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The leaked document also acknowledged that reducing emissions through renewable energy sources was “expensive” and came with “severe practical difficulties”. Getting to 9 per cent. from our current 2 per cent. by
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2020 would cost £4 billion, according to the leaked report. In other words, the Government would rather pay others to bring down our emissions for us—they would rather the taxpayer continues to buy our way out of the problem—while our economy continues to grow with dirty infrastructure and ever-increasing emissions.

As the carbon price rises and our domestic reductions do not keep pace with our economic growth, the offsetting policy implicit in the ETS will become increasingly expensive. Sadly, there could be few better examples of the new Prime Minister’s outdated thinking on climate change than those latest revelations. To follow that route will make Britain a hostage to fortune, as we lock in the infrastructure of our old ways and our old hydrocarbon fix for the next generation, while the costs of offsetting those ways will become increasingly expensive in the carbon markets, however efficiently the ETS works—all that while we fall behind in competitiveness at home.

The Conservative party wants Britain to lead with dynamic industrial change, to lead the global economy and to face up to the changes that we need to make, not to subcontract this economic opportunity to competing economies in the developing world.

When defending the Government’s renewables target U-turn on “Newsnight” on Tuesday, the Minister for Energy said that, at the end of the day, renewables was a means to an end and that the end was bringing down carbon emissions. That is where the Minister and the Government have got it wrong—it is where the Prime Minister has got it wrong. Renewables are not only about bringing down carbon emissions; they also constitute a huge opportunity. That is about using this challenge as an opportunity to reskill our economy and to gain first-mover advantage in what will probably be the fastest-growing market of the 21st century. It is about making Britain a leader in the new energy economy as we led in the old energy economy in the North sea in the second half of the 20th century. We will not achieve that by buying our reductions at the cheapest price that we can find in the developing world year after year. That is not leadership—it is just bottling out.

The EAC report is very well informed and argued. I hope that the Government will read it carefully. They have shown themselves to be adept at adopting other people’s ideas in a relatively short time. I hope that although this may not be as eye catching and headline grabbing as other ideas that they have purloined, they will nevertheless give it the consideration that it is due and undertake a sensible policy review as a result.

4.9 pm

The Parliamentary Under-Secretary of State for Environment, Food and Rural Affairs (Joan Ruddock): I congratulate the hon. Member for South Suffolk (Mr. Yeo) on his presentation and all the Committee members on an extremely useful report. It is a welcome contribution to the development of emissions trading policy. As he and many others have acknowledged, the Government regard the EU emissions trading scheme as the cornerstone of our framework to tackle climate change. The Environmental Audit Committee asks some important questions in its report.

The need for market scarcity is an important lesson of the report. We can achieve cost-effective emission reductions only with a suitable carbon price—I think
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that we are all agreed on that. I share the Committee’s view that the European Commission’s decisions on member state phase 2 caps are very encouraging. They show a clear determination to deliver a carbon price that will increase confidence in the scheme.

A key aspect of pricing carbon within the economy is ensuring that business takes into account the full price of carbon when making investment decisions. That is why we are pushing for increased levels of auctioning in future phases. As a number of hon. Members have mentioned, the EAC recommends 100 per cent. auctioning in the long term. The Government consider auctioning very important, which is why we are pressing for a review of the scheme. We would like to see a minimum level of auctioning, not a maximum as at present, in the directive from phase 3. The hon. Members for South Suffolk and for Ruislip-Northwood (Mr. Hurd) raised questions about that, and I want to make it absolutely clear that we agree with their sentiments, are pressing for that and hope to achieve it. We also want member states to be able to set higher limits for auctioning than whatever floor the Commission might set. It is important, not least for capturing the windfall profits resulting from free allowances.

However, I am sorry to tell the hon. Members who raised the issue, including my hon. Friend the Member for Gower (Mr. Caton) and the hon. Member for Cheltenham (Martin Horwood), that we cannot agree about the Government’s hypothecating the moneys raised through such auctioning. Hypothecation does not guarantee value for money, it can be distortionary and is not general Government practice, although hon. Members will know that we have accepted in our taxation system that in general, we should incentivise and reward the goods in our society and tax, penalise or disincentivise the bads. That is a fundamental underlying principle.

