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

Lord Lennie Excerpts

Monday 20th November 2023 Grand Committee

[Lord Teverson (LD)]

My Lords, perhaps I may make a few comments in front of the crowd here. I welcome the SI generally , obviously, and want to try to ensure that it works properly. I have a couple of specific questions.

I am interested in understanding how the free allocations were allocated or what the baseline was for the airlines. Also, in the scheme as a whole, what proportion of units are free issue these days? I would be very interested to hear that for the current period, which I think goes up to 2026.

The Minister referred to the UK ETS as the cornerstone of ambition in terms of net zero, but of course, that cornerstone is crumbling at the moment. I would be very interested to hear, more strategically, how the Minister sees the fall in the carbon price per tonne, which has moved this year from around £100 at one point down to under £50.

To me, that seems to be, in the words of Energy UK, a major disincentive to investment in the renewables sector. As I understand it, it has threatened the Treasury to the tune of £1 billion so far this year and will mean a hit of something like £3 billion on the Treasury per annum if that price continues. As we know, there is also a threat from the European Union’s move to a carbon border adjustment mechanism—particularly in 2026, when those measures will really start to bite. There is a feeling that UK industry’s exports to the European Union could be threatened by some £500 million per year if that price remains as it is. I want to know the Minister’s understanding of why the price has fallen so much. My economics A-level tells me that, with supply and demand, when demand stays roughly the same but the price goes down, there is an all-round surplus in the supply of those units. However, there is also a volatility there, perhaps through a lack of liquidity in the scheme as a whole.

Looking again at the trade and co-operation agreement, particularly the area of energy in 2025, I would be interested to understand whether this is an opportunity to bring those trading schemes more together again, which was a target that the Government sought to achieve when that agreement was first made. Clearly, the fall in price strongly affects the renewables and clean energy industries. It seems to me that, not just from a Treasury point of view but from an industry and net zero point of view, we need to get that price back up again. I would be interested to hear the Minister’s comments on how that can be achieved—or indeed whether the Government wish to achieve it.

[Lord Lennie (Lab)]

My Lords, when the UK ETS was established due to the UK’s participation in the EU ETS ending, the Opposition supported it. It is essential that the UK has a robust carbon price to help reduce emissions. So when the UK ETS was launched, we expressed a preference for a link with the EU ETS. Indeed, the EU-UK Trade and Cooperation Agreement states that both parties

“shall give serious consideration to linking”,

which would lower the cost of decarbonisation through more price efficiency discovery and easier trade. Most importantly, it would ensure that UK exports of high-carbon products to the EU are exempt from the EU’s carbon border adjustment mechanism. This remains our preference, to support UK businesses in remaining competitive and retaining trade access to critical markets. Can the Minister tell the Committee whether an update on any such consideration is still being considered? Can he also say whether the Government have made any projections on the impact that the CBAM will have on our exports? What is welcome is the seriousness with which the Government are treating this while we remain unliked.

I turn to the instrument itself, which amends the ETS in five areas; I will touch on each of them but do not oppose any of them. As these changes do not seem simply to be updates on the system, I am keen to hear from the Minister how foreseeable the situations that led to them were and what impact the delay in implementing them, from when the UK ETS was established, has had.

First, as we heard from the Minister, the instrument implements a cap on the maximum amount of free allocation that aircraft operators are eligible to receive at 100% of their verified emissions. Not only does this seem to be common sense but, for the next two years, by 2021’s figures, it will save around a fifth by putting an end to overallocations in the sector. That is welcome. Again, by 2021’s numbers, this will prevent around £100 million of potential profits from operators selling these overallocations. Do the Government have any projection for 2024-25 or are the figures on pounds and percentage of emissions expected to be roughly the same? Going back to the first question, could this not have been seen from the start, or was it by design?