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Changes to the taxation system can be introduced quickly through the annual Finance Bill process, and EU measures, including regulation, can be implemented using the European Communities Act 1972, without the need for new primary legislation. Without those powers, the Government would be forced to rely on fiscal measures or regulation to ensure that particular sectors were helping in the fight against climate change. I am sure that Members of the Committee do not intend that potentially more cost-effective trading policies with a lighter touch should not be introduced, because that would be the effect of removing the powers from the Bill.

In relation to parliamentary scrutiny—it is constantly one of our themes, although it was not raised this time—I have already set out the very strong safeguards in Clause 40 which will ensure that these powers are used appropriately. I was also asked about the breadth of the energy consumption definition—which could include, for example, breathing, and why we need such a broad power—and indirect emissions. I shall give an example from a manufacturing point of view.

As regards the simplest way to think of Clause 37(1)(a) to (d), let us say, for example, that the noble Lord, Lord Taylor, produces motor vehicles. Under paragraph (a), he uses electricity to operate all his plant. Production of electricity leads to direct emissions. Under paragraph (b), he buys components from specialist manufacturers, which are all direct emitters or use electricity, which is an indirect emitter. Under paragraph (c), the motor manufacturer throws away waste components and off-cuts. Although he did not necessarily use them for the purpose of paragraph (b), it led to effectively throwing away direct or indirect emissions needed in their production. This category is separated from paragraph (b) to provide the exemption for things that are to be recycled—off-cuts are a good example. Under paragraph (d), his cars run on petrol, so their use leads to direct emissions by consumers. That sets out how the different parts of Clause 37 might apply. The aim is to ensure that trading powers can be appropriately targeted so that all the possible sources of emissions can be included in the trading scheme at the most appropriate point in the supply chain.

As I have already mentioned, the trading scheme power is intended to be broad enough to enable the Secretary of State or devolved Administrations to make any trading scheme they consider appropriate within the powers in Schedule 2. However, as we

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made clear in the debate on 14 January, it would be inconceivable that the powers in the Bill would be used to introduce a trading scheme at this personal level. There are strong scrutiny arrangements before regulations making trading schemes can be introduced.

Clause 40 provides requirements that must be met before a new scheme can be introduced; that is, consulting those who are likely to be affected, seeking and taking into account the advice of the Committee on Climate Change and, of course, requiring affirmative procedure in Parliament. In addition, a decision to use the powers for a specific scheme will need to be based on a cost-benefit analysis of the scheme, including its impact on business. That will be in the impact assessments, which are generally published alongside consultations on the individual schemes.

The noble Earl asked me whether we are excluding sequestration. The answer is no. It is covered by Clause 36(2)(b), which relates to schemes encouraging the removal of carbon from the atmosphere. I hope that that answers the questions that I have been asked.

Earl Ferrers: I have listened to the Minister with fascination. Am I right in understanding him to say that, if you were, for instance, a motor manufacturer using various metals, which were produced by power—say, electricity—and that certain amounts of that material were off-cuts, if you threw them away that would be credited to you? Who will keep all those figures?

Lord Rooker: I gave the off-cuts as an example of Clause 37(1)(b), which refers to,

I gave the example of a motor manufacturer. At the end of the production line, we would have all the cars, but also several skips of scrap which are not included, let us say, in the price of the cars, although obviously the price would be there. The point is that the off-cuts could be recycled. They could be put back into the system. Therefore, this category would be different and would provide an exemption for items that are recycled. Obviously, the energy content is still there in the first place, so it would not be charged for twice, I hope.

Earl Ferrers: Does that mean that all these figures are going to be collected, collated and passed on to some department?

Lord Rooker: I hope not in the way implied in the noble Earl’s question. I see where he is coming from. The electricity consumption and the carbon footprint of the motor manufacturer’s plant, and the items that have gone into the plant, will be collected. I hope it would not be at the fine-detail level. It would be the original component supplier, for example. There would be another factory producing the components. To that extent, you would not be separating the several hundreds of components in a vehicle because

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you would go for the emissions at the most suitable and most cost-effective point of the supply chain. This is not a question of having lots of burdens on business, collecting figures that are of no use to anybody.

