09:25 The Minister for Business, Energy and Clean Growth (Kwasi Kwarteng)

That the Committee has considered the draft Greenhouse Gas Emissions Trading Scheme Order 2020.

It is a real pleasure to open this short debate, I hope, with you in the Chair, Mr Paisley. The Order in Council, which was laid before the House on 13 July 2020 in draft under the Climate Change Act 2008, establishes a UK-wide greenhouse gas emissions trading system—a UK ETS—as a policy replacement for our participation in the EU emissions trading system. The UK will cease to participate in the EU ETS at the end of the transition period at the end of the year as a consequence, obviously, of our withdrawal from the EU.

This stand-alone UK ETS, as some people refer to it, has been agreed by the four Governments of the UK nations, and those positions are set out in the Government’s response to the future of carbon pricing consultation, published on 1 June this year. Further secondary legislation will be introduced later this year that will introduce additional elements to the UK ETS. We have drawn on the best of the current system, which the UK, as everyone knows, was instrumental in developing, and we have made a number of improvements where possible to ensure greater flexibility to work in the interests of the UK and the global fight against climate change.

Given the importance of our net zero commitments, we will consult next year on what an appropriate development for the UK ETS cap is for the remainder of the first phase, once the Committee on Climate Change’s advice on the sixth carbon budget is published. We expect that to be published later this year. Reducing emissions while supporting UK business is central to my Department’s mission. We think that this is exactly the right way to go, and we always like to remind people that over the past 30 years our emissions have gone down by 45% while the UK economy has grown by 75%. It is absolutely the case that reducing carbon emissions is not really the enemy of economic development but can work very well with it.

The Order in Council also establishes a scheme for monitoring, reporting and verification requirements. The UK ETS clearly offers participants a robust and proportionate enforcement system, and it will establish and define the roles of national regulators in monitoring and enforcing the scheme. Finally, the order will establish a post-transition period carbon pricing policy for the UK. We want to encourage the best means of reducing carbon emissions and we feel that that is obviously central to the net zero target that we enshrined in law last year. On that basis, I commend the order to the Committee.

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09:29 Matthew Pennycook (Labour)

We know that carbon pricing alone will not deliver sufficient decarbonisation to achieve the net zero emissions target that we legislated for just over a year ago, but if we are to deliver significant reductions it is essential that the UK has a robust carbon price, however that is achieved, at the point that our participation in the EU ETS ceases at the end of the transition period on 31 December. Given the circumstances in which we find ourselves, the Opposition’s clear preference is for a UK ETS that is linked to the EU ETS. That latter option would retain for the country the key benefits that flowed from participation in the latter, with its larger pool of participants, including more opportunities for emissions reduction, greater cost-efficiencies, increased liquidity and a lower risk of market abuse.

In contrast, a carbon emissions tax provides certainty of price, but may be less cost-effective for business, more open to political interventions that risk undermining price stability and, because there is obviously no cap on total emissions, would require institutional safeguards to ensure that prices remain consistent with the UK’s net zero target. Some of those problems may be overcome by good policy design, but the workings of either scheme are not the focus of this morning’s discussion.

Secondly, we of course agree with the Government that the cap should be tightened in line with a trajectory consistent with a net zero target and the Committee on Climate Change’s advice on the sixth carbon budget. We also appreciate that the market needs appropriate forewarning and that industry should have enough notice to prepare for that. However, given how important ambitious climate action is in this decade, as the Minister knows, why will it take until at least January 2023, and potentially until 2024, for that alignment to take place?

The Opposition support the establishment of a UK-wide emissions scheme as a necessary contingency, but I cannot stress enough to the Minister that, as he knows, we cannot have a dysfunctional carbon pricing system in place in the year we are to host COP26. The challenge of designing a watertight stand-alone UK ETS should be a spur to the Government’s efforts to negotiate a link-in agreement with the EU system as soon as possible.

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09:36 Kwasi Kwarteng

In terms of a carbon tax and a UK ETS stand-alone scheme, we are talking to the devolved Governments all the time and it would be premature for me to say here what the outcome of those discussions will be. The hon. Gentleman is aware that the Treasury is also involved in the discussions. I can shed no further light on that.

With respect to the hon. Gentleman’s technical questions, yes, he can say that the proposed target, even though it is 5% more stringent than if we had stayed in the EU ETS, is not going far enough, but we have said specifically that once the cap is established we will consult on tightening it. We have also said, very specifically, that we will wait for what the Committee on Climate Change says about the sixth carbon budget. When that happens, we can have a further discussion and look at the cap again. As I have said, this is bridging legislation, trying to smooth our ETS and carbon emissions policy as we exit the EU. Clearly, once we have more information, particularly from the CCC about the sixth carbon budget, we can look at the cap again and, I am sure, make it even more stringent.

Alongside the UK ETS, the Government have a range of ambitious policies that will help industry reduce costs and decarbonise. Of course, in the midst of the covid-19 crisis, we are very focused, as many hon. Members know, on the green recovery. These schemes, along with this Order in Council, will maintain that we have an effective carbon pricing policy. With the EU ETS having covered about a third of UK emissions between 2013 and 2020, carbon pricing is, as the hon. Gentleman suggested a key tool. It is not the only way in which we will deal with carbon emissions, but it is a key tool in the fight against climate change. I commend the order to the Committee.

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