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25 Oct 2007 : Column 150WH—continued

The report majored on another area of reform, which has not so far been picked up. If it is not possible to move to the ideal scenario of 100 per cent. auctions outlined by the Chairman of the Committee, and if we
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must live with a process of phasing out free allowances, a consistent methodology must be applied to the giving out of allowances. That was the strongest message that I received on my visit to the Commission in Brussels earlier year to discuss the scheme. Those I spoke to fully acknowledged that the political process is the flaw and they were keen for greater consensus about the need for a consistent and transparent methodology for negotiation, for national allocations and, more importantly, for sector allocations within national allocations. The scheme’s credibility would be greatly enhanced if the scope for political interference in the allocation of permits was reduced.

Mr. Adrian Bailey (West Bromwich, West) (Lab/Co-op): I have been listening closely to the hon. Gentleman’s argument. Does he not agree that any global carbon market or auction must be disaggregated into sectors to avoid the situation that arose in phase 1, when the energy sector hoovered up the carbon credits and passed on the cost to other industrial sectors, which suffered a double whammy, because they had their own allocations capped and had to pay higher prices as a result of the free allocations to the energy sector? We need some sort of industrial, sectoral approach to avoid perpetuating that situation.

Mr. Hurd: I thank the hon. Gentleman for that intervention and I have a lot of sympathy with it. The issue will become particularly acute in the context of how and when aviation is included, because exactly the same pressures will be brought to bear.

The report and other analysis argue that the Government should be more proactive in arguing for greater transparency in the methodology used for the negotiation and allocation of allowances. For example, we should have the standardisation of sector allowances, which would ideally be based on the development of sector benchmarks for carbon efficiency. In addition, transparent assumptions should underpin any “business as usual” assumptions, and the report is very strong on the inadequacies and risks involved in relying on “business as usual” projections that are not transparent and consistent.

Finally, there should be a common approach to the rules for new entrants to the market; there is currently national discretion to set the rules, which, to my eyes, does not set a level playing field and runs against the grain of the single market. If there is one message that I want the report to send the Minister about the fundamental reform that is required, it is about removing the political risk from the process as we move, I hope, from a system of free allowances to pollute to one of full auctioning of allowances.

Part of the reform, as mentioned by the Committee Chairman, is the need for greater transparency and accountability for the policy. Emissions trading is hugely important, and almost completely invisible to the public. I doubt whether they talk about it much down the Dog and Duck in Congleton; they certainly do not in Ruislip-Northwood, but to some degree they should, because, in a very indirect and arguably almost stealthy way, many of the costs of the scheme are passed on to consumers, but not in a way that is visible to them.

In the context of transparency and open scrutiny, I stress one of the key points in the report, which is that Britain should take a lead in making a much clearer
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distinction between emission reductions achieved in the UK versus those sourced overseas. I think that many people would be surprised that the Government expect two thirds of the UK’s obligations under phase 2 of the EU emissions trading scheme to be met by the purchase of credits in overseas markets. That is a very high proportion.

Leaving aside for a moment concern about the integrity of those overseas credits, the fundamental issue is to determine the right balance between developed countries, such as the UK, getting their own house in order, and the preservation of our freedom to pursue lower-cost emissions around the world. Arguments based on equity are also finely balanced between the need to channel capital towards the developing world and the unfairness of our picking all the low-hanging fruit. The issue should be out in the open. The thrust of the report was that the matter is too opaque. Someone needs to take the lead on it in Europe, and it should be a Government who pride themselves on taking a lead on climate change across the piece.

I leave a final thought with the Minister. There is concern about the commitment of the new Administration to the climate change agenda. Few people doubted the integrity of the previous Prime Minister in his commitment to the cause, although there was plenty of room for criticism of the delivery. However, there are genuine concerns about the attitude of the new Prime Minister, and they are partly influenced by perceptions of the Treasury’s ambivalence about the agenda under his stewardship. As we have already discussed, worrying signals that have been given about commitment to the renewable energy target, and recent announcements about going back on waste taxes, are creating concern that the new Administration are not as committed to the agenda as the previous one, at a time that is, as the Minister will I am sure agree, critical with respect to the need not only to stabilise emissions—which we have failed to do—but to reduce them significantly. Therefore I see emissions trading and the attitude towards really pragmatic and fundamental reform of the scheme in the critical phase 3 as a test of the Government’s commitment.