Martin Horwood: I understand why the Government have reservations about hypothecation and would not want it to become a more general principle in Government policy, but does the Minister acknowledge that there is a public confidence issue about green taxes that I am afraid might have been exacerbated by the Prime Minister in his previous role as Chancellor of the Exchequer? There is a perception that green taxes are just about lining the Exchequer’s pockets. For green taxes in particular, we must perhaps advance the case of hypothecation more.

Joan Ruddock: I understand entirely, but the fact is that it is a trading mechanism. The public would find it quite difficult to understand, and they are not sufficiently involved in it.

Martin Horwood: What about business?

Joan Ruddock: Business is certainly involved, but business understands the principles perfectly well. Businesses that use auction systems would understand that the revenues from auctioning would return in general taxation to the Government. That is absolutely the norm as far as business is concerned. I do not think that the hon. Gentleman makes his case well. I agree that we need to work much more on public
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communication and explain when we levy certain taxes or charges that they are specifically designed to change behaviour. I think that he would agree that that is an important principle in bringing about environmental change, and I agree with his general concerns.

Mr. Hurd: I am grateful to the Minister for giving way, and I welcome high levels of auctioning as well as minimum levels, but I must press her on the use of proceeds from auction. There is no disguising the fact that that will be an additional cost on British and European business. Is it the Government’s policy to be sanguine about that, or is there a commitment that any further levels of auctioning will be cost-neutral for British business in the round?

Joan Ruddock: Any further discussion will have to be left to my colleagues, particularly my hon. Friend the Minister for the Environment. I apologise for the fact that he could not be here; hon. Members will appreciate that he is in Bali for preparations. The process also involves Ministers from the Department for Business, Enterprise and Regulatory Reform. They will hear this debate and will want to consider the points made.

I recognise the concerns raised in the report about the competitiveness implications for industry; the hon. Gentleman is one of the hon. Members who raised the issue. The UK is keen to work with other member states and the Commission to develop a more harmonised approach to the scheme. The EAC report recommends that to protect UK competitiveness and prevent carbon leakage, Government should develop trade agreements. We feel that the way forward is to create incentives by opening up trade in new technologies and developing an international carbon market.

The EU ETS needs to provide business with flexibility to make reductions where they are most cost-effective. That might mean that a proportion of emission reductions delivered by the UK cap will not occur within the UK. They might occur within the EU or outside it through the clean development mechanism. A number of hon. Members have mentioned that. I stress that such reductions are made and paid for by the UK economy, even though they occur in other countries. The problem that we face is global, and it is appropriate to contribute to bringing low-carbon technologies to other countries. We are counting such reductions in a transparent and open way.

The Committee highlighted the need for greater transparency in a number of recommendations. The Government agree that it is important to the scheme’s success that the market operates transparently and that we learn the lessons of phase 1, especially the need for market scarcity in phase 2 and beyond. Consequently, we have pressed hard for tight caps in phase 2 and are supporting the Commission in delivering them. Hon. Members will know that some other member states are contesting it, but we are supporting the Commission in that matter.

Our main aim for the review of the scheme is achieving the market scarcity necessary to reduce emissions. Similarly, we see the need for transparency in reporting. The climate change Bill will be key to achieving that, as enhanced transparency will be provided by annual reporting from both a Select Committee on climate change and Government.


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The EAC report is critical of how Government have presented our emissions figures. I acknowledge that if the Government are to count overseas savings towards domestic targets, we must be clear and open about the number of savings purchased. We have endeavoured to do that in Government reporting. For example, our annual report to Parliament in July this year presented emission figures in a way that showed the number of allowances brought in from the EU ETS. A number of hon. Members have raised that issue. I refer to our response to recommendation 24, on page 31 of the Government response, which shows clearly that we produce data on both UK CO2 reductions and total reductions funded by the UK here and abroad. The EAC recently stated that the value of carbon credits is only as real as the trading scheme that issues them is effective.

Questions were asked about the value of phase 1 and the suggestion that UK industry is merely buying hot air. Those are valid concerns. Indeed, they are the primary reason why we pushed for market scarcity in phase 2. However, it is difficult for the Government to make a judgment about the real value of any allowance. It is not the Government’s place to say whether the market price is right. It could also lead to a limited incentive to use tight caps if member states cannot count emissions reductions from the EU ETS towards their national targets.

