Charge for allocating allowances under emissions reduction trading scheme

Finance Bill – in a Public Bill Committee at 2:30 pm on 16th June 2020.

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Question proposed, That the clause stand part of the Bill.

Photo of Kemi Badenoch Kemi Badenoch The Exchequer Secretary

The clause provides the power to auction carbon emissions allowances, to establish a UK emissions trading system, which could be linked to the EU’s or operate independently. Alongside clause 92, to update the carbon emissions tax, this clause ensures that a strong carbon price remains in all scenarios, while supporting the ongoing negotiations.

The UK’s membership of the EU emissions trading system will end following the transition period. As mentioned in the previous clause, the EU ETS covers around a third of UK emissions, including the power sector, heavy industry and aviation. It has been an important tool, alongside other taxes and regulations, in helping to reduce emissions.

Following the UK’s exit from the EU, we have choices about how best to put a price on carbon, tailoring our approach to the UK economy. Carbon pricing will continue to play an important role to help meet the UK’s legally binding carbon budgets and net zero. The Government are preparing an independent UK emissions trading scheme, which could be linked to the EU ETS. As set out in the UK’s approach to negotiations, we are open to considering a link if it suited both sides’ interests.

Clause 93 is essential to the establishment of a UK ETS, as it provides the power for Government to auction emissions allowances and intervene in the market to deal with any price volatility. As I mentioned earlier, the Government are also preparing a carbon emissions tax and a possible alternative in clause 92. Introducing legislation to support potential negotiated options, as well as legislating for alternative approaches to carbon pricing after the transition period, will provide certainty that we maintain an effective carbon price in all scenarios, continuing to drive reductions in emissions on our journey to net zero.

The changes made by clause 93 introduce a charging power. This means that through regulations, emissions allowances can be auctioned by the Government in any future UK ETS, ensuring that participants pay a price for their pollution. The clause will also enable regulations to be made for additional market stability mechanisms, to operate in an independent UK emissions trading scheme. That will ensure a smooth transition for businesses. First, a price rule, known as the auction reserve price, will maintain a carbon signal when allowance prices are low. Secondly, a cost containment mechanism will respond to in-year price fights, protecting the competitiveness of UK business when allowance prices are high. Further detail on these measures has been set out in the Government’s recent response to our consultation on the future of UK carbon pricing.

This clause is a prudent and sensible one to legislate for. It will pave the way for an emissions trading scheme, which could be linked to the EU ETS, if that is in our interests. It also ensures that a stand-alone emissions trading scheme could be implemented as an alternative policy, should a link not be agreed. Alongside that, legislation will be updated related to the carbon emissions tax, so we are keeping all options on the table for maintaining a carbon price signal from 1 January 2021.

Photo of Wes Streeting Wes Streeting Shadow Exchequer Secretary (Treasury)

The Minister asked us to watch this space. We will certainly do that and wait to see how discussions progress. We look forward to seeing the details of future arrangements in the not-too-distant future.

Question put and agreed to.

Clause 93 accordingly ordered to stand part of the Bill.