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October 2007 Monthly Archives

Emissions Trading

October 25, 2007

Nick Hurd raises concerns about the effectiveness and operation of the EU Emissions Trading Scheme and also about the new Administration’s commitment to the climate change agenda and renewable energy targets.

Mr. Nick Hurd (Ruislip-Northwood) (Con): Thank you, Lady Winterton, not least for indulging me when I was temporarily absent from the proceedings. That allowed me to fulfil my democratic duty in Committee and bank the rare experience of enjoying the chairmanship of both Sir Nicholas and Lady Winterton on the same day.

I am pleased to have an opportunity to participate in a debate about this important issue. If the previous Prime Minister was right and climate change is

“the greatest long-term challenge facing the human race”,

we are discussing the main policy tool for responding to that challenge in the UK and Europe. It is the main policy tool because it covers 46 per cent. of emissions in this country and, broadly, across Europe. It is also our main policy tool in responding to the challenge set down in the Stern report of correcting the core market failure to take this thing called carbon, put a price on it and stitch it into the economics of daily life. Finally, the EU ETS is also important, as the Chairman of the Committee noted, because it is seen as something of a guinea pig and as a cornerstone for the long-term vision and ambition of creating a global carbon market. That may have profound implications for the City of London and its opportunity to profit and enhance the prosperity of this country.

The Committee, under the distinguished and experienced chairmanship of my hon. Friend the Member for South Suffolk (Mr. Yeo), has done the House a service in throwing a spotlight on the EU ETS at a pivotal time. On the one hand, the Government are articulating a vision of emissions trading and a desire to move further and faster. In a speech to the Green Alliance earlier this year, the current Prime Minister said:

“My ambition is to build a global carbon market, founded on the EU Emissions Trading Scheme and centred in London.”

On the domestic scene, the Government intend to extend emissions trading through the carbon reduction commitment to companies not covered by the current scheme. As has been said, there is also the important initiative to include aviation in the next phase of the ETS. That is the language that the Government are using.

On the other hand, however, some legitimate and valid voices are sowing seeds of doubt about how effective emissions trading has proved in achieving its core function of significantly reducing emissions. I gather from my contacts with European colleagues, not least through the parliamentary network run by the Global Legislators Organisation for a Balanced Environment, with which the Minister is very familiar, that there are different levels of commitment across Europe to emissions trading. We in this country are pioneers and we tend to be evangelical about the opportunities before us, but Germany, which has a much more ambitious and effective domestic climate change policy on renewables and energy efficiency, attaches less weight to emissions trading. Given that the ETS has no guaranteed life beyond 2012, I fear that we in this country may be too sanguine and complacent about the fragility of this important market mechanism.

The main message from the report is that the scheme needs profound reform, as the Chairman has explained more articulately than I could. As a Conservative, I firmly believe that market mechanisms will find the most cost-effective solutions, but we should be under no illusion that the market that we are discussing is artificial-a cap is set on it and it is set by politicians. The core message from the report and from all the evidence about phase 1 and, to a lesser degree, phase 2-there has been progress-is that the reduction and preferably removal of political risk from the process must be at the heart of reform. At the core of reform should be a steady process of reducing free allowances, because the decision to give away permits to pollute looks increasingly questionable, not least in the light of evidence that UK companies have passed the costs to consumers. UBS, for example, calculates that the first phase of the ETS added 1p to the cost of each kilowatt-hour of electricity, while the Government estimate that it generated windfall profits of £800 million in 2005. As we in this country-at least on the Opposition Benches-begin to articulate the need to reinforce the “polluter pays” principle through the tax system, the decision to give away permits under the scheme looks increasingly untenable.

