The Exchequer Secretary to the Treasury (Angela Eagle): I beg to move,

It is a pleasure, Mr. Jones, to serve under your chairmanship for the first time on a statutory instrument. I am obviously looking forward to it.

These regulations put in place the legislative provisions required for the Government to allocate European Union emissions trading allowances in return for payment. Climate change, brought about by the emission of carbon dioxide and other greenhouse gases, is the most pressing environmental issue facing the world. The EU emissions trading scheme was established with a strong lead from the UK.

Andrew Mackinlay (Thurrock) (Lab): I cannot hear the Minister.

Angela Eagle: I will speak up. It is the world’s most significant international emissions trading scheme to date. Indeed, it is an important step towards establishing a price for carbon with a view to ensuring that negative externalities are reflected in investment and consumption decisions.

In phase I, given the newness of the EU emissions trading scheme, effectively all allowances were distributed on a free basis. The EU emissions trading scheme directive permits member states to auction up to 10 per cent. of allowances in phase II, which runs from 2008 to 2012. The UK’s national allocation plan for phase II of the EU emissions trading scheme, published in 2006, set out the Government’s intention to auction some 7 per cent. of the total UK emissions allowances.

As set out in the UK Government’s “Vision for Emissions Trading”, published on 30 October 2006, greater use of auctioning will help to strengthen the long-term integrity and efficiency of the EU emissions trading scheme. In turn, it is essential to ensure that the auctions of EU emissions trading scheme allowances are robust and support the integrity of the scheme and the carbon market itself.

The regulations create a flexible framework for auctioning of emissions trading allowances. They provide for auctions, the Government’s preferred method of allocating allowances for payment, but also provide for allocations for value by using other routes to market, such as allocation by a market exchange. The flexible framework will allow auction design to evolve in response to feedback from participants and experience in auctioning emissions trading allowances.

The regulations create the framework to ensure that, for any method of sale, payment will be received and allowances will be transferred. Among other matters, the regulations also set out provision for the appointment of an independent observer to oversee allocations, and provide the opportunity for participants to obtain a review of decisions made under them.

As provided for by the Finance Act 2007, the Treasury will also publish a scheme, which will cover the conduct and terms of allocations, including the detailed terms and conditions for participants. This legislation gives the Government the power to ensure that the EU emissions trading scheme allowances are allocated in the most effective and efficient way. I commend this statutory instrument to the Committee.

Justine Greening (Putney) (Con): Thank you for calling me, Mr. Jones.

Justine Greening: I, too, was about to say what a pleasure it is to serve under your chairmanship, Mr. Jones.

Today we are debating the emissions trading scheme and regulations that will enable the scheme to use auctions, which the Opposition support. We think that the emissions trading scheme can help to reduce emissions across Europe and can be an important part of the toolkit to bear down on emissions over the coming years and decades. As the Minister said, phase I was arguably a new experience and perhaps not as effective as we might have expected with regard to the level of allocations that were made and the extent to which they bore down on CO2 emissions, but clearly we are learning from that.

One key aspect of the scheme on which we are yet to progress is the issue of allocating allowances via auctions, and that is what the regulations set up. We are all aware of the problems that we had when, because allowances were essentially given away, there was arguably a danger that there would be windfall profits for certain companies and organisations that received them and had something to trade but did not reduce their emissions in return for that allocation. Therefore, we think that introducing that auctioneering process is a good way to proceed. It will give accountability and clarity. Above all, it will perhaps means that we do not just bear down on emissions but have a better ability across the board to set a fair price for carbon across the economy.

The statutory instrument proposes a welcome approach. I have a lot of questions on the detail. I want to ensure that we fully understand exactly how the process, which I think will be so important, will work. I hope that the Minister will allow me to run through the questions. I appreciate that she might not be able to give an instant answer to all of them, and I would be perfectly happy, if it were easier, for her to write to me on some of them. I thoroughly understand that not all my questions may be answerable. Let us ensure that the statutory instrument is fit for purpose. If she will indulge me, I will run through my questions in regulation order.

