Energy BILL [ Lords ] (Fourth sitting)

Clive Lewis Excerpts

Tuesday 2nd February 2016 Public Bill Committees

[Andrea Leadsom]

Clause 80 was inserted into the Bill by the Opposition in the other place and intends to restrict the carbon accounting rules that are permissible under the Climate Change Act from 2028, which is the start of the fifth carbon budget period. This is quite a technical area and to aid Committee members’ understanding, I thought it would be helpful to explain briefly how carbon budgets and carbon accounting work at the moment. I hope hon. Members will bear with me as I explain that before I come to set out our reason for seeking to remove the clause from the Bill.

The Climate Change Act sets a target for the UK to reduce emissions by 80% from 1990 levels by 2050. It also requires us to set intermediate targets called carbon budgets to reduce emissions along the way. Carbon budgets are a cap on the emissions allowed over successive five-year periods. For example, the first carbon budget covered the period from 2008 to 2012, and we met that budget with 36 million tonnes of carbon dioxide equivalent to spare. We set carbon budgets 12 years in advance, so by 30 June this year we will be setting the fifth carbon budget to cover the period from 2028 to 2032. As well as setting each carbon budget, we make regulations that set carbon accounting rules for each budget period. The rules, in addition to what is set out in the Climate Change Act, tell us how to calculate the budgets and therefore whether we have met them.

I will now briefly explain how the current carbon accounting rules work before setting out the intended effect of clause 80 to the Committee. Under the current rules, we count the UK’s actual emissions for some sectors and for other sectors we reflect how the EU emissions trading system works instead of counting actual emissions. For transport, buildings, agriculture, light manufacturing and some other areas, we count the UK’s actual CO₂ emissions. For the power sector and heavy industry, we effectively reflect how the EU ETS works instead of counting the UK’s actual emissions. The EU ETS is a scheme in which emissions from power and heavy industry are capped and reduced at an EU level. Emissions are reduced by issuing a declining number of emissions allowances to member states. The emissions allowances are then traded by power stations and industrial sites across the EU. Our current carbon accounting rules tell us to count the UK share of the EU ETS emissions cap for the purpose of carbon budgets. In that way, carbon budgets reflect how the EU ETS works.

Clause 80 is intended to stop us reflecting how the EU ETS works in our accounting for carbon budgets. It amends the Climate Change Act to say that EU ETS units cannot be debited or credited from the UK net carbon account. I clarify that, even with that change, we will still participate in the EU ETS; we would just not reflect how it works in our carbon budgets.

There are positives and negatives in different accounting methods. Weighing them up needs careful consideration of a number of factors, such as the potential impact on consumers, on businesses, on industry and, of course, on cutting emissions at the lowest cost. It is absolutely right that we keep our accounting practices under review. However, I make it clear to all hon. Members that now is not the right time to make this change. The Government are totally focused on setting the fifth carbon budget by 30 June, and we have already been working on it for upwards of a year, as required by the Climate Change Act. That 30 June deadline is less than six months away.

We have been working on the basis that it will be permissible to use the current accounting framework, which is also the basis on which the Committee on Climate Change has produced its advice on the level of the budget. Accepting clause 80 would threaten serious delay in setting the fifth carbon budget, putting us at risk of not complying with the Climate Change Act at a time when the UK should be showing clear, decisive leadership following Paris. It is therefore my strong desire to see clause 80 removed from the Bill.

[Clive Lewis (Norwich South) (Lab)]

It is a pleasure to serve under your chairmanship, Mr Bailey. I thank the Minister for her pre-emptive argument against the proposal I am about to make seeking the retention of this extremely important clause.

Having repeatedly listened to the Minister and her colleague, the Secretary of State, I am convinced that they both personally share the Opposition’s genuine desire to make a success of our Paris COP 21 commitments. We all understand the urgent necessity to reduce our carbon output in the most cost-effective way possible. Ultimately, we all want to stave off the worst effects of climate change in a way that bolsters rather than undermines our economy.