The report majored on another area of reform, which has not so far been picked up. If it is not possible to move to the ideal scenario of 100 per cent. auctions outlined by the Chairman of the Committee, and if we must live with a process of phasing out free allowances, a consistent methodology must be applied to the giving out of allowances. That was the strongest message that I received on my visit to the Commission in Brussels earlier year to discuss the scheme. Those I spoke to fully acknowledged that the political process is the flaw and they were keen for greater consensus about the need for a consistent and transparent methodology for negotiation, for national allocations and, more importantly, for sector allocations within national allocations. The scheme’s credibility would be greatly enhanced if the scope for political interference in the allocation of permits was reduced.

Mr. Adrian Bailey (West Bromwich, West) (Lab/Co-op): I have been listening closely to the hon. Gentleman’s argument. Does he not agree that any global carbon market or auction must be disaggregated into sectors to avoid the situation that arose in phase 1, when the energy sector hoovered up the carbon credits and passed on the cost to other industrial sectors, which suffered a double whammy, because they had their own allocations capped and had to pay higher prices as a result of the free allocations to the energy sector? We need some sort of industrial, sectoral approach to avoid perpetuating that situation.

Mr. Hurd: I thank the hon. Gentleman for that intervention and I have a lot of sympathy with it. The issue will become particularly acute in the context of how and when aviation is included, because exactly the same pressures will be brought to bear.

The report and other analysis argue that the Government should be more proactive in arguing for greater transparency in the methodology used for the negotiation and allocation of allowances. For example, we should have the standardisation of sector allowances, which would ideally be based on the development of sector benchmarks for carbon efficiency. In addition, transparent assumptions should underpin any “business as usual” assumptions, and the report is very strong on the inadequacies and risks involved in relying on “business as usual” projections that are not transparent and consistent.

Finally, there should be a common approach to the rules for new entrants to the market; there is currently national discretion to set the rules, which, to my eyes, does not set a level playing field and runs against the grain of the single market. If there is one message that I want the report to send the Minister about the fundamental reform that is required, it is about removing the political risk from the process as we move, I hope, from a system of free allowances to pollute to one of full auctioning of allowances.

Part of the reform, as mentioned by the Committee Chairman, is the need for greater transparency and accountability for the policy. Emissions trading is hugely important, and almost completely invisible to the public. I doubt whether they talk about it much down the Dog and Duck in Congleton; they certainly do not in Ruislip-Northwood, but to some degree they should, because, in a very indirect and arguably almost stealthy way, many of the costs of the scheme are passed on to consumers, but not in a way that is visible to them.

In the context of transparency and open scrutiny, I stress one of the key points in the report, which is that Britain should take a lead in making a much clearer distinction between emission reductions achieved in the UK versus those sourced overseas. I think that many people would be surprised that the Government expect two thirds of the UK’s obligations under phase 2 of the EU emissions trading scheme to be met by the purchase of credits in overseas markets. That is a very high proportion.

Leaving aside for a moment concern about the integrity of those overseas credits, the fundamental issue is to determine the right balance between developed countries, such as the UK, getting their own house in order, and the preservation of our freedom to pursue lower-cost emissions around the world. Arguments based on equity are also finely balanced between the need to channel capital towards the developing world and the unfairness of our picking all the low-hanging fruit. The issue should be out in the open. The thrust of the report was that the matter is too opaque. Someone needs to take the lead on it in Europe, and it should be a Government who pride themselves on taking a lead on climate change across the piece.

I leave a final thought with the Minister. There is concern about the commitment of the new Administration to the climate change agenda. Few people doubted the integrity of the previous Prime Minister in his commitment to the cause, although there was plenty of room for criticism of the delivery. However, there are genuine concerns about the attitude of the new Prime Minister, and they are partly influenced by perceptions of the Treasury’s ambivalence about the agenda under his stewardship. As we have already discussed, worrying signals that have been given about commitment to the renewable energy target, and recent announcements about going back on waste taxes, are creating concern that the new Administration are not as committed to the agenda as the previous one, at a time that is, as the Minister will I am sure agree, critical with respect to the need not only to stabilise emissions-which we have failed to do-but to reduce them significantly. Therefore I see emissions trading and the attitude towards really pragmatic and fundamental reform of the scheme in the critical phase 3 as a test of the Government’s commitment.

