Environment, Climate Change and Land Reform Committee

Meeting date: Tuesday, September 1, 2020

Official Report 590KB pdf

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Climate Change Act 2008

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Greenhouse Gas Emissions Trading Scheme Order 2020 [Draft]

I welcome everyone back, and I thank Roseanna Cunningham, the Cabinet Secretary for Environment, Climate Change and Land Reform, for staying with us. She is joined by officials from the Scottish Government consumers and low carbon division: Ross Loveridge, head of heat demand and carbon markets unit, and Alice Mitchell, head of carbon markets.

In your correspondence with us, cabinet secretary, you mentioned your reservations about the proposed UK carbon emissions tax and its impact on an emissions trading scheme. Will you bring us up to date on your discussions with the UK Government about your concerns? Have they been resolved? What impact do you worry that a carbon emissions tax would have on emissions trading?

Emissions trading is a devolved function—what is in effect covered by the ETS is devolved. A carbon emissions tax would be Treasury led, which would immediately remove from us any real engagement in that regard.

What is being proposed, on the face of it, is a reserved carbon emissions tax as a fall-back to a UK ETS in the event that an agreement to link to the European Union ETS is not reached. Committee members will know how incredibly technical this whole area is.

A Treasury consultation on a carbon emissions tax has been going on and will finish at the end of September. We are in the middle of a consultation on a carbon emissions tax at the same time as we are developing a UK ETS.

I have to say that, at UK Government level, there has been resistance to clarifying the Government’s preference for either a stand-alone UK ETS or a carbon emissions tax. Two Whitehall departments are involved: the Department for Business, Energy and Industrial Strategy is responsible for climate change policy and, therefore, ETS; Her Majesty’s Treasury is also involved.

As recently as 4 August, I wrote to the Treasury to repeat my strong objection to a tax, on the basis that all accountability to the Scottish Parliament would be lost. Frankly, that would contravene the higher-level principles that were agreed at the joint ministerial committee that Mike Russell attends and is involved in.

A number of things are going on. The Government and officials have spent a vast about of time working on the proposal. We spent quite a bit of the previous session talking about common frameworks, and what we are discussing is one of the very important ones. Members need to be aware that, at the last minute, that work could, in effect, be put at naught by a decision to have the Treasury step in and impose a carbon emissions tax. All the work that we have done, all the negotiation that has taken place backwards and forwards, all the meetings and so on will have been put at nothing.

At the moment, the UK Government is running almost a twin-track approach. On the one hand, one department is processing the common framework but, on the other hand, the Treasury is consulting on and proposing something that runs absolutely counter to that framework. All that I can do in that position is to do my job in respect of Scottish interests, in good faith, with the Whitehall department that is processing the development of the policy. However, I know that, running counter to that, there is an entirely different approach. That is discourteous, and we have been put in an invidious position.

Let us not forget that it is not just about my time or the officials’ time; it is also about the amount of time that the Parliament, through the committee, has spent looking at the issue. I would be curious to know whether the committee has had any contact from the Treasury about its proposal for a carbon emissions tax—I bet that it has not.

We scrutinise the ETS, but we have not scrutinised any proposed carbon tax.

I want to move away from matters of process, which is what we have been talking about, to how the two alternatives compare against each other. If a tax approach is taken, there will be no carbon credits that can be traded off in a emissions trading scheme. Therefore, there will be no economic benefit to a company that has been making substantial progress in reducing its carbon footprint and has been able to sell off its carbon credits to others that have not been making the same progress. Is that not a concerning practical downside of taking a tax approach rather than a trading approach?

The tax proposal removes all flexibility, because a single way of managing the issue would be applied across the board. An ETS works on a much more flexible basis. Fundamentally, the tax proposal creates a big problem.

The level of emissions reduction is less certain with the tax. It is totally dependent on the right rate being set, and we do not have any proposals so far on what that rate would be. The ETS has an overall emissions cap, so it provides certainty on emissions reductions. It allows the market to discover the best way of doing that, and it encourages decarbonisation, whereas, as I have said, a static carbon tax, with rates set in legislation, would not ensure cost-effective decarbonisation.