To that end, I will break down our arguments in support of the clause into four key parts: first, how the clause will ensure investor confidence in renewables and the Government’s approach to them; secondly, why the over-complex accounting of our current carbon budgets risks our failing to meet our reduced emission commitments, both nationally and internationally; thirdly, how the clause will ensure lower costs for taxpayers, consumers and businesses as we strive to decarbonise; and fourthly, why the clause is necessary to live up to both our European and international commitments.

So far, Ministers have cut the solar subsidy by 64%, costing up to 18,000 jobs. They have cut the biomass subsidy and the biogas subsidy. They have scrapped the green deal without replacing it with something more effective, and they have slashed investment in home insulation and reducing fuel poverty. They have imposed a carbon tax on renewables by scrapping their exemption from the climate change levy, which is akin to extending an alcohol tax to apple juice. They are about to try their best this week to block further onshore wind generation, even where projects enjoy popular local support. They have slashed support for community renewable energy projects, and they have announced the sell-off of the UK Green Investment Bank without protecting its special green status. They have handed out generous 15-year subsidy contracts to diesel generators, which are one of the most polluting energy sources available. They have failed to incentivise a single new gas-fired power station, and they have cancelled a £1 billion manifesto commitment to carbon capture and storage—going back on a decade of promises from the Prime Minister himself.

Do not take my word for how damaging all that has been to investor confidence in our energy system. In a letter to the Secretary of State last week, the CBI and some of Britain’s biggest companies pleaded for

“clear leadership and stable policy”

for low carbon and energy investment generally. A separate report was published last week by the Institution of Mechanical Engineers. It stated that under existing Government policy,

“it is almost impossible for UK electricity demand to be met by 2025.”

In one fell swoop, this amendment would help to give investors and the industry the clarity that they need.

[Chris Heaton-Harris]

The hon. Gentleman mentions the institution just across the way from us and its report last week. Did that report not say that the intermittent nature of so much of our renewable energy supply meant that the Government could not guarantee that they could meet our future energy needs? I think that the hon. Gentleman may inadvertently have slightly misquoted the report.

[Clive Lewis]

I thank the hon. Gentleman for his comments. A number of points are made in the report, but on the issue of baseload, I think that National Grid itself and an increasing number of analysts say that baseload is increasingly diminishing in necessity because of increases in technology, increases in the ability to store energy, and interconnectivity. That all means that the concept of baseload is diminishing, so although I understand that it is important, many other countries across Europe have far more renewable input into their energy system and manage as well. National Grid itself says that it manages quite ably with the renewables already in place in our system.

[Chris Heaton-Harris]

I understand the hon. Gentleman’s point about baseload, but obviously I completely disagree with it, and I would like to point out to him what happened to our own electricity system last November. The wind stopped blowing on a cold November evening when solar was not producing anything for us. Our interconnectors were piling in as much electricity as they could, yet we had a shortage, and that shortage meant that instead of paying the normal amount of money that we pay for electricity, National Grid put out a call for electricity and we paid 25 or 30 times the amount that we normally pay for electricity to be produced in order for it to come into the grid. That is the first time in a long time that that has happened to our grid, and it goes to show that we do need a strong baseload, hence I have to disagree with the hon. Gentleman.

[Clive Lewis]

I thank the hon. Gentleman for his point. I think that he will know that the National Infrastructure Commission—I spoke to Lord Adonis himself—is going to put a lot of emphasis on spending on interconnectivity, which will increase; and ultimately somewhere in Europe the wind will be blowing and somewhere the tide will be coming in and going out. I think that the demand-side technology will make an increasingly big impact.

[Andrea Leadsom]

I have to correct the record. There is an interesting app on real-time power generation, and there are frequent occasions when there is no wind contribution whatever. It is simply not correct to say that the wind will always be blowing somewhere in terms of the UK’s power generation. The point made by my hon. Friend the Member for Daventry about intermittency is a very real one, which we deal with every day.