3.23 pm

Export Credits Guarantee Department

October 17, 2007

Nick Hurd calls for modernisation of the influential Export Credits Guarantee Department in respect of transparency, accountability and environmental standards.

11 am

Mr. Nick Hurd (Ruislip-Northwood) (Con): It is a pleasure to serve under your chairmanship for the second time in two days, Sir Nicholas. It is becoming a welcome habit.

I am delighted to have the opportunity to spend some time throwing a spotlight on an important institution that has a long track record of supporting British exports and facilitating British trade, but which has been dogged by controversy for most of its history, not least because of its involvement in projects such as the Baku-Tbilisi-Ceyhan pipeline and, most recently, Sakhalin. That institution is the Export Credits Guarantee Department.

The organisation needs to be modernised, and I speak as a member of the Environmental Audit Committee, although I was not a member in 2003, when it published its groundbreaking report calling for changes to the ECGD’s remit of. I am also a board member of the Conservatives’ quality of life policy commission-recently, it, too, called for changes to that remit. My thesis is simple: Britain is a recognised thought leader on climate change. Indeed, the Government take pride in their reputation for leadership on the agenda, and some of that pride is well placed. They have taken a lead in setting targets, pushing climate change up the agenda of international politics and, most recently, submitting to the House a draft Climate Change Bill. However, at this critical time we should seek to demonstrate best practice in our institutions. The ECGD is a particularly important institution, because export credit agencies are an important source of capital and therefore an important driver of change in the business community. Those agencies and the ECGD engage with other countries, so they should therefore reflect the British Government’s priorities and values.

The ECGD’s importance is made apparent by its own sustainable development action plan, in which it states:

“The annual total value of capital goods exported with medium to long term finance supported by all the ECAs of the OECD countries usually ranges between £30 billion and £40 billion, with ECGD’s share being around £2 billion. Although this level of ECGD support represents only around 2% of UK exports annually, the exports that are supported often form part of larger projects”.

It admits:

“ECGD’s involvement provides an opportunity for it to influence the attitudes of project sponsors, host Governments and the other financial institutions in regard to Sustainable Development issues at the project level.”

We therefore expect the ECGD to represent best practice on environmental standards, but the truth is that it pays lip service to them and runs with an unambitious pack. We expect it to support the industries of the low-carbon future, but instead it subsidises a relatively small number of powerful industries that are among the most polluting in the world. Surely, if the Government are serious about matching rhetoric with action, now is the time for them to show more ambition by changing the remit and culture of the ECGD to align it more explicitly with their sustainable development strategy, position it to support the clean industries of the future and bring it out of the shadows. That would transform it into a transparent and accountable public institution of which we can be genuinely proud.

I am delighted to make my argument to a Minister with excellent credentials. The hon. Member for Croydon, North (Malcolm Wicks) is a well respected Energy Minister whose commitment to the environment is not in question. Anyone who doubts it should visit the planning department of Croydon council, where they can see the files that bear testimony to his persistence in trying to install a wind turbine on the roof of his house. In fact, his passion for such technology extends to his having recently presented me with my own mini-wind turbine as a wholly undeserved reward. I have no doubt that he is a Minister who has fully aligned himself personally with the Government’s rhetoric on climate change and the importance of the environmental agenda.

I should like to break my argument into three parts. First, what should we expect of the ECDG? Some voices say, “Don’t muck around with it. It is working-don’t muck around with the core focus.” I suggest to the Minister that that is not good enough in 2007 in the face of climate change and the growing recognition of the wider damage that we are doing to the natural resources on which our prosperity and well-being ultimately depend. Leading politicians attach huge priority to climate change as the greatest threat to our long-term well-being, and we know that the response will require huge change and a transformation of our energy and transport infrastructure. In the short term, we face a major challenge in stabilising our emissions, let alone reducing them. You will be aware, Sir Nicholas, we have an unfortunate track record over the past 10 years, as our domestic emissions have risen, not fallen. The past 10 years have taught us that tackling the problem is hard, but there is growing consensus about the role of Government. They should correct the market’s failure to put a value on carbon, set the clearest possible framework for the market and lead by example.

