Climate Change Bill [Lords]

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Mr. Woolas: Indeed. To achieve the balance that we discussed, we require such powers. Let me explain. The first application of the new powers will be to support the carbon reduction commitment—a new UK cap-and-trade scheme that will apply to large non-energy-intensive organisations in the public and private sectors, including, we anticipate, Government Departments. That is a progressive step.
The powers may also be used to introduce a household energy supplier obligation to succeed the carbon emissions reduction target that ends in 2011. The principles underlying any additional scheme would be its interoperability with other schemes, specifically the ETS, its interoperability through that mechanism with other global or worldwide schemes, and, just as importantly, whether it would achieve further reductions in emissions than would existing participation in the ETS or the other two schemes that I mentioned. Given that we are legislating for a long period, it is possible that the ETS will not exist, in which case we would need those powers. We are simply taking powers that Northern Ireland and Scotland already have to set up such schemes.
Steve Webb: Will the Minister clarify whether the provisions apply only to sectors, broadly defined, that are outside the ETS? If they applied to people within the ETS, what would happen if they traded in the sectoral scheme, did well and built up credits? I want to know about that interaction.
The question takes us back to the debate about the domestic effort as against the international effort. Having a national cap or target means that if we do well domestically, we simply sell our surplus credit to somewhere else, so the aggregate across the EU will not fall. That seems to run counter to what we are trying to achieve through the sectoral scheme. Perhaps sectoral schemes should be non-EU ETS schemes.
Mr. Woolas: I see the hon. Gentleman’s point. Sectoral schemes could be within the ETS, but they probably will not be. One can envisage circumstances involving international industries that are not predominantly European-based. I hesitate to offer an example because trade associations will write to me about it, but let us say that the international widget manufacturing association wanted to propose a scheme, and that a lot of widgets were produced in a place—again, I shall not mention a particular country—that is east of Berlin.
Question put and agreed to.
Clause 44 ordered to stand part of the Bill.
Clause 45 ordered to stand part of the Bill.

Schedule 2

Trading schemes
Martin Horwood: I beg to move amendment No. 74, in schedule 2, page 51, line 33, leave out from ‘responsible’ to end of line 34.
The Chairman: With this it will be convenient to discuss amendment No. 73, in schedule 2, page 51, line 34, at end insert—
‘(5A) (a) Any method specified for the purposes of paragraph (5) shall have the aim of ensuring that any amount calculated bears as close a relationship as possible to the actual emissions of the activities to which the trading scheme applies;
(b) where biomass is used as an energy source, any such method shall take account of the carbon absorbed during the lifetime of the biomass;
(c) “biomass” has the same meaning as in the Renewable Transport Fuel Obligations Order 2007.’.
Martin Horwood: The amendments follow on from our previous debate, with a similar theme of interoperability. They seek to replace the rather vague wording in paragraph 3(5)(b) with more specific wording specifying that not only should regulations be introduced to set out the method by which the amount of reductions are to be measured and calculated, but they should bear
“as close a relationship as possible to the actual emissions of the activities to the which the trading scheme applies.”
One would hope that that would be an unnecessary measure, but practice tells us otherwise.
A wonderful variety of carbon and energy reduction schemes is developing. We have the ETS, climate change agreements and the carbon reduction commitment, and in another context there are renewables obligation certificates. However, the problem with that complexity is that perverse results start to emerge. The interplay between the last two schemes that I mentioned—renewables obligation certificates and carbon reduction commitment —is causing a few problems in the commercial, private sector.
The carbon reduction commitment is rather a misnomer, as it incentivises not the reduction of carbon, but the reduction of energy use. It is valuable as an energy efficiency measure, but it has one serious flaw as it assumes that all energy coming into an enterprise is at the grid average, and that there is an equal need to reduce energy across all of a company’s activities, no matter what the power source.
