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We believe that to put percentages in would be far too restrictive. However, if we were asked to pluck a figure from the air, what about 25 per cent? We have had 30 per cent, 10 per cent, and 40 per cent from the noble Lord, Lord Puttnam. We on these Benches do not know the right answer, and I do not think that we would get consensus in the Committee anyway. My noble friend Lord Crickhowell does not know, and he is an expert; I am not.

Lord Crickhowell: I am not an expert.

Earl Cathcart: Well, my noble friend is certainly more of an expert than I am. The committee’s members are the experts, and they should decide. The Bill should have no restrictions in it, but should give the committee a steer on our thinking. Once the committee has looked at all the evidence, it should then say what percentage limits should apply.

The concept of allowing overseas credits to be used to reduce a country’s net carbon account is widely accepted internationally. There are already at least three international agreements for allowing foreign schemes and reductions to be used in reducing or netting off the UK carbon account—the UN framework, the Kyoto Protocol and the EU Emissions Trading Scheme—and no doubt others will be developed.

There are two types of international carbon credits. The first is where UK companies and entities

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can buy credits from those who emit less than their capped allocation, and the second is the funding of projects abroad, which will displace the growth of emissions from the developing world. UK companies that emit more in a given period than their allocated cap must buy sufficient credits to bring their net carbon account into line with their cap. They can buy credits from another company within the UK; that will reduce their net carbon account but increase the selling company’s, so that both companies stay within their respective cap allocations. Because those transactions take place in the UK, there is no change to the UK’s net carbon account. Alternatively, the company can buy its credits from another company outside the UK. That will reduce both the individual company’s net carbon account and that of the UK.

That carbon trading is already taking place. It allows participants to reduce emissions where it is cost effective to do so and to trade where it is cheaper for others to do so, therefore reducing emissions at least cost. The noble Lord, Lord Rooker, said last week that the European Commission confirmed this,

“finding that the costs could be reduced by a third through emissions trading”.

However, it is vital that the caps set internationally are robust. If not, the credits bought are likely to be from the most lax systems. If that happens, progress to reduce emissions will be slow.

The UK company can also help to pay for green projects in a developing country, as can the Government. The effect would be to reduce the net carbon accounts of the Government and the United Kingdom. But are those credits for overseas projects desirable? In my view, they clearly are. As the noble Lord, Lord Rooker, said on Amendment No. 8,

“it does not matter where on the planet the reductions take place, so long as they are proper reductions”.—[Official Report, 11/12/07; col. 185.]

I agree, but when I wound up on Second Reading I said:

“It is rather like the buying of indulgences ... While it is obviously worth while to contribute to the global battle against climate change”,—[Official Report, 27/11/07; col. 1207.]

that should not be allowed at the expense of taking the necessary actions within the UK. The noble Lord, Lord Puttnam, said a little earlier that it is like pushing the problem abroad. It is actually pushing the solution abroad; we have to find the solution in this country.

6.45 pm

Pushing the solution abroad would convey entirely the wrong message. If the UK failed to reduce its own emissions by allowing too high a percentage of foreign credits, it would be a sort of “business as usual” approach. That theme is echoed by the Kyoto Protocol—it was referred to by the noble Lord, Lord Puttnam—which states that,

“the use of the mechanisms shall be supplemental to domestic action and that domestic action shall thus constitute a significant element of the effort made”.

“Supplemental” and “significant” suggest that a figure of well below 50 per cent would be acceptable.

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At this point, I would like to say something about the reporting of the UK’s net carbon account. There is a need for full disclosure in the reporting of the reduction in emissions from one period to the next. By that I mean disclosure of how much of the change is due to the UK’s domestic emissions, how much is due to carbon trading—both of credits and debits—and how much is due to the taking of credit for developing-world projects. That would offer some transparency to the process. We have tabled an amendment to that effect, to which we shall come later.

What is the right percentage? We have lots of different ideas in the Committee today. Should it be the same percentage throughout the 42 years? That was referred to by the noble Lord, Lord Turner. There may be merit in tapering the percentage over the period. Initially, companies would need to trade carbon extensively until they got their own house in order. If they failed to do so and as their allocated cap reduced year on year, the cost of trading carbon would become prohibitive, until price forced them to take action. For an example of tapering, let us take the figure of 40 per cent suggested by the noble Lord, Lord Puttnam. You could have something like 40 per cent in the first 10 years, 30 per cent for the next 10 years, 20 per cent for the next and 10 per cent for the remaining. That example averages out at about 25 per cent for the 42 years, which is coincidentally the same figure as I plucked out of the air at the beginning of my remarks. However, if there is to be any tapering, it should be for the committee to decide.

