Draft Greenhouse Gas Emissions Trading Scheme (Amendment) Order
2022 6.00pm The Chair Before we begin, I remind everybody that we
are still under socially distanced rules, and please to wear masks
if you are not speaking, as ordered by Mr Speaker and the
Commission. I call the Minister to move the motion. The Minister
for Energy, Clean Growth and Climate Change (Greg Hands) I beg to
move, That the Committee has considered the draft Greenhouse Gas
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Draft Greenhouse Gas
Emissions Trading Scheme (Amendment) Order 2022
6.00pm
The Chair
Before we begin, I remind everybody that we are still under
socially distanced rules, and please to wear masks if you are not
speaking, as ordered by Mr Speaker and the Commission. I call the
Minister to move the motion.
The Minister for Energy, Clean Growth and Climate Change ()
I beg to move,
That the Committee has considered the draft Greenhouse Gas
Emissions Trading Scheme (Amendment) Order 2022.
The draft order was laid before the House on 6 January.
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
that will contribute to the UK’s emissions reduction targets and
net zero goal. The scheme replaced the UK’s participation in the
EU emissions trading system—the EU ETS—and the 2020 order applied
EU ETS rules on the monitoring, reporting and verification of
emissions, with modifications to ensure that they work for the UK
ETS.
The 2020 order was subsequently amended by the Greenhouse Gas
Emissions Trading Scheme (Amendment) Order 2020 to include
provisions for the free allocation of emissions allowances and to
create the UK ETS registry. Regulations under the Finance Act
2020 established the rules for auctioning allowances and
mechanisms to support market stability. The UK ETS launched on 1
January 2021, and the first auction successfully completed on 19
May. The scheme has been running well since its launch, but there
is a need to continue to improve its operation.
Further amendments have been made by the Greenhouse Gas Emissions
Trading Scheme (Amendment) Order 2021, which is subject to the
negative procedure and comes into force on 7 February 2022. In
broad terms, the 2021 order makes various technical and
operational amendments to the UK ETS across a number of scheme
aspects, including providing for installations in the hospital
and small emitter opt-out scheme to be able to increase their
emissions targets, and for installations in both opt-out schemes
that return to the main scheme to benefit from free
allocation.
The purpose of this order is to amend the 2020 order to address
several residual operational issues identified during the
development and legislation of the scheme, and to support the
scheme’s technical operation. This legislation also addresses an
issue of doubtful vires relating to previous amendments, raised
by the Joint Committee on Statutory Instruments. This proposed
order consists of various operational issues identified by the
Department for Business, Energy and Industrial Strategy, the
devolved Administrations and the national scheme regulators
during the establishment of the scheme that were required to be
legislated for via an affirmative procedure.
This order does three things: introduces a civil penalty to
enforce an existing obligation to return overallocated
allowances; creates an offence of intentionally obstructing the
scheme regulators that are exercising enforcement powers; and
makes it clear that some enforcement powers previously introduced
by the negative procedure are valid.
In conclusion, this order will help to improve the effective
operation of the UK ETS. This in turn will help to ensure that
the scheme plays its part in reducing emissions. I therefore
commend the order to the Committee.
6.04pm
(Southampton, Test)
(Lab)
It is a pleasure to serve under your chairmanship, Mrs Miller,
albeit I have a slight apology to make for turning up at the very
last moment. I ought perhaps to advise the Committee that the
recently refurbished lift that takes hon. Members from the ground
floor opposite the Strangers’ Bar does not stop at the first
floor, which necessitated a rather circuitous route to get here.
I apologise for being right on time, or marginally later, and I
hope that the House of Commons authorities may have a look at
whether the lift ought to stop at the first floor, which would be
a good idea for good order in this House.
This statutory instrument is essentially uncontroversial,
although the operation of the UK ETS is perhaps a little more
controversial. The reason we are here this afternoon is because
the SI seeks to put right an amendment order of 2020, which was
put through under the negative procedure. However, the Joint
Committee on Statutory Instruments decided that it should have
gone through the affirmative procedure, which is why we are
debating this SI.
The changes in this SI, as opposed to those in the 2021 amendment
order, are minimal to the point of being nothing. What we have in
front of us is an amendment to the 2020 order, clarifying and
adding various things in the way the Minister has described on
aviation, on unused allowances and on definitions of how certain
procedures of the order would work. One could argue that those
perhaps might have been put in the 2020 order in the first place,
but I am pleased that they are with us now.
I do not have any particular concerns or objections about those
particular things in the order itself but, since we do not get
many, or any, opportunities to examine the operation of the UK
ETS, it is worth considering briefly what is happening to the
scheme and whether it might have been a good idea to place some
further amendments to the scheme before the House, both in terms
of what has happened in the EU as far as the UK ETS is concerned
and what has happened during the early stages of the scheme’s
operation.
I therefore have two brief questions for the Minister about the
operation of the UK ETS. Although my hon. Friend the Member for
Rotherham kindly sent me a note of what she intends to talk
about, I will not—in the best traditions of theatre critics not
to give away the plot of the play—tell the Committee exactly what
she will say. However, I want to reflect on two things that are
important to the operation of the UK ETS.
First, the intention of the UK ETS, at least for the first few
years of operation, is that it should pretty closely shadow the
EU ETS. As we know, that has not been the case. UK ETS prices
have come in considerably higher than those of the EU ETS over
that period. The intention behind the 2020 order, as set out in
its impact assessment, has not been realised. It might have been
wise to put in place linking mechanisms with the EU ETS much
earlier—the Government have said they would consider doing so at
some future date but have not done anything about it, as far as I
know—bearing in mind that the EU ETS and the UK ETS have diverged
in price in a way that was not originally envisaged.
