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This does not get in the way of trading. It will help our global position. I recognise the concern of the noble Lord, Lord Turner, that we do not get the balance wrong in the opposite direction. At the moment, if we are not careful, the balance will very much be to help our international partners in the developing world to reduce their carbon. We need to make sure that we do not get the balance wrong in the opposite direction, fail in our obligations and do not provide the glue that the noble Lord, Lord Stern, indicated was necessary to keep the global deal going.

That, for me, says one thing: the Bill is not sufficiently strong because the default position will be for trading rather than for domestic reduction. Although I would not want to see a number placed in the Bill for the proportion of reductions coming from UK action, I very much want to see a real commitment in the Bill for a fast movement towards the decarbonising of the UK economy. Before the next stage of the Bill, we ought to urge the Minister to explore how that can be worded in a way that does not take away from the very real need for the Committee on Climate Change to give specific advice on this. We certainly need to strengthen the Bill in this way.

Lord Turnbull: My Lords, I, too, welcome the fact that the noble Lord, Lord Stern, has joined our discussions. As well as reading his report, I commend to noble Lords his Ely lecture to the American Economic Association. The middle third is pretty difficult for people without a PhD in economics, but the first and final thirds make excellent reading. It also explains very clearly why the amendment passed in this House to set a 2 degree limit is flawed. We will come to that on another occasion.

On Second Reading I expressed concern about the use of credits. There are two possible reasons for this. Was I endorsing the moral view, expressed by the noble Lords, Lord Teverson and Lord Puttnam, that we should set a minimum effort that had to be achieved domestically? Or was I taking the view that the theory of a tonne of carbon being a tonne of carbon is basically sound, but its implementation is flawed? I was expressing the second view. If it really were the case that, for significantly less than it would cost in the UK, we could achieve a global impact by the use of credits, I do not see why we should prevent ourselves doing so. Incidentally, I do not believe that this is a real problem. If we are going to reduce our use of carbon, per unit of GDP, not by 60 but by 80 per cent or 90 per cent, there is no way that we will be able to do it simply by buying credits. In the end, the whole thing will go away. We will never get to per capita emissions of 2 or 2.5 tonnes per head simply by buying our way out.

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There is a kind of fallacy running through some of this debate, which is that the use of credits is a “get out of jail” card, a costless, rather immoral, way of sliding out of our obligations. These things cost money. Enterprises that buy them will find themselves at a strategic disadvantage. An enterprise that is heavily dependent on the purchase of credits will be under tremendous pressure to reduce its use of credits over time. It can use this only as a temporary measure. The use of credits has just as much impact and is just as much of an incentive to improve energy efficiency as not using them and doing it oneself. It is a powerful mechanism in its own right.

There are two approaches. One is to set a minimum amount for domestic effort; the other is to allow credits to be used freely. If we do that, there is the whole question of validation, which has not yet come up. We have to make sure that the credits being purchased are genuine in two senses. First, they must reduce CO2. Secondly, they must be genuinely additional. Suppose we set up a scheme that incentivises loggers to reduce logging and an area is designated. This will be useless if they simply go outside that area and continue logging.

I believe that the better course is not to have a limit of this kind. There is no evidence that 70 is the right figure, or that 60 or 80 are right. We have no idea. To set a figure at this stage would be a serious mistake. This is clearly what the climate change committee is being established to deal with. At the same time, we need to make a much greater effort to ensure that the quality of the credits being traded represent a genuine reduction in CO2 emissions. Again, that is an area where we could look to the Committee on Climate Change for advice.

Earl Ferrers: My Lords, I hesitate to take part in this debate at all. Noble Lords who have taken part have been enormously knowledgeable and erudite on the subject. I am neither, but one thing has haunted me the whole way through, and I hope the Minister will say that I am completely wrong. We have been concerned about controlling CO2 emissions per head and carbon reduction, but carbon credit trading and checking on emissions credits will mean a huge increase in cost and bureaucracy. I do not see how you can trade in carbon credits without setting up something like the Stock Exchange in a minor way to deal with the trading. Someone has to pay for buying these things and the structure for that to be done has to be put in place—at expense. Firms will have to check all their carbon emissions and then work out whether they should buy or sell and what they should put on the forms that will be sent to them.