3.23 pm

Mr. Martin Caton (Gower) (Lab): Thank you, Lady Winterton, for giving me the opportunity to contribute to the debate. Not surprisingly, as those present are all members of the Committee that produced the report, I tend to agree with the statements of previous speakers, but in contrast to the hon. Member for Ruislip-Northwood (Mr. Hurd) and as a democratic socialist, I am not instinctively attracted to the idea of meeting the greatest challenge that our planet faces, climate change, by creating a new marketplace.

I thus surprise myself a little in supporting the EU emissions trading scheme and in arguing that, as our Chairman, the hon. Member for South Suffolk (Mr. Yeo) has said, the market needs to be made freer, with the introduction of 100 per cent. auctioning of allowances in as many sectors as possible. I say that I surprised myself, but I suspect that I did not surprise myself quite as much as the representatives of industry who gave evidence to the Committee last week, in our current inquiry into the climate change levy, surprised themselves when they found themselves arguing for higher environmental taxes rather than emissions trading.

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The EU emissions trading scheme seems to me to be the best mechanism that we have yet come up with for putting a price on carbon. Of course, putting a price on carbon was one of the policy tools advocated in the Stern report, as other hon. Members have mentioned. I support the trading scheme as a cornerstone of the policy framework for tackling climate change, as the Government have put it. As we force up the price of carbon, there will, I believe, be an increasing impact on emissions of CO2 and other greenhouse gases. However, we need that cornerstone to complement other policy elements that Stern advocated: technology policy to overcome market failures associated with the research, development and deployment of low-carbon technologies, and measures to encourage behavioural change.

With respect to those other policy elements, I believe that the messages coming from the Government are somewhat disturbing at the moment. I am concerned in particular that we now appear to be limiting our ambitions for the UK contribution to the EU renewable energy target, as has already been mentioned. I am equally worried at apparent moves in the Department for Communities and Local Government to reduce the capacity of local authorities to use local planning policies to increase the contribution of on-site renewables and drive up energy efficiency standards. Those are matters to which our Committee will have to turn its attention in the near future. That is not the main focus of the debate, but as we said in the report, as the Committee Chairman repeated and as the Government agreed in their response, we need to supplement the market mechanism with other measures to deliver the outcomes that we all want.

Reading back over our report some months after its completion, I am surprised how gentle we have been in our assessment of phase 1 of the scheme. Okay, a complex system was set up over a fairly short time scale, with adequate administration, but we could find precious few witnesses or submissions that showed evidence of an actual reduction in carbon emissions as a result of that phase of the scheme. The allocation of allowances to emit carbon was far too generous, resulting in a price that was far too low to have an impact. In fairness to our Government, the UK was an exception. The evidence is that member states deliberately submitted plans that they knew would have little or no effect on the industries involved, within their borders. That was surely irresponsible, given that Stern’s main message was about the urgent need for action. Time has been wasted. Phase 1 could and should have brought about real and significant carbon savings, and despite what the Government say, I do not see that it has.

My worries about the cynical approach adopted by too many of our fellow member states are heightened by the national allocation plan submissions for phase 2. Again, instead of meeting the challenge and accepting the necessity of sacrifice, countries tried to minimise the impact of the scheme on their businesses. There were honourable exceptions, including the UK, and the Government are to be congratulated on putting forward an allocation plan that will have a positive impact.

The other institution that comes out of the preparations for phase 2 with head held high is, of course, the European Commission. If it had not been prepared to
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stand firm and reject so many allocation plan submissions, the over-allocation of phase 1 could have been repeated, as the Environment Agency predicted in evidence to us from its knowledge of the proposed national plans at the relevant stage. If that had happened, not only would we have failed to drive down carbon emissions between 2008 and 2012, but it could have been a death sentence for the scheme, as people recognised its failure.

The Committee went to Brussels and met various officials who were involved in administering and developing the scheme. I, for one, was very impressed by how seriously those individuals took global warming, how determined they were to make the emissions trading scheme work and how frank they were about the obstacles that they faced in making it work. At this stage, as we say in the report, we cannot know for certain that phase 2 will deliver what we hope and expect, but it has at least a fighting chance, thanks to more realistic national allocation plans.

