Schedule 2

Climate Change Bill [Lords] – in a Public Bill Committee at 1:30 pm on 3rd July 2008.

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Trading schemes

Photo of Martin Horwood Martin Horwood Shadow Minister (Environment, Food and Rural Affairs)

I beg to move amendment No. 74, in schedule 2, page 51, line 33, leave out from ‘responsible’ to end of line 34.

Photo of Peter Atkinson Peter Atkinson Conservative, Hexham

With this it will be convenient to discuss amendment No. 73, in schedule 2, page 51, line 34, at end insert—

‘(5A) (a) Any method specified for the purposes of paragraph (5) shall have the aim of ensuring that any amount calculated bears as close a relationship as possible to the actual emissions of the activities to which the trading scheme applies;

(b) where biomass is used as an energy source, any such method shall take account of the carbon absorbed during the lifetime of the biomass;

(c) “biomass” has the same meaning as in the Renewable Transport Fuel Obligations Order 2007.’.

Photo of Martin Horwood Martin Horwood Shadow Minister (Environment, Food and Rural Affairs)

The amendments follow on from our previous debate, with a similar theme of interoperability. They seek to replace the rather vague wording in paragraph 3(5)(b) with more specific wording specifying that not only should regulations be introduced to set out the method by which the amount of reductions are to be measured and calculated, but they should bear

“as close a relationship as possible to the actual emissions of the activities to the which the trading scheme applies.”

One would hope that that would be an unnecessary measure, but practice tells us otherwise.

A wonderful variety of carbon and energy reduction schemes is developing. We have the ETS, climate change agreements and the carbon reduction commitment, and in another context there are renewables obligation certificates. However, the problem with that complexity is that perverse results start to emerge. The interplay between the last two schemes that I mentioned—renewables obligation certificates and carbon reduction commitment —is causing a few problems in the commercial, private sector.

The carbon reduction commitment is rather a misnomer, as it incentivises not the reduction of carbon, but the reduction of energy use. It is valuable as an energy efficiency measure, but it has one serious flaw as it assumes that all energy coming into an enterprise is at the grid average, and that there is an equal need to reduce energy across all of a company’s activities, no matter what the power source.

In some cases it is difficult to pin down the source of energy, but in other cases it is rather easy. I cite a domestic example. I have a solar-powered radio in my flat in London. [Hon. Members: “Hear, hear.”]. Very sound, I know. I never plug it in and it is powered entirely by the solar panel on top of the radio. I leave it on all day—discreetly, so as not to disturb my  neighbours—and it is a useful security measure, especially if our addresses get published. It quietly plays all day while the sun is shining. There is no reason for me to practice energy efficiency, turn it off and reduce the amount of energy that I use, as it is powered from an entirely renewable source that does not compete with any other energy source and is completely carbon free.

There is an exact parallel in commercial enterprises where companies have on-site renewables, which, in some companies, are becoming highly significant. BT is, I think, the biggest and most impressive example so far, although an hon. Member quoted Lily Allen’s recording studio as another, and BT gets 30 per cent. of its energy from its own on-site renewable energy generation. The carbon reduction commitment treats that in the same way as energy coming from Drax or Kingsnorth or any other of those fossil-fuel intensive energy sources.

The Renewable Energy Association, BT and others would love to claim renewable obligation certificates for that renewable energy. That produces a problem of double counting or even double subsidy, whereby the same carbon reduction gains credit in the ROCs scheme and in the carbon reduction commitment. I acknowledge that there is a problem, and I would not entirely endorse the Renewable Energy Association’s optimistic lobbying on that front. However, it is clearly unfair that enterprises cannot at least exclude the energy generated entirely from a renewable source from the carbon reduction commitment scheme, so that it would effectively be neutralised and at least would not count as coming from a dirty source.

That is why it is important that the scheme design is changed or the rules amended so that in future, as in the clause, schemes are designed to pay close attention to carbon emissions. They should not be simply plucked out of a broader agenda such as energy efficiency, as that may not be appropriate. Various companies have raised that serious point about what is clearly an anomaly in the current scheme, which the amendment is designed to tackle.

