Draft Community Emissions Trading Scheme (Allocation of Allowances for Payment) Regulations 2008

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Justine Greening: I understand the logic for leaving some percentage for new entrants. Is the Minister saying that, nevertheless, by the end of that phase she expects that the UK Government will have auctioned pretty much the full 10 per cent? If new entrants do not want to come in and take up the additional 3 per cent. will the Government auction it anyway?
Angela Eagle: The hon. Lady asked me questions which I would need a crystal ball to be able to answer in absolute detail. That question is another of those. I explained to the Committee that we certainly agree that it is good in principle to auction as much as possible. In phase II of EU ETS, we will look to do that. This is a relatively new process. We have been through phase I, which was essentially a test phase, and we need a bit of leeway because we simply do not know what market entrants there may be in future. If the hon. Lady is asking me to speculate on that, I gracefully decline. However, we can both imagine instances when new market entrants might come on to the scene and wish to have access to an allocation of auctioned emissions. We wish to keep the flexibility to allow that, rather than auctioning everything at the beginning of what is a five-year phase. I hope that that answers her question—I suspect that that is the only answer that I could give her at this stage.
The hon. Lady went through a series of detailed questions, the answers to some of which will become clear when we publish the auction scheme. That can essentially be seen as a contract in which a lot of the details about the length of the bidding window, the amount of deposits, time scales and exchange rates will be set out. It is like a detailed terms and conditions for the auction. We are working on that document, and hope to have it available as soon as possible. There is no reason why one would expect to see that level of detail in a statutory instrument. The auction scheme will be available long before any auctions of allowances take place, so that all potential market participants who may be interested in taking part in the auction are well aware of the details.
Justine Greening: That is helpful. I obviously understand that the Government are working on the details. Will the Minister give us an idea of timelines? When will the first auction happen, and when will the more detailed proposals come out? I understand why every detail would not be in the statutory instrument.
Angela Eagle: The Department for Environment, Food and Rural Affairs is the Department responsible for conducting the auctions and it has decided to use the Debt Management Office, which sits in the Treasury and is used to doing auctions. It does a lot of successful auctions—it is quite good at them—and is au fait with the technical conditions needed to conduct gilt and other auctions in a sensible way, as trusted by potential market participants and all the agents that are responsible for such things.
The Debt Management Office is working with DEFRA to put most of the flesh on the bones of the terms and conditions—the auction scheme—which we hope will be available quite soon. That document is being worked on and is in reasonable shape, but it is not finished. Technical discussions are ongoing with the experts to get it absolutely right. It will certainly be available well before the first auction of EU ETS allowances of phase II is due. DEFRA says that it expects the first auction to be conducted by the end of the year. I suspect that it will be towards the end of the year, rather than towards the summer. The scheme, with a lot of the answers to the hon. Lady’s legitimate detailed questions, will be publicly available well before then.
The hon. Lady asked about the deposits. They will be set with reference to the prevailing secondary market price of carbon. There is already trading in the secondary market and I am told that the price of carbon there at the moment is €27.5 a tonne, and that 10 million allowances a day are traded. The Debt Management Office will look at that as the market deepens and develops, and will take decisions about the deposits closer to the time of the auction.
Mr. Blunt: Is that the price of carbon or carbon dioxide equivalents?
Angela Eagle: I understand that they are allowances to emit—CO2 allowances. There are other greenhouse gases that are not traded at the moment.
What is the purpose of the independent observer? They are there to act as a witness to reassure participants that auctions are being carried out fairly and they may be able to produce independent evidence if a participant feels that it is necessary. They strengthen the auction process and the integrity of the carbon market and, clearly, they will be independent of Government. The hon. Member for Southport asked what their qualifications will be. I would not expect the relevant qualifications to be put into secondary legislation, but it would not be sensible to appoint an independent observer who knew nothing about auctions and expect them to do the job that Her Majesty’s Treasury wishes them to do. They will be appointed to observe the allocations and auctions.
