Carbon Emission Charges

Jerome Mayhew Excerpts

Monday 1st November 2021 Westminster Hall

[Jerome Mayhew (Broadland) (Con)]

It is a pleasure to serve under your chairmanship, Mr Robertson, and to follow the speech made by the hon. Member for Newcastle upon Tyne North (Catherine McKinnell), the contents of which I very substantially agree with. One of the wonderful things about this debate is that it stretches across the divide that so often separates the views of people in this House.

However, I approach this matter from a slightly different perspective—albeit arriving at similar conclusions—because I see this as the role of the free market. As a former businessman and entrepreneur, I want to unleash the power of the free market to help solve some of the problems that its historical performance has helped create. Too often, the market has been seen as the villain. We talk about business profiteering at the expense of the environment, or businesses trashing the world’s resources, and that applies not just to carbon net zero but to biodiversity. As Professor Dasgupta noted in his report earlier this year, in terms of the biosphere our current practices are using the resources of 1.6 worlds.

It is true that historically, the market has been almost totally blind to the cost of carbon in its economic transactions. When I buy a product—such as this glass—I pay for the raw materials, the design process, the manufacturing, the marketing, the transport and the profit, but I do not pay for the cost of the carbon emission, because that is described as an externality: it dissipates into the atmosphere and there is no significant cost attached to it. The result of that misallocation of resources is that the transaction is incomplete. As a purchaser, I am not having a true economic exchange with the supplier, because I am paying for only part of the product, not all of it. As a result, there is no signal for consumers to look at two separate products and identify the differential cost between the manufacturing process of a high-carbon glass and that of a low-carbon glass. As consumers we are blind, so all those myriad consumer decisions that we take in our economy every day are ineffective in helping give a signal to manufacturers. The process does not provide a signal to consumers; and consumers, in turn, do not provide a clear market signal to entrepreneurs and businesses.

What are we left with? At governmental level, we all know that the climate change crisis is a huge problem, so we have plans from Government, who are picking technology winners by investing in hydrogen, for instance. I hope that hydrogen will be a key part of the solution in our progress towards net zero by 2050, but it might not be. The real problem is that we are currently relying on the Government to take those kinds of decisions because the market is substantially blind. We need to unleash its power through a price for carbon.

We know that markets are without question the most efficient decider that man has ever come up with for the use of resources. They do so not for moral but for wholly personal reasons: they wish to maximise profits, and the way to maximise profits is to minimise inputs. Properly directed by market signals, the market is the most efficient resource user we can come up with. It informs millions of decisions. Crucially, the market and its myriad transactions create the individual wealth that can go on to fund the additional Government action that the market alone is unable to provide. Although I am a free marketeer, I am not a free marketeer red in tooth and claw. There is absolutely a role for Government to set the structures and give the long-term signals for the free market, and to provide assistance and support for those left-behind parts of our community that otherwise would be disadvantaged by that process.

Our biggest challenge in creating a price for carbon is that the United Kingdom economy is not self-contained; we are part of a global economy. If we increase the price of carbon in this country, which is really another name for increasing the price of energy, that will have a very direct and immediate risk to our domestic economy, particularly our manufacturing base. Increasing the price of energy in our domestic economy would result in an increase in the costs of our manufacturing base, which would then either go offshore and relocate to a lower-cost environment abroad, or it would stay and get undermined by the sucking in of lower-cost, higher-carbon imports. That would result in the worst of all worlds: the destruction of our own economic base and an actual increase in greenhouse gas emissions as transport costs are added to the costs of production.

As an economy, we have been very timid in our approach to applying a cost of carbon. We do apply it in some sectors—about a third of our manufacturing base is affected in some way by carbon pricing through the emissions trading scheme. But that is only a third: two thirds of our manufacturing base has no carbon pricing attached to it at all, and none of this country’s imports are assessed or priced for their carbon content.

