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Clause 37 agreed to.

Clause 38 agreed to.

Schedule 2 [Trading schemes]:

Lord Taylor of Holbeach moved Amendment No. 165A:

The noble Lord said: I will speak also to the other amendments in this group. Amendment No. 165A is a probing amendment designed to elicit the operation of allowances and in particular to examine the scope of the prohibition against the allocation of allowances for money. Perhaps I may give an example. Let us imagine a situation where a large business owned and controlled by one person—perhaps a beef baron or a cereal Croesus. In the unfortunate circumstances of unexpected death or bankruptcy, would the estate be able to sell any allowances left unused against business already completed at the time of death; or would the allowances have to be returned to the scheme pool? Presumably, in the event of a sale, merger, takeover or break-up, the unused allowances would be transferred to the new owners. However, I should like the Minister to clarify exactly how the situation would roll out in such circumstances.

I turn now to our other amendment in this group. The Committee will all too readily remember, in 2001, the images of pyres composed of burning carcasses and thick smoke from the combustible materials used to sustain the flames. It was obvious that there were

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considerable emissions of various sorts, some of which appear on the list of greenhouse gases. Two years ago, the Home Counties were awoken by the explosion at Buncefield. Television reports again showed black clouds shot through with flame. More recently, some four months ago, there was a fatal fire at a Warwickshire warehouse, again with smoke and associated emissions.

None of those happenings was expected; they may have been feared in a general way but they were not planned for in any business sense. We hope that animal disease will never again require disposal by burning. However, if there is an event that overwhelms the alternative methods, it is conceivable that the Government of the day may have to order it. The report on the Buncefield explosion indicates that there are infrastructure problems throughout the oil distribution industry. A glance at any local authority asset management plan will identify infrastructure problems with gas mains, school boilers, oil tanks and so on. Any of those could cause a major fire with its attendant emissions. Then there is the level of arson prevalent in this country, with major fires at schools, warehouses, offices, railway switchgear housings and so on.

4.15 pm

Where does the responsibility lie for the emissions generated by these events? Will the owner of a business adversely affected by government decree or the activities of a third party—an arsonist—be liable for carbon emissions that could well consume more than his annual allowance? Should there not be a reserve that can be used to mop up the excess and avoid the problems of non-accidental damage, for example? Can one insure one’s business against government action? I beg to move.

Lord Redesdale: I speak to Amendment No. 166. One of the major flaws with the whole ETS was that the allowances allocated to some energy companies led to a windfall to energy producers. The allocation was probably due to the lobbying power of some of the German energy companies involved in the European scheme. The point of Amendment No. 166 is to say that these allowances should not be allocated. One of the major problems with the ETS is how to keep the price of carbon at a realistic level. If the price collapses, as has happened in the past, the whole basis of the scheme becomes almost irrelevant and the scheme suffers. This is a probing amendment to find out the Government’s view on the value of such a proposal.

Lord Rooker: This group of amendments, and the next few that we shall discuss, concern how the trading powers under Schedule 2 operate. I appreciate that these are probing amendments, but in many cases they seek to place restrictions on how these powers may be used. We believe that a better approach is for many of these issues to be considered on a case-by-case basis.

As I said, Clause 40 requires both Houses to approve any new trading schemes. We can certainly explore in detail issues such as the rules on auctioning

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allowances, the use of carbon units from other schemes and the enforcement arrangements when we have the facts and proposals before us. I hope to be able to provide some reassurance about the Government’s thinking on these issues.

Amendments Nos. 165A, 166 and 166A concern the way in which allowances in trading schemes are allocated to participants. As currently drafted, paragraph 5(4) of Schedule 2 makes it clear that trading scheme regulations introduced by the powers in the Bill may not include provision for allowances to be offered in return for consideration—effectively by auction or otherwise for sale. As the Government explained during pre-legislative scrutiny, we do not consider that it would be appropriate for provisions in regulations made under the Bill to allocate allowances by auction or otherwise for sale. Instead, given the importance of auctioning to government economic policy, with a potentially significant fiscal impact on the UK as a whole, we believe that the right approach is for these powers to be taken through a money Bill. For example, the Finance Bill was the legislative vehicle for introducing provisions to allow for the auction or sale of allowances in the EU Emissions Trading Scheme. Amendment No. 165A would remove the Bill's provisions on auctioning, and we therefore cannot accept it.

Although it is government policy to push for increased levels of auctioning in trading schemes, as that approach is consistent with the “polluter pays” principle, Amendment No. 166 would be overly restrictive by requiring all allowances in every scheme established by the powers in this part of the Bill to be auctioned post-2012. It is essential that the relevant national authority should be able to decide the right level of auctioning to be used alongside other possible measures, to ensure that environmental goals are achieved effectively and without undermining wider government aims, such as supporting business competitiveness.