There is also growing consensus about the need to reinforce the principle that the polluter should pay. A key audience for that message is business, which is a key agent of change, not least because of its ability to drive change through the supply chain. Sometimes business responds to Government through regulation, and sometimes it responds to employees. It certainly responds to customers and to sources of capital. Export credit agencies are a major source of capital. The Environmental Audit Committee pointed out that they are

“collectively the largest source of public finance for private sector projects”

and

“powerful, influential players in the field of international business. They underwrite ten per cent. of exports from large industrialised countries”.

They are funded by the taxpayer and are accountable to Government. Given the priority attached to climate change, and the Government’s pride in their leadership, an external observer would expect such an important organisation as the ECGD to be a shining example of best practice, standing shoulder to shoulder with the Government’s policy priorities. It is not.

In theory, the ECGD reports to a Government Department but in fact it stands apart and does its own thing. It derives its powers from the Export and Investment Guarantees Act 1991, which has not been materially adjusted for 16 years. It is an institution in decline, given the volume of business that it underwrites. Its core business is the subsidisation of a relatively small number of powerful industries-defence infrastructure, aerospace, oil and gas-that are characterised by their negative impact on the environment. Meanwhile, its participation in the financing of new industries is negligible, at 2 per cent. of the current fund, despite the commitments made by the British Government at Johannesburg in 2002 and, more recently, at Gleneagles. Instead of being at the forefront of promoting corporate responsibility, it pays lip service to what is explicitly described in its sustainable development report as a secondary duty to operate in accordance with other Government objectives,

“including those on sustainable development…human rights, good governance and trade.”

Since 2000, the ECGD has been required to produce a statement of business principles, and I acknowledge the Government’s role in that important initiative. The ECGD’s business principles state:

“We will promote a responsible approach to business and will ensure our activities take into account the Government’s international policies, including those on sustainable development”.

No reference to climate change is made in any of the ECGD’s strategies, risk assessments or investment decisions. The business principles are assessed by case impact analyses, which are designed to provide an assurance that the ECGD’s activities are consistent, but such analyses are not required for its aerospace or defence business, which is subject to other codes with environmental standards of questionable stringency. Even in cases in which the analyses are applicable, impacts are assessed by comparing them with the relevant international standards, for which the benchmark is World Bank standards which, historically, are not very demanding. A process is under way to find a common, more demanding standard, but I do not get the impression that there is much political momentum behind it. I should be interested to hear the Minister’s view and to receive an update.

It would not matter if the standards were the most exacting in the world, because it is quite clear to anyone who does business with the ECGD that it considers environmental and social assessment procedures to be discretionary. Standards apply, but only when it sees fit. It is therefore not surprising that it is extremely reluctant to disclose its analyses, obstructing attempts to obtain them through freedom of information requests. It is not surprising, either, that it has never rejected a project on environmental or social grounds, or that it is embroiled in legal cases with non-governmental organisations such as WWF that find its attitudes utterly frustrating in the new political environment.

Does all that matter? Of course it does, for at least three reasons. First, because at a time when British taxpayers are being told about the changes that they have to make to reduce their carbon footprint, their money is being spent on subsidising the development of projects with high carbon impacts for which the sponsors are not accountable. Secondly, our poverty of ambition has resulted in a missed opportunity to show a lead to other export credit agencies, and, thirdly, the impact of emissions can be linked both directly and indirectly to ECGD activity. In aviation, for example, in the past five years, the ECGD has provided £3.3 billion of finance for the supply of 294 aircraft, which is equivalent to British Airways’ entire fleet being added to the global airline industry every five years with Government support. The ECGD should act as a gadfly to the industry, encouraging it to move further and faster to improve the energy efficiency of those aircraft, but it is not at all clear that it has done so. The Sakhalin project is another example: WWF estimates that the 1.6 billion tonnes of carbon dioxide emissions from the lifetime oil and gas production of that one development are equivalent to just three years of UK national emissions.

