Draft Greenhouse Gas Emissions Trading Scheme (Amendment) Order 2022

Sarah Champion Excerpts

Monday 31st January 2022 General Committees

[Sarah Champion (Rotherham) (Lab)]

It is always a pleasure to serve under your chairship, Mrs Miller. I thank my hon. Friend the Member for Southampton, Test for encapsulating the issues we are facing.

It is extremely fortunate for me that I am on the Committee considering this piece of secondary legislation, because it is so pertinent to one of the oldest businesses in my constituency—one that I am extremely nervous may be thrown into considerable, if not terminal, economic problems because of the situation with the emissions trading scheme, among other things.

The rationale behind the UK emissions trading scheme and its predecessor, the EU ETS, was to encourage investment in decarbonising by charging industrial emitters of CO₂ for the pollution they were causing. The system placed a legal requirement on polluters to purchase CO₂ or carbon allowances from the state and surrender them to match the quantum of emissions emitted by an industrial installation on an annual basis, with strict penalties for non-compliance or failure to surrender allowances. It was designed to reduce the availability of CO₂ allowances over time, thereby pushing CO₂ allowance prices up, as decarbonisation technology developed and became an investable alternative to paying for emission allowances.

It was recognised that the scheme could have a negative effect on competitiveness and lead to production being moved to countries where costs were lower and operators did not face carbon emissions controls—what is called carbon leakage. To protect against this, businesses deemed at risk of carbon leakage received a percentage of free allowances to assist in minimising the risk. The logic behind the system appears sound, but sadly, as happens in so many cases, the reality does not match the theory.

Beatson Clark in my constituency is a small UK-owned glass manufacturer that has operated from the same site in my constituency since 1751. It employs 351 direct employees, as well as supporting many local businesses throughout its supply chain. It produces glass containers for the food, drinks and pharmaceutical markets, and is the only remaining producer of amber pharmaceutical glass in the UK. Beatson Clark has led the way in reducing its CO₂ emissions by increasing the levels of recycled materials in the glass it produces. It has invested millions of pounds in its own recycling plant in order to secure recycled materials for its glass furnaces. It is the only UK glass manufacturer that actually owns and operates its own recycling plant. Basically, Beatson Clark is a green, recycling business that the UK should be proud of; but, due to both commercial and physical factors, it is unable to reduce emissions further.

Glass can be melted using electrical energy, but the infrastructure to deliver sufficient energy to the site is not in place, and the costs associated with it would be prohibitive. It would also take years to implement. The switch from melting using natural gas to using electricity would add between £4 million and £5 million in costs—costs that were calculated before the current energy price spike. These additional costs would increase to around £30 million in electricity energy against gas at the peak of the current crisis. It would simply not be commercially viable to switch, even if the infrastructure were in place.

The UK market is now being offered glass at prices below the UK production costs. Increasingly, these imports are coming from the middle east and Turkey. Beatson Clark asked British Gas to conduct an assessment of the production costs and CO₂ impact associated with glass produced in Turkey. It established that shipping glass produced there to the UK—and no doubt bringing it from ferries to the actual sites on lorries—resulted in a 36% increase in CO₂ emissions. However, the cost of manufacturing in Turkey was around 39% lower. As a result of both lower energy costs, and the fact that there is no carbon allowance burden, such glass is made considerably cheaper than anything that can be produced in the UK.

In the last year, the UK ETS allowance prices, like the energy prices, have increased beyond what could have been anticipated by industry. When the first auction of UK allowances took place in May 2021, the reserve was set at £22 per tonne. The actual sale price was £43.99 per tonne. Prices have continued to rise over the year to around £80 per tonne. The equivalent EU CO₂ allowance price has also risen, but on average the cost of a UK allowance is around £4 a tonne more expensive.

[The Chair]

May I encourage the hon. Member to talk about operational improvements in respect of the UK ETS? I am sure she was about to come on to that.

[Sarah Champion]

Thank you, Mrs Miller; I will do so. I know what a good Chair you are, so I know that I am pushing my luck.

As a result, Beatson Clark, like many other essential UK businesses, has seen its carbon compliance costs triple. It cannot reduce its emissions further without significant investment in energy infrastructure. Even if the infrastructure were in place, the cost of alternative energy would be prohibitive. It is therefore in a Catch-22; it wishes to further decarbonise, but there is no commercially viable method of doing so. It feels that it is trapped, leaving the purchase of allowances simply as a tax on business. It also has concerns that some of the increase in the CO₂ allowance is being driven by speculators.

The Government have made over £4.5 billion from the sale of carbon allowances since May 2021. While the Treasury is enjoying the windfall as a result of higher carbon prices, UK obligated companies and institutions are suffering. Businesses need stability. They cannot realistically plan for all the unforeseeable circumstances, such as the massive increases in energy and carbon costs that we have seen over the past six months. The current system and policies are failing companies that want to do the right thing, and I fear that we may see businesses closing as a consequence.

The impact assessment published alongside the design of the UK ETS in June 2020 did not envisage the present situation. Can I therefore ask the Minister, at the very least, to recommission the impact assessment to bring it line with the current reality? More broadly, will the Minister commit to a total review of energy, energy policies, energy taxation and environmental policies? This would ensure that the Government are focused on levelling up costs across Europe, protecting against carbon leakage from beyond Europe and allowing sustainable CO₂ reduction while maintaining affordable production in the UK.