The way forward is for the EU ETS to open up the whole carbon market. That can be done by expanding the scheme to new sectors and gases, and through linking the scheme to other trading schemes around the world. That could lead to greater investment in low carbon technology in developing countries, and it could deliver reductions at the least cost. Linking the EU ETS to other trading schemes will encourage countries to work together, which we should all consider to be essential. Only by working together can we fight global climate change.

I shall now address some of the specific points raised during the debate. The hon. Member for South Suffolk spoke about including aviation emissions in the EU ETS, and auctioning them in a way that would not give the airlines the opportunity to make windfall profits. We agree that if aviation enters the scheme, there would have to be a greater use of auctioning. The hon. Gentleman will know that the UK has pressed repeatedly for aviation emissions to be included in the EU ETS. At the moment, if airlines pass through the costs of allowances and make windfall profits, the Government need to assess the evidence on what the costs would be in order to influence the debate on auctioning the limits. We are saying that there would have to be auctioning, but the extent of the auctioning in relation to aviation would clearly need to be determined by further research.

The hon. Gentleman also asked about “business as usual” projections, and whether we should use absolute figures. The Government agree that there are uncertainties in using such projections. In phase 2, projects were fully consulted on and were scrutinised by an independent auditor. Such projections can indicate the level of scarcity in the scheme; in effect, that gives important indications on what the carbon price should be. We accept the uncertainty, but we believe that it can be a useful guide.

The hon. Member for South Suffolk and my hon. Friend the Member for Morley and Rothwell (Colin
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Challen) asked about the need for a consistent figure on limiting the use of clean development mechanism credits. The United Kingdom has taken a keen interest in CDM, and we have worked hard to make the mechanisms more effective and accountable. We asked for a limit on CDM credits for the EU ETS. Each member state proposed limits, some of which were reduced by the Commission. We sought and won a limit of 8 per cent. of the free allocation and 93 per cent. of the electricity sector. We are pushing for limits in the EU ETS in phase 3 on that very topic.

My hon. Friend also asked about other measures, saying that we should be careful not to think that the EU ETS was the only solution to our difficulties. The Government agree. I remind the House that the Stern review suggests that three elements are involved: the first is carbon pricing; the second is technology policy; and the third is measures to overcome barriers to behaviour change in fields such as energy efficiency. We are committed to that. We accept the Stern analysis and we are doing various things in all those areas.

Gregory Barker: If the Minister accepts the imperative of energy efficiency, why has the Treasury cut the surplus in the energy efficiency budget?

Joan Ruddock: I am not the Minister responsible for that, so I would have to check, but I understand that we have changed schemes rather than cut them. If we end one scheme, we may introduce something better—something that will go further. I will happily write to the hon. Gentleman on the matter.

My hon. Friend spoke of contraction and convergence, as did my hon. Friend the Member for West Bromwich, West (Mr. Bailey) in an intervention. There is currently no international consensus on that approach. We believe that it could be a way forward and certainly merits attention, but other options are more favourable.

I am sorry to say that the consensus that so often exists in such debates—over the years, I have worked with many of the Members here today—was somewhat broken and soured by the hon. Member for Bexhill and Battle (Gregory Barker). He endeavoured to make a number of party political points, as did the hon. Member for Cheltenham. The Government would be delighted if either party were to produce an action plan to achieve a carbon economy of 80 per cent. or 90 per cent.—or even a zero-carbon economy. However, we have to be credible and realistic about what can be achieved.

It is vital that people understand the low level of renewable energy that existed in this country when Labour came to office; there was hardly any, except for the long-standing hydro schemes in Scotland. We have made huge efforts, and we have a target of 15 per cent. for electricity generation by 2015. The hon. Member for Cheltenham said that the Prime Minister had talked of 20 per cent. electricity coming from renewables by 2020. He was correct about our aspirations for renewable generation of electricity by 2020. No one has resiled from that.

The debate about the EU target is completely different. It is about the supply of energy as a whole; it is not about electricity production alone but about all sectors, including transport and heat. It is a very different situation, bearing in mind that the UK is now at 2 per
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cent. We would be very happy to receive recommendations on how to proceed at a faster pace and how to achieve more. We remain committed to the 20 per cent. EU-wide target. Many other member states have a much higher renewable energy supply and many of them will find it as easy or as difficult as us to move forward. There needs to be a balance, but a balance will be found. We have made a proper commitment to doing that and we remain committed.