Lord Dearing: To follow the noble Earl’s question, to what extent have the Government considered the administrative regulation and burden that would be involved in a scheme of this kind? It seems very large to me.

Lord Rooker: We are talking about big figures. That is the whole point of these trading schemes. We will be dealing with mega-millions of pounds. This is a big part of the economy, subject to what happens with the trading schemes. We know that now. I cannot put figures on it, but we are dealing with huge figures in the economy. There is bound to be an oncost—the backroom cost is going to be big.

Baroness Byford: What happens then if some of these parts come in from overseas? How and at what stage is it recorded, and who has to keep records? It seems an absolute nightmare. In principle, the idea is good. Most of us around the Chamber would agree that it is sensible, but I can see this paper trail going everywhere. If you are looking at component parts that come into this country which are then put together or manufactured here, where does the buck start and how does it get passed back to the relevant authorities?

Lord Rooker: I do not know, but we are talking about carbon emission trading schemes. The whole point is that there is going to be trading between different suppliers and manufacturers, some of which will not necessarily all be in this country. That is how one would take account of trade between countries. The key issue is that in, let us say, the production of a component that is imported, its carbon footprint must only be counted once in a scheme. Double counting would not make sense. It has to be separated out. As I said, the point of original production is the place to do that.

Lord Dixon-Smith: I do not know whether we are being thick—I probably am—but the Minister is describing something akin to the VAT system, so that the inputs to a business have a carbon footprint which has a carbon cost in it and that is paid. That is fine, but the trouble when you are operating such a system is that it is not like VAT, where you have a flat rate and everybody knows what the input VAT is. In this instance, we will be dealing with a trading system, and the effect on the outputs will depend on the cost of the certificates that the manufacturer has to purchase to cover that liability. We have not got a straightforward calculation because it depends on a market price, which may vary from day to day.

You also have this further difficulty, as my noble friend is saying, of how you handle imports, particularly if they come from a country where there is no trading system and, in effect for the manufacturer of the

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product, no measured carbon footprint. If we do not find some way of picking this up, this gives a completely unreasonable advantage to the manufacturers of imported raw materials from third countries where there is no trading system. We are in some real difficulties over this. I do not know whether the Minister is going to be able to explain his way out of it this afternoon. Can he set his scribes in motion to write to us all, explaining to us in simple language that we can understand precisely how this might work?

Lord Rooker: I might have to do that at the end of the day. Obviously I have been inadequate in explaining these matters so far, for which I apologise, but I shall try to answer the question by reading the Bill that we are scrutinising. We are dealing with Clause 37, which says:

paragraphs (a), (b), (c) or (d). I recited examples of that in the production of motor vehicles. Clause 36, which we have just passed, defines a trading scheme—at the bottom of page 17—as,

For the purpose of this part of the Bill, those activities indirectly contributing to greenhouse gas emissions—because there has to be a definition of direct or indirect—are those listed in paragraphs (a) to (d) in Clause 37. I gave the example of a motor vehicle plant. It would not matter where that plant was because the end of Clause 37 says:

We have always said that a tonne of carbon anywhere on the planet is a tonne of carbon. It does not matter whether it is in the UK or anywhere else.

Lord Teverson: This comes back to what I was saying about the previous clause. Defra’s own documentation says that the CRC, which is the first of the schemes, is expected to cover 52.1 million tonnes of carbon dioxide equivalent, which is a little under 10 per cent of the UK’s total emissions. I am not sure whether that is after rationalisation and overlaps. At the moment the EU ETS, according to Defra, accounts for some 52 per cent of carbon emissions in the UK under phase 2; we now have this scheme, which goes down to 10 per cent. Having spoken to the Carbon Markets Association and that sort of organisation, I seriously believe that we are already down to a level at which these schemes get quite uneconomic to operate in cost-benefit terms.

