Climate Change Act 2008 (2020 Target, Credit Limit and Definitions) Order 2009

My Lords, I shall speak to all three statutory instruments on the Order Paper in my name. Noble Lords will remember the many stimulating debates we had during the passage of the Climate Change Act 2008, which was much improved by the contributions of Members of this House. All three instruments have been laid in accordance with that Act and implement elements of the system of carbon budgets established by it. I thank the Joint Committee on Statutory Instruments and the Merits Committee for carefully considering them. As noble Lords will be aware, neither committee found anything to comment on, but the Merits Committee reported the statutory instruments because it felt that they would be of interest to the House, as we are seeing today. The challenge presented by climate change is enormous in both scale and urgency. The scientific consensus is unequivocal; namely, the global climate is warming and it is caused primarily by human activity. Without concerted world-wide action to reduce emissions, we face a best estimate increase in average temperatures of 4 degrees centigrade by the end of this century, with severe economic, social and environmental consequences. As the noble Lord, Lord Stern, set out very clearly in his review of the economics of climate change, the benefits of strong, early action outweigh the costs. The benefits include enormous economic opportunities for those companies and economies that adapt and innovate to take advantage of a low carbon future. That is why this House passed the Climate Change Act last year. It provides a clear, credible framework for the UK’s transition to a low-carbon economy and shows our commitment to playing our part in the global effort to tackle climate change. It is the core provisions in the first part of the Act that are most relevant to today’s debate; first, the requirement to reduce greenhouse emissions by at least 80 per cent by 2050 and carbon dioxide emissions by 26 per cent by 2020 and, secondly, the system of five-year carbon budgets, which are set up to 15 years in advance. Carbon budgets are one of the most radical and distinctive features of the Act. They provide a strong framework for delivering and monitoring the emissions reductions required to achieve the 2020 and 2050 targets. This framework includes a legal requirement on the Government to put in place policies that ensure we live within the carbon budgets. This means that the effects of any new policies that could increase emissions are carefully considered and corresponding reductions found elsewhere if this is necessary to meet the budget. There are of course processes already in place to help ensure that this is done systematically, in particular through the requirement for an assessment of the carbon impact of all new policies within the overall impact assessment. To ensure that the overall impact is to keep us within the budgets, we are developing strong internal mechanisms within government to ensure that every department has a clear responsibility to play its part. We expect to set out more about how this will work alongside the publication this summer of our climate and energy strategy, which will also clearly set out the details of our policies and proposed policies to meet the first three carbon budgets as required by the Act. I will speak to the first two draft orders before the House today; namely, the Carbon Budgets Order 2009 and the Climate Change Act 2008 (2020 Target, Credit Limit and Definitions) Order 2009, which are closely linked. The 2020 target should be covered first as it dictates the minimum level of the third carbon budget. As noble Lords may recall, the 2050 target was amended from 60 per cent to 80 per cent during the final stages of the passage of the Climate Change Bill. That followed advice from the shadow Committee on Climate Change, which is the independent, expert advisory body established by the Climate Change Act and very ably chaired by the noble Lord, Lord Turner. At the same time, the default greenhouse gas coverage in the Bill was changed to include all six Kyoto greenhouse gases rather than just carbon dioxide. However, the level of the 2020 target was not amended. It remained at a 26 per cent reduction in carbon dioxide emissions on 1990 levels. The Government made it clear at the time that, once we received the advice of the Committee on Climate Change, we would consider amending the gas coverage and the level of the 2020 target. This advice was included in the committee’s first report, which was published on 1 December last year. The committee’s view was that the 2020 target and our first three carbon budgets should reflect the outcome of negotiations for a global deal to reduce emissions, which is the focus of the conference in Copenhagen this December. It felt that the UK should follow the European approach of setting targets contingent upon a global deal. On that basis, the committee recommended that an appropriate level for the target reduction in greenhouse gas emissions, before a global deal is reached, would be 34 per cent. That level is consistent with the UK’s share of overall EU targets under the climate and energy package agreed last December, which set out the EU policy framework for the period 2013 to 2020. The Government accept the committee’s recommendations on this point. The order therefore uses powers under Section 6 of the Climate