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Westminster Hall

Thursday 25 October 2007

[Ann Winterton in the Chair]

Emissions Trading

[Relevant documents: The Second Report from the Environmental Audit Committee, Session 2006-07, The EU Emissions Trading Scheme: Lessons for the Future, HC 70, and the Eighth Report from the Committee, Session 2006-07, Emissions Trading: Government Response to the Committee’s Second Report, HC 1072.]

Motion made, and Question proposed, That the sitting be now adjourned—[Mr. Watson.]

2.30 pm

Mr. Tim Yeo (South Suffolk) (Con): I am delighted that this report has been selected for debate this afternoon, and I warmly welcome the Minister and, indeed, the shadow spokesman. We look forward to a dialogue with the Minister and her colleagues about the issues raised in the report. I am particularly glad that both Front-Bench teams are represented by Members who are known to have a genuine and long-standing interest in the subject—in my experience, that is not always the case.

Today’s debate is extremely timely for two principal reasons, the first of which is the growing urgency of the threat of climate change. Every week, there are news items that reinforce the reality of something that many people have long suspected but that has been difficult to prove. Month by month, the scientific evidence grows and it is clear now, even to the most determined climate change deniers, that it is happening. Furthermore, it is pretty clear to those of us who have followed the issue closely for 15 years that it is happening much faster than was originally expected—or perhaps much faster than the scientists who first flagged up the warnings dared to admit that they expected. Certainly, it is proceeding extremely quickly, and it is more and more likely that human activity is one of, if not the main, causes.

Despite the rapidly accumulating evidence, however, about the urgency and causes of climate change, the world’s response continues to be grossly inadequate. Global greenhouse gas emissions are a third higher than they were in 1990, and rising, despite universal agreement that, to keep the concentration of greenhouse gases in the atmosphere at levels consistent with a rise in temperature of no more than 2° C, they need to be lower than they were in 1990, and falling, and despite the nearly universal acceptance—as a result of the very authoritative Stern report—that action now will cost very much less than action later.

Even here in Britain, where successive Governments have played a distinguished and constructive role in leading the international debate for two decades, progress in cutting emissions has faltered. The Government, who admirably set targets for emissions cuts that went beyond those required by the Kyoto treaty, are now struggling to meet those targets and appear unlikely to do so. The limited progress made in cutting emissions during the 1990s, even though the economy was expanding for
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most of that period—as we all know, that progress was due principally to the dash for gas—has been halted. We have found in several recent years that emissions have risen, not fallen.

The second reason that the debate is very timely is that, potentially, emissions trading is one of the best tools for addressing climate change. In its purest form, emissions trading is a mechanism for directing resources to areas and technologies that cut emissions in the most efficient and cost-effective way. It is, of course, not the only tool for addressing climate change. Market instruments have a big role to play. Britain and some other countries have dipped their toes into the water in respect of market instruments. As it does every year, the Environmental Audit Committee will soon address the pre-Budget report, but given that it has not yet done so, I am speaking personally, rather than for the Committee, when I say that I was very disappointed with the extremely limited measures announced two weeks ago in that report. We are not going anywhere near as far or as fast as we could to use market instruments in this country.

Alongside emissions trading and market instruments, regulation has a role. Climate change is far too big and urgent a problem for us to rely on any one solution; we need to throw every available weapon into the fight. Neither market instruments nor regulations can guarantee a specific and quantifiable cut in greenhouse gas emissions in the way that a cap-and-trade emissions trading system can. Market instruments can incentivise consumers—businesses and individuals—to reduce their carbon footprints. Regulations can require certain processes to be amended, including, for example, vehicle engines. However, they cannot do what emissions trading can. A cap-and-trade scheme can specify a level of greenhouse gas emissions and guarantee, if it is policed and implemented properly, that that level will not be exceeded.

Mark Lazarowicz (Edinburgh, North and Leith) (Lab/Co-op) rose—

Ann Winterton (in the Chair): I call Dr. Lazarowicz.

