steel, aluminium, fertiliser, electricity, hydrogen and so on—as if they were outside it and should therefore be penalised, unless there is some convergence between the EU ETS and the UK ETS in future. That is a real issue. What plans has the Minister to seek greater convergence between the UK and EU schemes? That is important in the context of the SI.

[The Chair]

Are you making the point that those changes should be in the SI, but are not?

[Dr Whitehead]

I am making the point that there should be some mention of those particular circumstances in the order. For example, the substantial divergence between UK prices and EU prices will potentially have a real effect over time on aviation in Europe and the UK. The order ought therefore to be looked at in that light.

As the Minister has said and paragraph 7.4 of the explanatory memorandum explains, at 2021 prices, the free allowances set out for aviation represented 127% of the allowances that ought to have been made. In those circumstances, aviation has had something of a windfall. It has been able to take those free allowances, sell off the difference between 100% and 127% and make the actors in the industry between £50 million and £100 million. I welcome the fact that the allowances are to be capped at 100%, but I worry a little about whether the divergence between UK and EU ETS prices might lead the aviation industry to come back to us in the not too distant future and ask for some of those over-allowances back. We have to work together on the arrangements between boundaries for the UK ETS and EU ETS.

Was the over-allocation by accident or design? If it was by accident, are there any measures under way to try to restore some of the profits that have been made by aviation as it has put those substantial over-allowances into its pockets through trading, or is the Minister content to say that because it is now 100%, it is okay for the future and we will write off the past?

There is a similar issue of potential misallocation in the reclassification of companies that have not exported electricity for quite a while. As the Minister said, they continue to be classified as exporters even if they might not have exported electricity for quite a long time. Clearly, some long-term issues related to that misallocation will effectively be brushed over by the order, but I would like to know whether that has also resulted in free allocations being misapplied to the industry and whether the companies that have halted electricity exports but have been classified as exporters for quite a long time have benefited in an inappropriate way from that misclassification. If so, to what degree?

Although Labour supports getting the classifications right in the order, questions remain about why and how the misclassifications occurred and what action, retrospective or otherwise, the Government will take to ensure that the harm or benefit of them is as small as possible.

Having posed those three questions for the Minister, I confirm that we will not oppose the SI. Indeed, we welcome its clarification of how the UK ETS will move forward.

--- Later in debate ---

[Graham Stuart]

I thank hon. Members for their contributions to this debate on pretty technical adjustments to the ETS.

By capping aviation free allocation, we are ensuring that it is distributed appropriately until full auctioning in 2026. The current situation is not deliberate; the policy did not intend for aircraft operators to receive more allowances than their verified emissions. It is noteworthy, though, that those allowances meant that operators were doubly encouraged to invest in cleaner operations, since they were incentivised not only by any savings from investment in more fuel-efficient aircraft, for instance, but by the credits that they received within the ETS. The Government have no plans to claw any of that back.

On the overall position of the UK carbon market, the UK ETS is of course a market mechanism. The price of carbon allowances in the UK ETS is set by the market. In line with the net zero cap we announced in July, the supply of emissions allowances entering the market will fall significantly every year from 2024. We are committed to continuing to deliver on these changes, as we have shown, by legislating to amend the supply of allowances over the coming years and publishing an auction calendar.

The hon. Member for Walthamstow mentioned the CBAM. We are closely following developments on the EU CBAM and engaging with the Commission on technical considerations that are relevant to UK manufacturers. As the hon. Lady will know, EU CBAM charging does not start until 2026.

I am nervous of opening up wider matters, although you have been generous, Sir Gary, in allowing discussion of issues that are broader than the technical amendments that the SI makes. If Members want a broad debate on the ETS and its interaction with Europe, there are many opportunities in the parliamentary calendar to do exactly that.

[Dr Whitehead]

Given that the Minister has mentioned the CBAM in response to the inquiry of my hon. Friend the Member for Walthamstow, I want briefly to record that iron and steel are in the first phase of the EU CBAM, and that that may affect UK iron and steel negatively. They could be treated as if they were imports to the EU, similar to iron and steel from India or other parts of the world. That should give substantial pause for thought about how we proceed with the UK ETS.

[Graham Stuart]

The hon. Gentleman is right about that being a substantial prompt for thought, but not on the particular order that the Committee is considering. As hon. Members will know, we ran a consultation earlier this year on domestic measures to mitigate carbon leakage, including consulting on a potential UK CBAM and mandatory product standards.

In answer to the point that the hon. Member for Walthamstow made, our commitment to the UK steel sector is clear. We continue to work closely with industry, including British Steel, to secure a sustainable and competitive future for the sector and its workers. We will continue to fulfil that commitment.

As I said, the UK ETS is a market mechanism, and the price of carbon allowances is set by the market. That continues to be our position.

The UK ETS is a cornerstone of UK climate policy. It is worth noting, to look momentarily at the bigger picture, that since 1990, the UK has cut its emissions by more than any other major economy on the planet. The Government put net zero into law for the first time, and the former Conservative leader, now the Foreign Secretary, was the first leader of a major party to call for a climate Act, which was introduced in 2008. I was proud to serve on the Joint Committee on the Draft Climate Change Bill under the excellent chairmanship of Lord Puttnam.

[Dr Whitehead]

We were both members of that Committee.