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"Progress in reducing emissions in the five years before the first budget period"-
the first carbon budget period-
"both overall and in most sectors, was far slower than now required to meet budget commitments. A step change in pace of reduction is essential."
The committee's report refers specifically to some of the issues that we are discussing today. Of the power sector it says:
"Investment in low-carbon generation is risky and may not be pursued sufficiently under current market arrangements."
In other words, the current market arrangements are those prevailing under the European emissions trading scheme.
Mr. Redwood: How serious do the Liberal Democrats think the possible shortage after 2016 will be, given the number of power stations being retired and the absence of new ones? What would he do about that?
Martin Horwood: The right hon. Gentleman makes an important point. That is an issue that might in the end lead to derogations from European directives to keep aged power stations online or to allow more importation of gas, which would not be a satisfactory outcome. We certainly need action now, not only to promote CCS but to promote greater seriousness about renewables. For example, we need a stronger feed-in tariff for renewable energy and many other such actions to address the issue that he is talking about.
The Committee on Climate Change also said in its report that the current market arrangements-in other words, those prevailing under the European trading scheme at the moment-are insufficient and leading to a perception of risk in investment in low-carbon generation. It states:
"A new framework to support investment in CCS generation is required."
It also talks about reviews, as the Minister did. However, it mentions
"financial support for roll-out, limits on generation from conventional coal beyond the early 2020s, and timely commencement of a second demonstration competition".
I suspect from the Minister's remarks that she may have misunderstood the committee's advice. That does not mean that we should wait until 2018, 2019 or 2020 to do something about an emissions standard or a limit on generation. We have to give signals that we intend to take such action right now-as early as possible. In fact, the Committee is even more specific about that later in its report, when it says:
"It is likely that there will be a period where CCS is deemed viable but where the carbon price is insufficiently high to cover the CCS cost penalty. In these circumstances, a successor support mechanism would be required. An early signal that such a mechanism would be introduced as appropriate should be provided to reduce risks for investors in the first set of partially fitted CCS plants."
That does not mean an early signal once we have discovered that it is too late; it means an early signal now.
Joan Ruddock:
The hon. Gentleman clearly misunderstands the committee's report. It has argued that we need to indicate that we will be prepared to use the mechanism for retrofitting; we have done exactly that and it is in this Bill. We have responded precisely to what the committee said. If he reads the whole report, he will see that it speaks of the need for the review to
conclude in around 2020. Our review will conclude two years earlier and also contains the interim reporting stages in new clause 8.
Martin Horwood: I am sorry to disagree with the Minister, but I do not think that that clear signal is being given at the moment. In answer to the hon. Member for Wealden, the Minister talked about how an emissions performance standard might undermine the whole investment market, and the hon. Gentleman gave a very good response to that point- [ Interruption. ] I do give credit to Conservative Front Benchers occasionally. They know about business and investment, if nothing else-[Hon. Members: "Oh!"] I withdraw that uncharitable remark. We need those early signals now in order to create the investment framework. The truth is that businesses respond to clear long-term signals. The investment decisions in CCS have to be made now, and they are being made all over the world.
John Robertson: I do not know whether I necessarily agree that the Conservatives understand business. They certainly do not understand the CBI, which seems to know a bit more about this issue. How many research and development projects set themselves interim targets? It is a gradual slope up towards-we hope-100 per cent. sequestration. Putting targets in could hinder development and put companies off research and development, as the CBI has pointed out. That does not mean that if the Government-
Martin Horwood: I am sorry, but I cannot keep taking interventions. I must at least reply to the point made by the hon. Member for Glasgow, North-West (John Robertson).
That does not mean that if the frameworks and signals are given by the Government and regulation, businesses will not respond to them. No business wants to be constrained, but when constraints are set clearly and well in advance, they will respond.
John Robertson: Will the hon. Gentleman give way?
3.30 pm
Martin Horwood: I am sorry, but I need to make some progress.
There are signals from other sources that the current market arrangements are insufficient. We have the European emissions trading scheme. The Environmental Audit Committee, on which I sit, commissioned-well, requested-an important report from the National Audit Office, which reported last March. It stated:
"The range of uncertainties associated with Phase III"-
"means that no forward price for Phase III allowances has been established. It is through establishing a long-term stable carbon market with forward prices that the EU ETS should incentivise long-term investment in low carbon technologies. Until this is created the EU ETS is unlikely to be demonstrably achieving its objectives."