Lord Campbell-Savours: The noble Lord is talking about a mechanism for tapering. Surely the market will determine that.

Earl Cathcart: It may well, but the climate change committee could decide on the mechanism for tapering in carbon trading. Buying indulgences abroad may increase as years go by but, by having a tapering mechanism in place, the whole thing would reduce.

I said earlier that we should not put a percentage into this Bill, as we would only be guessing. The setting of limits for carbon credits should be left to the committee of experts. Indeed, I understand that Brussels is currently looking at setting those limits centrally, so it would be entirely inappropriate for us to put a limit in the Bill before the EU had deliberated. Doing so would make our position inflexible—another reason why the setting of limits should, we believe, be delegated to the committee so that it can look at all the facts and evidence. We have tabled amendments to that effect, which we shall debate later.

Lord Rooker: We have had an interesting debate, although there is something very British about noble Lords queuing up to say how innumerate they are. We are all pretty numerate, but it is a matter of trying to explain the figures in a forum like our Committee, when we lack the good communications technology that the Committee on Climate Change will certainly have. I freely admit that we shall return to some aspects of this important debate, as some of your Lordships have said. The significance of this matter is

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such that I have here a speaking note of 11 pages; however, I shall start by sharing its very last sentence with the Committee.

One or two Members of the Committee have asked how the Government can prove that we are determined and committed to decarbonising the UK economy. From that point of view, the Bill needs more clarity. We will take that aspect away to see how we can modify the Bill to make it absolutely clear that we are committed to that decarbonisation. That is what underlies it: we are all agreed on trading. The only reason that people might oppose trading on principle might be if we are not committed to doing anything ourselves. The very last sentence of these 11 pages says that in view of the opinions expressed, we are certainly prepared to take the Bill away to see how we can clarify our commitment.

I do not propose to use all 11 pages; that was just to frighten your Lordships. However, I want to answer the discussion on the amendments which, as they were put to us, have been incredibly interesting in getting the debate going. It will also be useful for our debates on other amendments. Domestic action is crucial and, if I have not made this clear, I want to emphasise that we recognise the importance of reducing our emissions within the UK. We are committed to the international principle of supplementarity, which states that the use of international mechanisms should be supplemental to domestic action. The latter should, therefore, probably constitute the significant element in our efforts to meet our targets.

For example, the 2007 energy White Paper, Meeting the Energy Challenge, sets out an ambitious and far-reaching programme of action across the economy to reduce our own emissions. Our projections are that it would put us on track to reduce carbon dioxide emissions—through domestic action and the EU Emissions Trading Scheme—by between 21 and 26 per cent by 2020. We recognise that further action will be needed. However, as I have said before, a tonne of carbon is a tonne of carbon wherever it is emitted. The international trading has significant benefits in reducing the cost to the world as a whole in tackling climate change, by providing the finance needed for developing countries to move to a low-carbon development path. It also underpins the global system that we simply must have if climate change is to be tackled. The question that we must ask, therefore, is: how are we to get the right balance between domestic and international action to reduce emissions over time? We are talking about a fairly long timescale.

The amendments proposed would take different approaches to that balance. When debating and scrutinising a Bill, it can sometimes appear as though amendments to one part of the Bill are somewhat contradictory to those in other parts. That is easily done—I have done it myself when in opposition—and there is nothing wrong in it. We are here to scrutinise, so I make no point on principle that, because an amendment takes one view, a political party is therefore being contradictory or changing its mind.

However, I will deploy the amendments in turn. While the amendments take different approaches, we do not accept that they capture the complexity of the

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situation or the fact that this picture will change considerably before 2050. For instance, within the EU, surely we can expect the European Commission to come forward with proposals to change how the EU Emissions Trading Scheme operates? Meanwhile, internationally, as the Committee will be aware, discussions on the post-2012 framework have been taking place in Bali—and their outcome is difficult to predict.

