Greenhouse Gas Emissions Trading Scheme (Amendment) (No. 2) Order 2024

Lord Offord of Garvel Excerpts

Monday 2nd December 2024 Grand Committee

[Earl Russell (LD)]

My Lords, in the main, I support the changes that this statutory instrument enables to the previous scheme. It resets the UK ETS cap to be in line with the top of the net-zero consistent range. The cap is the limit on how many allowances can be created over the trading period, which runs from 2021 to 2030, and in each year. The cap is set to reduce over time to drive down total emissions. When the scheme was established in 2020, the cap was set at 5% of the UK’s expected notional share of the EU ETS cap. The statutory instrument now brings the overall ETS cap in line with our net-zero target and carbon budgets under the Climate Change Act.

I was a little confused on one point. Why has the previous scheme come to be so out of line with the UK net-zero trajectory for the traded sector? Was it really a question of our leaving the EU and its schemes and setting our own national standards, or is there something else going on? An explanation on that would be appreciated.

The SI reduces the industry cap, which is the total number of allowances that can be made available to existing installations for free. The SI reduces the absolute level of the industry cap while increasing its proportion of the overall cap. The share of allowances set aside for the purpose increases from 37% to 40% but the reduction in the overall UK ETS cap means that the industry cap will fall. It is argued that this will help to mitigate the risk of carbon leakage across participating sectors, while maintaining an effective incentive to decarbonise.

We welcome that this SI expands the scope of the ETS to the venting of CO₂ in the upstream oil and gas sector for installations already covered by the scheme. This means that such emissions will also be subject to a carbon price. The SI removes what is described as a perverse incentive whereby operators could routinely vent gases that contain carbon dioxide without being subject to a carbon price, even though they would, if flared, constitute reportable emissions for the purposes of the scheme. It also extends the scope to cover flights departing from aerodromes in Northern Ireland to arrive at one in Switzerland. My understanding is that this change reflects the return of the Northern Ireland Assembly and its ability to consider legislation.

The SI makes a number of amendments to the levels of the scheme penalties to ensure consistency and proportionality in enforcement for all operators and introduces a new deficit notice. It makes several corrections and clarifications to existing legislation following consultations in August 2022 and July 2023, mainly on small penalty amendments. It also reflects a reduction in the cap on allowances and strengthens enforcement and penalties for non-compliance, including by introducing a deficit notice. It accounts for a reverse price for stability during excessive market volatility.

What actions are the Government taking to improve the monitoring of venting and flaring? Do they hope to bring forward plans to move that forward or are they sticking with the date previously announced? What estimates do they have of the associated costs of upstream venting and flaring that this SI might impose? While we welcome that the proposed changes will bring in a cap consistent with net zero, we call on the Government to do more to support a just transition, particularly for the North Sea oil and gas sector, to ensure that companies have adequate resources and help, particularly training, for their staff to transition to other industries.

What other industries and sectors are the Government considering bringing under the ETS and what are their plans to do so? Are there any plans for further convergence with the EU ETS on carbon leakage? Do the Government feel this could help stop further carbon leakage? Finally, I note that there was no impact assessment for this SI, though I understand that the Government conducted a number of consultations. Can the Minister say why?

[Lord Offord of Garvel (Con)]

My Lords, I support this instrument. This order will expand the scope of the UK Emissions Trading Scheme to include carbon dioxide venting in the upstream oil and gas sector. It will introduce deficit notices to allow regulators to penalise operators for failing to surrender allowances by a set date and makes technical changes to penalties. There is no doubt that climate change is an issue that any Government need to take steps to tackle. That is why the Conservative Government introduced the UK ETS, to ensure that businesses monitored, reported on and surrendered allowances in respect of their greenhouse gas emissions. We are glad that the Government recognise the benefits of the scheme and are taking steps to continue to use it.

However, this Government have prioritised their climate policy above financial and economic concerns. While we understand that there must be trade-offs to reach our net-zero targets, I caution them on raising taxes consistently on the North Sea oil industry—they are now running at 78%. This could put significant costs on companies already navigating a complicated regulatory environment. We must remember that net zero by 2050 does not mean zero hydrocarbons. We will still have about 25%. However, as this ETS will provide support by removing venting and flaring, we can have clean hydrocarbons. We must also consider the impact of the hydrocarbon companies in investing in renewables and the people required in the transition to net zero.

With that being said, I will ask the Minister one question that was left largely unanswered in the other place, to do with the impact of the carbon price rise to £147, as highlighted by NESO. What will the impact be on employment, industry and households, and will there be an impact assessment on those key areas?

[Lord Hunt of Kings Heath (Lab)]

My Lords, I thank noble Lords for their general support for the order, which is much appreciated. I will seek to respond to the points raised but will follow up if I am unable to answer everything.

Clearly, the emissions trading scheme is a key pillar of our climate and net-zero policy regime. It sets a cap on emissions in the sectors covered—currently around a quarter of the UK’s emissions. In doing so, it guarantees that the sectors will reduce their emissions in line with our net-zero target. We see maintaining a strong UK ETS playing a key role in making Britain a clean energy superpower, delivering our mission of secure and clean electricity by 2030, and having a positive impact on bills.

I very much take the point about the impact on industry. In relation to the North Sea, in particular, I understand that noble Lords are concerned to make sure that the transition is as effective as possible—something that we are very much committed to doing.

On the point of the noble Earl, Lord Russell, regarding ETS expansion, we see the scheme continuing to remain a key driver of decarbonisation. Our intention is to expand it further. We have recently consulted on proposals to expand the scheme to energy from waste incineration. We are also currently consulting on expansion to maritime operators and on a regulatory framework for integrating non-pipeline transport for carbon capture, usage and storage. We are exploring options to build the UK ETS into the world’s first integrated market for carbon emissions and carbon removal; subject to consultation, our intention is to include engineered greenhouse gas removals. We see that as supporting the new technologies we will need to meet net zero while providing a sustainable path for industry to decarbonise and to encourage that process.

To refer to the impact assessment and the question from the noble Baroness, Lady McIntosh, I think I can reassure her on fracking. We have no intention to permit fracking. As for the impact assessment, it was published alongside the decisions in the response to the report on developing the UK ETS authority. We stand by that assessment as the best assessment of the implications of our policy changes, and therefore we do not think it necessary to do any further work in that area.

The noble Earl, Lord Russell, was right that, in the absence of the Northern Ireland Assembly, it was not possible to make changes to the UK ETS order that extended to Northern Ireland using an affirmative procedure. It is a very good thing that we have made progress in Northern Ireland and are now able to make that provision.

I should say too that the UK ETS authority agreed that the UK Government should amend the UK ETS auctioning regulations to give partial effect to the agreed policy of reducing the cap, and that the authority would pursue a legislative programme in line with the decisions and intentions made in the main UK ETS authority response, including for the cap, set out in the response for 2026 and beyond. As stated there, the authority is now taking the necessary steps to finalise that legislation, and the IA is being relayed alongside that legislation to support parliamentary scrutiny.