Photo of Gregory Barker Gregory Barker Shadow Spokesperson (Environment, Food and Rural Affairs)

The amendments are intended to enhance levels of transparency and accountability in the calculation of emissions. The hon. Member for Cheltenham asked some sensible questions of the Minister, and enlightened us as to his home listening habits.

It is not in the interests of accountability or transparency on trading schemes for the method by which emissions are measured to be entirely self-regulated, or for there to be any doubt about how they are calculated. There is eminent sense in these Liberal Democrat proposals.

Photo of Phil Woolas Phil Woolas Minister of State (Environment), Department for Environment, Food and Rural Affairs 1:45 pm, 3rd July 2008

The point that the hon. Member for Cheltenham made is right: perhaps carbon reduction commitment is a misnomer. It is intended primarily as an energy efficiency measure because it measures energy use, rather than direct emissions—it is a proxy for emissions. Conceptually, the carbon reduction commitment lies underneath the climate change agreements and brings in the mid-ranging organisations. Fifty per cent. of emissions in the UK are covered by the ETS and we are trying to bring in other organisations, such as large energy users. Increasing energy prices may change the relationship.

The difficulty, however, and the answer to the hon. Gentleman’s question, philosophically, is double counting. One must ensure that the mother scheme—if I may use that phrase; I think I can—or the parent scheme that caps emissions is not undermined by the carbon reduction commitment that lies underneath it. To follow the logic of the hon. Gentleman’s argument, if there was a way of measuring direct emissions from the use of energy by mid-ranking organisations, one could have a subservient direct emissions cap and trading scheme, but there remains the issue of double counting. I shall give him the technical explanation in a minute, but bearing in mind his point about needing to take account of where we get our energy from within the carbon reduction commitment, we are trying to provide an incentive to energy efficiency, which I know he supports.

Photo of Martin Horwood Martin Horwood Shadow Minister (Environment, Food and Rural Affairs)

I am grateful to the Minister and he is making perfectly valid points. As regards one scheme undermining another, does he not accept that at the moment, an enterprise taking all its energy from a dirty source has no incentive under the scheme to develop on-site renewables, even though that would clearly be a good thing to do, because that energy would be treated exactly the same as the dirty energy? Surely, the key is accountability for the energy that is coming from outside, measurement of it, and the transparency of the process. As that is something the Government are working on, they should be happy to accept the amendment.

Photo of Phil Woolas Phil Woolas Minister of State (Environment), Department for Environment, Food and Rural Affairs

I will come to why I should not be happy to accept the amendment in a moment, but the hon. Gentleman’s policy point is right. Indeed, I hear the echo of many meetings with my colleagues in the Department for Business, Enterprise and Regulatory Reform. The carbon reduction commitment will take into account the source of the energy and will incentivise use away from dirty energy by the renewables obligation and, indirectly, through the ETS.

Martin Horwoodindicated dissent.

Photo of Phil Woolas Phil Woolas Minister of State (Environment), Department for Environment, Food and Rural Affairs

Let me explain, and then the hon. Gentleman will stop shaking his head and start nodding it, I hope. We want to encourage the uptake of renewable energy. However, where the carbon savings from renewables are already counted by supplier schemes, such as renewable obligation certificates, it would result in double counting if the same units of renewable electricity could count towards the carbon reduction commitment. The proposed approach for the carbon reduction commitment is, therefore, simply to ensure that there is no double counting. However, we propose that participants may count renewable electricity generated on site if it is not counted against targets in the renewables obligation. That approach demonstrates the commitment to ensuring that the carbon reduction commitment delivers additional carbon savings over and above those that suppliers are required to deliver through the renewables obligation certificates scheme, and will help to encourage it further.

Amendments Nos. 73 and 74 would alter a provision of the trading scheme powers with regard to how the greenhouse emissions from activities covered by trading schemes may be calculated. The amendments make specific provision on how energy from biomass should be treated under future trading schemes. As currently  drafted, under paragraph 3 of schedule 2, trading scheme regulations must identify the activities covered by the trading scheme, and

“specify the units of measurement of the activities for the purposes of the scheme”.