Irrespective of the reasoning—and very good reasoning it is too—for the objective behind this, I should like the Minister to say, “Don’t worry. You’re completely wrong. This will not involve an increase in bureaucracy or in costs to business”. However, it looks to me as though it will.

Lord Rooker: My Lords, we have had a fascinating debate and I am very grateful for the contributions that have been made. I am particularly grateful for the

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fact that, unlike some of the debates last week, I do not feel completely and utterly alone at the Dispatch Box.

We discussed these issues in Committee and I gave a commitment to go away and have the matter studied further. I did that and I bring back the collective view of the Government. I repeat: it is not the view of Defra but the collective view of the Government. Having considered the matter in substantial detail over the past couple of weeks, our view remains that setting limits in national legislation on the purchase of credits would be wrong because it would send the wrong signal regarding our confidence in the market and would be damaging domestically in relation to flexibility and our ability to engage in international and EU debates on the shape of the future carbon market. As such, we cannot accept any of the amendments, and I shall set out our four main reasons for that. I shall attempt to respond to the detail of some of the points that have been made but, first, I want to put the more formal position on record.

The first reason is that we are already committed, through action at both a domestic and a European level, to decarbonise the UK economy. We do not need limits on the use of overseas credits to achieve this.

Secondly, we must not lose sight of the fact that the Bill represents the United Kingdom’s contribution to what must ultimately be a global response to climate change. I emphasise that international emissions trading under binding caps plays a vital role within that, and this is also in line with the conclusions of the valuable work carried out by the noble Lord, Lord Stern.

We are already seeing significant flows in low-carbon investment to developing countries through the clean development mechanism, which is estimated to be worth $17.5 billion dollars at present. However, these flows will need to be massively scaled up if the world is to tackle climate change. The UN Climate Change Secretariat recently estimated that $200 billion to $210 billion of investment and financial flows would be needed in 2030 as part of a global effort to return greenhouse gas emissions to current levels. To achieve this, the UN believe that the global carbon market, driven by demand for overseas credits and deeper commitments by rich countries would have to be “significantly expanded” and could provide up to $100 billion of the flows needed. Therefore, we need to massively scale up—not scale down—the current international flows in low-carbon investment.

As we know, emissions trading also reduces costs, making it possible to reduce emissions by a greater amount. Early modelling by the Office of Climate Change suggests that the global costs of mitigation can be reduced by 50 per cent to 70 per cent in 2020 by expanding international trading in emissions permits. As I mentioned in Committee, our own analysis, and that of the European Commission, arrives at the same conclusion: emissions trading reduces costs. In other words, for the same costs, international trading allows you to reduce emissions by more.

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4.30 pm

Thirdly, the EU Emissions Trading Scheme is the cornerstone of the European Union’s efforts to tackle climate change and covers around 50 per cent of the UK’s carbon dioxide emissions. Under EU law, United Kingdom companies can freely trade in EU allowances across national boundaries. For the purposes of the EU Emissions Trading Scheme, it does not matter whether United Kingdom companies reduce their own emissions or buy allowances from another EU country where the same emissions reductions might be made more cheaply. We must not do anything in this Bill that would interfere with the legal right of UK companies to trade freely in EU allowances.

Fourthly, we are already bound by limits on overseas credits under the Kyoto Protocol and, since the Bill was first tabled, the European Commission has come forward with a comprehensive package of proposals on climate and energy. While these are still subject to negotiation, the Commission has proposed binding European Union-level limits on the use of project credits from uncapped schemes outside the European Union. So we do not need further limits to apply at a domestic level.

Looking in detail at the amendments in this group, we are unable to accept any of them, although they have been carefully considered across government. We need to think carefully about the signal that we are sending out internationally to the countries that we need to persuade to join us if we are to have an effective post-2012 international framework to tackle climate change. This Bill is partly about demonstrating to the rest of the world that we in the UK are serious both about reducing emissions domestically and about supporting action to reduce international emissions.

The need for increased low-carbon investment will be a key part of the global negotiations on the action plan agreed at the Bali conference last year, which we hope will lead to international agreement—the ultimate prize in tackling global climate change. In those negotiations, we will need to show emerging economies that finance will be available to them to pursue sustainable development. We cannot do this credibly if we have tied our hands in domestic legislation with strict limits on buying international credits. We would also need to be able to explain to UK companies how these amendments take account of the EU Emissions Trading Scheme, to avoid cutting across their legitimate ability to meet their obligations by trading in EU allowances.