Change Act to amend the 2020 target to 34 per cent and extend its coverage to all greenhouse gases. I turn now to the Carbon Budgets Order 2009. This sets the first three carbon budgets; that is, the total permissible level of the net UK carbon account for the periods 2008 to 2012, 2013 to 2017 and 2018 to 2022. The net UK carbon account means the total amount of greenhouse gases emitted in the UK, adjusted for any credits or debits. I will say a little more about crediting and debiting later. The levels in the draft order are units of million tonnes of carbon dioxide equivalent, the standard for measuring greenhouse gas quantities. The reductions on 1990 emissions amount to just over 22 per cent in the first period, just over 28 per cent in the second period and just over 34 per cent in the third. The third budget complies with both the current 2020 target of a 26 per cent reduction in carbon dioxide and the amendment to a 34 per cent greenhouse gas reduction being considered today. Those levels follow the advice of the Committee on Climate Change. In line with its approach on the 2020 target, that committee proposed two sets of carbon budgets: interim budgets to apply now, before a global deal is reached, and more challenging intended budgets to apply once a global deal has been agreed. The levels in the draft carbon budgets order are broadly at the committee’s interim level, with a small adjustment to reflect the final outcome of the EU climate and energy package. That package, which came after the Committee on Climate Change reported, results in budgets that are slightly more challenging than those recommended by the committee. Some noble Lords have called on Government to set the budgets and the 2020 target at the intended level now. We accept absolutely the need for tighter carbon budgets following a successful global deal, but we agree with the committee that we should await the deal before setting them. The committee proposed a 2020 target of 42 per cent under the intended scenario, but the precise figure will depend on the details of a global agreement; after a global deal, and once proposals for sharing out the EU target are agreed, the Government will ask the committee to review its recommendation. We will then amend the budgets to take into account its advice. It is important that I draw noble Lords’ attention to something that we announced when we laid this order before the House on 22 April. We said that we would aim to meet the budgets we propose through domestic emissions reductions alone, without use of international offset credits, outside of the EU Emissions Trading Scheme. That commitment shows how serious the Government are about decarbonising the UK economy, but we also think that it puts the UK in a good position to make the transition to tighter budgets after a global deal. That is because, given that we would expect international credit purchase to form part of the additional effort needed to meet tighter carbon budgets, we are likely to be well placed to deliver any extra domestic reductions that are needed. The committee recommended that approach and also advised that it was consistent with the path to meeting the long-term 2050 target of an 80 per cent reduction on 1990 levels. I come to the second element of the Climate Change Act order—the credit limit. This refers to the use of carbon units to represent emission reductions, which have often taken place abroad, as credits against carbon budgets, thereby offsetting UK emissions. In line with the commitment to domestic emissions reductions I have just mentioned, the draft Climate Change Act order sets the limit for the first budget period at zero. There are two exceptions to the limit, where credits may be used, although in both cases they would not be bought by the Government, but by participants in emissions trading systems. The Government have consistently supported the principle of emissions trading and it remains our ultimate objective to achieve a global carbon market. First, as I mentioned earlier, our commitment does not apply to the EU Emissions Trading System. Companies participating in the EU ETS may either purchase carbon units from within the scheme or from the international system, such as credits from projects under the Clean Development Mechanism, if they do not have enough carbon units to cover their emissions. If they have a surplus of carbon units, they may sell them to other EU ETS participants, whether in the UK or elsewhere in the EU. Overall, if UK participants are net purchasers of credits over a carbon budget period, by which I mean their collective emissions exceed the level of the UK’s overall cap under the scheme, we propose to count this as a credit against the budget, whereas a net sale would be counted as a debit. However, there are already limits on the use of international credits by participants in the EU ETS which guarantee that at least 50 per cent of the emissions reductions between 2008 and 2020 will take place in Europe. In its report, the committee advised that these limits were appropriate and that further restrictions for carbon budget purposes were unnecessary. For this reason, we intend that any credits resulting from the EU ETS should not be counted against the zero limit being proposed. The second exemption relates to EU allowances acquired through a trading scheme under Part 3 of the Climate Change Act. In practice, this would apply to the proposed carbon reduction