17:30 Jerome Mayhew (Conservative)

I ask hon. Members to imagine that, as they settle down in their beds, they start to wonder how we could create the economic environment for levelling up in our manufacturing heartlands, giving them a low-carbon head start on the rest of the world. As they turn over and start to count the fluffy sheep jumping over a fence, they catch sight of a free market that naturally seeks out the most effective way to reach carbon net zero and deliver on the Prime Minister’s 10-point plan. Finally, just as they drift off to sleep, they glimpse, as in a glass darkly, a Government leading the world at COP26, achieving an international approach that brings co-operation and rapprochement with our European and American friends and allies. Could this be real, or must it evermore remain but a dream?

Well, this is no dream, and we can turn it into reality with a border carbon adjustment. We know we need to reduce carbon to net zero by 2050, and centuries of experience have taught us that the free market is without equal in being able to solve challenging economic problems such as this. Yet, right now, our free market stands helplessly by, its creativity and innovation useless.

Border carbon adjustment can transform that process: charge imports from a high- carbon economy the same carbon cost as we impose on our domestic industry via a BCA and the problem is solved. There would be no incentive for our manufacturers to base production abroad, since the costs would be equalised. Foreign companies would no longer have an unfair trade advantage. In fact, it would provide them with a direct incentive to reduce carbon usage in their domestic environment to avoid corrective tariffs. From a policy perspective—I am using China as an example—the Chinese Government would have a choice: either their exports pay a carbon price at our border and the money goes to our Exchequer; or they create a carbon price in their domestic market and they get to keep the money themselves. There is, therefore, a really positive incentive internationally for carbon reduction and the benefits to be spread. After all, climate change knows no borders. Better still, using the same calculation for border carbon adjustment but this time in reverse, our own factories would get the benefit of a carbon cost rebate at the border when they export, making their exports both cheaper and more profitable, increasing our competitiveness already on the international market.

Moving on to energy, we naturally assume that we create all the energy that we use in this country domestically, but that is not the case. On average, we import, via undersea interconnectors, about 7% of the electricity that we use in this country. Members may recall that, last May, we trumpeted in the press that we had a two-week period in which we were coal free. We had coal-free electricity for two weeks. That was very exciting, but what the newspapers failed to mention was that, during that two-week period, we imported from Holland 40 GW of coal-fired electricity. The reason that we did that was not that we lacked generating capacity in the United Kingdom, but that it was cheaper to import coal-fired electricity from mainland Europe than it was to use our own. The reason why it was cheaper was that it was entirely tax-free, whereas we imposed a carbon tax on the generation of our own domestic electricity. Unbelievably, we actually incentivise the importation of high-carbon coal-generated electricity at the expense of our domestic manufacturing processes. How can that be right? A border carbon adjustment would sort that out in a jiffy.

What single better way is there to forward this Government’s levelling-up agenda than by putting in place the economic conditions for the market to want to re-industrialise in the UK, and all that with no need for Government subsidies. In fact, not only does it not require Government subsidies but it will actually produce an annual windfall for the Treasury year after year. Working out how big that windfall might be has a number of imponderables in it, but the Grantham Research Institute of Climate Change and the Environment has produced a report on this and, again, using the assessment of a carbon price between £50 and £75 a tonne, starting in 2020 and working up towards 2030, it assessed that the gross amount that the Treasury could recover under this process would max out at £36.7 billion a year. I stress that that is the gross amount. Members may well take the view that, rather like VAT, this is a tax that is consumer based and would impact poorer households disproportionately as a percentage of their gross income. The Government might very well want to use some of that £36.7 billion to cushion the blow and to make it more acceptable for lower-income families, perhaps by investing in insulation for their houses or other measures.

My hon. Friend is making a fascinating speech—despite starting off talking about sheep, he has managed to keep everyone’s enthusiastic attention throughout. A lot of emissions-intensive British industries will already find it difficult to compete in the global marketplace. As we begin to encourage the use of carbon capture and clean hydrogen by heavy industry, they will face higher production costs. Would a border carbon adjustment enable heavy industry to decarbonise while preventing job losses, and is that something the Treasury would also find attractive?

My hon. Friend has hit the nail on the head, because one of the key benefits of a border carbon adjustment is that it would allow us to decarbonise, and allow our heavy industry to accept the pain of higher energy costs, therefore letting the market work in our domestic market to incentivise the development of lower-carbon technology, while at the same time protecting it from being undercut by countries that are taking a little longer to go on the low-carbon journey.

More practically, if the UK were to join the United States of America, our friends in the European Union and other countries to establish the principle of BCAs at COP26, that would be a game changer, because that would ensure their practical acceptance. Others worry that putting forward such an ambitious proposal at COP26 runs the risk of failing to achieve the consensus that would allow the PR men to claim a stunning success. It might, but the risk of failure is the price of ambition, so should we give up on our ambition? Of course not.