On regulation 4, will the Minster run through how the deposit levels will be calculated? I know that that was raised in the consultation that she talked about. Will she say what methodology will be used to calculate the levels, and what levels she expects? She raises the issue in the explanatory memorandum but it would be good to get more clarity. Staying on regulation 4, who will decide for how long the bidding window will operate? Will it be a consistent period, or will it be set on an ad hoc basis, depending on the nature of the auction? How will the Government approach understanding how long that window needs to be open?

Will the Minister say whether the nominated holding account can be changed during the process? I appreciate that that is a technical point, but given that the process will be new for organisations, there may be times when, for whatever reason, they want to change the account details provided. Will she confirm whether such changes will be possible, and whether they will be possible only within the bidding window or also when payments are clearing?

On regulation 5, will the Minister briefly talk about what exchange rate between sterling and euros will be used? Will it be the rate on the date of the transaction, a rate that is set at the beginning of every Treasury financial period, or a rate that is set at the beginning of each auction? Will she clarify whether that rate would be agreed in advance, or set after the auctioneering process?

It would be helpful to understand more about what information is required to effect a transfer of allowances, under regulation 6. Specifically, will the Minister be absolutely clear about who will be expected to provide that information? I think that the regulation mentions that the Environment Agency will provide it, but can she confirm that the extent of the information required is agreed? If the information will come from the account holder, perhaps via the Environment Agency, is the agency fully signed up to that and happy with how that part of the process will work? Regulation 6 also talks about information being provided

Does she expect that to mean days after the auctioneering process has finished, or are we talking about weeks or months? It would be helpful to get a better understanding of the time frame.

Regulation 7 talks about information being necessary. Will the Minister outline what information will be necessary and how exhaustive it will be? The transfer of excess allowances in regulation 9 is important. Can she give us some examples of the situations where she expects that to arise? It looks as though it is the account holder who has to give notice to the Environment Agency that it has had a transfer of excess allowances. Are they the only people who can do that? I accept that often, presumably, it will be the account holder who spots it first. Are they under an obligation to let the Environment Agency know? If other agencies are aware that something has not worked and that excess allowances have been transferred, are they also able to give formal notice to the Environment Agency?

Regulation 10 relates to persons who may conduct other allocations. The Minister said that other allocations could include a market exchange approach. Are there any other approaches that she sees falling under the other allocations approach? If so, can she give us a few more details about them? If we have a range of other allocation methodologies we should know how they will be worked out. Will it be done by negotiation or will it be something that the Treasury sets out as a fait accompli to participants in the auction? Will it be discussed or will people simply be given an outcome? Will any fees be charged for the process of other allocations? Clearly it will have a cost when it is set up. Will that be recouped by fees or will it simply be seen as a burden to be borne in order to get the revenue from having auctioned off these allocations?

Moving on to part 4 and regulation 11, can the Minister tell us what information could end up in a statement published by the Treasury in relation to public censure? That is quite important. Will it simply be the name of the account holder and the nature of the breach or will there be much more than that? How exhaustive will that statement be? How much detail will it go into? Will it simply be a statement of fact or will it go into more detail about why a breach has occurred and perhaps whether there is fault in a particular area?

How long would the account holder receiving the statement have to respond to it? If the statement is to be issued and if public censure is to happen, it sounds like the Treasury has to give the account holder 28 days’ notice. Does the Treasury see a situation where realistically the account holder receiving the statement would have 28 days to respond, or will there be a shorter or longer period? Again, will they be able to respond formally or is that response a private response between the account holder and the Treasury? How visible will that process be? That is important given that the process on the Treasury side will be very visible. If it is putting out public statements—perhaps the Minister can confirm that they will be public statements—they will obviously be of importance to the account holders concerned. The key questions here concern the extent of the statement and time scale.