[Clive Lewis]

I thank the Minister for her input. We are not saying that we will rely entirely on renewables. They are part of a balanced mix. However, as the Government have already made clear, they are not committed to that. Carbon capture and storage is one of the key ways, one of the most cost-effective ways, in which we can begin to use, yes, gas and coal to produce energy and also meet our carbon targets, and the Government have backtracked on that. We are not saying—[Interruption.] I will press ahead, because we have been on this point long enough.

By supporting the amendment, the Government would send the industry a clear signal about the direction of travel of our power sector, giving businesses clarity, transparency and long-term assurances as to what decarbonisation investment will be needed and by when. In other words, they would be providing certainty—something that is now in short supply. Part of that certainty will come from clear, unambiguous accounting of carbon budgets. This goes to the heart of the clause. It means that by 2028 the power sector in particular should be using cleaner technologies, not simply buying in credits from other parts of Europe. Opposition Members are not opposed to the EU ETS scheme in itself. If reformed, it still has the potential to be a key part of Europe’s strategy for reducing pollution levels, but permission to use ETS credits in the carbon budget accounting process indefinitely is wrong, because it distorts the clear market signals that business needs to invest in new cleaner power stations here in the UK.

As the former coalition peer, Lord Teverson, explained in the other place, when talking about getting rid of the ETS allowances in the budget for the post-2027 period, the allowances would then

“mean what everybody would understand them to mean—that is, what the emissions of UK plc are. It would get rid of all those strange accounting distortions and bring us back to common-sense accounting and what people would understand carbon budgets and our own carbon emissions to be.”—[Official Report, House of Lords, 21 October 2015; Vol. 765, c. 719.]

Meanwhile, ClientEarth, a non-governmental organisation that lists DEFRA as an official supporter, said:

“If the UK is to continue to be at the forefront of global efforts to reduce greenhouse gas emissions following the historic agreement in Paris, we need carbon budgets which are clear, certain, and which drive emissions reductions in all sectors of our economy…This new clause, if implemented, would remedy these weaknesses and mean the Climate Change Act for the first time doing what it must do: set genuinely clear and certain emissions targets that are binding across the board.”

[Chris Heaton-Harris]

I am sorry if I have to keep disagreeing with the hon. Gentleman, but he talked about decarbonisation across every sector of the economy, and about transparency, having integrity in what we are trying to say and having a coherent policy. He has a very strong background in the green agenda. I know from a tiny bit of research I did that he is backing the divestment fund from the University of East Anglia to get out of investing in the North sea, which makes things interesting for some parts of the Bill, because we are talking about trying to save our oil and gas industries to a certain extent. However, surely he understands that to get to the point that he might want to get to in future, there has to be a long-term economic energy plan that heads in this direction. Perhaps gambling all on just one or two technologies is exactly the wrong thing to do.

[Clive Lewis]

I thank the hon. Gentleman for that intervention. On divestment, I think he will find that even the Governor of the Bank of England, Mark Carney, has advised businesses to look at where their investments are made on that particular issue. On the point that the hon. Gentleman made, the fifth carbon budget is not until 2028—we are not talking about immediate carbon budgets coming up, but about the fifth carbon budget. That gives organisations and businesses plenty of time to prepare and get their houses in order, especially in the sectors that will be affected. This is not an immediate change; it is for the fifth carbon budget, so there is ample time for that to take place.

Without the amendment, there is a risk that pollution levels in the UK could grow, investment in clean energy could shrink, and yet, on paper, it would look as though we had achieved carbon targets. We need to stop any Government from cooking the books. As such, we seek an assurance from the Minister that the Government still believe in building a low-carbon economy here and will not use such accounting tricks to hide their failures on clean energy.

However, let us put all that aside for just a second and deal simply with the cost of meeting our international commitments and getting value for taxpayers’ money—something that I am sure all Members here would agree is worthy of our attention. The Government’s advisers, the Committee on Climate Change, said that we should be a net seller of ETS credits if we are to pursue the lowest-cost option to go green and meet our climate targets. Therefore, there is a real risk that by putting off emission reductions to future years, as current accounting practices inevitably encourage, taxpayers and consumers would be at risk of higher costs.