Amendments Nos. 110 and 137, in the name of the noble Baroness, Lady Miller of Chilthorne Domer, would require a limit to be set on the use of overseas credits through secondary legislation, following advice from the Committee on Climate Change. I agree that the committee’s view on this subject is vital. That is why the approach taken in the Bill ensures not only the provision of expert and independent advice from the Committee on Climate Change on the balance between domestic and international action, but maximum transparency about the Government’s plans to meet budgets. It will therefore provide improved certainty for business, while at the same time ensuring that we can take the most cost-effective approach to reducing the UK carbon account.

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While the committee’s view on the balance of effort will be valuable in informing government policy making, I do not believe that this should extend to advice on a limit. This is because a requirement to set a binding limit, as in Amendment No. 110, risks being seen internationally as undermining our continued commitment to maintaining low-carbon investment flows to developing countries.

Amendment No. 106 goes even further. It would set a legally binding limit now, in primary legislation, on our ability to use overseas credits to meet our budgets. I agree that this proposal would provide the greatest certainty about the balance between international and domestic action, but it would also be a completely inflexible option. Not only would the same problems with our international signals apply as under the noble Baroness’s amendments, but the limit of 70 per cent would remain in force indefinitely regardless of any changes in the European or international context, unless of course further primary legislation was introduced to change the situation. Those are the reasons and I cannot gloss over them any further. I am in no position to say that we can get this all redrafted for Third Reading.

In the debate, some points of substance were made that deserve a response. The noble Lords, Lord Teverson and Lord Redesdale, said that the proposal does not get in the way of trading, particularly under the EU Emissions Trading Scheme. We disagree with that. I am sticking carefully to the notes that I have from officials who have thought about the issue. Trying to explain verbally at the Dispatch Box without overhead projectors or PowerPoint presentations how these things work is incredibly difficult. The other morning—I think that it was yesterday—I heard on the “Today” programme two professional communicators explaining these issues. I got a bit lost—and I thought that I knew a little about what was being talked about—so I am sticking to the brief on this. The issue is very complicated, but the points that have been made are valuable and deserve a response.

We cannot predict the extent to which companies will reduce their emissions in the UK and the extent to which they will buy in allowances from abroad. This will depend on the level of the carbon price and on many individual private commercial decisions, as I think the noble Lord, Lord Turner, indicated. If we were to limit the number of units bought by companies within the emissions trading system that we can count towards the net UK carbon account, we risk the problem that in some years UK companies will decide to buy more than this limit. We cannot and would not want to interfere with their freedom to do so under the EU Emissions Trading Scheme rules. However, this would mean that we could not count all these units towards meeting the overall UK budget. To comply with that overall UK budget, the Government would need to find additional emissions reductions, which could have perverse consequences.

Either we would have to introduce additional regulation on top of the emissions trading system to reduce our emissions—in which case, why bother having the EU Emissions Trading Scheme at all?—or we could ask the rest of the economy to make up the

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difference. That would create massive uncertainty. How would we know in advance whether companies would choose to buy credits—

Lord Teverson: My Lords—

Lord Rooker: My Lords, may I finish this response? Then I will gladly give way to the noble Lord.

How would we know in advance whether companies would choose to buy credits, as they are allowed to do under EU law, or reduce their own emissions? How could we plan sensibly so that the practical effect would either be extra regulation or uncertainty? I am sure that the noble Lord does not want that.

Lord Teverson: My Lords, I am astounded by the statement that the Minister made. Neither Europe nor the Government are saying that they rely entirely on emissions trading systems, whether they are from the EU or the CRC. The European Union itself has renewable targets and it is introducing regulations on emissions from cars. There is a whole other area of EU policies, which are part of the mix; the Government, too, have such policies as part of their mix. The Minister seemed to be saying that the emissions trading schemes operate in isolation, which is how carbon targets will be met. However, the Government have a whole range of other policies—unless they are telling us different now—as do the EU. Of course those other policies have to be used. The Government clearly have them as active, alternative, complementary policies. I do not understand how the Government can say that they will rely only on trading systems.

