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The financial support from the EU via framework 6 and the research fund for coal and steel programmes is a laudable first step, but we need to go further. The British steel industry in particular has expressed concerns that as the EU ETS is currently devised—a regional cap and trade system with an underlying allocation process that shifts with each successive phase—there is no real incentive to invest in new, less polluting technologies. In fact, the system as it stands in its initial 2005 to 2007 phase encourages output reduction instead of investment in operational efficiency. In that framework, there is every likelihood that if a new technology such as carbon capture and storage were to be fully developed and subsequently deployed, the future allocation would be reduced, thus
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negating the value of the investment in generating CO2 credits that can be sold to cover the significant research costs, and leading to a lack of incentive to improve. Instead, we should be trying to increase production at the most energy-efficient plants and ensuring that companies have incentives to invest in the best technology and thus drive down emissions in the long term.

Gregory Barker (Bexhill and Battle) (Con): The hon. Lady is a very articulate champion for the sector, but she does frequently use the phrase “long term” and she talks about technological development, which is also a long-term issue. If we accept the science that we have a relatively short window—a maximum of 10 years—in which to make a substantial difference in reducing CO2 emissions, does she see these solutions as part of the bearing down on CO2 that we need to do within the next decade?

Nia Griffith: Indeed. We have to accept that there are short-term and long-term goals. We have to use everything that we can because the situation is so grave, but we must be realistic about what we can do in terms of research and development. We are talking about 2013. That is only six years away and we must be realistic about the time that it takes to develop new technologies. We certainly need to look at other sectors, which I shall come to in a moment, in respect of emission reductions.

From 2013 onwards, we need to move to a more sector-based regional baseline and credit system, with allowances for better-than-standard performance. That could provide a much more positive incentive for the commercial implementation of several forms of technology, including carbon capture and storage. Current carbon allocations depend on forecasting how much steel will be produced, but it is often difficult to predict that exactly so many years in advance. We therefore need a scheme that encourages efficiency, regardless of the volume baseline.

The benefits of such a solution are many; efficiency and manufacturing performance in the EU steel sector would become the basis of allocation and that allocation would be adjusted for actual output. The benefits would include the removal of the reliance on imperfect forecasts of output, the development of more efficient installations and the removal of distortions to competition in the EU. Ideally, of course, the more we involve countries outside the EU and develop worldwide systems for reducing emissions, the better.

We now need a scheme that judges each industry sector on the basis of best practice in that sector, rather than an all-encompassing trading scheme for all sectors that fails to take into account the different circumstances in different industries. To be more specific, all-inclusive trading schemes run the risk of failing to reduce overall emissions and causing considerable disparities between those industries that can pass on costs to consumers and those that cannot.

I congratulate my hon. Friend the Minister for Climate Change and the Environment on his willingness to challenge the aviation industry to face up to climate change. Domestic flights, whether internal to the UK or the EU, are a good example of an industry
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that could pass on the cost of its carbon allowances to the consumer, because all competitor operators in the EU would be subject to the same scheme. That contrasts sharply with the situation of the steel and manufacturing industries, which face stiff price competition from countries outside the EU, where companies are not subject to the EU scheme. As a result, EU-based companies collapse in the face of competition or move their factories to countries with much more lenient conditions. Either way, that has a devastating effect on our manufacturing industry, in which we have built up skills over many years. That could lead to large job losses and an overdependence on imported steel.

Nor does such a situation do any good in terms of global warming, because the companies involved will continue to produce emissions; indeed, the reverse could be true, as companies take advantage of less stringent conditions outside the EU and produce more emissions than they would have done in the EU. They might also use older and more polluting equipment, and there might be the thorny issue of less generous conditions for workers and less rigorous health and safety expectations. Indeed, more emissions might be produced, because more products would have to be transported around the world.

We therefore need to look carefully at the effects of lumping everyone together in one ETS, under which the price of emissions credits could, for example, rise sharply, as the aviation sector buys in more credits from other sectors. Although it makes sense to expand the number of activities that come under the ETS, we need careful mathematical modelling to determine the possible effects of mixing different sectors together. There is a real danger that we will end up not reducing overall emissions or encouraging industry to develop best practice.