That brings us back to one of the fundamental things about the Bill: while we all strongly support trading schemes—they have an important role—they cannot be the whole answer. I suspect that much beyond the CRC, at 10 per cent, the answer is really none of this and that it is regulation and all sorts of other things that stop carbon emissions. I entirely agree that the CRC is hugely less administratively

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expensive than the EU ETS, but below that level the administrative costs will be large enough to be a burden to the businesses that are then not covered. The CRC already covers all those businesses above £500,000 of electricity or energy costs a year. I would be interested to understand from the Minister what the one after the CRC is likely to be. Surely we need to start using other instruments after that, because I am concerned—as I said earlier on, when the Minister was unable to answer, although I can perhaps understand why—that even with the CRC there is not sufficient liquidity in the market for the serious financial institutions that make these things work, for which London has become a great centre, actually to get involved.

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Lord Rooker:I shall come back to that issue if I may. I apologise for not answering the question about liquidity, but I have a better answer than the one that I gave to the noble Lord, Lord Dearing, about the administrative burdens. All the issues would have to be looked at when considering whether to develop a scheme. The question would be whether it was too costly or administratively burdensome to introduce a trading scheme, in which case the Government would have to look at other instruments. It is hypothetical, but when there are proposals for a scheme the Government have to consult and Parliament must approve it by affirmative procedure. There is no chance of something that would damage industry in a big way slipping through on the nod, without any debate.

On the liquidity of the market, it is expected that the carbon reduction commitment will cover up to 5,000 direct participants. While the volume of each trade may be small, we expect the amount of trades to be considerable; that will be the test of a liquid market. In addition to direct participants, third parties will be able to trade in a secondary market, which will further increase that amount. The noble Lord mentioned the consultation; as I said, the Government will publish our response to that next month and, as part of this process of looking at more detailed aspects of the CRC, we will consider further issues relating to that market.

I am not in a position to answer the question asked by the noble Lord, Lord Teverson, about where we go next. The snag is that there is a trigger for industries or bodies that use a certain amount of electricity. I cannot put my finger on it—I know that I have seen it somewhere in these notes on a future amendment—but the figure that I have in my head is some hundreds. Whatever it is, a separate set of metering covers those industries, so that there is no argument about who is and is not covered.

Earl Ferrers: Would the Minister be good enough to try to help me a little further, as this seems to be becoming complicated? He was good enough to give an example of a person building a motor car. That has alarmed me, since as far as I can see this system will increase hugely the amount of civil servants and be a huge burden on business. Is that the wrong interpretation, or am I right?



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Lord Rooker: I certainly hope not, as it is not intended to be either a job creation scheme for civil servants or overly onerous on business. Indeed, I am assuming—falling back now to our position on the early part of the Bill—that when we have the great and the good appointed to the committee, it will look at issues such as this. We have spent hours on this; it is now our sixth day in Committee. That is no criticism, because I want to be able to tell the noble Earl that he ought to be able to rest assured that this is not intended to increase bureaucracy, although there will be an increase. This is a new enterprise of looking at what we are doing to tackle climate change. It will create new industries and businesses, some of which will probably go to the wall, as there will be winners and losers. However, it is far from being a job creation exercise for Whitehall civil servants.

Lord Dixon-Smith: I am sorry if I am still being particularly stupid. I am in the business of manufacturing some metallic product; in order to do that I require to purchase energy with a carbon cost, but I trade in the market to buy carbon certificates to cover that cost. That is how the new system will work. As I trade in the market, the price of those certificates will go up and down across the year, depending on circumstances and how people judge the market, and so on. Now, I have to include that cost in my product costs, but the truth is that because it is a variable cost I will not really know the cost of my purchased carbon certificates until I am well into the year, if not until the end of it. I would only then be able to assess what they have actually cost me and make a proper price for goods that I supplied at the beginning of the financial year. That is because we do not immediately know the effect of one on the other. The alternative way is to charge the carbon certificates that you use at a particular time directly on to the cost of your output, but that will mean that, if the cost of carbon certificates fluctuates, the cost of your product will have to fluctuate to take account of that. That seems to me a rather peculiar system to operate.

Lord Rooker: I am completely ignorant, but I thought that that was how the City worked on all the commodities in the world. I thought that manufacturers who are making products with raw materials buy on the futures and that the price of their end products going out of the factory gates was fixed. I was the mere factotum at a factory making these things, which I did not own, yet the cost of the products and materials that we used went up and down every day on the world markets. Account is taken of that. I thought that that was what the City of London was for.