That was also the view of the Joint Committee, which stated that,

It concluded that the Bill,

We agree with that reasoning and therefore cannot accept Amendment No. 166, which takes that restrictive approach.

Amendment No. 166A introduces the notion of some kind of force majeure provision relating to auctioning, to be used in an unspecified and unexpected situation, examples of which were given by the noble Lord, Lord Taylor. We have been keen to stress the importance of the flexibility of the trading scheme powers, and we feel that the aim of the amendment is already covered by paragraph 5(3). This provides:



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This would allow the relevant national authority to include force majeure provisions where they are required.

I am not a lawyer and cannot say anything definitive about this, but the examples that the noble Lord gave—both the fires and the burning of the carcasses in 2001—seem to be unexpected events that are outwith the normal rules. They would have to be covered by some kind of arrangements. I will not nitpick about the drafting of the amendment, which I assume was designed to elicit the response I have given. That kind of arrangement or example would be dealt with by the national authorities within the terms of the Bill.

Lord Crickhowell: The noble Lord twice mentioned the Joint Committee, and he was quite right in his second reference that we agreed with the Government on that particular point. However, he did not make it clear that we did not agree with the Government on the first point. We listened to the explanation of why paragraph 5(3)(a) of the schedule was in the draft Bill, but we also pointed out that it appeared to be contradictory to the Government’s intention to decide on auctioning case by case. The Government’s argument was that there were good reasons for auctioning, and I agree with that.

We were told that the Government’s legal advice was that this provision would not be an impediment to provision in the Finance Bill. However, we said in paragraph 196 of our report:

I have listened to the Minister, but no argument has been produced that counters the Joint Committee’s conclusion. I simply do not understand why the Government insist on leaving this provision in the Bill. It adds nothing and retracts nothing. We think that there should be the power to auction, and that it is perfectly appropriate that that is done through the Finance Bill. Why on earth should we have a provision in the Bill that is likely to cause confusion and appears to deny the very principle that the Government want to pursue?



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Lord Rooker: I will have to take advice on that. I am not sure whether the noble Lord was accusing me of misquoting the committee. I cannot quote the paragraph. In the first quotation I was not quoting a full sentence, because it does not start with a capital letter. I have no advice about what the committee felt about paragraph 5(3). I think he was saying that the committee felt the paragraph was not required. Basically, I have used paragraph 5(3) as my defence for covering the points that the noble Lord, Lord Taylor, made, points that probably were not put to the committee.

Lord Woolmer of Leeds: I agree that the Joint Committee’s report was as read to the Committee by the Minister. However, paragraph 5(3) applies to more than just the possibility of allocating by auctioning. It is entirely likely that different trading schemes would require careful thought about how to allocate any quotas, as it were, and that is likely to be different for each scheme. To put it crudely: without involving the question of auctioning, how are we to determine who gets how much? I should have thought that the basis for deciding those principles of allocation would come under paragraph 5(3). I agree that the Joint Committee addressed that matter in considering the issue of auctioning, but I hope my noble friend will agree that paragraph 5(3) would apply to much more than just the question of whether or not to auction.

Lord Rooker: I fully accept that. There has not been criticism of this, but the way in which paragraph 5(3) has been drafted could almost, in the context of the Bill, mean what you wanted it to mean:

The fact that that was my defence, or rather my answer, to the point made by the noble Lord, Lord Taylor—that the paragraph allows the relevant national authority to include force majeure provisions where required—indicates that the provision is pretty wide. I am working just with the Bill as it was introduced into the House, by the way; there were other draft Bills around.

I now have the answer. The Bill’s wording on auctioning changed in response to the Joint Committee’s report to clarify the situation, but we remain of the view that any auctioning should be done through a money Bill. So there has been a change. However, there is the central point which I made—that there ought to be a different kind of legislation, as was the case for the European Union trading emissions programme.

Lord Crickhowell: I have noted that the wording has been changed from that which was considered previously, but I am still puzzled. I had thought that this was now partly covered by paragraph 5(4), but in the light of what has been said I am not entirely clear what is the intention of the wording:



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Does that not cover auctioning? I am not clear. The Minister may say that it is not the regulations that will provide for it and that it will be dealt with in the Finance Bill. All I am saying is that where we have a clear recommendation from the Joint Committee and a change is made, it is useful to have a clear explanation from the Minister about what change has been made and why, so that people reading the original report and looking at the Bill again can see where we are. I confess that I was confused. I still am, a bit.

