Draft Greenhouse Gas Emissions Trading Scheme Order 2020

Matthew Pennycook Excerpts

Tuesday 8th September 2020 General Committees

[Matthew Pennycook (Greenwich and Woolwich) (Lab)]

It is a pleasure to serve under your chairmanship, Mr Paisley. The matter that we are discussing this morning is important, and although, for reasons that I will come to, the Opposition support the establishment of a UK-wide emissions scheme and consequently do not intend to press the order to a Division, I hope that Committee members will forgive me if I spend a short time setting out a series of questions that I hope the Minister will be in a position to answer.

We know that carbon pricing alone will not deliver sufficient decarbonisation to achieve the net zero emissions target that we legislated for just over a year ago, but if we are to deliver significant reductions it is essential that the UK has a robust carbon price, however that is achieved, at the point that our participation in the EU ETS ceases at the end of the transition period on 31 December. Given the circumstances in which we find ourselves, the Opposition’s clear preference is for a UK ETS that is linked to the EU ETS. That latter option would retain for the country the key benefits that flowed from participation in the latter, with its larger pool of participants, including more opportunities for emissions reduction, greater cost-efficiencies, increased liquidity and a lower risk of market abuse.

We therefore support the order on the basis that a UK ETS is a precondition for a linked UK-EU scheme and recognise that, given the uncertainties around the ongoing negotiations with the EU, it is important that the legislation that will establish it is completed before the end of the transition period. However, I would be grateful if the Minister could provide some further clarity regarding the Government’s present position on the possible future link between the UK ETS, to be established via the order, and the EU ETS.

In the May 2019 consultation document on the future of UK carbon pricing, the UK Government and the devolved Administrations stated clearly that securing a linking agreement with the EU was their preferred option. In contrast, the explanatory memorandum to the order merely states that the UK Government are

“open to considering a link…if such a linking agreement…is in both sides’ interests”.

I obviously do not expect the Minister to comment on the ongoing negotiations, but I would be grateful if he could clarify that a UK ETS link to the EU ETS remains the Government’s preferred option, and that they are still actively seeking to secure it as part of the negotiations.

The Opposition hope that a linked agreement is successfully negotiated, but there is obviously a chance that that is not the case, or at least that no agreement is secured for some time following the end of the transition period. In those circumstances, in order to avoid a carbon pricing gap, the Government have made it clear that we would have to fall back on either the UK ETS that the order facilitates, but as a stand-alone system, as the Minister made clear, or a carbon emissions tax from 1 January 2021.

Both options are, I think, sub-optimal compared with the option of a UK ETS linked to the EU ETS, and both, as I am sure the Minister will be aware, are potentially problematic. The management of a stand-alone UK ETS will require a significant amount of Government intervention on the part of his Department, and even then risks being dysfunctional, with a highly volatile price plagued by low levels of liquidity and high levels of speculation.

In contrast, a carbon emissions tax provides certainty of price, but may be less cost-effective for business, more open to political interventions that risk undermining price stability and, because there is obviously no cap on total emissions, would require institutional safeguards to ensure that prices remain consistent with the UK’s net zero target. Some of those problems may be overcome by good policy design, but the workings of either scheme are not the focus of this morning’s discussion.

I am concerned about certainty for those covered by the arrangement. With just 16 weeks until the transition period ends, surely the Minister recognises that the emitters covered by either scheme require some certainty about which of those two options the Government will ultimately opt for as a fall-back if no linking agreement is in place on 1 January next year. That choice is not subject in any way to the negotiations taking place with the EU.

We have been asked to pass today’s order and will, one presumes, be asked to pass a similar order for those aspects of the carbon emissions tax yet to be legislated because the Government have not been able to resolve internally which of the two is their fall-back preference, and have therefore been forced to ask Parliament to authorise both options in advance of a decision. We know that officials at the Minister’s Department and at the Treasury have failed to reach agreement, but he should at least be able to tell the Committee when a decision will finally be made on what the preferred fall-back option is if the Government fail to negotiate a linked UK-EU ETS, ready to go in 16 weeks’ time, so that those affected can properly plan for what comes next. I hope that he can shed some light on those aspects.

Before I bring my remarks to a close, I have two technical questions about the UK ETS, which is the subject of the order, and I hope that the Minister might be able to shed some light on the Government’s thinking on both of them. First, he must surely accept that the proposed initial cap, which I concede is set 5% below the UK’s notional share of the EU ETS, is wholly inadequate as a tool for reducing emissions. UK emissions last year in sectors covered by the EU ETS stood at 129 megatonnes and are predicted to fall further next year. The allowance cap that the Government propose for a UK ETS through the order is 156 megatonnnes—well above that level.

I note the Government’s arguments about the impact of the pandemic and the economic emergency in predicting future emissions as well as the need to minimise the risk associated with the transition, but the arguments for that amount of proposed headroom are far from robust. Will the Minister explain why it was determined that the scheme’s starting point should not be the latest data on UK emissions in the traded sector, particularly given that the market stability mechanisms, which the Government argue will support the price, will not function in the first year of the UK stand-alone ETS?

Secondly, we of course agree with the Government that the cap should be tightened in line with a trajectory consistent with a net zero target and the Committee on Climate Change’s advice on the sixth carbon budget. We also appreciate that the market needs appropriate forewarning and that industry should have enough notice to prepare for that. However, given how important ambitious climate action is in this decade, as the Minister knows, why will it take until at least January 2023, and potentially until 2024, for that alignment to take place?

The Opposition support the establishment of a UK-wide emissions scheme as a necessary contingency, but I cannot stress enough to the Minister that, as he knows, we cannot have a dysfunctional carbon pricing system in place in the year we are to host COP26. The challenge of designing a watertight stand-alone UK ETS should be a spur to the Government’s efforts to negotiate a link-in agreement with the EU system as soon as possible.