In some cases it is difficult to pin down the source of energy, but in other cases it is rather easy. I cite a domestic example. I have a solar-powered radio in my flat in London. [Hon. Members: “Hear, hear.”]. Very sound, I know. I never plug it in and it is powered entirely by the solar panel on top of the radio. I leave it on all day—discreetly, so as not to disturb my neighbours—and it is a useful security measure, especially if our addresses get published. It quietly plays all day while the sun is shining. There is no reason for me to practice energy efficiency, turn it off and reduce the amount of energy that I use, as it is powered from an entirely renewable source that does not compete with any other energy source and is completely carbon free.
There is an exact parallel in commercial enterprises where companies have on-site renewables, which, in some companies, are becoming highly significant. BT is, I think, the biggest and most impressive example so far, although an hon. Member quoted Lily Allen’s recording studio as another, and BT gets 30 per cent. of its energy from its own on-site renewable energy generation. The carbon reduction commitment treats that in the same way as energy coming from Drax or Kingsnorth or any other of those fossil-fuel intensive energy sources.
The Renewable Energy Association, BT and others would love to claim renewable obligation certificates for that renewable energy. That produces a problem of double counting or even double subsidy, whereby the same carbon reduction gains credit in the ROCs scheme and in the carbon reduction commitment. I acknowledge that there is a problem, and I would not entirely endorse the Renewable Energy Association’s optimistic lobbying on that front. However, it is clearly unfair that enterprises cannot at least exclude the energy generated entirely from a renewable source from the carbon reduction commitment scheme, so that it would effectively be neutralised and at least would not count as coming from a dirty source.
That is why it is important that the scheme design is changed or the rules amended so that in future, as in the clause, schemes are designed to pay close attention to carbon emissions. They should not be simply plucked out of a broader agenda such as energy efficiency, as that may not be appropriate. Various companies have raised that serious point about what is clearly an anomaly in the current scheme, which the amendment is designed to tackle.
Gregory Barker: The amendments are intended to enhance levels of transparency and accountability in the calculation of emissions. The hon. Member for Cheltenham asked some sensible questions of the Minister, and enlightened us as to his home listening habits.
It is not in the interests of accountability or transparency on trading schemes for the method by which emissions are measured to be entirely self-regulated, or for there to be any doubt about how they are calculated. There is eminent sense in these Liberal Democrat proposals.
1.45 pm
Mr. Woolas: The point that the hon. Member for Cheltenham made is right: perhaps carbon reduction commitment is a misnomer. It is intended primarily as an energy efficiency measure because it measures energy use, rather than direct emissions—it is a proxy for emissions. Conceptually, the carbon reduction commitment lies underneath the climate change agreements and brings in the mid-ranging organisations. Fifty per cent. of emissions in the UK are covered by the ETS and we are trying to bring in other organisations, such as large energy users. Increasing energy prices may change the relationship.
The difficulty, however, and the answer to the hon. Gentleman’s question, philosophically, is double counting. One must ensure that the mother scheme—if I may use that phrase; I think I can—or the parent scheme that caps emissions is not undermined by the carbon reduction commitment that lies underneath it. To follow the logic of the hon. Gentleman’s argument, if there was a way of measuring direct emissions from the use of energy by mid-ranking organisations, one could have a subservient direct emissions cap and trading scheme, but there remains the issue of double counting. I shall give him the technical explanation in a minute, but bearing in mind his point about needing to take account of where we get our energy from within the carbon reduction commitment, we are trying to provide an incentive to energy efficiency, which I know he supports.
Martin Horwood: I am grateful to the Minister and he is making perfectly valid points. As regards one scheme undermining another, does he not accept that at the moment, an enterprise taking all its energy from a dirty source has no incentive under the scheme to develop on-site renewables, even though that would clearly be a good thing to do, because that energy would be treated exactly the same as the dirty energy? Surely, the key is accountability for the energy that is coming from outside, measurement of it, and the transparency of the process. As that is something the Government are working on, they should be happy to accept the amendment.
Mr. Woolas: I will come to why I should not be happy to accept the amendment in a moment, but the hon. Gentleman’s policy point is right. Indeed, I hear the echo of many meetings with my colleagues in the Department for Business, Enterprise and Regulatory Reform. The carbon reduction commitment will take into account the source of the energy and will incentivise use away from dirty energy by the renewables obligation and, indirectly, through the ETS.