How do we address this seemingly impossible conundrum? The answer is, in principle, quite simple: a carbon border adjustment mechanism. That means that, at the edge of the economy, when imports reach the border, we assess those products for their carbon content and take a similar approach to that taken in the domestic market by applying a tariff. That is not protectionist in principle, because it would apply the same price and create a level playing field, as opposed to disadvantaging exports in favour of domestic manufacturing. It must also be transparent and within the permissible exceptions of the World Trade Organisation, which allows for tariffs in environmental cases.

This approach allows, in principle, for the increasing of the price of carbon for the domestic market, safe in the knowledge that imports will have a similar price attached. A lot of work has been done by think-tanks and others—and, I hope, by the Treasury and the Department for Business, Energy and Industrial Strategy —on how we can start applying this approach in practice. Conceptually, it is a very simple process, but it has the potential to be fiendishly difficult to apply. If we can apply it, the benefits would be enormous. The market signals would incentivise the reduction in carbon manufacturing processes that this country seeks to achieve.

The benefits would also expand beyond our borders. If a manufacturer in a third country—let us say, for example, in China—exports its product to the United Kingdom, they will not want to receive a significant tariff addition to the price of the product. The Chinese Government—or any other third-party Government—have a choice. They can think to themselves, “Well, we can either have a tariff applied to our exports, which then gets paid to the UK Treasury, or we can apply a similar process ourselves and keep the money here in China.” The third option is that they reduce their 70% to 80% reliance on coal for their energy, and reduce the differential between their carbon production and our own. All these are very positive international signals that we can spread beyond our borders through the imposition of a CBAM.

There is evidence that this is already working. On 15 July the European Union published a draft Bill to implement a carbon border adjustment mechanism throughout the European Union. Even before that has come to fruition—it is just at draft stage—there is evidence that automobile manufacturers in South Africa are already seeking to decrease the carbon content of their manufacturing process, because they are concerned that they will be adversely affected by the imposition of a CBAM in the European Union. Even the publishing of a Bill—a draft Bill—is already having real-world positive impacts on the reduction of carbon.

Another advantage is the potential for reshoring manufacturing production to the United Kingdom. It removes one of the current disincentives for high-energy or relatively high-energy production in this country because we do have a price for carbon through the ETS. That is not sufficiently significant to change consumer behaviour on a more widespread basis, which we wanted to do, but it is enough to provide a minor disincentive to have manufacturing in this country. If we can remove that disincentive, it will encourage reshoring. Research undertaken, I think by Capital Economics, into the steel industry in the United Kingdom has concluded that steel manufacturing’s international competitiveness would actually be increased through the imposition of a carbon border adjustment mechanism by between £50 and £75 per tonne through the 2020s.

In my submission, we have a political opportunity now not just with the advent of COP26, but, more significantly perhaps, with the publication of a draft Bill by the European Union. This gives us an opportunity to address one of the key challenges to a CBAM, which is how we deal with the concern or disapproval of large exporting countries that have a high carbon input—for instance, China. We have an opportunity to join forces with the European Union and have a more internationalist approach to the introduction of a CBAM now. It would not hurt given that, dipping into another language, we have a certain froideur across the channel currently, and sticking to the same approach, what about a bit of rapprochement?

There is a joint objective here. With Brexit, we are allowed to be nimble of foot. We can come up with these policies ourselves, and we are not held back by a pan-European approach. Equally, it does not prevent us from agreeing and co-operating with the European Union when it is in our national interests. I think this is a great example of where our national interests and those of the European Union coincide very neatly, and it gives us an opportunity to build bridges should we wish to do so. It also helps us with the potential approach to China, in that it is the entire European market that is taking—or potentially taking—this approach, as well as with the United States of America, which has expressed an increasing interest in the concept of some form of carbon border adjustment mechanism.

