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9 Jan 2007 : Column 14WH—continued

Emissions trading is crucial to the financial viability of the project because it will provide a basis for the selling price of captured CO2. Long-term economic
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certainty over the payback period of the £1 billion investment project is important. Crucially, the project’s CO2 pipeline is likely to be oversized so that it can carry captured CO2 from other large emitters in Tees valley. It is certain that the construction of the power plant, the commissioning of its equipment and the development of the associated offshore pipelines would bring many construction jobs at a difficult time for such jobs in Teesside. Of course, it would also enhance our manufacturing bases in Teesside and the north-east. I hope that the Minister will look at the consents for the scheme which will be coming his way and consider the concerns of the chemical industry in my area that I have mentioned.

I would like to reinforce what my hon. Friends have said about the steel industry and its future. I could have gone on for hours about the importance of the steel industry—

Gregory Barker: The hon. Gentleman is making an interesting, short speech. Does he believe that the success of the Centrica clean-coal plant depends on each sector being segregated within the ETS, or on cross-sectoral emissions trading?

Dr. Kumar: I do not have a fixed view either way. It does not matter which route we follow. Only when we look at the overall problem down the line will we learn whether it has worked. All I will say to the Minister is that he must make the right judgment, as the wrong one could cost us dearly—certainly in industries that we have worked hard to make successful, of which the steel industry is a living example. It was the most profitable industry in the world, but hundreds of thousands of jobs were lost in the 1980s. It is now going through a transition period—I am thinking particularly of Corus. In the spirit of what my hon. Friend the Member for West Bromwich, West and others have said, it is crucial that we consider the importance of steel, especially for our regions, and the fact that the industry has gone through difficult times. I ask the Minister not to jeopardise the success and achievements of Corus and other steel companies when he takes a decision on this matter.

Mrs. Joan Humble (in the Chair): I previously advised Members that I wished to call the first of the Front-Bench spokesmen at 10.30 am, but the hon. Member for Bishop Auckland (Helen Goodman) wishes to speak. If she is very brief, I will call her.

10.28 am

Helen Goodman (Bishop Auckland) (Lab): I am most grateful, Mrs. Humble, that you have called me to speak at this late moment and I am sorry that I was not here at the beginning of the debate to hear what everyone else had to say. I shall make a few brief points.

It would clearly be a nonsense to set up a tight regime here that would mean closing down UK and European manufacturing that is relatively efficient in terms of emissions and then importing goods—particularly heavy metals and heavy manufacturing
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goods—from countries where they are produced inefficiently. I have two suggestions as to how we could deal with that problem.

First, we need proper pricing of shipping and aviation fuel, as that would change the economics of local production—the alternative is the production of goods in faraway places—and would apply equally to people in this country and in Beijing. Secondly, the emissions trading scheme could examine sectoral agreements, so that we do not put financial services into competition with steel production or heavy manufacturing, as any economy needs some of those things. It is necessary to cut the cake horizontally as opposed to vertically, as it were.

10.30 am

Martin Horwood (Cheltenham) (LD): I congratulate the hon. Member for West Bromwich, West (Mr. Bailey) on securing this crucial debate. He rightly described the European emissions trading scheme as a good first attempt. It has flaws, which we are exploring, but it has put Europe at the leading edge of greenhouse gas action and has focused corporate attention on climate change and CO2 reductions among companies responsible for 46 per cent. of Europe’s CO2 emissions. It incentivises clean technology and a reduction in energy use, but, given the bigger picture, it should do so.

Some pejorative references to fortress Europe were made by the hon. Member for Scarborough and Whitby (Mr. Goodwill), who is no longer in his place, but another advantage of the European emissions trading scheme is its international linkages. It enables companies in places such as the United States of America, and states and projects in the developing world to participate in the wider scheme. It is unfair to say that the ETS reinforces fortress Europe. In effect, it is the first building block of a global scheme, and all the better for that.

The analysis made by the hon. Member for West Bromwich, West was typically astute and his solution sounds logical, as do those made by other hon. Members, when applied to the steel industry alone. In effect, he suggests benchmarks based not on historic emissions but on production capacity, best practice and other analysis. Such a scheme would be complex and could penalise growing companies, and it would be open to the same problems of application between different countries that apply to the current emissions trading scheme.

There is a more fundamental problem with a sectoral approach. Let us consider its application not to steel but to wind energy. Would we say that the least efficient wind energy companies would also be penalised for emissions over their baseline and that that industry would be treated in the same way as much more carbon-intensive or energy-inefficient industries? That example begins to expose the flaw in a segmented, sectoral approach. One of the beauties of the ETS is that it allows flows between sectors. In its simplest and most efficient form, it should steer carbon reductions to the parts of the economy where they can be most cost-effectively and efficiently made in economic terms. The sectoral bureaucracy advocated by some hon. Members would fatally undermine that system.