Martin Horwood: I will happily send the Minister our recommendations on how to achieve the ambitious targets that we have set out, which would achieve reductions in unclean energy and electricity generation. The hon. Lady was right to make that distinction. A crucial part of that is using other clean technologies as transitional phases, as I mentioned, until we can increase the overall level of renewables. One such transitional technology might be clean carbon capture and storage. Would the Minister support a massive increase in its use if it can be supported through research and development?

Joan Ruddock: I wish that the hon. Gentleman were giving credit to the Government on this point. We are the people who have put the Government and all their energies behind the development of carbon capture and storage. We have promoted that internationally and set up a competition. We are doing everything possible. We have already written the terms of the competition, which will be about producing a post-coal generation carbon capture process. We have chosen that because we know that China and India will continue for many decades with coal-fired power stations. The only hope is that we produce a technology that will help them secure a reduction in CO2 emissions at the same time as bringing their people out of poverty through energy generation.

The hon. Gentleman is right. We want it and we will have it. We have done more than any other Government to secure that end result. However, it is enormously expensive, so we will wish to seek support from the whole of the House on its roll-out to agree that this is a way forward and that it would be appropriate to invest more in it.

Gregory Barker: There is a clear reason why the UK is at 2 per cent., as the Minister rightly said, and why progress on renewables has been so poor: it is the renewables obligation. The largest beneficiary of the RO over the past 10 years, or the period in which it has been alive, has been landfilled methane gas, which has been sucking in a huge amount in public subsidy. Contrast that with a different public policy in Germany for feed-in tariffs. At long last, the Government are starting to change.

Ann Winterton (in the Chair): Order. I think that is a long enough intervention, Mr. Barker.

Joan Ruddock: I think perhaps that the hon. Gentleman needs to look at the achievement of our Kyoto emissions targets and compare that with Germany. I think that different mechanisms achieve different results. We have made a good effort and are
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meeting our international obligations on CO2 targets. We started without renewables, or effectively with limited renewables, except for the historic hydro in Scotland, because of the previous Administration’s total failure to understand the developments in this new technology. We are reviewing the renewables obligation. It is going to change substantially and I am convinced that it will give a new impetus to the development of new kinds—new forms—of renewable technologies.

The hon. Member for Ruislip-Northwood said that we needed a consistent, transparent methodology for giving out allowances with less scope for political interference. He will not be surprised that we agree with that sentiment. There should be greater harmonisation of the allocation and future free allocation should be based on benchmarking. It is particularly important that we have harmonised rules for new entrants’ allocations from phase 3. The hon. Gentleman can rest assured that we are with him. With that approach added to much more auctioning, we would be able to make much further progress.

Both the hon. Gentleman and my hon. Friend the Member for Edinburgh, North and Leith (Mark Lazarowicz) mentioned the need for a sectoral approach in allocating allowances and said that energy producers should not get a disproportionate number and be allowed to pass on the cost to other sectors. Again, we agree with that. Some pressure was put on the electricity producers in terms of the cap and they took a cut in allowances in phase 1. In phase 2, allowances for auctioning will be taken from that sector and in doing so we will be putting special pressure on them. I think that that is what hon. Members would want. In other sectors, there is allocation on a business-as-usual basis.

The hon. Gentleman turned away for a moment from his good all-party credentials and questioned the commitment of the present Administration on climate change. In questioning the commitment of the Prime Minister, he is speaking of a man who, as treasurer, provided all the instruments that have been used to drive down CO2 emissions, increase renewables and make a real difference in getting this country on a path to a low-carbon economy. The hon. Gentleman will remember that the Prime Minister, when he was Chancellor, introduced the climate change levy, the first really important instrument in this regard, which the hon. Gentleman’s party has consistently opposed.

Let me also remind the hon. Gentleman that it was the present Prime Minister, when Chancellor, who commissioned the Stern report. I know that the hon. Gentleman knows this because he and I have travelled to conferences together around the world, and the Stern report is considered a seminal work on climate change dialogue.

Gregory Barker: True.


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