Mark Lazarowicz: As a member of the Environmental Audit Committee, may I put on the record my appreciation of the way in which the hon. Gentleman chaired the Committee during the preparation of what were extremely technical evidence sessions. We are grateful to him for doing that.

The hon. Gentleman mentioned that the cap-and-trade scheme has the theoretical possibility of delivering results, which is why we should be doing our best to make it successful. However, he is aware, as we all are, of the danger of leakage from a cap-and-trade scheme, which means that this country could meet—

Ann Winterton (in the Chair): Order. I think that it would help hon. Members if interventions were much shorter. Despite the fact that I awarded Mr. Lazarowicz an honorary doctorate, I must ask him to bring his remarks to a conclusion as quickly as possible.

Mark Lazarowicz: Would the hon. Gentleman consider the importance of placing a link on how far we can meet our targets by purchasing credits from
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overseas, because there is a danger that we purchase credits from overseas and then do not take steps to cut emissions in the UK?

Mr. Yeo: I am grateful to the hon. Gentleman for his kind remarks. I appreciate the contribution that he makes to the Committee. I agree with his point, to which I shall refer specifically in a moment or two, and we highlighted it in the report that we issued earlier in the year and returned to it in our comments on the Government’s response. It is true that, to make a cap-and-trade system effective, we require greater political will than has been shown so far in the EU system or any other.

Certainly, we are much more conscious of climate change than we were five years ago. It is equally certain that, five years from now, international alarm about climate change will be much greater than it is today. Then, if not now, the public might be clamouring for the further, tougher and more radical steps that are needed to tackle the problem effectively. The continuing increase in greenhouse gas concentrations in the atmosphere might be such already that dangerous and irreversible climate change is unavoidable. Even if that is not the case, it is very likely that the steps needed to prevent it would involve far greater cuts in greenhouse gas emissions than those in the targets that have been agreed. We talk about cuts of 60 per cent., but it is almost certain that we would need cuts of 90 per cent. by a significantly earlier date, if we are to contain the risk of irreversible climate change. Of course, neither Britain nor anywhere else in the world is anywhere near being on target to achieve even the modest and, in my view, insufficiently challenging targets that we have set ourselves.

That is the background to the Committee’s report and the debate. The importance of the EU emissions trading scheme is that it is the first, and so far only, international trading system to be operating fully. The first three-year phase ends at the end of 2007, so this is a good time to take stock of progress. The importance of the scheme extends far beyond Europe; the whole world is watching to see how the EU ETS works. If it should fail or prove seriously defective, the chances of emissions trading being adopted in other parts of the world might be reduced, although in my view the momentum from the business community in the United States is such that a national US scheme will inevitably start within the next two or three years. Either way, it is vital that we learn the lessons from the first phase of the EU ETS and apply them in the future.

I hope that the Government will be honest and realistic, and not try to over-claim the results so far. Our report highlighted the need for the Government to be more transparent about emissions trading. So far, phase 1 has achieved very little: it has not cut carbon emissions, and it has not achieved a sustainable price for carbon, which would incentivise investment in low-carbon technology. It has failed on the two most important objectives. However, we must not be too harsh. The scheme, by its very existence, has done more than any other scheme elsewhere. It has shown that trading can be undertaken internationally and a market established, which, by themselves, are worthwhile gains.

There are two main flaws in phase 1. First, the national caps were set far too high; indeed, only Britain
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had to make significant cuts in emissions from its pre-phase 1 levels. Secondly, the allowances were allocated by bureaucratic decision instead of by being optioned. The first flaw has, with pressure from Britain, been partially addressed in phase 2. After a certain amount of haggling, the national caps for phase 2, which were announced after our report was published, were set at more realistic levels, and the forward market price suggests that the reasonable expectation is that phase 2 will force some meaningful reduction in emissions.