We also need to look at the knock-on effects of having the ETS in one sector on other sectors. For example, electricity does not have a single price in the EU, and there are several reasons for that, some of which are more transparent than others. Again, the ETS gave Governments leeway to apply its provisions in different ways to the electricity generating industry, and that has different knock-on effects on industry in different countries. Electricity generators are not subject to international competition in the same way as manufacturing industry, so they can pass on the full costs of the ETS to the consumer, with considerable effects on high-energy users.

There is also a real risk that high credit prices will lead to substantial political pressure from consumers, the public, national Governments and Brussels to reduce the environmental stringency of the ETS. That would be a catastrophic development, which would take us back several years, to a much more inactive and complacent past. Let me point out, however, that my colleagues in the European Parliament have already expressed their opposition to plans to include aviation in the ETS. Last July, they voted in favour of creating a separate closed or semi-open trading scheme for aviation, in which airlines would buy credits from the ETS on a carefully limited basis.

We need to be careful about the dangers to the environment and UK commercial competitiveness of inflexibly applying the scheme to sensitive industry
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sectors. We need to be clear about that with our European partners and particularly the European Commission. In some of this country’s industry sectors—steel is undoubtedly one—the inflexible imposition of additional costs can prove lethal. The UK steel industry and steel workers have done everything in the realm of feasibility to drive down costs, and any unreciprocated increase in the cost of production could leave them exposed to fierce competition from low-cost countries in the developing world.

Dr. Francis: My hon. Friend is making a telling case. Has she posed those questions to Ministers from the Department for Environment, Food and Rural Affairs across to the Department of Trade and Industry? If so, has their response been consistent? Implicit in that question is the further question of whether she would agree that we need to take a step backwards and establish a Department of Energy to address these important issues.

Nia Griffith: Initially, the issue was a little cloudy, and we were not sure whether we should have been dealing with DEFRA or the DTI. The important thing, however, is that we are on a learning curve and that Ministers in both sectors need to be well aware of the issues involved. We are all working together in the EU to get the best out of the scheme, although any new scheme will inevitably throw up effects that we had not dreamed of. However, I take the point that energy is such an important issue that we need to give it all possible governmental support, particularly as we work out what to do in the future.

On the issues that we currently face, only 30 per cent. of the world’s steel producing countries have signed up to the obligations in the Kyoto agreement, while 70 per cent. remain outside it. Of those, 50 per cent. are countries such as China, India, Brazil and Korea, which are not covered by Kyoto, and 20 per cent. are countries such as the US, which have not ratified Kyoto.

Martin Horwood: The hon. Lady may not be aware of this, but India, and China are covered by Kyoto, and that is probably true of the other nations, too, although I am not certain about that. They are signatories, although they were not set targets in the first phase.

Nia Griffith: That is the point; they were given different conditions because they are developing countries. That is different from the case of the US, which refused to ratify Kyoto. Those countries are not covered by the same stringent conditions as we are, but they were involved in the negotiations.

Most frighteningly, 90 per cent. of all new capacity is being developed in countries that are not covered by Kyoto. As a G8 country and an influential EU member, the UK must continue to take the lead that it took on Kyoto and use its influence to develop worldwide schemes.

To sum up, I urge the Minister to work with UK and EU colleagues to develop schemes that take an efficient but pragmatic approach to EU emissions trading. Such schemes should involve the development of cleaner technologies, with a recognition that their development
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needs active support, not only at the research stage but in terms of creating a favourable business context that will render such technologies an attractive option.

Gregory Barker: In the interests of clarity, may I ask a question? When the hon. Lady says “active support”, does she mean subsidy?

Nia Griffith: That is something that we will have to look into. What we are really talking about is incentivisation. The scheme should provide an incentive to produce a certain number of tonnes of steel in a more efficient and more environmentally friendly way, rather than simply reward a reduction in production. We are looking for the best possible practice in the sector.

We should develop a suitable context, which rewards better-than-standard performances and in which people are committed to sustaining such performances. We should also undertake a careful analysis of the problems involved in mixing a range of different activities into the same scheme, when the capacity of the sectors involved to pass on costs is very different. I should appreciate it if the Minister would carefully consider a credit-based system that would help to pre-empt inflation of prices and emissions, and would not run the risk of collapsing under the burden of its own poor planning. We need to develop a flexible credit system that will take into account the need for reciprocity; we also need to realise that the problem is a global one, and that any scheme that fails to address it as such could increase greenhouse gases worldwide. I ask the Minister to take those points on board. I hope that in the difficult negotiation with our EU partners and the worldwide community he will consider carefully how to ensure that each industry will do its best, and that the outcome will not be part of a global muddle with other systems and industries which cannot be comparable.