In my opinion, the clear lesson from cap setting for phases 1 and 2 is that we should move as fast as possible away from the system by which member states propose their own national allocation plans to a system with an EU-wide cap based on clear carbon reduction targets that is transparent in operation and in which national and sectoral allocations are harmonised.

As the report says, the Government are to be congratulated for leading the way on auctioning in phase 2 and for pressing for more in phase 3. I was disappointed, however, that because they oppose hypothecation, they rejected out of hand our suggestion for using auction revenue to help speed up the development and take-up of new carbon technologies. I hope that they will rethink, because we will need to demonstrate in future that income generated by green policies, including green taxes, is used for good green ends. Like the rest of the Committee, I support bringing aviation into the ETS, but the impact of that will depend on the tightness of the cap on aviation emissions. We must also look to the future involvement of the maritime sector.

I shall not refer to the Committee’s recommendations on how to improve the reporting of Government statistics, because that has been dealt with very well by the Committee Chairman and by the hon. Member for Ruislip-Northwood, and I support what they have said. The Committee raised another perhaps related issue that was mentioned earlier by my hon. Friend the Member for Edinburgh, North and Leith (Mark Lazarowicz): the need for the UK and, indeed, other EU member states not to rely heavily on purchasing carbon credits to secure emissions cuts in other parts of the world. To quote an old green motto, we need to “think globally, but act locally”.

I applaud the Government’s intention that the EU emissions trading scheme should evolve and emerge with other schemes, so that a global scheme is established. Like the Committee Chairman and the hon. Member for Morley and Rothwell (Colin Challen), however, I believe that if there is to be any chance of reaching an effective, one-planet approach to the threat of climate change, we need to move as fast as possible to something along the lines of the contraction and convergence model and to gain support for that from around the world. Under that model, emission budgets should be allocated to every nation and progressively amended until rich and poor countries—developed and developing
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countries—arrive at an equal per capita budget based on an agreed stabilisation level. In developing the ETS, we need to ensure that it facilitates, rather than impedes, progress to such an approach.

3.31 pm

Martin Horwood (Cheltenham) (LD): I welcome the opportunity to serve under your chairmanship, Lady Winterton, and to contribute to a debate among so many distinguished members of the Environmental Audit Committee. I am a new member of the Committee and I was not involved in the preparation of the report, so I embark on my speech as a Front- Bench spokesman with some hesitation and in the knowledge, which I have acquired from my first few meetings on the Committee, that some great experts on the subject are present.

I agree with a great deal of what has been said, and the context in which the Committee Chairman put the debate is absolutely right. The overall picture on global warming and that for this country is serious. Under this Government, carbon emissions have regrettably increased rather than decreased, and the trend in emissions of both carbon dioxide and the basket of Kyoto greenhouse gases now seems to be a gently upward one. There is a risk that we are becoming complacent. Some Government Ministers—I do not include the Minister in this—have been tempted to repeat the claim that we are on course to meet the Kyoto targets. That might be technically true, given that the dash for gas drastically reduced this country’s carbon emissions many years ago, but the actual current trend is now in the opposite direction, and much more drastic action is needed than is contemplated at present.

The European emissions trading scheme was designed to fulfil the EU’s Kyoto target of an 8 per cent. cut in emissions against 1990 levels by 2012. The Committee Chairman was right to point out that that has set a significant precedent for the whole world by way of an international policy mechanism that really tries to tackle climate change. It has set a particularly important precedent for the United States. I am pleased, therefore, that, although the EU position has not been comprehensively picked up by the United States Government, it has been picked up by many states and cities in the US. That is leading to clear pressure for a national trading scheme in the US as well. Logically, the schemes would link up in the end. It is good to think that the much maligned European Union has been responsible for that global step against the threat of climate change.

It has been common ground among those who have spoken so far that we must be realistic about phase 1. The hon. Member for Gower (Mr. Caton) rightly said that time had been wasted, that on balance the scheme had not cut carbon emissions, and that it had not established—the Committee Chairman said the same—a sustainable carbon price that can exercise real pressure to reduce carbon emissions at the commercial or economic level. We must therefore focus on phase 2, under which national caps will be lower. We hope that that will mean more scarcity and a higher price for carbon, so that there is more such pressure.

However, there are flaws in that approach too, as the Committee Chairman also rightly pointed out, because there is still a limit on auctions. He is entirely in agreement
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with Liberal Democrat policy in that respect, which is to aim for 100 per cent. auctioning, so that the market can exercise the most efficient pressure on emissions of carbon dioxide, and possibly other greenhouse gases, if they can be included.