I mentioned earlier that CBAMs are simple in principle and hard to apply in practice. I am agnostic as to how we do it, and many different approaches have been suggested. We could expand on the current ETS. We could, as Mr Carney has suggested, take the key products that are internationally traded—steel, cement, aluminium, chemicals and so forth—and start on that basis, but then build out into the wider economy as we gain confidence and competence in the process of a CBAM. We could apply it by sector assessment by country, which would be more of a purist approach, but much more complex to apply. I suspect that the answer is to start small and to grow as we learn; but the sooner we start, the better. I conclude my speech by challenging anyone to come up with a way in which we can impose a price for carbon without some form of carbon border adjustment mechanism.

[Alan Brown (Kilmarnock and Loudoun) (SNP)]

It is a pleasure to serve under your chairmanship, Mr Robertson. I congratulate the petitioners on bringing forward the petition and the hon. Member for Newcastle upon Tyne North (Catherine McKinnell) on presenting the debate and making some key points. It is a worthwhile time to debate this subject, given that COP26 is taking place in Glasgow as we speak, and how we achieve net zero in the fairest way is something that needs serious discussion. It is a slight disappointment that there were not more Back-Bench contributions, but so be it.

I completely agree with the three key points made by the hon. Lady. Obviously, we need to generate the shift to low-carbon technologies, but it is critical that we protect the most vulnerable and stop carbon leakage. The hon. Member for Broadland (Jerome Mayhew) also made that point. He made an interesting contribution, and I will try to summarise it. I think he said that although he is a proud free marketeer, he is not really a free marketeer because interventions need to be taken. That is quite an interesting dynamic. He also seems very much to be a protectionist when it comes to imported goods—but again for the right reasons, because we are talking about carbon border adjustments.

[Jerome Mayhew]

I want to make it absolutely clear that I am not a protectionist. If a CBAM is to be successful, it is important that we ban the P-word. The tariff has to be applied at exactly the same level as that used in the domestic economy.

[Alan Brown]

It is possible that I was being slightly flippant when I used the word “protectionist”. I take his point that if we are going to do this correctly, it will have to be in collaboration with other countries. I agree with that.

If we believe in the basic principle that the polluter pays, a carbon tax makes sense. If we are serious about achieving net zero, we need to give serious consideration to carbon taxes. However, as has already been said, any such taxation needs to be fair. It cannot be structured in such a way that companies feel obliged or rewarded for relocating to other countries, therefore defeating the purpose. Critically, it must also not lead to the poorer in society paying a bigger burden, especially if a tax is levied on gas bills. The reality is that the more affluent will be able to switch to heat pumps, but those struggling to pay their energy bills will have no chance of doing so. We cannot leave the most vulnerable to pick up the carbon tab for others as the energy sector transitions to net zero.

The recent Government policy of £5,000 grants for heat pumps is still insufficient for most people to be able to afford the installation of a heat pump. The unit cost of a heat pump is still in the price range of £6,000 to £10,000. A £5,000 grant goes only part of the way, but it does not make up for all the additional work that is also required. We need to have proper energy efficiency measures, which are welcome but cost money, such as a new water tank, possibly new radiators, decommissioning boilers, and then there is decoration works that need to be done to a property once all that work is completed. That £5,000 grant is clearly not the pathway to increasing the number of heat pump installations from current figures of 30,000 per year to the Government target of 600,000 a year. Going forward, we need to look at that in the mix. Before a carbon tax is introduced, we need to ensure that it does not create more people who are fuel poor, and also look at how we use the revenues from the carbon tax to help get heat pumps and energy efficiency measures for those who need them most.

At the moment, decarbonisation of the power sector is being paid for by levies from our electricity bills. The UK Government have acknowledged that that is unsustainable, because roughly a quarter of electricity bills are made up of those levies. That needs to change; there needs to be a fairer system. That is where carbon taxes could be looked at, but—I am repeating myself—it is important that the most vulnerable are protected.

In wider industry, cost-effective decarbonisation solutions need to be available to industry when a carbon tax is introduced, and taxation must be structured so that it is fair and equitable across the UK. Recently, the UK Government opted to fast-track two carbon capture and storage clusters in the north of England but, disgracefully, they have made the Scottish cluster a reserve cluster. That means that, despite the Scottish cluster being the most advanced in project development and deliverability, it is estimated that the two other clusters will proceed at a faster rate.

