Climate Change Bill [HL]

Although we are dealing with small figures here, I shall kick off by saying that the figure of 1 per cent was not plucked out of thin air, and in the course of my remarks I shall seek to explain where it came from and why it is useful. I am dealing with Amendments Nos. 77 and 78, and thus effectively with Clause 13, as the noble Lord, Lord Teverson, remarked, so I shall be slightly longer than I was on previous debates. The clause ensures that there are strong incentives to over-achieve against budgets and to reduce emissions by more than is necessary. Where this is the case, the surplus emissions may be, but do not have to be, banked for use in the next budget period. The benefits of banking to provide incentives for early action and over-achievement are recognised under the Kyoto Protocol, which also allows for unused emissions rights to be carried forward for future use. We think that this will encourage deeper emissions cuts to be made earlier, which would not be the case if we could not carry forward the savings made by early action. Banking is therefore a good thing in environmental terms because it rewards good behaviour, whether by government, business or other organisations. Banking can also help to reduce the costs of mitigation, especially where abatement becomes more expensive over time, while still ensuring that emissions, over the period as a whole, are limited. In the context of the policies designed to establish a carbon price, banking reduces the risk of price spikes or crashes at the end of the budget period. There is some evidence, cited in the Stern review, that allowing banking between phases of the United States Acid Rain Program, for example, helped to deliver early reductions and improved participants’ efficiency. This evidence suggested that because of the ability to bank from the first phase into the second, the emissions reduced in phase 1 were twice that required to meet the cap. Unlimited banking is allowed for companies operating under the EU Emissions Trading Scheme, which covers around half of the United Kingdom’s carbon dioxide emissions. Allowing banking under the Bill ensures that there is no inconsistency between the two systems. Without banking, the risk is that effort will be focused on trying to meet budgets exactly, rather than reducing emissions by more and going beyond the budget. Given the problems of the natural variability of emissions, and the uncertainties over what level of carbon savings will be achieved by many policies, removing banking will also increase the risk of not meeting the targets at all. Clause 13 allows borrowing of emissions from the next budget, but only in strictly limited circumstances. This is to help deal with unexpected natural events, such as a particularly cold winter at the end of a budget period, that could otherwise mean a budget or target is missed. Amendment No. 77 would halve the limit on borrowing to 0.5 per cent of the following budget. As I said, the current limit of 1 per cent in the Bill is not a number plucked from thin air. It reflects the likely situation when an unexpected shock towards the end of a budget period would otherwise lead to a risk of missing the budget. Analysis suggests that allowing up to 1 per cent of a future budget to be borrowed would be consistent with the rise in emissions that may result during an unexpectedly cold winter, or with the uncertainty around emissions data. There have been three large emission rises due to unexpectedly cold winters since 1990, the coldest of which led emissions in these years to be between 3 and 4 per cent higher than the year before. This effectively means that if 0.8 per cent—that is to say, 4 per cent divided by the five years of the budget period—of the subsequent budget were borrowed, the shock could be absorbed with a 1 per cent limit on borrowing, and the budget would still be met. This would not be the case with a limit set at 0.5 per cent, as Amendment No. 77 proposes. Another important source of uncertainty is the time it takes to make sure that the UK emissions figures are completely accurate. Provisional figures for emissions in the final year of the budget period will be available shortly after the period ends. These figures are generally accurate to within a few percentage points, but the final confirmed emissions figures are not available until later. Again, if the emissions figures for the last year of the budget period were to be revised upwards by this amount, as the period had already ended, the Government’s options would be incredibly limited. One option available to the Government following the end of a budget period is to buy international credits from the carbon market. As we discussed earlier, there are concerns within the House about this. The 1 per cent limit is therefore considered the most appropriate approach in providing a small degree of flexibility to smooth emissions across budget periods but, crucially, without undermining the clarity and certainty that the budget system as a whole provides. I have given an example of realistic figures from cold winters since 1990. We have an example where we can deploy the figures. I turn to Amendment No. 78, which would require approval from the Committee on Climate Change.