Revenue from auctions should be ring fenced and should be used to reduce taxes or invest in low-carbon technologies. There have been other suggestions for the future of the ETS, including expansion to the aviation and maritime sectors. Road transport should be covered too. As the Chairman said, there is a lot more scope to go further and faster in the use of market instruments.

There has been some speculation on the philosophical basis for such ideas from the democratic socialist and democratic conservative points of view. As a democratic liberal, I am enthusiastic about the use of free markets; they are welcome tools and are generally more efficient than Government in driving carbon reduction in the economy. However, they can have pernicious and unintended consequences, and they must be combined with other policies in order to ensure good outcomes. Trading schemes are a necessary but not sufficient part of policy.

The hon. Member for Ruislip-Northwood (Mr. Hurd) described trading schemes as the main policy tool of the Government, but seemed wrongly to cast doubt on the principles behind them, saying that the market is artificial. I do not agree. The Stern report pointed out that the cost of carbon emissions might be a deferred one, but is real. Emissions trading schemes and pricing of carbon in general are trying to reflect in current policy and in current financial and economic calculations a price for carbon for the cost that will impinge on us all if we do not act soon.

The hon. Member for Morley and Rothwell (Colin Challen) put things more poetically. He rightly said that trading schemes should not be seen as the saviour of us all, and he was right to alert us to the weaknesses. He said that clear, long-term signals were needed rather than just targets and mechanisms. That is absolutely right too. Support for and strengthening of the ETS need to be combined with real, practical policies to achieve reduction.

The contrast is with programmes such as the low-carbon buildings programme, which might be the best or worst example, depending on one’s point of view. That programme is important, because households are responsible for 27 per cent. of this country’s emissions. Unfortunately, the kind of “stop-start”, and then “suspend”, approach that has been adopted in that case has completely undermined the local markets for renewable energy and energy efficiency products. I am sure that many hon. Members have had experience of suppliers of such products in our constituencies who have become utterly frustrated with the low-carbon buildings programme and its predecessors. They have provided, not clear, long-term signals, but confused, short-term ones. I hope that the Government are trying to address that at the moment.

I have some suggestions for clear, long-term signals, which all have the virtue of being Liberal Democrat policies, so I am on safe ground. They are designed to create a policy context in which the overall targets and mechanisms are not the only elements, but in which real, practical steps are being taken. One policy has to be that of the international context. Other speakers
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have mentioned the importance of a post-Kyoto agreement, which is particularly significant in the context of competitiveness. If we impose a pressure on our economies to reduce carbon emissions such that there is financial cost, industries such as the aluminium industry that can relocate—the point has been discussed in this Chamber before—might be forced to move to economies in which carbon emissions do not bear the same costs. We may, in effect, drive industry from a carbon reduction regime to one without those reduction pressures, and make the situation worse by not addressing competitiveness. It is crucial that the next Kyoto phase includes economies such as the USA and Australia, so let us hope that there is progress in that direction. We may have to decide what sanctions to apply to economies that do not play ball in the international framework phases after Kyoto.

Gregory Barker: What sanctions does the hon. Gentleman have in mind?

Martin Horwood: The hon. Gentleman might want to look at the Stern report, which suggests a carbon border tax, although that is not my preferred solution. We need a debate on what sanctions might be possible, and we must talk realistically about what sanctions could be applied to other economies and how to add some cost to non-participation in international schemes.

A second long-term signal might be on particular sectors.

Colin Challen: China has taken on a lot of carbon emissions after taking our heavy manufacturing industries. Should we continue to bear the cost of China’s emissions or should that be the producer’s responsibility? A Bill before Congress suggests that a charge of anything up to 15 per cent. should be placed on imports that have not been accounted for within the emissions trading scheme or another approach in the producing country.

Martin Horwood: The hon. Gentleman makes an important point. China comes in for a great deal of criticism during some debates on climate change, but many of its emissions have resulted from us exporting our industry to China, which manufactures goods, not for the Chinese population, but for western markets. Any equitable international framework must take account of that. The price of carbon should take account of the origins of the companies that are responsible for carbon emissions. In the British context, we must look at the limits or burdens that should be imposed on British companies that are manufacturing goods and emitting carbon overseas. The hon. Gentleman raises an important point.

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