Is there international support for this approach? Do we have a realistic prospect of bringing the world community together and with us at COP26? I say that there is, because President-elect Biden has already spoken about “carbon adjustment fees” against

That is a clear indicator that the incoming Administration in America is taking this seriously. I know that there is many a slip between a statement of intent and action, but it is something that we can potentially get behind at COP26. The European Union, as has been mentioned, just this July launched a formal consultation on the implementation of a border carbon adjustment, and it is worth noting that for the President of the Commission—I think it was part of her manifesto when she was first appointed— this is one of the key objectives for her presidency.

The hon. Member recognises that we are on a journey in our decarbonisation of industry. I would be delighted if I managed to persuade the Minister to accept this one element of the policy without rewriting the entire economic agenda for the next period, but it is clearly true that, over time, we will be moving away from petrochemicals, and the economic case—the business case—for subsidising what will soon become stranded assets becomes less and less clear.

Our hosting of COP26 would be the perfect forum to crystallise these disparate movements that we have already identified around the world into a coherent whole. What better objective for the conference could there be? Politics is full of mis-steps and compromise. Very rarely do the stars align in favour of a truly inspiring act of political and economic leadership—one that can transform the future of our country and the world for the better. The stars are aligning for border carbon adjustments, if only the Government will believe in the Prime Minister’s vision of a post-Brexit Britain and be bold.

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17:53 The Minister for Business, Energy and Clean Growth (Kwasi Kwarteng)

If my hon. Friend takes a broad view of this subject internationally, he will see that 2020 has seen far greater progress than any previous year. Only a couple of months ago the Chinese Government pledged to achieve a net zero carbon target in 2060, and that is incredibly significant. I remember when I was first appointed to this job, someone said to me that what we did in the United Kingdom would make no difference if China continued along its present path. I am pleased to say that China has changed its path and said very clearly that it has set a net zero target for 2060. The Japanese followed suit soon afterwards, adopting our target of 2050, as did the South Koreans. So the auspices for international co-operation on the measure that my hon. Friend has described are actually very good, and there is a chance that if we cannot reach an agreement at COP26 next November, we may well be advancing along the lines that he suggests in the not-too-distant future. I have to stress that multilateral co-operation on how we price carbon and how we account for carbon in the round is far more constructive than placing a unilateral tax in the way that he has described.

My right hon. Friend has said something that I regard as significant. Yes, we are going to try to achieve a multilateral approach at COP26, but if we do not succeed, we will consider a more unilateral approach. I am bound to say at this particular juncture, when the term “level playing field” is so commonly spoken about in respect of a certain negotiation, that it would surely be a distortion of international competition for some countries to be doing their best to deal with climate change and for other countries to be exploiting those efforts. If that is not a distortion of genuine free trade, I do not know what is. I think that the unilateral approach is justified.

This is an interesting debate. My hon. Friend suggests that a unilateral approach, punishing other countries for not adopting the climate change agenda—that is effectively what we would be doing—might work. As I have had to say repeatedly, I think that a multilateral approach is the best way forward. There is an open debate about the effectiveness of a unilateral approach when every other country in the world would not be disadvantaging these products.

I am very happy to take up that point. Of course, I discuss with my right hon. Friend the Chancellor all the time how we can capture carbon accounting more effectively in order to pursue the goal that we all seek, which is a net zero world and certainly a net zero British economy.

Ahead of COP26, obviously, as the hon. Member for Brent North (Barry Gardiner) mentioned, we have to look at carbon accounting in the round, and we have to look at how we reduce incentives for carbon-emitting activity here in the UK and in the context of the imported carbon that we bring in from other countries. All these issues have to be addressed in the round.

What I wanted to say, and have said very clearly, is that we are actual leaders in this subject. We are actually driving ahead mandatory TCFD financial disclosures. There are no other countries in the G20 that have done that. We passed the net zero amendment to the Climate Change Act 2008 last year. Again, even though other countries have made public statements supporting that policy, they have yet to enshrine it in their in their legal codes. We are showing leadership. We intend fully to continue showing leadership and providing that sort of steer at COP26 in Glasgow.

The Minister has repeatedly said that the best way to proceed is by multilateral agreement, and I absolutely agree. It is wonderful that we have COP26 coming up next year, and it is the perfect opportunity to show multilateral leadership. Will the Minister therefore commit to the House that we will make border carbon adjustments a core objective of COP26?

It is not in my power to make that commitment to the House. As my hon. Friend knows, I am not the COP26 president, and I suggest that he directs that question to my right hon. Friend the Business, Energy and Industrial Strategy Secretary, who is the president of COP26. However, I can assure my hon. Friend that the issue is absolutely at the centre of the wider debate about climate change and of what I might call international energy diplomacy, and I am sure it will discussed very seriously at COP26 next year.

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