Further, paragraph (5)(a) ensures that the activities covered by a scheme can be calculated with

“reference to the amount (in tonnes of carbon dioxide equivalent)” for which they are responsible, and paragraph (5)(b), which amendment No. 73 would remove, ensures that the regulations may specify how that amount is calculated. In philosophical terms, that exactly meets the point that the hon. Gentleman is rightly making.

To explain further the whole debate about alternative sources, if one looks at electric cars, they do not in and of themselves reduce emissions; it depends on where the electricity comes from. That is what counts. The hon. Gentleman is absolutely right that the CRC must incentivise not just energy efficiency but emissions reductions.

There are two likely situations. First, let us take it as read that it is often difficult, expensive and sometimes frankly impossible, to measure the volume of greenhouse gases emitted at a site, so it is common that emissions in a trading scheme are derived by taking the volume of fuel consumed and applying co-efficients to calculate the volume of greenhouse gases that result. It is the calculation of that co-efficient that a scheme must do—to meet the hon. Gentleman’s point.

Secondly, these powers apply equally to direct and indirect emissions, as set out in clause 43. Indirect emissions are sometimes measured by taking electricity use at, say, the office building in question, and then applying the same co-efficients to work out the volume of greenhouse gases when the electricity was produced back at the power station—to meet the point that the hon. Gentleman makes. Alternatively, by taking the volume of fuel sold for combustion and applying co-efficients, it could be possible to calculate the volume of emissions that result.

Under the CRC, for example, it is proposed that emissions from participants’ energy use will be calculated using a grid electricity emissions factor. That will be based on the five-year rolling average emissions factor, which is currently 0.523 kg of CO2 per kWh. That shows how the provisions in paragraph (5)(b) may be applied.

Martin Horwoodrose—

Photo of Phil Woolas Phil Woolas Minister of State (Environment), Department for Environment, Food and Rural Affairs

I have confused the hon. Gentleman. Let me reassure him, and then he will not need to intervene. Paragraph (5)(b) ensures greater flexibility in the calculation of emissions from a trading scheme. My figure is the co-efficient around which that is calculated; it is the baseline, which is taken up or down depending on the individual participant. One should remember that my officials and others will be discussing with each participant in the CRC their particular circumstances. That is necessary. It is not intended that paragraph (5) will allow the Government or a national authority to fudge the figures. I must cover things from the other point of view as well, or the hon. Gentleman will press me as to whether the provision is too flexible, and he would be right to do so.

Paragraph (5)(b) ensures that the methodology for measuring emissions may be set out in the regulations, which gives the hon. Gentleman the guarantee he is looking for. Removing that sub-paragraph would therefore have the effect of reducing the transparency of the trading scheme. The hon. Gentleman is right, and I have added powers to make regulations to meet the points he makes. I agree with him that CRC is a misnomer.

Photo of Martin Horwood Martin Horwood Shadow Minister (Environment, Food and Rural Affairs)

For once, I am reassured by the Minister’s comments. [Interruption.] Maybe I am going soft, at this late stage in the Committee. His comments about what is possible under the new clauses are encouraging. If he is true to his word, that will be a positive step. I was slightly worried that nevertheless he went on to talk about schemes based on grid averages, although I accept what he also said, that they could be varied for individual participants. The use of grid averages as the baseline is part of the problem. Once we have proper accounting for the source of energy, it is difficult to see why we need the grid average baseline at all.

Photo of Phil Woolas Phil Woolas Minister of State (Environment), Department for Environment, Food and Rural Affairs

If I used “reference points”, rather than “baseline”, perhaps that would help.

Photo of Martin Horwood Martin Horwood Shadow Minister (Environment, Food and Rural Affairs)

I am grateful to the Minister but, again, if we are accounting accurately for energy, that should in time remove the need even for a reference point. Furthermore, if each energy statement to a particular enterprise specified, from the energy company’s side, what the source of that energy was, there would be a double benefit, by preventing energy companies from claiming double credit for green-tariff electricity, as we have discussed before. We will be able to account for each unit of electricity coming in, and its source. However, the intention behind the Minister’s comments is clear. I am glad that he appears to be accepting that the carbon reduction commitment has an anomaly at the moment and that, under the provisions of the Bill, Ministers will be able to change or remove that anomaly, to tighten up the scheme, which will be warmly welcomed in industry. I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Photo of Phil Woolas Phil Woolas Minister of State (Environment), Department for Environment, Food and Rural Affairs

I beg to move amendment No. 23, in schedule 2, page 60, line 3, after ‘participants’, insert

‘or other persons authorised to trade in allowances, credits or certificates’.