Baroness Worthington summed it perfectly when she spoke on this amendment in the other place, saying that

“the way the budgets work is that, essentially, we pay other people to decarbonise and then we import the certificates. That can be done for a while, and it makes economic sense to do so. In fact, for the first three carbon budgets, while the system has been bedding down, it probably made sense to use a traded system—the rules and the allocations from Europe were clearer”—

or less clear—

“and we were all finding our way to see whether the EU ETS would deliver. The closer that we get to our 2050 target, the more that that approach starts to be a false economy. We find then that, potentially, we are repeatedly paying other countries to decarbonise and not investing in our own country.”—[Official Report, House of Lords, 21 October 2015; Vol. 765, c. 722.]

The cheapest route to climate safety is to get investment flowing now into clean energy industries such as solar, CCS, nuclear and wind. Yet, as I have explained, the Government are pulling the rug from underneath the lowest-cost options, such as onshore wind and solar. Only last week, the Government were warned that the cost of achieving climate targets could double without CCS, yet they have pulled support away from that in the UK as well. Let me be clear: the amendment would not prevent the Government from taking measures to protect our important strategic manufacturing industries from higher costs, whether through exemptions or other devices. Instead, it would ensure that the UK stayed on the cheapest pathway to a clean energy future.

Ultimately, though, the amendment is necessary to ensure that we live up to our European and international commitments. The proposed fifth carbon budget for the period in question is aligned with EU ambition—no more, no less. Nothing in the amendment would mean that we were going further than the rest of Europe, nor is it a decarbonisation target for the power sector of the type that the Conservatives ruled out in their manifesto. What we propose is new, but it is not a target. It is about clarity of carbon budget accounting. The amendment would complement European efforts in the same way as the Chancellor’s own carbon floor price and the UK’s contracts for difference. Those initiatives were taken with the stated intention of driving investment into cleaner energy sources here in the UK. The amendment would bolster those efforts without undermining the European ETS.

In Paris, the UK signed up to achieving a carbon-neutral global economy. The amendment would ensure that we played our part in achieving that, rather than offloading our responsibilities through tricks on a spreadsheet. I therefore conclude by asking the Minister to see that in the absence of a clear strategy to build a low-carbon British economy, and given the roll-back of key policies on solar, wind and CCS, there is a need to send an unqualified signal to the investment community and the world at large—a clarion call that Britain remains committed to achieving the goals to which we signed up in the historic Paris agreement. The amendment would do that job, and I urge Committee members to support it.

[Callum McCaig (Aberdeen South) (SNP)]

The hon. Member for Norwich South has made an interesting contribution to this debate, particularly in his last comment about the investment climate surrounding the issue, which is of huge importance. On Second Reading, I said that I was not convinced by the amendment. I have since read into it quite a lot, and the more I read, the more complicated it becomes. The accounting rules are fiendishly complicated, as are the rules surrounding the ETS cap and how it is dealt with.

What I would like to see, as I think would all of us when dealing with the Climate Change Act 2008 and the carbon budget, is no cooking of the books, to borrow a phrase from the hon. Gentleman. I am not suggesting that anyone would do that deliberately, but the mechanism allows for it almost by default because of the lack of clarity and of proper accounting for the major sectors of energy production and large-scale manufacturing.

The proposal is not short-term. We are dealing with the carbon budget for 12 years hence, which provides ample opportunity for the Government to establish, through their work with the Committee on Climate Change, how it can be achieved. That will not necessarily be easy, but given the changes that have come through the Paris agreement and the fact that we as a country led the high ambition coalition at the discussions in Paris, we need the same high level of ambition here at home. We cannot have high ambition or high achievement unless we have appropriate accounting.

