My Lords, the order was laid before the House on 13 July 2020 in draft. The UK will cease to participate in the EU emissions trading system at the end of the transition period, as a consequence of the UK’s withdrawal from the EU. This draft Order in Council, laid under the Climate Change Act 2008, establishes a UK-wide greenhouse gas emissions trading scheme: the UK ETS.
Emissions trading schemes work on the cap and trade principle, where a cap is set on the total amount of certain greenhouse gases that can be emitted by installations and aircraft covered by the scheme. Within the cap, participants receive or buy emission allowances, which they can then trade with one another as needed. This cap is reduced over time so that total emissions fall. Participants are required to monitor their emissions during a calendar year and surrender one emissions allowance for every tonne of carbon dioxide equivalent they have emitted at the end of each reporting year.
The four Governments of the United Kingdom nations have agreed the policy positions that act as a basis for this UK ETS. These positions are set out in the government response to The Future of UK Carbon Pricing consultation, which was published on 1 June 2020. Further secondary legislation, to be introduced later
this year under the Climate Change Act 2008 and the Finance Act 2020, will amend this order to introduce additional elements of the UK ETS.
On the importance of emissions trading for decarbonisation, a UK ETS would support us in pursuing our climate ambitions by enhancing the UK’s carbon market signals. From day one, the cap on emissions within the scheme would be reduced by 5% compared to the UK’s notional share of the EU ETS cap. That is not the limit of our ambition. The Committee on Climate Change will, in December this year, deliver its advice on the level of the sixth carbon budget. Once this advice is published, we will consult within nine months on what the trajectory for the UK ETS cap should be for the remainder of the first phase, to ensure that it is appropriately aligned to our net-zero objective. At the same time as ensuring that we reduce our contribution to climate change, the new scheme will provide a smooth transition for businesses.
The UK was instrumental in developing the EU emissions trading system and has long been a centre of carbon trading. We have drawn on this experience in designing the new system, while simultaneously improving certain scheme elements, like the tightened cap, to reflect our world-leading climate ambition. Reducing emissions while supporting UK industry is central to my department’s mission to deliver our net-zero target. Alongside carbon pricing, the Government have schemes worth nearly £2 billion operating, or in development, to support our vital energy-intensive industries to decarbonise. Our economic recovery from Covid-19 must build on the UK’s proven track record of cutting carbon emissions while still growing our economy. Over the last three decades, we have seen the economy grow by 75%, while cutting emissions by 43%. It is vital that we keep up the pace of change as we rebuild from the pandemic and look ahead to the UK’s presidency of the COP 26 climate talks in November 2021.
The Government have an ambitious range of policies in place to help industry reduce costs and decarbonise while supporting a clean, green recovery. In July, as part of a £350 million package to cut carbon emissions, the Prime Minister announced £140 million to drive the use of innovative materials in heavy industry. The 13 initial projects will include proposals to reuse waste ash in the glass and ceramics industry and the development of recyclable steel. Some £139 million was also committed to cut emissions in heavy industry by supporting the increased use of low-carbon hydrogen as a greener fuel source, instead of natural gas, and scaling up carbon capture and storage technology.
We want to show that the UK can have a thriving, competitive industrial sector, aligned with our net-zero target. To this end, in July we announced that the Government will publish a comprehensive long-term industrial decarbonisation strategy in spring 2021. This strategy will cover greenhouse gas emissions from manufacturing, including steel, cement, chemicals and oil refineries. Carbon pricing will be at the centre of this, incentivising decarbonisation. The UK ETS will provide a clear signal for businesses to invest for a net-zero future, backed by the funding and support we have, and will have, available to them.
This draft Order in Council establishes a UK ETS which will be operational from 1 January 2021. It establishes the following key areas: the scope of the UK ETS, and this includes energy-intensive industries, the electricity generation sector and aviation; the cap on allowances created under the UK ETS each year, which will initially be set at 5% below what would have been the UK’s expected notional share of the EU ETS cap over the 2021-2030 period; a full review of the UK ETS in 2023; the monitoring, reporting and verification requirements for UK ETS participants; a robust and proportionate enforcement system; and the roles of the national regulators in monitoring and enforcing the scheme.
This order will establish a new carbon pricing regime for the UK, encouraging cost-effective contributions to our emission reduction targets and furthering progress towards our net-zero goal. I commend it to the House.
2.37 pm