Climate Change Bill [HL]

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