10.10 am

Ms Angela C. Smith (Sheffield, Hillsborough) (Lab): I congratulate my hon. Friend the Member for West Bromwich, West (Mr. Bailey) on securing this important debate, and my hon. Friend the Member for Llanelli (Nia Griffith) on her contribution. I shall speak—briefly, I hope—on the steel producers’ perspective on the matter. I am aware that, as my hon. Friend the Member for West Bromwich, West made clear, the debate is relevant to other industries too, but because I represent the great steel city of Sheffield I must focus on the steel industry. The industry is, indeed, still relevant not just to Sheffield but to the whole of South Yorkshire. Rotherham is of course one of the other great producers of steel, even now. I want to echo much of what my hon. Friend said about the emissions trading scheme. Its objectives are worthy, but it has shortcomings, and I hope that the Minister will respond fully and positively to the way forward that he outlined.

My interest in the steel industry arises, of course, from the location of Corus Engineering Steels in my constituency. Corus Engineering Steels is a division of Corus UK. It has two main plants—one in Rotherham,
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at Aldwarke, and one at Stocksbridge. Stocksbridge is in my constituency and employs between 650 and 700 people. In total, more than 2,000 people work for Corus Engineering Steels in South Yorkshire, so it is incredibly important to the future of the steel industry there. It is critical to my constituents that companies such as CES should be given a level playing field for the emissions trading scheme. An important point that has not yet been made in the debate is that they provide significant high-value, highly skilled employment. The Chancellor has repeatedly made the point that if we are to compete in a global economy we shall have to continue to develop and secure the future of companies such as CES in this country. Not only will we have to develop our young people, so that they may have the skills to continue in those industries; we shall have to allow those industries to keep ahead of the field and to continue their work in securing their top place in the international production of steel and materials for manufacturing.

The products of CES in particular are used for manufacturing precision components by the aerospace, automotive, energy-related and specialist mechanical engineering industries. Remelted steels are used for aerospace and high performance engineering, and quality approvals for their products have been given by British Aerospace, Bosch, Caterpillar, Rolls-Royce and Siemens, to mention only a few. Hon. Members will understand from what I have said that my main concern is that high value and important companies of the kind I am concerned with should be given a future. The importance of that future and of continuing to develop the relevant technologies is recognised by the industry and companies such as CES, whose apprentices undergo a rigorous programme to NVQ level 3. Its employees generally are encouraged to undertake academic study continually, to HNC and degree level. If we are to meet the Chancellor’s objectives of ensuring that this country has a highly skilled work force who are capable of competing in the global economy in the next 20 years, we must do our utmost to ensure that such companies can compete. That is why we want the Government to do their bit to ensure that approaches such as the emissions trading scheme offer a level playing field.

On the environmental front, some hon. Members may be surprised to learn that the specialised steel production industry uses scrap metal for its basic raw material, and is thus a good example of recycling. When we think of recycling we often think of paper and paper-based products, but one of the first, and best, examples of good recycling in this country was in the specialised steels industry. That should be recognised in the context of the emissions trading scheme; the starting point of the industry is the use of materials that would otherwise be difficult to dispose of. I should like the Minister to deal with that point.

The specialised steels industry is committed to improving its energy use and to developing new technologies wherever it can, in both the short and the long term. The question has been raised this morning whether new technologies can be developed quickly enough to deal with the challenges presented by global warming, but we should not forget that very small refinements to the manufacturing process which improve energy efficiency are also important in
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reducing carbon emissions. The emissions trading scheme should be flexible enough to recognise that.

Many of my constituents and their families rely, even now, on the steel industry for their livelihoods. They value the well paid, highly skilled jobs offered by companies such as CES. It is imperative that the methodology of the emissions trading scheme is reviewed, to create the fair trading conditions that are so critical to the British steel industry—an industry, by the way, that became once again a net exporter of steel in 2005. I do not think that the value of that should be underestimated. For me, coming from a family in which there have been generations of steel workers, but which now has none, that achievement is tremendous. I am proud that that position has been gained after all the problems of the 1980s and 1990s, and I do not want us to lose it. I want us to consolidate it, on the basis of a responsible attitude to emissions trading and the reduction of carbon emissions in the manufacturing process.