It would be inherently unfair for the Government to support, either via direct taxation or consumer levies, some industries in some areas of the country while potentially slapping a carbon tax on another area just because they have not been progressed at the same rate. These things have to be looked at in the round. The Scottish cluster takes in the two biggest carbon dioxide emitters in Scotland—Peterhead gas station and the INEOS facilities at Grangemouth. As the biggest polluters, they have to pay to remedy that—that is where we are right—but will they make that investment? They need that assistance, and they must not be disadvantaged when others are getting support.

Revenues from a carbon tax must be reinvested in green initiatives targeted at the most vulnerable and the hardest sectors to decarbonise. They must also be completely transparent. We have had a carbon tax in the airline industry for years: air passenger duty, which is supposed to follow that basic principle of polluter pays, in relation to aircraft emissions. The actual reality is that, over the years, APD has become nothing more than a Government revenue stream. It is not ring-fenced or reinvested; it becomes part of the “money in” column and is added to the mix of Government expenditure.

It is outrageous that over the years, so-called environmental taxes have been levied and never ring-fenced and reinvested in the way they should have been to reduce emissions. Last week, the Chancellor made the crazy announcement of lowering APD on domestic legs of return journeys. We need a serious debate about support for the airline industry and the wider travel industry, but a reduction in air passenger duty should apply only to airlines that use sustainable aviation fuel, which costs more money. At least companies would be incentivised to lower their emissions, with the offset reward of reduced APD. It makes no sense in the current climate to do a blanket APD cut.

In the aviation industry as a whole, for years consecutive Governments of different colours have maintained a policy that aviation fuel is duty free. We pay our petrol duties at the petrol pump for domestic use in our cars, but all these years, aviation fuel has been duty free. That makes no sense. It needs to be looked at in the round. I do not want to kick the airline industry when they are down and make it harder for them, but we need a system that is fair for everyone on carbon taxes, emissions and incentivising behaviour to drive change. The Government need to look at that.

In the oil and gas sector, £350 billion of revenue has come from Scotland over the years. Those were carbon taxes, but that money has never been ring-fenced or reinvested. A sovereign wealth fund has never been created. Most countries across the world have created sovereign wealth funds, which they are using now, in these tough times, either to help their economy, stimulate their economy, or do green initiatives on the path to net zero. But the UK Government have never done that. It is to their shame that we do not have that money, as a legacy, to go forward.

Today, I actually managed to attend a COP26 panel event before I got on the train to come down to Westminster. There was a representative at the event from Louisiana; he was explaining how for years it has used its offshore revenues to pay for climate adaptation measures along its coastline. Obviously, Louisiana is one of the areas most affected by coastal erosion. That shows us what can be done with long-term thinking, but it needs the initiative to look at revenues that are coming in and how to use them wisely. That is what I am calling for. If there is carbon taxation coming in, it must be transparent and it must be available to be reused to fight climate change.

In a similar vein, I represent a former coalfield area. Carbon taxes had been applied to the extraction of coal over the years, but a few years ago, when the open-cast coal industry collapsed in my constituency, it left massive craters that needed reinstatement work at a cost of millions of pounds. Carbon taxes came from my constituency to the Treasury, but they just went into the black hole. When we asked for assistance for restoration work on those abandoned coalmines, the answer that came was, “No. Too bad. That money came in and it has been used. There is no money coming back to your constituency. It doesn’t work that way.” That shows the folly of not ring-fencing a tax for the purpose that it should be ring-fenced for. Again, transparency is utterly critical if we are to go forward.

I would also say on transparency that the Treasury will have to develop these taxes following open consultation with industry, non-governmental organisations and charities. I also suggest that it would be worth the UK Government’s following the lead of the Scottish Government and having a just transition commission that is able to advise the Government on fairness, look at policies across the board and advise the Government accordingly. Equally, the Treasury cannot be left with the power to introduce exemptions from carbon taxes without robust and transparent procedures, or else it is a lobbying exercise and it becomes open season for donors and cronies to lobby the Government and possibly get exemptions. Again, anything that comes forward needs to be transparent.