commitment trading scheme which will include a "safety valve" mechanism that allows participants to use EU allowances to offset emissions in excess of the scheme’s cap. Because the mechanism will lead to a reduction in the number of EU allowances available to EU ETS participants, the Government consider it appropriate also to exclude these units from the zero limit. I should make it clear that safety valve allowances will be an option of last resort. We expect that the price of allowances purchased through the safety valve will be higher than the prevailing carbon reduction commitment allowance price, which will deter participants from using them. Furthermore, the exclusion does not mean that any safety valve units must be counted as credits, and the Government will aim to meet the budgets without using them, reserving their use as a fallback. I turn now to the third and final element of the Climate Change Act order, the definitions of "international aviation" and "international shipping". Noble Lords will recall that emissions from international aviation and international shipping are not covered by the targets and budgets in the Climate Change Act at present. This is on the basis—the point was much debated during the passage of the Bill—that there is currently no globally agreed methodology for allocating emissions from international travel to individual countries. The Act gives the Government the power to define "international aviation" and "international shipping" for carbon budget purposes, which is what we are considering today. The reason we feel it is necessary to define these terms is so that they are used in a way that is consistent with how international emissions are reported in practice. The definitions themselves therefore reflect international reporting practice and follow the approach we use in reporting to the United Nations Framework Convention on Climate Change. They put beyond doubt possible ambiguities such as how to treat flights which have interim stops. It is important to note that their purpose is only to set out which emissions are not covered by the Act. The definitions have no bearing on how international aviation and shipping emissions might be allocated to the UK or any other country. Finally, I turn to the last of the three instruments for consideration today, the draft Carbon Accounting Regulations 2009. I have already mentioned the concept of the net UK carbon account and the possibility of crediting and debiting carbon units against it. These regulations are required by the Climate Change Act to establish a system to define what we mean by carbon units, when and how they can be credited and debited, and how we will keep track of them. The regulations make use of the existing UK registry for holding and tracking carbon units, which is used under the Kyoto Protocol and the EU Emissions Trading System. This avoids unnecessary costs and complications in setting up a separate registry. The first thing the regulations do is define what will be counted as carbon units. Only carbon units that are internationally recognised, under United Nations and European Union Rules, will be counted. These have the benefit of being subject to significant international scrutiny and allow the system to be compatible with the existing systems under the Kyoto Protocol and the EU ETS. Secondly, the regulations establish a new credit account in the UK registry, into which carbon units to be credited voluntarily must be placed. As I said, we are aiming not to use any such credits to meet our carbon budgets, but we felt that it was best for continuity to put in place the mechanism for crediting them at the start, which we are likely to need when we move to tighter budgets after a global deal. Thirdly, the regulations provide a mechanism to account each year for credits and debits from the operation of the EU ETS, as I described above. This will have the result that the contribution of the EU ETS towards the carbon budget will correspond to the level of the UK’s cap under the system. Fourthly, the regulations define how units will be debited from the net carbon account if the Government dispose of any of their existing holding of carbon units. Fifthly, the regulations implement a very important provision of the Climate Change Act. Because the first carbon budget is significantly more stringent than our Kyoto target—a 22 per cent reduction rather than 12.5 per cent—we could meet our Kyoto target and still have a large number of carbon units left in the national registry. If the UK were to sell or give these to other countries, allowing them to offset their own emissions, the environmental benefits of the tighter budget would be lost. To avoid this, and to comply with the Act, the regulations set out how any such surplus carbon units will be cancelled to put them beyond use. Finally, the regulations establish a register of transactions, to record details of the crediting, debiting and cancellation of carbon units. This was included because a number of responses to the public consultation called for transparency on carbon accounting. Together with the guidance that I have already mentioned, and the annual and end-of-budget statements required by the Act, this will ensure full transparency on how the net UK carbon account is calculated. I apologise for speaking at length but these are the first statutory instruments to be produced in relation to carbon budgets. I beg to move the draft order.