Emissions Trading

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.

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