That is not good enough. At an absolutely critical time, a key British institution that the Government ought to be able to control is sending the wrong signals to the market. The Government should point the ECGD in a different direction. First, they should change its remit. The 1991 Act should be amended to make it clearer that the Secretary of State and the ECGD must have more explicit regard to climate change and other key policy requirements. Secondly, the Government should change the culture of the organisation to make it more transparent. We should know about direct and indirect emissions resulting from investments facilitated by public money; the ECGD should be required to disclose them and bring its aerospace activities under the scope of the environmental and social assessment, including climate change. Thirdly, they should bring the ECGD into the collective Government effort to control greenhouse gas emissions in this country. They should have targets to reduce contributions to those emissions.

Lastly, and more controversially, the ECGD should lead a shift towards low-carbon finance as part of a Government-led initiative to phase out subsidies to fossil fuel industries. By taking a lead on that issue, the British Government would reinforce leadership on climate change and go with the grain of developments elsewhere. The Minister may be aware that the “End Oil Aid” Bill was introduced in the United States in April 2007 to end subsidies for oil companies’ international operations. Calculations by the World Bank and the Organisation for Economic Co-operation and Development show that global subsidy removal could reduce CO2 emissions by about 10 per cent. worldwide. The EU sustainable development strategy requires a 2008 road map to phase out subsidies that are harmful to the environment. The message is that the polluter should pay, not be paid.

There are concerns about competitiveness, and the Minister might make that argument. I urge him, however, to consider the example set by the Canadian equivalent of the ECGD, which follows best practice by disclosing the environmental standard used to assess projects, and allows appeals against decisions, unlike the ECGD. Unlike its British equivalent, its business is not in decline. Indeed, last year it reported record numbers and business grew by 15 per cent. The message is that the world is changing and it is time for the ECGD to change with it.

I shall close with some questions for the Minister. Does he believe that the ECGD is playing its full part in the Government’s battle to reduce greenhouse gas emissions? Is he satisfied that it is operating with satisfactory levels of transparency and accountability to the public? Does he believe that it offers the taxpayer value for money? Would he support an investigation by the National Audit Office into whether it offers best value? Does he believe that a publicly funded body should continue to subsidise the fossil fuel industry, particularly in emerging markets where the priority should be to help develop clean energy? Does he think that the ECGD should retain its current focus and prioritisation or does he accept the need for change?

11.15 am

LATER INTERVENTION IN THE SAME DEBATE

Mr. Hurd: I have been following the Minister’s argument with interest, but he is moving on from the thrust of my argument. I know that I can speak frankly to him. He is a highly intelligent Minister, capable of delivering his own personal view on a subject. He is reading out a fairly explicit brief from the Department, but may I ask for his personal view? Does he accept that there is an argument for a change to the ECGD’s remit in respect of striking a balance between the need to promote trade and the need to protect the environment, or is the message from the Department that the status quo is entirely adequate?

Malcolm Wicks: What I have been doing, albeit with a little help from my friends in the Department-we work closely together-is to demonstrate to the hon. Gentleman that there is an ethical framework. We take account of environmental considerations and social impacts, and we work internationally with other export credit agencies to ensure that purpose. If he is asking whether we might be doing more to ensure that we can align our sustainability and climate change objectives with our export credit objectives, perhaps we can, and I shall certainly consider that. The hon. Gentleman presented a bleak picture of what the agency is doing, but I do not accept it. His view was not as balanced as the one that I would usually expect from him.