The second flaw, however, has been largely unaddressed, because the EU has unfortunately funked the need to introduce more options. Instead, it has set a 10 per cent. limit on the allowances that can be allocated by auction. We must be clear about how damaging that is. Emissions trading will cut emissions on an economically efficient and fair basis only when the trading is on a pure market basis, but the bureaucratic allocation of allowances undermines that purity. It guarantees inefficiency and unfairness in the scheme. We must therefore move as quickly as possible to auction 100 per cent. of allowances. It should be a definite target for phase 3, and we must make progress towards it in the meantime.

One advantage of a 100 per cent. auction is that it removes completely the need for national caps; all that is needed is a single EU-wide cap within which allowances can be bought by businesses in any EU country. The only issue that 100 per cent. auctions raise is what happens to the money that is paid. Business and individual consumers are understandably suspicious that it will just become a giant stealth tax. The money raised from auctioning should therefore be ring-fenced by law and returned to businesses and their customers in the form of lower taxes elsewhere. If those lower taxes were chosen to reward greener choices in the relevant industry, they could be used to incentivise further low-carbon technology.

There is an opportunity and a challenge for the EU with the forthcoming inclusion of aviation in the emissions trading scheme. Airlines are among the most experienced and effective lobbyists of any industry, and aviation will bring American airlines and companies into the EU ETS more directly than ever before. However, there is no reason why there should not be another single EU-wide cap on aviation emissions, which would apply to all domestic flights in the EU. It could and should apply to all flights—passenger and freight aircraft alike—taking off and landing in EU countries. No allowance should be allocated by bureaucrats and none should be given free to the airlines; instead, all should be auctioned.

Individual airlines—there are some honourable ones—that already take the need to reduce their carbon footprint seriously would have nothing to fear from the introduction of such a system. That approach would be the most effective way of using emissions trading to cut overall aviation emissions. Alas, the lobbying process and, I fear, the pleasure that some European Commission officials take in the power that they exercise when allocating allowances mean that such an approach is unlikely to be adopted in quite that form. As our report pointed out, there is a risk that, if the airlines are given the initial allowances free, they will enjoy the same windfall profits that some power companies did when they passed on the notional cost of allowances to their customers, despite having paid nothing for them. If airlines obtain a windfall advantage from a scheme
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intended to incentivise them to cut emissions, it suggests that neither the EU nor the airline industry is yet sufficiently serious about tackling the threat of climate change.

Reporting was another important concern of the Committee’s report. Owing to the fact that the EU ETS is a trading scheme, firms can achieve their necessary targets for cutting emissions by buying allowances issued to other countries, rather than by cutting emissions. The hon. Member for Edinburgh, North and Leith (Mark Lazarowicz), who has now left the Chamber, made that point earlier. In theory, there is nothing wrong with that situation. The purpose of a market is to allow resources to be allocated efficiently, and the purpose of the EU ETS is to cut emissions globally, as well as locally. If it is cheaper to cut emissions abroad than at home, it makes sense to do so, but we must be honest about the extent to which that is happening. In publishing figures, the Government must distinguish more clearly between actual emissions reductions at UK installations and the purchase of carbon credits by British companies to meet their own reduction targets. There was concern about that in phase 1, because of the over-allocation of allowances to other EU countries, and it impacts directly on how much the system helps us to achieve our domestic targets for emissions cuts.

A related issue is the way in which emissions reductions are calculated. The Committee expressed its concern about the excessive use of business-as-usual projections to provide the baseline against which claims were made about the size of subsequent emissions reductions. The National Audit Office exposed the uncertainties attached to forecasts of future emission levels on a business-as-usual basis, and the Committee strongly believes that the only safe way to proceed is to use absolute figures for actual carbon emissions as the basis for making progress comparisons. Caps that are calculated by reference to business as usual have very little value. I hope that the Minister will persuade her Government colleagues to address the Committee’s concerns about that point in future documents. The pre-Budget report, which was published only two weeks ago, contains some rather misleading statistics.