"The absence of long-term carbon price signals has a particular effect on some key sectors, such as the power sector, because of the long asset lives associated with new investments."
We even have academic support.
Martin Horwood: I happily give way to a fellow member of the Environmental Audit Committee.
Dr. Turner: There is one flaw in the argument about the signals for investment that an EPS can provide. If we are worried that too strict an EPS will disincentivise investment, surely to incentivise investment, it would have to be a very lax EPS, which will get us nowhere.
Martin Horwood: I hate to say it, but I think that the hon. Gentleman is misunderstanding how a market works. Constraints can drive investment in different directions. That is the whole basis of the idea behind a carbon price and an ETS. A counter example is what happened in Norway, which, not having our opportunity to be part of an ETS and to have an EPS, introduced a different incentive-a carbon tax. The result was not to stop investment in those technologies, but actually to drive investment, and it has put Statoil-the Norwegian energy company-at the absolute forefront of those technologies worldwide.
I would like to mention a fantastic institution situated close to my constituency. The International Energy Agency greenhouse gas research and development programme, based at Stoke Orchard near Cheltenham, has credited that carbon tax and those price signals with driving investment by private industry, including Statoil and others, in these technologies, and with putting Statoil and others at the forefront of that technology.
Dr. Whitehead: Does the hon. Gentleman accept that investment decisions are not just about whether we build new things, but about whether we keep existing things open? Does he also accept that after 2015-16, about 10 coal-fired power plants will continue to operate on the basis of fitting scrubbers to their chimneys under the large plant directive? We ought to ask whether those plants should continue to exist abated in the 2020s. Does he consider that they are necessary to balance the system, or does he think that they should close immediately after 2015-16? Furthermore, does he believe that a three-year review, at the time when those decisions to close or open are being made, might be the best method of ensuring that those plants know that they are going towards carbon sequestration and that they can stay open for a time as marginal suppliers in order to balance out the system and keep that new investment coming in?
Martin Horwood: I might have lost track of some of the questions in that intervention, but broadly speaking I think that the hon. Gentleman is absolutely right-he is expert on these issues. Retrofitting and the attitude to the maintenance of existing plant are obviously critical, and the signals sent by proposals for an EPS would be important in achieving that. The flaw in the Government's position, and in the Minister's constant use of words such as "aim" and "expectation", is that they do not give that concrete signal. They give the encouragement to investors that they might be able to exploit the loophole, whereas the Committee on Climate Change has made very clear its expectation, and has advised the Government, that unabated coal power should form almost no part of our energy generation after the 2020s, regardless of whether CCS is economic or not.
Joan Ruddock:
I have made it absolutely clear today that we agree with the independent Committee on Climate Change. That is a fact. We are giving the clearest signal to industry that we will provide an investment framework
that will enable it to invest in a way that can be profitable, but is at the same time carbon constrained. That is the best framework that exists in the world, and it is the only financial mechanism being provided in the world to achieve that. I cannot think of anything better, or that could provide greater certainty, to offer industry.
Martin Horwood: Except that we have a range of options based on emissions performance standards that absolutely would give greater certainty. Earlier the Minister asked for one example of a business that was asking for such certainty, and I can give her that example: Progressive Energy, one of the major investors in carbon capture and storage technology. Progressive Energy says:
"It would be extremely unwise to rely on the carbon signals coming from the Emissions Trading Scheme to ensure that investment is made to limit CO2 emissions from coal generating plant...an EPS has real value in providing a market signal against which investment decisions can be made."
If not an emissions performance standard, what is the Government's suggestion for something concrete that we can put in the Bill? We have had no alternative suggestion, and now we have a range of new clauses. The Government's new clause 8 is a welcome response to the pressure that they have been put under on the issue, but it is all about reporting, and not about actually doing something. We have a range of new clauses, from the Conservatives, from the Liberal Democrats and from the hon. Member for Nottingham, South (Alan Simpson). They have been criticised in turn, for being too specific or not specific enough, but surely one of them must be acceptable to the Government as a way forward.
Mr. Binley: May I take the hon. Gentleman back a little? Has he talked to industry about investment in this area? If so, will he tell us who he has talked to and what they said?