The hon. Member for Putney asked about the review. It is there to create an opportunity for participants to have a review of the decisions made under the regulations without having to apply for a judicial review. It is meant to solve disputes, problems or worries without the panoply of a judicial review, but it does not exclude the possibility of one if participants are still unhappy. It would not be sensible or beneficial to try to prevent a judicial review.
I have answered one of the hon. Member for Putney’s crystal ball questions, if I may call them that, which was about the 7 per cent. On her questions about auctioning and Treasury funds, I do not know at the moment how much money will be made by conducting auctions. We can guess and look at the current price of carbon on the secondary market, but it may not be the same when the first auction happens. We do not know what the price will be in that auction. I am flattered that she thinks that I have that sort of insight into the future, but I am afraid that I do not. Clearly, the results of auctions will be public knowledge and she will then be able to come back to some of the questions about how much money might be raised. We can discuss what we wish to do with it then.
Justine Greening: Can the Minister confirm that public finance and comprehensive spending review projections do not include any provisional assessment of likely income from the auction process? I think that that was what she was saying, but it would be helpful if she confirmed it.
Angela Eagle: Yes, I am saying that. I would be extremely worried if our review of public expenditure and income were based on money from an auction that may happen in the future for a carbon price that we will not know until we get to the end of the year.
My hon. Friend the Member for Thurrock asked his usual range of questions and made his usual observations, which I respect, about the nature of delegated legislation. I do not know whether he is on a crusade never to be allowed to serve on another statutory instrument Committee; if he is, it is not working. I always welcome his presence at statutory instrument and other legislative Committees and at debates on public accounts and such things. He asked who the consultees were. There were two consultations; the first, between December last year and March this year was on the auction design; and the second was on draft regulations, to see whether people had any comments on the regulations that we have before us. We sent the questions to all market participants. I think that there were 1,000 EU ETS operators, and the drafts were sent to all of them. We got five responses, but we cannot be faulted for not trying. If there had been any serious worries about that, we would have heard about them. I rather think that that proves what the hon. Member for Southport was saying about this being a standard approach to auctioning as a process, rather than an issue about what we are auctioning. I hope that that reassures my hon. Friend the Member for Thurrock.
With regard to the EU Commission’s views, I can tell my hon. Friend that it has rejected all other phase II national allocation plans except the UK’s. It is happy with the UK and believes that we have set an appropriate cap, and it appears to believe that all other countries in the EU are setting their caps too high. It now has power under the directive to ensure that member states do not continue to do so and is busy exercising that power. The UK, however, is the only member state whose national allocation was accepted without amendment. I hope that that gives him some confidence in the seriousness with which we take that process.
Andrew Mackinlay: I am pleased I asked.
Angela Eagle: I am also glad that my hon. Friend asked. I am happy to be asked about those issues and pleased to be able to tell the Committee where we are in that important process.
My hon. Friend also asked why phase II excludes the trading of aviation emissions, which is an issue that many of us wish we could resolve faster than is proving to be the case. We now have agreement to include aviation in phase III of EU ETS, which is a great step forward, given that we operate within the framework of the Chicago convention, which does not permit any taxation of aviation fuel whatsoever in the world. Indeed, it is illegal to tax aviation fuel under that convention. It is therefore important that we have an agreement for phase III, which will begin to include the cost of aviation fuel in EU ETS after 2012-13. That means that we can begin to tax aviation fuel without having a detrimental effect on individual countries that might be doing the right thing but whose aviation trafficking costs will move detrimentally as a result. That is a big step forward, and although it might be frustratingly slow for my hon. Friend, it is progress.
Justine Greening: When aviation starts to be included, will the level of emissions be based on outgoing flights as well as incoming flights at airports in Europe and the UK, or will either one or the other be taken into account?