The Committee on Climate Change’s November report contains a section on maintaining the integrity of the carbon budget process, which recommends that the budget not account for the ETS cap and that we account for what we actually deal with and emit here. That is what the general public and our constituents would expect, and, to return to a point, the people who will make the transition work are the businesses that will invest the money. They need clarity on how the accounting process would work, how the Government would be held to account, and how that will shape Government policy over the next 12 to 19 years. Clause 80 would provide greater clarity on that and a much stronger focus in shaping Government policy, and I look to see it retained.

[Andrea Leadsom]

I am disappointed that Opposition Members think that clause 80 is the answer—to what question, I am not entirely sure. The hon. Member for Norwich South suggested that there were four reasons—investor confidence, complexity, getting costs down and helping us to meet climate change commitments. I put it to him very courteously that clause 80 would not achieve those things of itself. It is absolutely not the case that simply changing the accounting method in the power generation sector as currently covered by the ETS would improve investor confidence.

What is vital in improving investor confidence is the very good speech made by my right hon. Friend the Secretary of State for Energy and Climate Change last November, in which she made it absolutely clear that the priorities for the UK Government were first, far and above all else, energy security, and, secondly, that no responsible Government should take a risk on climate change. Those two absolute abiding principles underline everything that we do.

Throughout this Parliament, we will be seeking to meet our objectives, which are energy security while decarbonising at the lowest cost to consumers. The Secretary of State talked about our commitment to new offshore wind, getting the costs down and deploying up to 10 GW; to new nuclear, which, as the hon. Member for Norwich South must concede, is a very low carbon form of power generation; and to new gas, which again I think the hon. Gentleman will accept is the bridge. Consulting on taking coal off the power generation side of things and using instead new gas as a bridge to a low carbon future is possibly the biggest thing we could do to decarbonise quickly and securely and at the lowest cost to consumers.

It is simply not the case that by changing the way we account for carbon in the power generation sector we would achieve any of the investor confidence and assurance of meeting targets for reducing costs to consumers or helping us to meet our climate change commitments.

[Clive Lewis]

Energy security is a really important point. I will just pass on a fact. Ten years ago the UK imported no gas at all from Russia. By 2013, in the whole of the EU, only Italy and Germany imported more gas from Russia. Energy security has actually gone backwards, not forwards, because now we are relying more on Putin’s Russia for our energy supplies and gas than we were under the last Labour Government.

[Andrea Leadsom]

That is an extraordinary thing to say. The hon. Gentleman’s party is doing everything possible to try to ensure that the Government are not able to improve our own access to home-grown gas. I am glad that his party has come out in favour of supporting the oil and gas sector in the North sea—that is something to be welcomed—but 40% of the UK’s gas supply still comes from the North sea. The hon. Gentleman is right to point out that that is a reducing amount—by 2035 it is expected to be only about 25%. The issue of energy security and where we get our gas supplies is a very important one.

I am pleased to tell the hon. Gentleman that, since it is a global market, supplies as things stand are very good. Our biggest partners are Norway and, for liquid natural gas, the middle east. It is not true to say that we have a big dependency on Russia by any means. Nevertheless, energy policy is vital for this country’s future energy security. Of course, 80% of us in the UK use gas for heating and cooking. Members who are rightly enthusiastic about renewables, as am I, must bear it in mind that this country will continue to need gas for a long time.

--- Later in debate ---

[Andrea Leadsom]

Again, the hon. Gentleman highlights the need for diverse sources of energy and for an absolute focus on ensuring that we have a proper mix of sources, and not a focus on having all our eggs in one basket. Specifically on EDF, we expect announcements any day. We fully expect to have that deal done within the next short period of time. These are commercial deals, and it is a big transaction, as we know. Such things take time. Nevertheless, a comprehensive energy policy that includes new gas, new offshore wind and new nuclear is important so that we can be the first country in the developed world to take coal out of power generation. Of course, we are continuing to support renewables.