My first question to the Minister is this. Does he intend to look
at linking mechanisms with the EU ETS at an early stage to
prevent future divergence, which may otherwise be increasingly
wide? Among other things, businesses and commerce in this country
want to be able to anticipate what will happen with carbon
pricing. We do not disagree with the principle of carbon pricing,
but businesses need some stability in their forward understanding
of it.
Since the 2020 order, from which this amendment order derives,
the EU has adopted in principle a proposal for a new carbon
border adjustment mechanism. That mechanism would deal with the
consequences of carbon leakage—that is, where the EU’s carbon
taxes and carbon trading arrangements mean that third countries
have a considerable trade advantage, because they can import
goods without such arrangements attached and bring them within
the EU’s borders. As far as I know, the UK has not yet taken any
action on considering or implementing a carbon border adjustment
mechanism. If the EU proceeds with such a mechanism, as seems
likely, the UK will be in an even worse position than it is now
when it comes to carbon leakage. We will be external to a carbon
adjustment mechanism, so we will have punitive elements against
us. At the same time, people will be able to import goods into
the UK, safe in the knowledge that they are not subject to the
same sorts of arrangements.
The Minister knows that various members of the Government—he is
not one of them—have indicated that the UK should take the idea
of a carbon border adjustment mechanism very seriously. My second
question to him is this. Has he considered adding a carbon border
adjustment mechanism to the 2020 order that brought about the UK
scheme, as a successor to the EU ETS? If he has considered it,
what action is his Department taking to forward the idea of a UK
carbon border adjustment mechanism?
I hope that I have not stolen my hon. Friend’s thunder and that
between us we will get some clarification at least from the
Minister about how these things will work as the UK ETS proceeds.
As a great supporter of carbon trading, I would say that a UK
carbon trading mechanism—the UK ETS—should have been the obvious
thing to introduce after the UK’s exit from the EU. I fully
support that. What I am concerned about is ensuring that the UK
ETS works as well as possible, to the net benefit of the UK and
UK industry, rather than causing problems for it, as it sometimes
looks like it might. I am sure the Minister will give me a full
and frank run-down of the Government’s intentions in these areas.
I look forward to hearing from him, but first I am very happy to
hear from my hon. Friend the Member for Rotherham, who I think
will develop this theme a little further in relation to
particular businesses in her constituency.
6.16pm
(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 CO2emissions 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.
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.
6.24pm
(Swansea West)
(Lab/Co-op)
It is a great joy to serve under your chairmanship, Mrs Miller. I
would like to make a couple of quick points on the operational
improvements of the trading scheme.
First, I support the points made by my hon. Friends the Members
for Southampton, Test and for Rotherham about the carbon border
adjustment mechanism or tax, which could be in these changes. The
steel produced in Wales, for example, has half the carbon of
Chinese steel coming in. Over time, we want to be in a situation
where we support jobs rather than export them to China and
elsewhere, where dirtier production occurs. China produces some
30% of overall carbon emissions and uses half the world’s
coal-fired power stations—we are talking about 1,037, with
another 300 on the way. Perhaps the Minister could comment on
that.
Secondly, will the Minister comment on why Drax is not included
in the emissions trading scheme? Drax burns 7 million tonnes of
wood pellets. That wood is grown in America. It is argued that
the wood that is cut down is replaced. Even if it is, that in
itself is a neutral operation, but then it is burned here, and it
is not counted in our carbon emissions. That is amazing, given
that it is the biggest emitter of PM10 in Europe. We basically
spend £800 million subsidising it, which is £114 a tonne. In
burning wood and coal, we burn a carbon store, but in burning
wood, we also destroy a way of absorbing CO2 and producing
oxygen.
Thirdly, on airlines and aircraft, I am aware that British
Airways is buying up Welsh farms in order to get the carbon
offset to fly more planes. Some of those farms are sheep farms,
so we will end up flying in Australian sheep and lamb, having
basically allowed BA to use this scheme to create more carbon
emissions through their planes.
Finally, will the Minister comment on the Government’s plan to
double incineration by 2030? What impact will that have, and how
will it be factored into the scheme, if at all?
6.27pm
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 (), 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.
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.
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.
Just for clarity, the point I was trying to make was simply that
British Airways is buying up sheep farms in order to offset the
aircraft it uses to send people on holiday or whatever,
and—separately from that—that obviously gives rise to less sheep
production in Wales. We have an open-door deal with Australia to
allow exports of sheep, so we end up displacing consumption of
Welsh sheep with consumption of Australian sheep and burning more
carbon, which does not seem to be very good, either economically
or environmentally.
The hon. Gentleman is tempting me down the path of debating the
Australia free trade agreement—
The Chair
Which the Minister will not follow.
Which I will not go down. The two of us have been here before—I
know that he is a member of the International Trade Committee—but
I will not engage with him on the topic of British Airways and
Welsh farms.
I thank hon. Members for their valuable contributions to today’s
debate. This order will help improve the effective operation of
the UK ETS and, in doing so, will help support delivery of our
climate ambitions. I therefore commend it to the Committee.
Question put and agreed to.
Resolved,
That the Committee has considered the draft Greenhouse Gas
Emissions Trading Scheme (Amendment) Order 2022.
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