Draft Greenhouse Gas Emissions Trading Scheme (Amendment) (No. 2) Order 2023
Shailesh Vara Excerpts(5 months, 1 week ago)
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The Minister for Energy Security and Net Zero (Graham Stuart)
I beg to move,
That the Committee has considered the draft Greenhouse Gas Emissions Trading Scheme (Amendment) (No. 2) Order 2023.
It is a great pleasure to serve under your chairmanship, Sir Gary, and to be with colleagues from across the House on this clearly brilliantly whipped Committee.
The UK emissions trading scheme—the UK ETS— was established under the Climate Change Act 2008 by the Greenhouse Gas Emissions Trading Scheme Order 2020 as a UK-wide greenhouse gas emissions trading scheme to encourage cost-effective emissions reductions, contributing to the UK’s emissions reduction targets and net zero goal. The scheme is run by the UK ETS Authority, a joint body comprising the UK Government and the devolved Governments—we are all in this together. Our aim is to be predictable and responsible guardians of the scheme and its markets. In so doing, we will ensure that the scheme remains a cornerstone of our ambitious climate policy.
Shailesh Vara (North West Cambridgeshire) (Con)
My right hon. Friend mentions that the UK Government are working with the devolved assemblies. Given that the Northern Ireland Assembly is not working at the moment—or not sitting, anyway—are there other mechanisms in place to ensure that the civil servants in Northern Ireland are dealing with this matter and co-operating so that we can move forward as four nations?
Graham Stuart
My right hon. Friend, with his customary acuity, will have noticed that the draft order does not apply to Northern Ireland. As it happens, there are not counterparties in Northern Ireland to which these particular provisions apply, but energy in general is devolved to Northern Ireland, and it is up to Northern Ireland to take care of it.
The statutory instrument will implement a number of necessary changes and improvements to the UK ETS. The changes relating to aviation free allocation rules and to the treatment of electricity generators follow the announcements made by the UK ETS Authority in July, in our response to last year’s consultation on developing the UK ETS. The final change remedies an inconsistency with free allocation and carbon capture at UK ETS installations.
On aviation, the SI will cap the total amount of aviation free allocation that operators are eligible to receive at 100% of their verified emissions.
The SI makes technical changes to free allocation rules regarding the electricity generator classification for industrial installations—a minority sport, if ever there were one. It will amend the electricity generator classification to consider only electricity exports in the baseline period, instead of all electricity exports since 2005, allowing operators to change their installation’s electricity generator classification if they have put a stop to the export of electricity. Electricity exports representing no more than 5% of the total produced will also be excluded from consideration in this classification.
The SI will amend the electricity generator definition to exclude installations that have produced electricity for sale if that electricity was produced by means of a high-quality combined heat and power plant operating as part of an operator’s industrial activity. That will limit reductions in free allocation entitlements and provide further encouragement for industrial operators to achieve improved efficiency for their combined heat and power plants.
The SI makes an operational amendment to the electricity generator classification to allow electricity generators to be eligible for free allowances after the application date if they can demonstrate that they produced measurable heat by means of high-efficiency co-generation during the allocation period.
The SI remedies an inconsistency in legislation to make it clear that carbon capture and other types of regulated activity may be carried out on the site of the same installation. It will allow provision of free allowances to industrial installations at the same site as a carbon capture plant.
As the Northern Ireland Assembly is not sitting and cannot consider affirmative legislation, the SI covers only Great Britain. Officials in Northern Ireland have agreed that none of the provisions currently affects operators in Northern Ireland.
These changes will deliver on commitments made by the UK ETS Authority and improve the operation of the scheme. For aviation, the SI will ensure that free allocation is distributed appropriately until full auctioning for the aviation sector begins in 2026. That follows the decision announced in July that aviation free allocation will be phased out by 2026.
On free allocation technical changes, the SI will ensure that installations classed as electricity generators, whose eligibility for free allocation is limited, are able to change their classification if they are no longer exporting electricity. The SI will also ensure that industrial installations with high-quality combined heat and power plants that export excess electricity to the grid are not classified as electricity generators, in order not to limit their eligibility for free allowances.
On the electricity generator operational amendment, the SI will ensure that electricity generators can become eligible for free allowances during an allocation period if they meet the eligibility criteria.
On free allocation rules for carbon capture, the SI will prevent industrial installations from being disqualified from receiving free allowances because they are on the same site as a carbon capture plant—a situation that would pose a risk of disincentivising the uptake of crucial carbon capture technology.
These changes either follow appropriate and comprehensive consultation with stakeholders or did not require consultation. In the “Developing the UK ETS” consultation in 2022, the UK ETS Authority considered what technical improvements could be made to the current aviation free allocation methodology until aviation free allocation is phased out. The responses to the consultation called for an end to over-allocation. The policy intent of aviation free allocation is to mitigate the risk of carbon leakage, and the policy did not intend for aircraft operators to receive more allowances than their verified emissions. To that end, in July the UK ETS Authority announced the decision to cap aviation free allocation at 100% of verified emissions.
In the “Developing the UK ETS” consultation, we considered technical changes to free allocation rules regarding the electricity generator classification. The majority of respondents agreed with our suggested amendments, and the UK ETS Authority announced that it would proceed with changes to the electricity generator classification.
A consultation was not carried out for the CCS free allocation amendment as that is a clarification of existing policy intention and not a change to the policy.
Dr Alan Whitehead (Southampton, Test) (Lab)
It is a pleasure to serve under your chairmanship, Sir Gary. Like the Minister, I commend the Committee for the huge turnout this afternoon to consider the SI. I am sure that is because everyone wants to hear at some length the Minister’s comments and, indeed, some of mine, but in case anyone is here because they think there might be a Division, I can assure them—I hope they do not leave now—that there will be no Division. Broadly speaking, we very much agree with these changes to the operation of the ETS. However, I have a number of questions about the detail of those changes, and I would like to put the SI in a bit of context. I am disappointed that that context is not better represented in the SI.
The context is not just that the UK ETS is up and running and requires minor amendments, but that it is rapidly diverging from the EU ETS. The divergence is such that, in October prices, the permit cost per tonne is £87 in the EU ETS, but £40 in the UK ETS. The EU-UK trade and co-operation agreement, which the UK freely signed, states:
“The Parties shall cooperate on carbon pricing. They shall give serious consideration to linking their respective carbon pricing systems in a way that preserves the integrity of these systems and provides for the possibility to increase their effectiveness.”
No action has been taken so far—[Interruption.]