These EU documents are politically important because:
1.1The European Union has provisionally agreed its ‘European Climate Law’, which will increase the EU’s climate ambition by reducing greenhouse gas (GHG) emissions EU-wide by at least 55% by 2030.
1.2The original draft law (document (a)) was accompanied by a Communication (document (b)) detailing a set of policies across all sectors of the economy required to achieve the target, committing to a review of these and, ultimately, to detailed legislative proposals by June 2021. These include broadening the scope of the EU Emissions Trading System to include international aviation and maritime emissions and introducing a Carbon Border Adjustment Mechanism to mitigate the risk of carbon leakage.
1.3We to the Minister for Climate Change and Corporate Responsibility (Lord Callanan) on 20 January 2021 inviting him to update his original of the documents in the light of the EU-UK Trade and Cooperation Agreement (TCA), which included important provisions on climate change. We explored the relevant parts of the TCA, as well as the Commission’s documents and the Government’s initial position, in our of 20 January 2021.
1.4In his , the Minister observes that the EU and UK have a shared ambition to tackle climate change and will therefore remain close partners in this area, not least by working together for success at COP26.
1.5The Minister draws attention to the introduction of the UK Emissions Trading Scheme (UK ETS), to replace the EU Emissions Trading System (EU ETS) at the end of the Transition Period. The UK, he says, recognises the importance of international co-operation on carbon pricing, and with there being more than 20 emissions trading systems globally, the UK remains open to linking the UK ETS internationally.
1.6The UK ETS, explains the Minister, will be the world’s first net zero carbon cap and trade market and is more ambitious than the EU system it replaces, with the cap already set at 5% below the UK’s expected notional share of the EU ETS cap for its current phase. Later this year, the Government will review the cap to align it with the net zero ambition.
1.7On the matter of the EU’s suggested Carbon Border Adjustment Mechanism (CBAM), the Minister says that the European Commission has yet to make a concrete proposal. Nonetheless, the UK is following the broader debate on possible designs with interest. The UK recognises the importance of ensuring that its policy interventions to cut domestic emissions do not lead to increased emissions elsewhere and work is ongoing across Government to better understand this potential issue, known as carbon leakage. As set out in the of the Net Zero Review, a range of approaches could potentially help to address this, of which carbon border adjustments are one, and the UK continues to engage on the issue.
1.8The Minister notes that the conclusion of the European Climate Law, legislative proposals for reform to the EU ETS and introduction of an EU CBAM all relate indirectly to ongoing UK policy development and, as such, will necessitate the UK’s engagement as an independent country with a legally binding domestic commitment to achieve net zero emissions by 2050.
1.9The Minister has recognised the indirect relevance for the UK of the EU’s various initiatives. We have no outstanding issues to raise at this stage.
1.10We report the Minister’s letter to the House and draw it to the particular attention of the Business, Energy and Industrial Strategy Committee and the International Trade Committee as future UK Government work on tackling carbon leakage, possibly through a carbon border adjustment mechanism, is of interest to those Committees.
1 (a) Commission Communication: Stepping up Europe’s 2030 climate ambition—Investing in a climate-neutral future for the benefit of our people (b) Amended Proposal for a Regulation establishing the framework for achieving climate neutrality and amending Regulation (EU) 2018/1999 (European Climate Law); (a) 10865/20 + ADDs 1–4, (b) ; Legal base: (a)—(b) Article 192(1) TFEU, Ordinary legislative procedure, QMV; Department: Business, Energy and Industrial Strategy; Devolved Administrations: Consulted; ESC numbers: (a) 41521 (b) 41523.
2 ““, Council of the EU, Press Release, 21 April 2021.
3 Where industrial activity might be outsourced outside of the EU to reduce the EU’s own emissions but leading to an increase in carbon intensive imports from countries with less ambitious climate regulation.
4 Thirty-fourth Report HC 229–xxx (2019–21), (20 January 2021).
5 A carbon “cap and trade” market sets an overall cap of emission allowances equating to the amount of pollution that is permitted. Emission allowances are then traded so that those emitting are able to buy allowances or, alternatively, sell them if they choose instead to take actions to cut emissions. To reduce emissions overall, the cap must be lowered.
6 Net Zero Review: Interim Report, HM Treasury, December 2020.