British Steel: EU Emissions Trading Scheme (EU ETS) update

Greg Clark MP: Mr Speaker, I wish to inform the House of a commercial agreement that the Government entered into with British Steel on 24 April. I wanted, as you know Mr. Speaker, to update the House at the first available opportunity, now that the market sensitive elements of the resulting transaction have concluded.

Mr. Speaker, the agreement with British Steel relates to their obligations under the EU Emissions Trading scheme (ETS). The ETS requires heavy industry and power producers to obtain and surrender allowances equal to their level of carbon emissions on an annual basis.

Companies that are the most exposed to international competition are allocated a proportion of free ETS allowances annually. For years, many companies have used these free allowances to comply with their obligations for the previous year.

Just over four months ago, in December 2018, the European Commission suspended the UK’s ability to auction ETS allowances until the Withdrawal Agreement is ratified. This was decided in order to maintain the integrity of the European carbon market in the event that the UK left the EU without a deal on 29 March of this year. This position means that free allowances for 2019 have not yet been issued. The Withdrawal Agreement negotiated with the European Union allows for full and continuing membership of the EU ETS until the end of December 2020. Therefore, once ratified, we will have the full legal basis immediately to issue free 2019 allowances.

However, the decision of this House not to vote in favour of the Withdrawal Agreement means that it has not yet been possible to proceed on this basis. This has meant that UK businesses have unexpectedly, since December, been left without access to 2019 free allowances. All members of this House should reflect on the real-world impacts of decisions that we make in this place – or the lack of them – on the businesses on which many thousands of jobs and whole towns depend.

Despite the continued uncertainty, all UK installations have now met their 2018 obligations in full before yesterday’s compliance deadline of midnight last night. My department reminded all participants that they still had a legal duty to meet their obligations for 2018, and that the UK is committed to upholding our environmental standards and to continue to fully comply with European law while we remain a member of the EU. However, until this week British Steel had not complied with its obligations.

British Steel, as many members know, employs 4,200 people directly in the UK, in Scunthorpe, in Skinningrove and Redcar, and thousands more in its associated supply chains. As the second biggest steelmaker in the UK, and one of only two integrated steelmaking sites in the UK, the assets at Scunthorpe and in the North East are of significant importance to the UK. They are a major supplier to rail networks across Britain. As the only UK steel plant which produces the rails used on our tracks, they provide almost all of those procured by Network Rail as well as supplying Scotrail, TFL, and Translink in Northern Ireland – and export a large volume of their product across Europe.

British Steel approached my Department earlier this year to explain that the absence of the expected 2019 free allowances left them unable to comply with their 2018 obligations. If it had failed to do so by last night’s deadline, it would have attracted an immediate and unremovable fine of half a billion pounds, on top of the continuing liability of around £120 million, putting the company under significant financial strain.

The government was therefore left with a choice – either see British Steel be unable to comply with their legally binding obligations, creating a liability of over £600 million, or consider whether there was a path to allow them to comply within the strict bounds of what is possible under domestic and European law.

After careful consideration the government took the decision to enter into a short term bridge facility valued at around £120 million under Section 7 of the Industrial Development Act 1982 at an interest rate of LIBOR plus 7%. The effect of this agreement is that the government has in the last week purchased the necessary emission allowances on behalf of British Steel. In return, under a deed of forfeiture, ownership of the company’s 2019 allowances will now be transferred to the government once they are released. Through the subsequent sale of these 2019 allowances, we expect the taxpayer to be repaid in full.

The 2019 allowances are more than are needed to fulfil the 2018 obligations and all of them will come to the government. The terms of the deal ensure that if the price of allowances were to rise, the taxpayer would receive half of any financial upside once the allowances are sold back into the market. To ensure the taxpayer is protected in the event that allowances were to fall, under the terms of the deal, British Steel has been required to underwrite any shortfall and are covering the cost of arranging the facility. The price of carbon allowances has been rising over the last two years and the Exchequer received £1.4 billion from auctioning allowances in 2018, up from £533 million in 2017.

In the unlikely event that we were to leave the EU without a deal, we are engaging with the Commission about the implications for our continued participation in the EU ETS. However should an agreement not be reached, the government is able to implement a domestic scheme that provides the security against the loss of the EU derived allowances. I can confirm to the House that following the purchase of the necessary allowances, British Steel have been able to comply with their 2018 EU ETS obligations in full.

Mr. Speaker, I want to be quite clear with the House that the agreement reached with British Steel is a unique one in exceptional circumstances. My department’s assessment, which has been agreed with the Treasury, shows that the Deed of Forfeiture offers value for money to the taxpayer, with benefits exceeding the costs, meeting the Accounting Officer test. This is set against the alternative of British Steel failing to comply and causing a business with an annual turnover of £1.4 billion to have an instant £600 million financial pressure.

This is a position that was supported by the independent Industrial Development Advisory Board who assessed the proposal in their statutory role and agreed with the value for money assessment. I am placing in the Library of both Houses a copy of my Accounting Officer’s letter to the Chair of the Public Accounts Committee and the Comptroller & Auditor General, and I have written to the Chairs of the BEIS and Treasury select committees. I have been advised that the arrangement is fully compliant with the state aid rules that apply to the steel sector which require its terms to be commercially comparable.

Mr Speaker, while this was an unenviable situation to face, the government believes that the agreement reached with British Steel to ensure that it could comply with its legal obligations represents a responsible course of action. I hope this is a view that Members across this House will also support and I commend this statement to the House.