Martin Horwood: I have lost count of the number of private companies that I have talked to in my role as shadow Environment Minister for the Liberal Democrats. I have talked to and been in correspondence with a considerable number of companies, including Progressive Energy, as well as with many academics and many people in business. As an officer of the all-party group on corporate responsibility, I meet private companies all the time. However, as I said before, my experience in business is that business sectors rarely set out to have themselves regulated and constrained more-that is simply not how business works-but they will respond to those regulations and constraints, albeit only when they are given clearly. As the hon. Gentleman's hon. Friend the Member for Wealden said eloquently from the Conservative Front Bench, only when those signals are given clearly and unambiguously will business respond adequately.
Mr. Binley: Let me ask the hon. Gentleman to answer my question again, bearing in mind that my Front-Bench colleague gave an answer to it, and that I know that he has spoken to those in industry, and also what they have said.
Martin Horwood: I do not think that that refutes my point-that businesses never set out to regulate themselves-but anyway, we have been round that course at least three times, so let us move on.
New clause 25 is the most robust and specific of the three new clauses on offer. It would make it absolutely clear that an EPS must be introduced, and it would set a clear target of 75 per cent. for emissions captured, compared with the equivalent had CCS not been fitted.
Colin Challen: Will the hon. Gentleman give way?
Martin Horwood: I will give way for the last time, because I really ought to leave time for other Members to make speeches.
Colin Challen: I have a short question. I just want to know what the basis for that calculation is. How does it tie in with the carbon budgets and all the other things that we are doing?
Martin Horwood: That calculation is realistic, given that the current technologies in many places are already delivering about 85 per cent. capture. Indeed, we discussed a proposal in Committee for a target of 90 per cent. capture. That was not supported, so we are trimming a little and trying to see at what level we can command support from the Government. The calculation is led by the science, yet it is an acceptance that we are perhaps having to moderate our ambitions a little, but- [ Interruption. ] Sorry, it was the Environmental Audit Committee, of which the hon. Gentleman is a fellow member, that advocated an emissions performance standard of around 90 per cent. We are going below that, which is the very least that the science demands-and indeed, the level would be increased in time.
Rather less robust is new clause 6, tabled by the hon. Member for Nottingham, South, which we on the Liberal Democrat Benches are perfectly happy to support. Equally, it would mandate an emissions performance standard, but rather less specifically. Then we have the most flexible proposal, or the weakest, depending on one's point of view: new clause 15, which has the virtue of being supported by those on the Conservative Front Bench. Compromising on compromise, we are equally happy to support that, too, if it is the best that we can get today.
There is clearly some opposition to an emissions performance standard. E.ON has provided us with a helpful brief, which says:
"from our perspective as an investor in new generating capacity...an EPS creates new risks which will substantially increase the discount rates we apply to new investments, and ultimately determine whether we proceed with an investment or not."
That is quite a mild rebuttal. It does not say that it will not proceed; that would be foolish, of course, as its investors would query whether it was sensible. E.ON also says in its brief that it recognises that an emissions performance standard can have a useful role in defining what individual new fossil plants will have to achieve in terms of CO2 abatement.
I have already cited Statoil in Norway, which has invested in the Sleipner project, as well as in the Algerian project at In Salah, and in Snøhvit. That has all been driven by the market intervention of the Norwegian carbon tax. Other economic incentives have driven investment in other parts of the world, including the potential for enhanced oil recovery in some places. That is clearly not happening in this country, however.
A further reason for the Government to clarify the situation is the legal uncertainty to which my hon. Friend the Member for North Southwark and Bermondsey (Simon Hughes) referred in Committee. This relates to the European Union's view on whether an emissions performance standard would even be legal. I want to refer to the report by the legal organisation Client Earth, which outlines a scenario in which we hesitate and do not place the position beyond doubt in law, thereby ending up in a situation in which
"the post-combustion CCS demonstration project is deemed ...to be 'not on track'".
In such a case, a subsequent emissions performance standard would become highly controversial. The energy companies could then take the British Government to law to challenge the legality of any UK CO2 emissions performance standard.
Client Earth does not think that the standard would be unlawful but states that it is
"concerned that the European Commission has proposed an amendment to the definition of 'permit' in Directive 2008/1/EC (the IPPC Directive) as part of a process to recast the IPPC Directive that is currently going through the European Parliament. The European Commission's proposed amendment, although categorised by the European Commission as minor, could remove the ability of the UK to introduce the CO2 EPS. The UK should take all steps to resist the European Commission's proposed amendment and ensure that the scopes of the IPPC Directive and Directive 2003/87/EC (the EU ETS Directive) remain mutually exclusive."
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