Martin Horwood indicated dissent.
Mr. Woolas: Let me explain, and then the hon. Gentleman will stop shaking his head and start nodding it, I hope. We want to encourage the uptake of renewable energy. However, where the carbon savings from renewables are already counted by supplier schemes, such as renewable obligation certificates, it would result in double counting if the same units of renewable electricity could count towards the carbon reduction commitment. The proposed approach for the carbon reduction commitment is, therefore, simply to ensure that there is no double counting. However, we propose that participants may count renewable electricity generated on site if it is not counted against targets in the renewables obligation. That approach demonstrates the commitment to ensuring that the carbon reduction commitment delivers additional carbon savings over and above those that suppliers are required to deliver through the renewables obligation certificates scheme, and will help to encourage it further.
Amendments Nos. 73 and 74 would alter a provision of the trading scheme powers with regard to how the greenhouse emissions from activities covered by trading schemes may be calculated. The amendments make specific provision on how energy from biomass should be treated under future trading schemes. As currently drafted, under paragraph 3 of schedule 2, trading scheme regulations must identify the activities covered by the trading scheme, and
“specify the units of measurement of the activities for the purposes of the scheme”.
Further, paragraph (5)(a) ensures that the activities covered by a scheme can be calculated with
“reference to the amount (in tonnes of carbon dioxide equivalent)”
for which they are responsible, and paragraph (5)(b), which amendment No. 73 would remove, ensures that the regulations may specify how that amount is calculated. In philosophical terms, that exactly meets the point that the hon. Gentleman is rightly making.
To explain further the whole debate about alternative sources, if one looks at electric cars, they do not in and of themselves reduce emissions; it depends on where the electricity comes from. That is what counts. The hon. Gentleman is absolutely right that the CRC must incentivise not just energy efficiency but emissions reductions.
There are two likely situations. First, let us take it as read that it is often difficult, expensive and sometimes frankly impossible, to measure the volume of greenhouse gases emitted at a site, so it is common that emissions in a trading scheme are derived by taking the volume of fuel consumed and applying co-efficients to calculate the volume of greenhouse gases that result. It is the calculation of that co-efficient that a scheme must do—to meet the hon. Gentleman’s point.
Secondly, these powers apply equally to direct and indirect emissions, as set out in clause 43. Indirect emissions are sometimes measured by taking electricity use at, say, the office building in question, and then applying the same co-efficients to work out the volume of greenhouse gases when the electricity was produced back at the power station—to meet the point that the hon. Gentleman makes. Alternatively, by taking the volume of fuel sold for combustion and applying co-efficients, it could be possible to calculate the volume of emissions that result.
Under the CRC, for example, it is proposed that emissions from participants’ energy use will be calculated using a grid electricity emissions factor. That will be based on the five-year rolling average emissions factor, which is currently 0.523 kg of CO2 per kWh. That shows how the provisions in paragraph (5)(b) may be applied.
Martin Horwood rose—
Mr. Woolas: I have confused the hon. Gentleman. Let me reassure him, and then he will not need to intervene. Paragraph (5)(b) ensures greater flexibility in the calculation of emissions from a trading scheme. My figure is the co-efficient around which that is calculated; it is the baseline, which is taken up or down depending on the individual participant. One should remember that my officials and others will be discussing with each participant in the CRC their particular circumstances. That is necessary. It is not intended that paragraph (5) will allow the Government or a national authority to fudge the figures. I must cover things from the other point of view as well, or the hon. Gentleman will press me as to whether the provision is too flexible, and he would be right to do so.
Paragraph (5)(b) ensures that the methodology for measuring emissions may be set out in the regulations, which gives the hon. Gentleman the guarantee he is looking for. Removing that sub-paragraph would therefore have the effect of reducing the transparency of the trading scheme. The hon. Gentleman is right, and I have added powers to make regulations to meet the points he makes. I agree with him that CRC is a misnomer.
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