As I said earlier, I echo the view of my hon. Friend the Member for West Bromwich, West about the way forward. The shortcomings of the current methodology are that it requires the Government to second-guess how much steel companies will produce for many years ahead and, more than anything, that it rewards failing companies and penalises growing companies such as Corus UK and Corus Engineering Steels. There are wide variations across Europe, never mind internationally, and that is unacceptable. We need a sectoral agreement, as has been outlined by my hon. Friends the Members for West Bromwich, West and for Llanelli, which will de-link allocation from the volumes produced and relate it instead to energy efficiency—on both a small and a large scale. That agreement should be flexible enough to enable improvements in energy efficiency to be recognised, and should be common to all EU member states. Of course we need to remember the EU’s responsibility to exert international pressure for a similar approach.

I hope that the Minister will respond positively and remember the importance of the steel industry, and manufacturing generally, to this country’s future position in a global economy.

Mrs. Joan Humble (in the Chair): I advise hon. Members that I intend to call the first Front-Bench speaker at 10.30.

10.19 am

Dr. Ashok Kumar (Middlesbrough, South and East Cleveland) (Lab): I start by congratulating my hon. Friend the Member for West Bromwich, West (Mr. Bailey) on his eloquent testimony in defence of the steel industry. It is a great credit to him that he articulated the case for the steel industry so well. I worked in research and development in that industry for 15 years, when I tried to solve some of the problems that we are discussing. I praise my hon. Friend for securing this debate.

I agree with my hon. Friends about the importance of the steel industry, which we in this country have worked hard to make a success. We have gone through tough times, such as some of the times when I worked in the industry, and now the good times have emerged.
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I ask my hon. Friend the Minister not to jeopardise all the success and the jobs of people who work in the industry. As someone who represents the Teesside steel industry, where many of my constituents work, I ask him to bear it in mind that several thousand jobs are at stake. He is familiar with the area because he has visited my constituency. However, I want to focus not on the steel industry but on the chemical industry, which is certainly an issue on Teesside. Emissions trading is important for our area and the chemical industry plays an important part in that.

The energy requirement of the UK chemical industry is responsible for only about 4 per cent. of total UK carbon dioxide emissions. Through its trade association, the Chemical Industries Association, the chemical industry has been measuring and improving energy efficiency for many years. In 1997, the CIA was the first trade association to enter into a voluntary agreement with the Government, and it has negotiated a climate change agreement with them. The chemical sector has a target of a revised energy efficiency improvement of 19 per cent. by 2010 from the levels in the base year of 1998, which will bring the total energy efficiency improvement between 1990 and 2010 to 34 per cent. That target is achievable given that the chemical sector has improved its energy efficiency by 19.5 per cent. since 1998. As an engineer, I know the importance of emissions. Given their effect on plant efficiency and product cost, we have to have a technology-led programme for the reduction of emissions because it makes good business sense.

I want to raise two issues with the Minister about the chemical industry in my area. The first is a plea from a chemical company called Terra Nitrogen UK regarding something called joint implementation, which comes under the emissions trading arrangements of the Kyoto protocol. Joint implementation enables companies to undertake projects to reduce greenhouse gas emissions and allows Governments to use the credits against their Kyoto targets or for the company to use them itself within the EU emissions trading scheme. Terra wants our Government to support a domestic joint implementation project, but I am told that they are against that idea. Other EU countries such as Germany and France support such schemes—indeed, France is already developing a regulatory framework for such a scheme—and I ask the Minister to consider the pleas of companies in my area and take this matter up seriously.

The second issue that I want to discuss concerns Centrica, which is committed to participating in the UK’s first complete clean-coal power generation project at a cost of £7.15 million. With its technology development company, Progressive Energy, it has agreed to set up a new energy undertaking called Coastal Energy Ltd, which will seek full consent for the right to construct a new clean-coal power station in Teesside. The project would be the first to combine integrated gasification combined cycle with carbon capture and storage capabilities. That would mean the development of a clean-coal power station to supply electricity for British Gas customers, together with a pipeline and storage project to capture CO2 emissions for under-sea sequestration in the North sea.

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