Amendment No. 25 would place a limit on the use of carbon units of 30 per cent

“of the difference between the 1990 baseline and the annual equivalent of the carbon budget”.

Carbon budgets will get smaller over time, as we reduce emissions towards our 2050 target, so the difference between the 1990 baseline and the carbon budget will increase over time. This amendment, therefore, would mean that the number of carbon units allowed would increase over time. Under Amendment No. 25, if the 2050 target was set as at least an 80 per cent reduction, as many of your Lordships have proposed, this amendment would mean that the limit on the use of carbon units was higher than the budget itself. That is because the level of the carbon budget would be, at most, 20 per cent of the 1990 baseline in 2050, while the number of carbon units allowed would be 30 per cent of 80 per cent, which is 24 per cent of that baseline.

Amendment No. 27 would limit the use of carbon units to 30 per cent of the carbon budget, so, over time, as that budget got smaller it would mean that the number of carbon units allowed would decrease. As one of your Lordships has already mentioned, that is therefore the opposite approach to that taken by Amendment No. 25.

Amendment No. 111 would place no explicit limit on the quantity of carbon units that may be used; instead, it says that if we are going to use carbon units, no more than 5 or 10 per cent of them can be from overseas. In practice, the vast majority of carbon units credited to the net UK carbon account will come from elsewhere in the European Union and from the international carbon market. This amendment would, in practice, make it difficult for us to use any carbon units to meet targets and budgets. That may not have been the intention, but I am trying to explain the practical effect.

I now have about seven pages extolling the virtues of emissions trading schemes and their importance. I think everyone understands that they can have an importance, particularly in providing aid to developing countries. I will save these for other debates, showing that I have learnt a thing or two during the past 30 years while going through each House in succession.

None of this is to say that this debate is not important. We are all grateful to the noble Baroness, Lady Miller, for letting us have this crucial debate early in the Committee’s proceedings. The Environment Audit Committee in the other place looked at this very issue and concluded that,

“this must not become an ‘either/or’: the Government should ensure that the UK’s targets are sufficiently challenging that they drive decisive emissions reductions at home and abroad”.

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We are already committed to looking at tightening up our 2050 target, as we said at Second Reading. There is a general consensus on that question. We all recognise the need to meet our international obligations under the principle of supplementarity, and we have every intention of doing so under this Bill. However, as your Lordships have said, the situation is complex and not the easiest to explain. That is why we are proposing and asking the Committee on Climate Change for each budget period on an ongoing basis to provide advice on the appropriate balance between domestic, European and international action. This is a flexible approach that recognises that the international climate change framework will look very different in 2050 from how it looks now—although I was taken by the point made by the noble Lord, Lord Oxburgh, on not leaving it all to the Committee on Climate Change in this respect: there are other aspects of this for business. The noble Lord made a telling point.

For those reasons we would like to take this concept away to see where we can clarify in the Bill—although I do not identify where that will be—that we are committed to decarbonising the UK economy. We obviously want to decarbonise the world economy at the same time, but the fact of the matter is that we do not want to do one of those things by hiding behind the other. That is the point that we need to come back on, and we are grateful for the debate initiated by the noble Baroness.

7 pm

Lord Puttnam: On this question of clarity, because I am a rather sad person, I looked up the Oxford English Dictionary definition of supplement and supplementary. It states clearly that it is to furnish a supplement or to supply the deficiency. If I heard my noble friend correctly, he helpfully said “the significant”, rather than “a significant”. This type of tautology frightens the life out of me. Will he help me with my slight crisis and go to the extent of using the words “the majority”? Would the Government be prepared to instruct the climate change committee that the majority of carbon savings would be achieved from domestic action? I stress that because successive Governments will come under the hammer on this. Getting behaviour change through will not be politically popular, but I am desperately trying to cling on to something here that ensures that the government of the day are required to take relatively unpopular actions for the benefit of the country as a whole and in the longer term.

Lord Rooker: That is a question to which, in all honesty, I should be able to say yes, but I cannot do that here tonight; I shall have to take the matter away and come back on it. I wanted to come back to the point the noble Lord raised. I do not normally follow notes and read out narrative. I have always said to officials, “If there are words that you want me to use precisely, put them in bold and I will use them”. This time around, I changed the words as I used them, because, conscious of the debate that I have just heard, I said—and I shall read it again—that,

“we are committed to the international principle of “supplementarity” which states”,

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in bold letters,

“that use of international mechanisms should be supplemental to domestic action and that domestic action should therefore constitute a”—

I then said that perhaps it should be “the”—

“significant element of our efforts to meet our targets”.