Lord Rooker: My Lords, I am not saying that. Let me go back to what I have just referred to. The practical effect would be either extra regulation or uncertainty. I am not familiar with all the points that the noble Lord raised about what is coming down the EU system, but uncertainty comes about if there is to be regulation, covering everybody, as opposed to hundreds of private sector companies making decisions at any time in a framework of their choosing.

The noble Lord, Lord Taylor, asked about the definition of “supplemental”. The UK has intentionally not defined supplementarity in numerical terms. We are in the middle of international discussions following Bali, at which we are seeking to launch the negotiations for a global and comprehensive agreement on climate change. It would be unhelpful to define supplementarity at domestic level at this point, given the risk of biasing these carefully balanced discussions.

The noble Lord, Lord Teverson, said that, if we carry on as we are now, there is a risk of doing nothing at home. I realise that there is a degree of trust here. No one is saying that they do not believe what I or the Government are saying, but there is pressure and a demand, the implication and undertone of which is that we cannot be trusted—I use that term loosely—to do this. However, the Government are committed to taking significant action at home. We have shown that we can. UK emissions of greenhouse gases, even without the impact of the EU Emissions Trading Scheme, were down over 15 per cent in 2005 from 1990 levels. We have reduced our non-CO2 emissions by around 44 per

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cent since 1990. The measures set out in the 2007 energy White Paper will already reduce our CO2 emissions by around 20 to 26 per cent by 2020 through domestic action and the EU Emissions Trading Scheme. The idea that we will not do anything at home does not stand the test of practical experience.

The noble Lord, Lord Teverson, said that the Government’s 2010 target does not include carbon credits. This is not the case. I clearly set this out on 7 February in one of my many letters to noble Lords—I apologise for the length of some of them. I said:

We made that absolutely clear. The Bill simply continues that approach. There is no change to what has been said.

The noble Lords, Lord Crickhowell and Lord Taylor, asked whether we should place an obligation on the climate change committee to recommend a limit. As other noble Lords, such as the noble Lord, Lord Stern, have said, Clause 27 already requires that. The Committee on Climate Change is required to advise on the extent to which the carbon budget should be met by domestic action and by the use of carbon units, and the Government must publish a plan setting out how we will meet the budgets. There is absolute transparency on this.

I regret that the Government’s position has not advanced since Committee, although we have advanced in as far as, in government, we have gone right over this again from scratch, not just in Defra but across all the relevant government departments. As I said, moving on this would create massive uncertainty. The fact is that we have covered the central objective, which concerns the lack of trust—with a small “t”—in the Government’s position, by ensuring in Clause 27 that we will listen and take advice from the expert independent committee that is being set up under the Bill. I sincerely hope that the House agrees with that as a way forward.

4.45 pm

Lord Puttnam: My Lords, I hope that my noble friend accepts that I listened carefully to what he said. There was a dog that did not bark—a matter that I very much hoped that he would raise. He talked about not wanting to damage the confidence of the market. Have the Government considered how they might successfully regulate this entirely new and relatively untried trading concept? One can be sure that for every legitimate trader there are likely to be a dozen illegitimate ones out there waiting to take advantage of this untested situation. If the World Bank, with all its resources and all its experience, is forced to concede that as much as half its aid fails to reach the beneficiaries for whom it was intended, what chance does this fledgling scheme have of not becoming a brand-new black hole down which billions of well intended pounds, dollars, euros and yen are poured?

While I am on my feet, perhaps I may respond to the noble Baroness, Lady Young, who suggested that I have been somewhat lyrical. I took my tone entirely

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from the Prime Minister’s speech on 19 November, which could hardly have been more lyrical. In it, he said that overcoming climate change must be one of the great projects of this generation. I deliberately elided the concept of trust with the amendment. At the end of the Prime Minister’s speech, he said that he wanted the post-2012 agreement to include,

I assure the Minister that 99 per cent of the population of this country listening to that remark believed that he meant domestic carbon savings. That is what I mean by trust. If he did not mean domestic savings, he could easily have said so.

Lord Rooker: My Lords, I cannot comment on the interpretation of the Prime Minister’s speech. To answer the first part of my noble friend’s question, I have been answering Questions at Question Time about what has happened with the current arrangements. There have been difficulties with some of the arrangements and the clean development mechanism. That is one reason why we want flexibility.

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