The amendment makes a small change to the trading scheme powers in schedule 2 by ensuring that trading scheme regulations may make provision to levy charges on third parties, as well as on participants, for the cost of operating the trading schemes. As currently drafted, the Bill does not allow us to do that. We need that power in order to operate such a scheme. I hope that the amendment is accepted as a technical one.

Photo of Gregory Barker Gregory Barker Shadow Spokesperson (Environment, Food and Rural Affairs)

Any amendment that judiciously enhances both the role and the efficiency of the carbon markets will have our support. The amendment appears to do just that. I am content to give it our support.

As the Bill stands, administration of national-level trading schemes can only be conducted by participants, such as devolved authorities or central Government. Under the amendment, powers to run and charge for a  national levy scheme could be administered by a group other than a national authority; a scheme could be run by

“other persons authorised to trade in allowances, credits or certificates”.

That presumably means that banks, brokers or local authorities could run a scheme on behalf of or under contract to national authorities.

The amendment may be technical, but potentially it is a big little amendment. We are, therefore, taking an awful lot on trust. Could the Minister clarify in a little more detail which authorised persons he would envisage carrying out such duties on behalf of national authorities? We see no reason why the Government should run something when it could just as easily be done, or done better, at local level or by the private sector. I would welcome the Minister taking the opportunity to clarify who the other authorised persons are intended to be.

Photo of Phil Woolas Phil Woolas Minister of State (Environment), Department for Environment, Food and Rural Affairs

The answer to the hon. Gentleman’s question is, predominantly, the Environment Agency. Let me clarify. The issue is about who can trade within the scheme, not who can run the scheme. Perhaps I should have made myself even clearer. If people trade within the scheme, but a third party is not allowed to pay into it, we would inadvertently be taking away a big United Kingdom industry growth area. The type of organisation that we envisage being able to run the trading schemes is the Environment Agency or a similar body.

Photo of Martin Horwood Martin Horwood Shadow Minister (Environment, Food and Rural Affairs) 2:00 pm, 3rd July 2008

I am now slightly puzzled, because I had assumed that the amendment was rather innocuous and that it would simply extend the scope of those who can run the schemes to commercial organisations. Like the hon. Member for Bexhill and Battle, I had considered that to be a positive step. However, I am now confused, given that the Government have in mind yet another of their agencies. Does the Minister imagine that profit-making organisations could be involved in convenient circumstances?

Photo of Phil Woolas Phil Woolas Minister of State (Environment), Department for Environment, Food and Rural Affairs

Once again, I have learned the lesson that reading out the next paragraph in the brief saves time in the debate. I am sorry, I should have made matters clear.

As drafted, paragraphs 9 and 19 of schedule 2 allow for third parties to trade in allowances or certificates under a trading scheme. We believe that that is necessary, so that a deeper and more liquid market can develop as a result of the scheme than would be the case if only the participants—the actual organisations and companies, whether public or private, that were members of the scheme—were allowed to trade. Those paragraphs make a distinction between third parties and participants, and that is not replicated under paragraph 26 in connection with the power to levy charges towards a trading scheme.

Participants are those who have an obligation under the scheme, such as the company, the Department or the supermarket, that are typically there to surrender a particular number of allowances equal to their emissions—indirect emissions, in some cases—to acquire a certain number of certificates. Third parties are those who have no obligations, but decide voluntarily as a business to trade in the scheme’s allowances or certificates. I should  have explained that I am taking the provision under paragraphs 9 and 19 and putting it under paragraph 26. If the hon. Member for Cheltenham wants a debate on other agencies, we will come to that.

Amendment agreed to.

Schedule 2, as amended, agreed to.