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Valid concerns have been raised, and the scheme must be introduced properly. The Carbon Trust has said:

Consistency is important, and the hon. Member for West Bromwich, West pointed out some of the inconsistencies between countries. Any hon. Member wishing to study the WWF’s country-by-country analysis of how national allocation plans have worked is in for an entertaining but depressing read.

Sir Nicholas Stern, using typical economist’s language, said:

That is right. The importance is not just in terms of economic competitiveness and fairness, because bad rules allow carbon leakage to economies with worse emissions. China is often criticised for its rising manufacturing emissions, but whose goods are being manufactured there? Many of the goods are destined not for Chinese consumers but for western markets.

The Carbon Trust examined the competitiveness threat of the EU ETS and identified two crucial factors—price and allocation, and exposure to competition in various sectors. On price and allocation, it, too, conceded that phase 1 was a bit of a sorry tale. WWF’s analysis shows instances of cheating and of wishful thinking, such as Finland’s counting of emission reductions from nuclear power stations before they have even been built. However, everyone concedes that that was the testing phase in the ETS and that it was never supposed to work perfectly the first time. We were to work out how the thing would happen in practice during that phase.

There is a risk that phase 2, in concentrating on levelling the playing field and ironing out some of the inconsistencies, might encourage countries that performed better in the first round, such as the UK, to take their foot off the accelerator. Friends of the Earth has criticised the Government’s business-as-usual approach in the national allocation plans for phase 2. The Government have reasonably responded that in real terms, when the number of installations is taken into account, a reduction is involved, and I understand that.

There are other indicators that the Government are not pursuing this process quite as aggressively as they could be. Why is the full possible auction allocation of 10 per cent. not being taken up? Why are they planning for only 7 per cent., when Sir Nicholas Stern and many others have shown that encouraging a real market in carbon allowances by the use of auctions contributes to fighting climate change? I would be grateful for the Minister’s answer on that.

The other issue is exposure to competition. The Carbon Trust concedes that some sectors, such as steel and aluminium, are more exposed to competitive forces than others, and that therefore the reassurance that most sectors are not affected might not be true in all scenarios for industries such as steel. That raises a key question: how do we maintain the competitiveness of European industries against carbon cost-free imports
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and avoid cutting off our carbon-efficient industrial nose to spite the face of the planet?

The Carbon Trust was reassuring about most sectors, but it concedes that steel and aluminium are vulnerable. So, as the hon. Member for West Bromwich, West mentioned, what are we to do about sectors of which the ability to pass on costs to the consumer is limited? As the scheme progresses, the situation will worsen; as carbon allowances become tighter, those companies will face even more competitive pressure. This raises a wider geopolitical issue for the post-Kyoto international agreements: how do we treat countries such as the United States and Australia, which are refusing to play ball? Such countries are not making their own contribution and are making the situation worse in their own right. In addition, they are undermining the efforts of more responsible bodies such as the European Union to find a solution.

Gregory Barker: How would the hon. Gentleman treat such countries?

Martin Horwood: I was just about to say that there are three responses. As various hon. Members who represent steel-producing areas have suggested, the first is that significant support, including investment in research and development, could be provided for industrial processes such as carbon capture, which can enable emissions reductions to take place while maintaining steel production. We could also examine more incentives for the large-scale use of renewable heat and power, such as geothermal energy, at industrial sites.

Gregory Barker: Does the hon. Gentleman mean state-sponsored research and state-subsidy incentives? Is that a spending commitment or is he just recommending that the private sector do those things?

Martin Horwood: If the hon. Gentleman is to get his chance to speak, I shall have to move on to the other two responses, which are the substantial ones. The first relates to international agreements. There is not time to reinvent the wheel. We do not have the time for a radical redesign of international agreements and trading systems. The next generation of international agreements must be based on Kyoto and on schemes such as the European emissions trading scheme.

Secondly, we must consider plan B for those who do not participate. There has been much talk of the US, China, Brazil and India, but only one of those countries has not ratified Kyoto and only one is responsible for 30 per cent. of historic carbon dioxide emissions. Peter Mandelson recently rejected a French proposal for a tax on imports from non-Kyoto countries, and anything that Peter Mandelson rejects must have something going for it. The proposal for a carbon border tax is mentioned in the Stern report, which concedes that there will be stronger and stronger pressure for that. It could offend purist free traders because there is obviously a risk of protectionism, but we need some form of carbon sanctions against the United States and other countries to provide a powerful boost in those countries for the Chicago climate exchange and the regional greenhouse gas
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initiative in states such as California which would be able to avoid those penalties and sanctions. It would show that the UK and Europe are taking real leadership in the sector and tackling difficult questions. Real sanctions and border taxes would have to be compatible with World Trade Organisation rules, and would that not be a good test of that organisation’s green credentials? We must show real leadership and I hope that the Minister will encourage us to believe that we are doing so.