I make it clear that, in our feed-in tariffs review and in all our work on renewables, we have trodden a fine line between what is right for renewables generation and what is right for the bill payers who pay for it. We have had a lot of debates in this House, and in the other House, on fuel poverty, which is a big issue. New technologies should stand on their own two feet when they are able to do so. As the costs of deploying new renewables come down, so should the subsidies. We should not continue with subsidies that create an overly generous return when, at the other end of the spectrum, we still have many people who cannot afford to heat themselves or to keep their lights on. That is an important balance. As I have said time and again, the Government are absolutely committed to energy security but, secondly, we are committed to decarbonising at the lowest cost to consumers, which underpins everything that we do.

The hon. Member for Norwich South asserted that effectively removing ETS from the calculation of carbon budgets would somehow make decarbonisation cheaper. I am sorry, but I just do not find any evidence for that. We will keep our accounting under review, and it is right that we do so, but he has not provided any evidence that decarbonisation would be cheaper or that investor confidence would be greater. He has failed to answer why, with only a few months to go before, according to our legally binding commitment under the Climate Change Act 2008, we must set out our policies to meet the fifth carbon budget, which is being proposed, we should suddenly turn everything on its head and change how we account for carbon.

The hon. Gentleman and all Opposition Members must appreciate and realise that although what they are proposing has some merit—it is certainly an interesting idea that the Government will keep under review—it is just not realistic at this late stage to start to turn on its head the way in which the Committee on Climate Change or the Government make their calculations. The work has been going on for up to a year already and is now stepping up apace so that we can meet our legally binding commitment to publish our report by the end of June this year.

The hon. Gentleman quoted the Committee on Climate Change’s recent letter, which I can quote back to him. On whether the fifth carbon budget should be tighter, it said a few days ago, in January, that its

“judgement is that our existing recommendation is sufficient at this time, although a tighter budget may be needed in future”.

Let us be clear that the committee is not calling for what is in the clause. All its recommendations and assessments have been done on the assumption that we continue to use the European ETS scheme to account for carbon in the power generation and other sectors. Were we to go ahead and agree to the clause, it would be extremely difficult, if not impossible, to meet our commitments under the 2008 Act.

[Clive Lewis]

The Committee on Climate Change also said that it expects the ETS sector, which is exempt from the current carbon budget proposals, as we have been discussing, to use only ETS credits, not debits, by the fifth carbon budget. That is my understanding. If we are to achieve the most cost-effective route to decarbonising the economy, we have to make this change. Yes, what the Minister says is correct, but there are other components to what the Committee on Climate Change has said that imply to me that the clause would simply make the whole process clearer and more transparent. The Minister says that there is no evidence, but I do not think anyone present would disagree that markets like clear signals. They want to be able to see what is coming in future. They do not like surprises and want to know what the investment scenario is. By making that clear and having a clear accounting process, the market signals will be far clearer.

[Andrea Leadsom]

I have to disagree. The hon. Gentleman talks about clarity, but, having worked on one basis for a year and with the Committee on Climate Change having proposed that we work on that basis in its recommendations, there is nothing clear about suddenly deciding to change it six months ahead of putting out a legally binding commitment to a legally binding piece of legislation. What is clear about that? Absolutely nothing. I am sorry, but I just do not agree.

On the hon. Gentleman’s point about the budget, the Committee on Climate Change says that it

“should be met without the use of international carbon units (i.e. credits) outside the EU Emissions Trading System.”

The committee goes on:

“If unexpected circumstances mean the budget cannot be met cost-effectively without recourse to purchase of credits, the Committee would revisit this advice, including an assessment of the strength and validity of the credit market at that time.”

The clause simply introduces a massive amount of uncertainty, not certainty, so I just do not agree with the hon. Gentleman’s assertion that it would somehow create greater certainty.

We are where we are. I have already said to the hon. Gentleman that it is right that we keep our accounting policies under review, and I have told him that we will do and are doing that, but now is not the right time to make this change. It would be very destabilising and would certainly give us a problem in meeting our legally binding commitment. Hot on the heels of what I think all Members would agree was the significant leadership role played by the UK in the Paris agreement, it would not be the right thing to do. We would be throwing the balls in the air, which would lead to a great deal of uncertainty. I therefore hope that clause 80 will be removed from the Bill.