Select Committee on European Scrutiny Forty-First Report


The European Scrutiny Committee has agreed to the following Report:—




COM(01) 581

Draft Directive establishing a scheme for greenhouse gas emission allowance trading within the Community, and amending Directive 96/61/EC.

Legal base:Article 175(1) EC; co-decision; qualified majority voting
Department:Environment, Food and Rural Affairs
Basis of consideration:Minister's letter of 23 September 2002 and SEM of 5 November 2002
Previous Committee Report:HC 152-xviii (2001-02), paragraph 1 (6 February 2002) and HC 152-xxxvii (2001-02), paragraph 1 (17 July 2002)
To be discussed in Council:10 December 2002
Committee's assessment:Politically important
Committee's decision:For debate in European Standing Committee A (decision reported on 6 February 2002)


  1.1  At the Kyoto climate change conference in December 1997, the Community agreed to take certain measures to reduce emissions of a "basket" of six gases. Emphasis was, however, placed upon the need for flexible mechanisms, and the Kyoto Protocol allows for "emissions trading" between countries. Similarly, many developed countries, including the UK, have proposed allowing their businesses to participate in emissions trading.

  1.2  This proposal, which the Commission brought forward in October 2001, reflects the thinking in an earlier Green Paper,[1] and would introduce a Community-wide emissions trading scheme in 2005, three years before the start of international trading under the Kyoto Protocol, its main purpose being to provide experience on which to base more definitive arrangements from 2008. Its main features were that it would in practice be confined initially to carbon dioxide, and to certain "core activities" as defined within the Integrated Pollution Prevention and Control Directive (96/61/EC); Member States would grant greenhouse gas permits free of charge to undertakings in those sectors under national allocation plans subject to Commission approval; those undertakings would be able to emit quantities of carbon dioxide up to the permitted limits, and would have to surrender an allowance equal to their actual emissions; and, if an undertaking failed to surrender sufficient allowances, it would be subject to a financial penalty (though it would be able to sell any unused balance to another undertaking).

  1.3  In his Explanatory Memorandum of 21 January 2002, the Minister of State (Commons) at the Department for Environment, Food and Rural Affairs (Mr Michael Meacher) said that the UK was firmly committed to early action on emissions trading, and that its own scheme — the first of its kind — was due to become live in April 2002. Consequently, although it welcomed the Commission's proposal, it was concerned that this would cut across the domestic scheme, and might impact on wider UK energy policy.

  1.4  The Minister's main concerns were that the UK had chosen a voluntary approach to participation in advance of 2008, whereas the Commission scheme would be mandatory as from 2005; that electricity generators were excluded from the main part of the domestic scheme (with power emissions being assigned to the end-user as indirect emissions), whereas the Commission proposal only includes direct emissions; that the sectoral coverage was unduly restrictive; and that the requirement on Member States to allocate emission allowances was likely to be bureaucratic, and might not be consistent with UK energy and industrial policy.

  1.5  In our Report of 6 February 2002, we recommended the proposal for debate in European Standing Committee A, which we suggested should take place at a reasonably early stage in the Council's deliberations, but preferably after receipt of the promised Regulatory Impact Assessment. This Assessment was eventually provided by the Minister in a Supplementary Explanatory Memorandum of 9 July 2002, in which he also said that the European Parliament's first reading of the proposal was expected in September 2002, and that the Danish Presidency was aiming to reach a Common Position in the last quarter of the year, and potentially as early as October.

  1.6  In our Report of 17 July 2002, we noted the contents of the Regulatory Impact Assessment, and that the Presidency could be seeking political agreement in October. We said that we therefore expected the Government either to arrange a debate beforehand, or, if that was not possible, to maintain the UK scrutiny reserve until the debate had taken place.

Minister's letter of 23 September 2002

  1.7  We next received a letter of 23 September 2002 from the Minister, in which he said that the proposal could receive its first reading in the European Parliament on 9-10 October, leaving the way open for a Common Position at the Environment Council on 17 October. He added that the UK regarded this as a particularly important proposal on which it had negotiated important improvements, and that to maintain a scrutiny reserve would be taken as a sign that it was not fully committed to the proposal. He therefore concluded that it would be "inappropriate" to maintain the reserve.

  1.8  Because of our concern at this development, we decided on 16 October to invite the Minister to give oral evidence to explain this blatant over-riding of the scrutiny reserve resolution on a document on which a debate was still outstanding. Notwithstanding informal indications that the Environment Council had in fact decided to defer a decision until December 2002, we concluded on 23 October that, as the Minister's intentions had been clear, it would still be right to take oral evidence from him. We did so on 6 November.

Second Supplementary Explanatory Memorandum of 5 November 2002

  1.9  We have since received a Second Supplementary Explanatory Memorandum of 5 November 2002, which confirms that a decision is now likely to be taken by the Environment Council on 10 December, though it does not explain why the Council did not do so on 17 October, as originally intended.

  1.10  In the main, however, this Memorandum concentrates on the progress in the negotiations since the Supplementary Explanatory Memorandum of 9 July 2002. It identifies three main changes as follows:

  • that, as regards the choice between a mandatory or voluntary approach before 2008, the proposal now included arrangements whereby individual Member States might be able to "opt out" emission sources covered by national climate change policies between 2005 and 2007, and that the European Parliament had also approved an amendment to this effect; the Minister adds that, although there are still detailed issues to be pursued, the prospect of a smooth transition has been enhanced by this development;

  • that, in negotiation, the UK has accepted the direct emissions approach to power generation, which the Minister says will directly incentivise low carbon generation approaches by making explicit the carbon content of electricity: he adds that the Government will, however, consider how to maintain incentives on end users to make energy efficiency savings;

  • as regards the potential scope of the proposal, the Minister says that the current text includes an "opt in" provision, whereby individual Member States can include additional activities and greenhouse gases in the Community scheme from 2008.

The Minister also reiterates his earlier concerns about the potentially bureaucratic nature of the arrangements for allocating allowances, and says that the UK is concerned that the allocation method for the second phase from 2008-2012 has yet to be determined, a delay which he suggests will create uncertainties for business and Member States.


  1.11  We have noted the developments on the substance of this proposal referred to in the Minister's Second Supplementary Explanatory Memorandum of 5 November, and we are drawing these to the attention of the House as relevant to the debate, which we understand will now take place on 21 November.

  1.12  We will report separately on the scrutiny reserve problem, on which we took evidence from the Minister on 6 November.

1   (21093) 6915/00; see HC 23-xiv (1999-2000), paragraph 10 (12 April 2000). Back

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