My Lords, British industry is very concerned about the UK Government’s approach to carbon pricing after Brexit. The Government have committed themselves either to an emissions trading scheme or to a carbon pricing scheme post Brexit. This is despite the fact that witnesses from business, who recently gave evidence to the business Select
Committee, were unanimous in their opinion that a UK emissions trading scheme, with a capacity to link to the EU Emissions Trading Scheme, is critical for everyone, both those in industry and the environmental NGOs. Reasons for this are simple: an ETS works by placing emissions under a cap, thereby producing a defined and legally binding environmental outcome in terms of greenhouse gas emissions reductions. By creating a tradable commodity, emissions trading uses the incentives of the market to ensure that emissions reductions are achieved in both the cheapest and most efficient way. The cap provides a long-term price signal for business, and gives predictability for industry in its decarbonisation pathway. Emissions trading ensures that cash flows in the direction of innovation and investment in low-carbon economies. In short, it provides a balance that works for all actors: flexibility for industry and environmental certainty for policymakers.
In comparison, a carbon tax is not designed to provide certainty as to environmental outcomes. Put simply, the lack of a cap means that is not possible to align a carbon tax with the UK’s legally binding net-zero target. Setting the carbon tax at a level necessary to achieve climate action is extremely difficult, as emissions are controlled by a set of external factors. Experience shows that taxes face additional challenges in the long run—as has been said by the noble Lord, Lord Bilimoria—because they are highly politicised. No Government can provide long-term certainty over future pricing levels. This restricts the industry’s ability to hedge and puts in jeopardy the popular support for carbon pricing among the general public.
I too have a few questions. To some extent, they overlap with those of the noble Baroness, Lady McIntosh of Pickering. I want an assurance that whatever carbon pricing scheme is chosen, it will have full endorsement of the devolved authorities and that they will be actively involved in the decision-making process. The Government have presented their proposals for a UK emissions trading system that is regulated by a legally binding emissions cap. What assurance can they give us that it is possible to be regulated by a legally binding emissions cap? What assurance can they give us that it is possible to align the proposed carbon emissions tax with net zero, given the lack of an emissions cap? What assurances can the Government give that that the revenue collected by a UK emissions trading system, or a UK tax, would be hypothecated and largely reserved for climate measures and investment in low-carbon energy?
Article 6.2 of the Paris climate change agreement allows two countries to link their emissions trading systems. I was talking this morning about two such linked systems, both of which have a partner in the EU and one outside. Evidence shows that this will enable the UK to move to net zero more quickly and at less cost. Are the Government aware that opting for a carbon emissions tax would negate any possibility of such a linkage, given that an operational emissions trading scheme is necessary to allow linkage negotiations to begin?
Are the Government aware that opting for a carbon emissions tax only weeks before the end of the transition period will result in significant new regulatory costs for
industry as it grapples with a new compliance system in the middle of a global economic crisis? Do the Government understand that an emissions trading scheme provides continuity for industry at a difficult time? Do the Government agree that by opting for a carbon emissions tax instead of an ETS just before COP 26 would send a troubling message to it about the UK’s commitment to carbon markets, as envisaged in the Paris climate agreement?
I fully concur with what has been said about heat emissions; they are most troubling and something on which every Government should get a firm grip. Despite the fact that there is a lot of sympathy for the aviation sector, as a big emitter, it needs to be included in any system.
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