10.41 am

Gregory Barker (Bexhill and Battle) (Con): This has been a surprising, interesting and robust debate, and I have learned something from it. I congratulate the hon. Member for West Bromwich, West (Mr. Bailey) on securing it and on his worthwhile and articulate speech. He put his finger on the central issue at the start when he asked how the UK, which accounts for only 2 per cent. of global emissions, can play a much larger role in leading the rest of the world towards a low-carbon future by pioneering the technology and low-carbon solutions which, on the one hand, avert the worst catastrophic effects of climate change and, on the other, secure economic efficiency and growth? How will the UK square that circle?

I believe that the EU’s emissions trading scheme probably represents our best hope for doing that, but the bottom line is that phase 1 has been an absolute shambles and barely successful. The impact on the carbon price of the nonsense of the national allocation plans in phase 1 shows that it has not worked properly or efficiently, but we must not allow the failure of the early stages to blind us to the potential of the ETS to move forward. It remains our best hope of a free-market, flexible solution that can grow into something not just EU-wide but worldwide, and which offers companies and economies in a free-market context the opportunity to do something about carbon emissions. That will require the EU to put its house in order in double-quick time and our Government to do more to show real leadership in Europe in ensuring that our European partners do not repeat the ridiculous performance with national allocation plans that we saw previously.

The EU in this case is absolutely right to send back with a clipped ear those national allocation plans that merely seem to replicate what happened in phase 1, which overestimated the requirement for their industries. I compliment the Government on coming in at the low end of our own national allocation plan estimates, but unless we all play ball and do that throughout Europe, it will simply not work. We must make it work.

My party often rightly criticises the European Union for invading too far into national domains of competence, but the environment is one of those issues that needs a truly pan-European solution. The environment is an issue on which the European Union can play a worthwhile, added-value, pan-European role, and we must ensure that it does that. If Europe cannot get the environment right, what can it get right? That goes to the heart of what the European Union is for. It is crucial that in going forward the European
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Union gets it right and that our Government are at the forefront of debate and support the Commission in ensuring that other countries play their part in getting the EU ETS right.

That is not to say that there are no shortcomings with the system. The hon. Member for Llanelli (Nia Griffith) articulately outlined some of the concerns that people have about not allowing our own emissions trading scheme to drive efficient low-carbon business to other parts of the world. However, at the end of the day we must not shirk difficult decisions. There is no pain-free solution to the transformation to a low-carbon economy. There are many opportunities, but there are no pain-free solutions.

Martin Horwood: The hon. Gentleman talks about painful decisions and he was very critical just now about the actual practice of the ETS and the national allocation plans. Does he believe that Britain’s allocation for NAP2 is too high or too low?

Gregory Barker: I believe that, by and large, the Government did a pretty good job, and I said so in my compliment to the Minister. We now need to play a leadership role in backing the Commission and ensuring that the other countries in Europe that have been listed during the debate go back and do what the UK has done. We argued forcefully during the decision process that the Government should come in at the lower end of the scale and, to their credit, that is what they have done. It is right that the Opposition not only criticise the Government but say when they do the right thing, and that is where the Government’s record is to their credit.

I am very interested in the issues that have been flagged up during the debate about long-term development of technological solutions to the problems of climate change. This country has a huge opportunity. We have some of the greatest minds and research establishments, terrific pioneering research and development in industry, great entrepreneurial businesses and business leaders, and extraordinary capital markets in the City of London which show great innovation in funding. However, by and large, we cannot simply wait for long-term technological solutions before we take action. They must go hand in hand. We stand on the threshold of what is widely called a tipping point. The next 10 years will be crucial and we cannot simply delay our solutions to the problems of climate change for 10 or 20 years until we can rely on those solutions. We must get stuck in now and start making real cuts in CO2 in the next five years. That will require the next phase of the EU ETS to start biting.

Nevertheless, I was particularly interested to hear about the developments in the constituency of the hon. Member for Middlesbrough, South and East Cleveland (Dr. Kumar), and the Centrica clean coal power station. I would be interested in learning more about that because, in the long term, it offers real opportunities and that is where Britain can show real leadership to the world. If we can develop a pioneering technological solution involving clean coal and carbon capture and storage, that would offer real solutions for places such as China, which is building many coal-powered stations. We must support the technology
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and there is a requirement for a public policy framework that allows such building.

The most important thing that the Government can do in public policy is not just to dole out more subsidy, as the Liberal Democrat spokesman suggested, but to promote a framework for a long-term sustainable—

Martin Horwood: Will the hon. Gentleman give way?

Gregory Barker: I cannot give way now.

We must promote a long-term, sustainable and high carbon price. I believe that that is what the hon. Member for Middlesbrough, South and East Cleveland was getting at when he talked about the need for long-term economic certainty.

I shall bring my comments to a conclusion by saying that the Government have done well domestically, but they must do a lot more within the EU to sort out the EU ETS. However, in the long term the scheme holds real potential to grow beyond the EU into an international framework. That represents our best hope for doing something urgently in response to climate change.

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