So I am with my noble friend on that; it is a question of how we can do it in the Bill. I hope that I have said enough in this debate for my colleagues in the department—the climate change Ministers for whom I am masquerading as their spokesman on earth, while we still have one. We will take the issue away, because I shall have to come back with something solid that I can get the House to accept, otherwise it will force its will on the issue. We want to be practical about this and the answer to my noble friend that I should be able to give is “yes”, but I am in no position to do that tonight. I will go away and see whether I can come back with that answer.

Lord Crickhowell: I had not intended to intervene again, but I think that the recommendation of the noble Lord, Lord Puttnam, was soft and was not nearly tough enough. Supplementarity has been interpreted consistently by the European countries as meaning at least a half. That is where we are now. There is a general view that it must be a good deal tighter than that. I said that I do not think that we can decide on the exact percentage, but following what the noble Baroness, Lady Young, said earlier, we have got to give a clear steer to the climate change committee on this issue which cannot rest on the existing definition of supplementarity or the interpretation of it. It has to be tougher than that. I intervene only because, while I nearly always agree with my former chairman who chaired us admirably on the Joint Committee, for once he was not being tough enough. I would like to be a good deal tougher in giving our steer, however it is devised, so that the climate change committee, in coming to specific recommendations, understands perfectly that the international and the national issues must be taken into account, but the national issues must be a very substantial part of the contribution.

Lord Rooker: That is a classic case of hard cop/soft cop and I am the victim.

The Earl of Caithness: I was grateful for what the Minister said. This is a fearfully complicated, but essential, part of the Bill. My memory goes back to the issue of CFCs, when we had the distinct advantage of an international agreement. When I was in the Department of the Environment, British industry bleated at my door regarding the extra cost that it would face. The noble Lord, Lord Puttnam, is absolutely right. We all agree on this principle in this Chamber, but implementing it on the ground, when one has seen the results of Bali and that some countries are not signing up to targets, will be very hard for British industry.

Having listened to the debate, I am coming down in favour of the need, as politicians, for us to set a target in the Bill. That was not where I started from, but it must be made clear to British industry that we expect

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it to deliver, often when others will not deliver initially—I think they will catch up. We are going to ask Britain and British industry to take a lead with all the costs that that involves. As politicians, it is our duty to put something in the Bill, but I would like to back that up, rather like we did in Clause 1, by an “at least” and then leave it up to the Committee on Climate Change. As everyone in the Committee has said, this will change. In 10 years’ time we will be talking a totally different language from a different position, but we have to start this ball rolling now. I am grateful for what the Minister said; we should strengthen the Bill and put a figure in and, as my noble friend Lord Crickhowell said, give clear guidance to the committee.

Baroness Miller of Chilthorne Domer: I am immensely grateful to all noble Lords who have spoken, because they have eloquently expressed a principle that I did not express when I rather dryly introduced these amendments. The noble Lord, Lord Crickhowell, is quite right to say that their correct place would have been in Clause 22, but I really could not see how we could get through Clauses 5 to 21 without debating this important principle. I am extremely grateful to the Minister for his positive reply in recognising the principle and saying that the Government will take the issue away and look at how this might be incorporated in the Bill.

Several noble Lords, including the noble Lord, Lord Turner, the noble Baroness, Lady Young, and the noble Lord, Lord Oxburgh, spoke about the necessity of certainty for business. British industry will be floundering without that certainty. Will we in this House start to look at putting in a target as some sort of percentage as a starting point for the climate change committee or will we simply leave it as a principle? I am glad that we will have a break and that we can come back to Clause 22 for a second round even before Report stage.

For me, this was one of our most exciting debates because it has concerned an issue of immense principle. We are not talking about just British industry, but the international dimension, as my noble friend Lady Northover mentioned. I am very grateful to the Minister for his reply. It will not be easy to come up with either a percentage or a taper. I agree with the noble Lord, Lord Crickhowell, that this decision will not be easy to arrive at. Are we the correct people to take it? However, we are the correct people to set a principle and that is what we are moving towards.

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