Lord Rooker: I hope that we are, overall, less confused than we were when we started, because I do not have anything to add.

4.30 pm

Lord Taylor of Holbeach: The Minister referred to the money Bill element. Would there be no scrutiny of that element in your Lordships’ House? I do not believe that in practice we get involved in money Bills.

Lord Rooker: That is the case. Mr Speaker issues a certificate as to whether a Bill is a money Bill or not. We are unelected; we do not do money.

Lord Taylor of Holbeach: I take it that the noble Lord is saying that we will not be involved in any discussion about these auction provisions.

Lord Rooker: I have not dealt with a money Bill; when there is a money Bill, a screen goes up and I run a mile. In this House, we have a Second Reading debate on a Finance Bill, for example, but we do not do anything else. We do not table amendments; we do not scrutinise it. That is the normal process and that would be the case. That is not to say that there would be no facility for debate, but scrutinising in the normal legislative way is outside our powers on a money Bill.

Lord Taylor of Holbeach: I come back to the Minister’s response to my original contribution to the debate. I was trying to establish, first, to what extent the allowances were assets to the business and would be transferred to any successor business and what would happen in the case of liquidation, mergers, takeovers, and so on. I was not sure that the Minister had given me a reply on that point. It would be useful to know how that might work.

Secondly, I listened to the Minister’s reply on the force majeure element. In truth, at any level, fires and so on can be catastrophic. My illustrations were dramatic, because they involved a lot of atmospheric pollution. As far as training schemes and allowances are concerned, an unintended loss through fire is a problem at any level of business. One can envisage situations where these catastrophes might have to be allowed for in any scheme if they were not to distort an individual company’s chances of recovering from such a catastrophe. Is that the way the Minister would see it happening?



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Lord Rooker: I honestly do not know. I do not have a detailed response on that. I assume that businesses—and we are dealing here with professionally run businesses—have to assess their risks and try to mitigate any potential losses from unforeseen circumstances via insurance and other matters. Therefore, this would probably be covered in the same way. I do not know, but my answer, as an ordinary, reasonable person, is that if a company has purchased something, it becomes an asset of that company, irrespective of what happens to the company. In other words, if a company disappears or gets sold, the assets and whatever it has purchased get transferred. That asset may be intellectual or physical property, or certificates to do certain things. They would go with the company.

Baroness Byford: I come back to the Minister’s first response; I understand and am quite happy with the second part. What if you are a farmer? One example given by my noble friend concerned foot and mouth disease and the burning of livestock. Surely the Minister would agree that, at the moment, it is not possible to get proportionate insurance against that sort of liability. Indeed, the Minister has a consultation out with the livestock industry at the moment, looking at how cost sharing can happen in the future. His statement is, if he will forgive me for saying so, a bit broad in accepting that it is always possible to take out insurance and for that to be affordable. In some cases—including flooding, which is not a good example—it is not possible to get insurance coverage. Some people or companies might well be jeopardised by these provisions in the Bill.

Lord Rooker: I hope that I was not implying anything incorrect. I appreciate that it is virtually impossible to get insurance for flood damage to crops in the ground and for exotic diseases in our food animals. There is no provision for that; I have discussed it with insurers. One could not even offload this. That is why the consultation on cost and responsibility sharing is under way. The noble Lord, Lord Taylor, gave examples of what happened in 2001 when the Army commandeered a field, dug a trench and filled it with cattle that had come from all over the place. In those circumstances, that would clearly not be a burden on a particular landowner or farmer. There would have to be a different set of rules for it. That would be force majeure; it would require the national authorities to have some kind of arrangements and regulations to cover it. I do not think that there is a case to be made. My answer about insurance in relation to companies and businesses was quite legitimate, but it did not apply in any way to livestock or the fact that you cannot get insurance for crops in the ground. That is well known, but it is not well enough known in some quarters.

Lord Taylor of Holbeach: I am grateful for the Minister’s response, which has clarified the situation considerably. I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

[Amendments Nos. 166 and 166A not moved.]



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Lord Taylor of Holbeach moved Amendment No. 167:

The noble Lord said: Most of our amendments in this group, which seek to set a maximum limit of overseas carbon credits at 25 per cent, are probing amendments. With the first of the amendments we are seeking to secure assurances from the Government on the limits that will be placed on trading overseas credit. In an earlier debate on this topic, my noble friend Lord Cathcart used the analogy of the buying of indulgences. That is a powerful analogy, if one-sided. The philosophical points surrounding the balance between ensuring genuine carbon reductions at home and support for overseas development were covered substantially at Second Reading.

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