I have just one further warning about the money not becoming a Treasury income, because that nearly happened post Brexit. The Department for Business, Energy and Industrial Strategy had devised an emissions trading scheme, which was agreed with all the devolved nations, but at the eleventh hour the Treasury wanted to throw away all that work and replace it with the introduction of a carbon tax. That was clearly just because the Treasury saw it as an income stream. That cannot be allowed to happen; the Treasury cannot have carte blanche to do what it wants. It also shows us that carbon taxes have to be developed in conjunction and consultation with the devolved nations.

In Scotland, we have our own net zero by 2045 target. We have, as I said, the Just Transition Commission. We are working with our own policies, so it is only right that carbon taxes be introduced in such a way that they do not adversely impact our direction of travel.

I am getting near my conclusion, Mr Robertson. I have some concerns about a carbon tax, but largely I do favour the concept. I pay tribute to the work done by the Zero Carbon campaign, which has illustrated and highlighted the fact that surveys prove that such a tax is generally popular with the wider public. They understand the need for net zero; they understand the benefits of a carbon tax being introduced, but again, the critical question is whether that is being done fairly. Scotland’s Climate Assembly has had similar findings with the delegates who have participated in the assembly.

Things can be done to resolve the concerns. Again, that is about transparency. It is about targeted reinvestment. Ireland is already doing that: it targets top-up social welfare payments. That is something that this Government could look at, especially with the cost of living and the fuel and energy cost crisis at the moment. They could put more money into supporting electric vehicles as we try to transfer away from the internal combustion engine.

Something that the Scottish Government are doing is interest-free loans. They have extended interest-free loans to the second-hand market to try to extend affordability, but the UK Government are cutting the grants available. If we are going to have carbon taxes, we need to further stimulate the electric vehicle market and ensure that some people are not left behind.

The decarbonisation of our heating systems is absolutely critical. It would be good to step up energy efficiency installations, treat energy efficiency as a capital infrastructure programme and speed up the upgrading of all properties to EPC––energy performance certificate––band C. That would reduce emissions and fuel costs. What could be a fairer way of using the carbon taxes that are levied?

I agree with the two contributions so far about introducing a broader carbon adjustment to minimise leakage or offshoring. We know that carbon taxes can be successful in changing behaviour. We know that they seem to have wider support if they are introduced fairly and transparently, so let us continue with this serious discussion. Let us find a way to introduce them but ensure that it is done in a way that helps us get to net zero and is part of a just transition.

--- Later in debate ---

[Lucy Frazer]

I thank the hon. Member for her intervention. The two schemes that we already have in place are obviously ones through which the polluter pays; they are about industry recognising that when it pollutes, it must pay for that.

The hon. Lady, as well as the hon. Member for Kilmarnock and Loudoun (Alan Brown), talked about what the Government could do to support individuals. The issue of heat pumps, and the importance of such measures not being too burdensome on those who need to implement them, has been raised on two occasions. A number of Ministers have made this point clearly, but I reiterate that we are not forcing people to take measures such as installing heat pumps: we are saying that if they wish to do so, a grant is available to them. Regarding heat pumps in particular, I would like to make it clear that we expect the price to come down. I suspect that that will happen when we have a requirement for all new homes to be net zero by 2025. When there is the volume of supply of heat pumps that we need, I suspect that their price will come down, as we have seen in relation to electric cars, for example.

[Jerome Mayhew]

My understanding is that it is not the price of the product that will go down, because France is already installing 400,000 heat pumps, so there is volume in product. Interestingly, it is about the mechanism of installation: when the big electricity suppliers begin to install heat pumps, rather like British Gas does with boilers today, that is when the prices will really come down.

[Lucy Frazer]

I am grateful to my hon. Friend for that interesting intervention. I hope that the prices of installation will fall as well.