Angela Eagle: These agreements have to be agreed by all EU countries that participate in the detail of the decision. For emissions trading and environment changes in general, there is a qualified majority. One would have to agree with the 26 other members of the EU on the details of a scheme, which could be any of those things. I am not now in a position to anticipate the detail of how that scheme will work, as the hon. Lady has asked me to do. If we were to be able to renegotiate the Chicago convention, for example, one would imagine that we would think about emissions from aviation coming in as well as out, but it is much harder to do that without change at an international level. I am looking at you carefully Mr. Jones, as the hon. Lady is tempting me down a path that I do not think it is advisable for me to follow any further, as much of that concerns future negotiation. It is possible to think of a scheme that could do that in either or both ways, but we are not at the stage where that detail is available.
Justine Greening: I should be clear about why I asked. When the Government conducted their consultation on Heathrow airport and worked out the CO2 impact of expanding the airport, they only included the emissions from outgoing flights. Technically, therefore, only half of the emissions from the airport were calculated. It is important to understand how the Government will approach such policy decisions within the context of the ETS, but I accept that that is a debate for another time.
Angela Eagle: The best thing that we could do on aviation taxation would be to effect change at a higher level than the EU agreements because aviation emissions are a worldwide problem and need to be tackled at the appropriate level. However, we have made progress in agreeing to include it in phase III of EU ETS.
My hon. Friend the Member for Thurrock asked about the devolved Administrations. He asked what the ground rules are for auctioning in the devolved Administrations. Although environment issues are devolved, the auctioning of emissions trading allowances is a significant fiscal and economic measure. Hence, it is a reserved measure. The auctioning policy in the legislation was prepared in consultation with the devolved Administrations and officials are working closely together, but it is not a devolved issue.
My hon. Friend asked why regulation 10 refers to the Department of the Environment in Northern Ireland and not Northern Ireland Ministers. The devolution agreement set down the relevant terminology and this is the standard method of reference for the Executive in Northern Ireland for all environmental functions. That is a technical answer and there is nothing that he should be worried about regarding excluding access.
I have ranged quite widely to deal with the questions, but we must remember that these are quite technical regulations that set out the bones of a structure for auctioning in quite a flexible way as we develop our plans via DEFRA and the Debt Management Office to hold auctions for EU ETS. That will happen by the end of the year. I hope that with those reassurances, Committee members will accept the regulations.
The Chairman: The question is—
Mr. Hamilton: My hon. Friend the Minister did not answer the question on how the regulations will affect coal. May I make one further important point? I know that this is an administrative exercise, but there are three Administrations outside the UK Parliament and there will be an unwanted conflict. All I am trying to do is to avoid that conflict arising. If this agreement is to be administered in Scotland, Wales and Northern Ireland and that involves a cost, as sure as night follows day, the Treasury will have to pay that cost to the Administrations of those countries.
The Chairman: I apologise to the hon. Gentleman for not seeing him rise to his feet.
Angela Eagle: I also apologise to my hon. Friend. His important questions got stuck behind one of the many pieces of paper before me. He asked about the independent observer and I hope that he feels that I have covered that point. He also asked whether there would be an adverse effect on coal-fired power stations. The dirtier such power stations are, the more expensive it will be for them to operate. That is the point of EU ETS. It will make it economical to use cleaner coal technology by retrofitting or by new build. Coal-fired power stations that damage the environment more than other forms of power generation will pay the polluting costs. It is important to have a properly diversified energy policy. The idea of EU ETS, as it applies to coal-fired power stations, is to incentivise the retrofitting and development of cleaner coal technology to reduce emissions. Emissions will be priced into decisions about energy generation.
I also forgot the questions from the hon. Member for Reigate. I apologise to him. He made a point about direct policy and how awful the Treasury was at dealing with tax credits. I will not argue on that, although you know that I would if it were in order, Mr. Jones. As I explained earlier, the Debt Management Office, which is part of the Treasury, does auctions regularly and is extremely good at them. It has been appointed as the agent for doing the auctions by DEFRA. I hope that the hon. Gentleman will recognise that.
With those responses, I hope that the Committee will decide to accept the regulations.
Question put and agreed to.
That the Committee has considered the draft Community Emissions Trading Scheme (Allocation of Allowances for Payment) Regulations 2008.
Committee rose at ten minutes to Six o’clock.
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