Finally, I say to the Minister: Beatson Clark is an absolutely fantastic example of how a business can support a local community and local suppliers. I know that it would really welcome a visit if the Minister is passing.

[The Chair]

Before I bring in the next Member, I would like to remind everybody that Delegated Legislation Committees are tightly focused on the measure in front of us. We really do need to focus on the issue in question: the operational improvements of the UK ETS.

--- Later in debate ---

[Greg Hands]

I thank all Members for participating in this debate. The hon. Member for Southampton, Test mentioned the trouble with the lift opposite the Strangers’ Bar. It can sometimes be confusing, taking a lift directly outside a bar. I have to say that I took one of the two lifts there and came up without any difficulty. To be fair, he may well have taken the other lift, and it may well also not stop at the first floor. I am sure that the House authorities will want to have a look at it. Perhaps they might also find an explanation for the SNP’s failure to attend the Committee, which may also have its origin in that interesting feature of the House as it has been reconstructed.

The hon. Gentleman said that the draft order was not controversial, and I agree. He described the evolution of the affirmative SI that we are considering today, and he is correct that it is generated out of the 2020 order. One set of changes is subject to the negative procedure, and one set is subject to the affirmative procedure—particularly those changes that create new offences, which is what is before us today.

The hon. Gentleman asked two questions about the UK ETS system in general. Its intention, as he sees it, is to shadow the EU ETS. I do not think that is the right way to describe it. Its original features were based on the EU’s ETS scheme. He is right that our prices have been higher, but I would not say drastically so; as the hon. Member for Rotherham pointed out, they have been around 5% higher. We never said that the prices—or, indeed, the eligible elements within the scheme—would necessarily track, but the hon. Member for Southampton, Test is right that there is a common origin.

In terms of linking mechanisms, we are open to dialogue with the European Union in consideration of linking to the EU scheme. That follows our commitments in the trade and co-operation agreement. The two sides updated each other at the trade specialised committee on 12 October.

The hon. Gentleman also asked about the EU carbon border adjustment mechanisms. As he will know, that is an EU proposal that has not yet been legislated for. In my previous ministerial role at the Department for International Trade, the UK was well aware of that proposal, and we continue to watch it very closely. The two things that I would say in relation to it are that it needs to be World Trade Organisation compliant, and that we must make sure it does not discriminate against genuine developing countries. I know that the hon. Member for Rotherham, in her role as Chair of the International Development Committee, will take a strong interest in that point as well.

It is always good to hear about the practical impact that Government decisions and policies can have on successful small and medium-sized enterprises such as Beatson Clark in the constituency of the hon. Member for Rotherham, which has been there since 1751—a remarkable achievement in its own right. We want to make sure that, having been around for 271 years, that company might have a future for the next 271 years, so I will pass on the information about it to the Minister for Industry, my hon. Friend the Member for North East Derbyshire (Lee Rowley), who is more directly involved with the glass sector.

To respond to the points that the hon. Lady raised, we are in daily contact with energy-intensive industry stakeholders regarding ongoing concerns over energy markets. Ministers and officials continue to engage with industry to further understand the impacts of high global gas prices. Our priority is to ensure that costs are managed and supplies of energy are maintained. We are committed to minimising energy costs for businesses, which is vital. In 2020, relief to energy-intensive industries for electricity policy costs alone was worth over £470 million.

[Sarah Champion]

In debates like this I am normally arguing for steel, which I also have in my constituency. I know that Liberty Steel was a beneficiary of those grants, but I do not think that glass is getting the same support as steel. If the Minister could look into that issue, I would be extremely grateful.

[Greg Hands]

I will certainly look into that in conjunction with the Minister for Industry; I will make sure that he is aware of the issue that the hon. Lady raises. As she rightly pointed out in her speech, allowances were allocated freely in 2021. The 2022 free allocation amounted to 42 million allowances, as it did the year before, and will be issued by 28 February 2022, in advance of the 2021 compliance deadline of 30 April 2022. There is good continuity of approach there.

By putting a price on carbon emissions, the UK ETS incentivises market participants to find the most cost-effective solutions to decarbonising. We understand, of course, that there is a risk of carbon leakage, which we mentioned just a moment ago in relation to the EU’s approach. The UK ETS authority, which is the four Governments in the United Kingdom together, will consult in the coming months on the trajectory of the scheme’s cap, particularly to keep it aligned to our net zero obligation. As part of that consultation, we intend to review our free allocation in the UK ETS, for which we will start a call for evidence in the spring. Energy prices, policy and taxes are all things that we keep under constant review—particularly taxes—so I can assure the hon. Lady that we already have a total review.

Turning to the points made by the hon. Member for Swansea West, in terms of Drax, it is important to recognise that policies are not specific to any particular company. Currently, installations that use only biomass are out of the scope of the ETS, but I can take away the points that he made and follow up on them. He mentioned British Airways flying in Australian sheep; I think he might have meant sheepmeat or lamb meat, rather than the sheep themselves. Having negotiated the Australian trade deal, I am pretty sure that the movement of sheep themselves would not be within scope.