Regulation 12 deals with the appointment of the independent observer, but I know that the respondents to the Treasury’s consultation had concerns about how the appointment would be made and how independent the observer would be. Presumably, the observer will be put in place by the Treasury, so can the Minister confirm that? The regulations refer to the observer as independent, but independent of who exactly? Will they be independent of the Treasury or account holders, or are those mutually exclusive? Can we be absolutely clear about what the Treasury is seeking to achieve by that role? I think that I have a pretty good idea in that regard, but it will clearly be an important role in ensuring that the scheme operates fairly.

It would be helpful to have further details on the role of the independent observer, such as the length of term for the post. Will an independent observer be allocated to each auction process, will a team of independent observers be allocated almost at random to auctions, or will they have a term that corresponds to an entire phase in the emissions trading scheme, such as phase III? How will that role work in practice, what kinds of people do we expect them to be and from where do we expect to recruit them?

Regulation 13 deals with the review of decisions, which is clearly another important part of the process. It refers to the appointment of another independent person to carry out the decision. I am pretty sure that that person will be different from the independent observer whom I have just mentioned, but will the Minister describe the process by which the independent person carrying out any review would be identified and put in place? Would the person be identified for a specific review on an auction or would they be in place permanently to carry out reviews when necessary? Any further information on that would be helpful, as would some response from the Minister on how detailed she expects any review of a decision to be. Will it simply be an audit-style statement on whether the auction process was fair and robustly run, or does she expect the reviews to be more detailed and perhaps take the form of a report? Will those receiving a review have an opportunity to respond to it formally or will they simply have to receive whatever they are given by the independent reviewer?

Will the Minister outline the purpose of a review? The statutory instrument does not indicate what will happen if the independent reviewer comes up with some serious issues that indicate that the auction process has not worked effectively. The statutory instrument seems to assume that any review will conclude that things worked fine, so it is important for the Minister to outline what will happen and what process will be expected if the review concludes that the auction process did not work effectively.

With regard to regulation 14 notices, I do not want to be overly nit-picking on this, but paragraph (2) mentions that the Environment Agency will only take e-mails. I wondered whether that was some sort of talking the talk initiative from the Environment Agency, whereby it wants to move to a paperless environment. I wanted to check that, because it is important that we do not let that get away from what needs to be a robust process. For example, I cannot believe that the Minister and the Environment Agency would be averse to having someone walk over a notice if that were similarly carbon friendly.

The next point that I want to flag up is that the language used in paragraph (4)(a) of regulation 14, which deals with notices being given in writing and perhaps left at a person’s address, seems a little weak. It suggests that one could simply throw a notice over the wall—it would be left at the address but it would not necessarily have got to the person one was hoping that it would get to. I notice that the wording is completely different earlier in regulation 14. Paragraph (1)(c)(ii) talks about “personal delivery” to such an address. That is a perfectly accurate way of talking about how we expect something to be delivered. I do not know whether there is a reason for having much looser language in paragraph (4)(a), but I wanted to flag it up.

I want to talk about the percentage of our allocation that will be auctioned. The Minister talked about 10 per cent. We support the auction process and think that it can introduce accountability and clarity into the emissions trading scheme, but why have the Government decided that 7 per cent. of our allocation will be auctioned? The approach can work, but why have we not used the 10 per cent.? How will we work out which 7 per cent. will be auctioned? Will it be particular areas? Will it be a Government decision taken in a backroom or will there be a rationale behind how the 7 per cent. is arrived at? Can she clarify those points?

The regulations will bring in money because organisations will be buying their allocations. What level of funding does the Minister think that the auction process will generate for the Treasury? Does she expect that funding flow to be hypothecated to environmental matters, for example, or to tackling climate change? Perhaps, as I suspect, the money will go into the general Treasury coffers never to see daylight again. It will be helpful to get some clarity on those matters, too. I realise that I have asked a lot of questions but this is an important process. It is important to ensure that we thrash out all the issues now rather than later.