Another of our concerns is the variation in the extent to which different EU countries can use clean development mechanism credits to meet their national targets. There needs to be a consistent figure for the limit on which CDM credits can be used to meet domestic and EU targets. Again, there is nothing wrong in principle with using the CDM, but there must be a clear statement about how much it is used and a realistic limit put on the contribution from that source.

The ETS also raises issues about competitiveness. The hon. Member for Stoke-on-Trent, North (Joan Walley) expressed a particular concern about that during the Committee’s work. Unfortunately, she cannot attend the debate today because she is indisposed. The competitiveness concerns relate to the burdens that may be placed on a business that has to take part in emissions trading when competing with businesses in other parts of the world that may not have the same burden. I recognise that some companies have genuine concerns about that issue, but we must be careful about special pleading from vested interests. In the long term, it is in the interests of British business and individual firms for us to be in the forefront of low-carbon technology.
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There will be a huge advantage in 10 years’ time for the firms, industries and countries that make the switch to low-carbon technology early on.

I wish to touch briefly on the role that trading could play in the future. Crucial negotiations about the international response to climate change in the post-Kyoto phase are now beginning. It is vital that big emitters, such as China and America, become full participants in that phase, and the use of emissions trading is one way to draw them in. One of the most difficult issues in addressing climate change is equity—how can one fairly apportion the burden of combating a historical problem to which some countries have contributed much more than others, albeit unwittingly? That problem is made more complicated by the fact that the harmful consequences of climate change are also distributed inequitably. A landowner in the Scottish highlands may view the prospect of climate change with more equanimity than a subsistence farmer in a low-lying part of Africa or even a city dweller in Australia—at least, for a generation or two. In the end, the fairest solution must be based on contraction and convergence, as that would even out the amount of greenhouse gas emission for which different countries and individuals are responsible.

Of course, it would be difficult to agree a basis and timetable for working towards a system of contraction and convergence, but the present situation, whereby per capita emissions are 100 times greater in a rich country, such as America, than a poor one, such as Tanzania, is unsustainable. Progress towards contraction and convergence could be facilitated by more international emissions trading. Unlike the alternative measures, such as carbon taxes, whose impact is essentially regressive on those who pay them, emissions trading offers a tool for tackling climate change whose impact is basically progressive.

Colin Challen (Morley and Rothwell) (Lab): Does the hon. Gentleman agree that plans for contraction and convergence, or indeed any other framework that the Government have in mind for tackling climate change, should be published, so that we can have a proper public debate about the framework that the UK wants to develop from Bali and become the successor to Kyoto?

Mr. Yeo: I do. The Government, and the previous Secretary of State in particular, performed a great service in the past year by promoting the debate on tradable personal carbon allowances. It would be enormously helpful if the Government could now promote a debate about contraction and convergence in the same way. There is an opportunity for Britain in particular to influence international opinion on such issues, and contraction and convergence is one of the most important areas of future discussion. Now is the time to start that debate, as we begin the post-Kyoto phase.

In my view, contraction and convergence is the only fair way eventually to share out the costs of climate change, and it will be made more achievable by successful international trading systems. I therefore hope that the measures adopted for the post-Kyoto phase will explicitly include an extension of international emissions trading. That is more likely if the EU system functions effectively in the meantime.

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A lot is at stake in the next phase of the EU ETS. It is a great pity that some of the opportunities to improve the present scheme were not taken, but there is still time to make further improvements. It is vital to ensure that the aviation industry enters the system in a way that increases the incentives on it to cut its greenhouse gas emissions. It is also vital that the planning for phase 3 of the EU ETS, which will not start for another six years, reflects the concerns that I have mentioned and those that are mentioned in the Committee’s report.

I urge the Minister and the Government to take on board the recommendations in the report, even those that they have not yet publicly welcomed, and I commend it to the House.

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