Lord Taylor of Holbeach: I have a further question for the Minister regarding the CRC. He said that it would be likely to cover some 5,000 participants, with the definition of a unit being those that consume above 6,000 megawatt hours. Is that a site-based calculation or one that covers the manufacturing base across the country for the company or organisation?

Lord Rooker: I do not know the answer to that and will take advice. I also remember looking at it, because some of these units will include hospitals. I am not

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sure whether the unit would be the hospital on a site or the health trust, which may have more than one hospital. I do not know, but it is a practical question; it is the type of issue that will be touched on. It is true that different sites will have different supplies; I am talking about this trigger mechanism of the electricity that they consume. However, I do not know whether it would be linked up or not. I do not know the answer to that, but I will do my best to get one.

The noble Lord, Lord Teverson, asked me—this is the question that I did not answer—what further schemes might follow the CRC. The powers in this part of the Bill may also be used to introduce a household energy supplier obligation to succeed the carbon emissions reduction target, which ends in 2011. However, it is difficult to specify at this stage how the powers might be used, as the purpose is to maintain flexibility in supporting activities that will enable us to meet the targets in the Bill.

The point of enabling powers is that they will allow schemes to be introduced quickly without the need for further primary legislation, although subject, as I said, to a vote in both Houses following consultation with those affected and—and I do not mean this in a nasty or pejorative sense—advice from the great and the good on the Committee on Climate Change. As has been said, the Committee on Climate Change has to be authoritative. These are strong safeguards, which will make sure that the powers are used appropriately and not inappropriately.

Lord Taylor of Holbeach: I thank the Minister for responding to this debate, which has shown what happens when you drop a pebble in the pond; it has been illustrative of the complexities to business that some of these schemes might bring. If we are asked directly whether the Opposition are in favour of these schemes, the answer is that of course we are, provided that they reduce carbon emissions and can be introduced in a non-complex and satisfactory manner. What has been shown is how difficult these schemes can be. Nevertheless, we all know that the waste recycling obligations had similar critics when they were first considered. We will learn as these schemes progress. However, they are no panacea and there comes a point, as the noble Lord, Lord Teverson, said, when it is totally counterproductive for them to be introduced. I am grateful to the noble Lord for elaborating on how he sees this part of the Bill operating.

Lord Woolmer of Leeds: Before the noble Lord sits down, will he take this opportunity to clarify the position of Her Majesty’s Opposition on personal carbon allowances and trading in them? Does he share the view expressed by the Minister last time that it is unimaginable that personal carbon allowances and trading could be smuggled in on the basis of the provisions of this Bill?

Baroness Miller of Chilthorne Domer: The noble Lord, Lord Woolmer, has tempted me to comment on that now, because it was very late when we debated the amendment that I introduced on that topic. One

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of the things that prompted me to question the noble Lord, Lord Taylor of Holbeach, this afternoon was that he did not have anything to say about personal carbon allowances. I have no idea whether he is in favour of them or not, so I am grateful for the intervention of the noble Lord, Lord Woolmer. Is the noble Lord, Lord Taylor of Holbeach, in favour of carbon trading for small and medium-sized enterprises or personal carbon allowances? Certainly, to progress much beyond the big schemes, one has to be in favour of something.

Lord Taylor of Holbeach: It is not my job to defend the Government’s legislation or even to use the opportunity to make a policy statement on behalf of Her Majesty’s Opposition. There is a gradualism that the Minister has expressed—

Lord Redesdale: We on these Benches are in favour. It might help if I make that policy statement.

Lord Taylor of Holbeach: I have no need to take a lead from the Lib Dems on these matters. I was seeking to suggest that I was at one with the Minister in accepting that this section applies to a whole area of economic activity. One would imagine that there will be a gradualist approach. We will learn a lot from the major schemes, which are already in existence, and soon be able clearly to define where it is no longer viable for these schemes to be introduced. But this is not the place for me to say what that position is as far as the Opposition are concerned.


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