11:15  

It also would not link to the EU ETS market, which has been a big part of the discussion about the setting up of a UK ETS. In the EU ETS market, the carbon price changes daily in response to supply and demand, so the tax could lead to carbon leakage between the UK and the EU, which would be an extremely unfortunate outcome. As Stewart Stevenson indicated, participants can trade excess emission allowances in the ETS, creating a stronger financial incentive to decarbonise.

There are a lot of areas in which the ETS is a far better mechanism, and it is the mechanism that BEIS is pursuing. However, we appear to have a UK Government that is pursuing two separate policy lines at the moment.

In addition to the point that Stewart Stevenson made, there are other big differences between the two processes. I can be asked questions in the Parliament chamber about the operation of an ETS, but decisions about a carbon tax taken by the Treasury will remove that from us. It is an example of the removal of power from the Scottish Parliament.

Given that there is a four-Administrations policy set out in the Government response on a UK ETS, I must admit that I am a bit disappointed that we are still talking about division and grabbing powers. Can we just concentrate on the papers in front of us, which we should celebrate as a good example of how the common frameworks might work?

I suggest that it is good practice to ensure that, if the UK ETS cannot, for whatever reason, be put in place when we leave Europe, something is developed in parallel. As the cabinet secretary said, there is an opportunity to feed into the consultation, which, quite rightly, you have done, saying that you would not welcome a carbon emission tax.

I would rather dwell on the positives: we have a four-nations response and, potentially, a UK ETS. That is what my questions are focused on. How confident are you that the UK ETS will link to the EU ETS at some point in the future? Will the draft order allow that to happen seamlessly?

I can well understand why Finlay Carson wants to put a rosy glow on what is in front of him, but, unfortunately, he has not been the one involved in all our attempts to negotiate sensibly through this.

The linkage question is absolutely on point with my concerns. A linking agreement is dependent on the outcome of negotiations between the UK and the EU, and we are not party to those negotiations. We are outside the room when those conversations take place. In those circumstances, I suggest that members of Finlay Carson’s party consider making representations to their party members who are in Government at Westminster if they want to have a say or if they want the Scottish Government or the Scottish Parliament to have the slightest involvement.

The UK and the EU’s negotiating positions suggest a willingness to link our respective ETSs, and I am pretty clear that that is what BEIS wants to do. Unfortunately, I have had an experience where terminology that had been agreed between all four Administrations was later unilaterally changed. That kind of thing has bedevilled a lot of what we are doing. There is a precedent for the EU linking to other countries, with the Swiss ETS link, and the UK ETS order will establish a link-ready ETS that can be linked as soon as an agreement is reached. However, in my view, there is a considerable concern about that kind of thing falling foul of an overwhelming ideology that appears to be developing about the end of December.

I have not received any update from the UK Government about the status of its negotiations with the EU on linking our respective ETSs, despite the fact that I have repeatedly pressed the UK Government to prioritise reaching an agreement on linking, given that both sides share an apparent willingness to co-operate. I am sorry that we do not have a clearer statement on that from the UK Government; the statement from the Scottish Government could not be clearer.

Let me get this right. You played your part in putting together the order for the UK ETS to align as closely as possible to the EU ETS. That should be welcomed; as cabinet secretary, you have done everything to ensure that that will be as seamless as possible. Are you confident that your contribution to that order will allow the UK carbon market to function successfully in the absence of that link to wider carbon markets?

I am confident that it will allow the UK carbon market to function as successfully as it can, but we can all agree that the wider the carbon market, the more successful any such scheme will be.

I will move the questioning on from the constitution to the climate. At the moment, there is a big gap between the emissions that were produced by large industrial plants last year and the proposed cap in the ETS. That gap was evident from last year’s emissions; it will be bigger this year because of Covid and, because a lot of industrial decarbonisation around heat and power is happening, the gap will probably be even larger going forward. I struggle to see how the cap that is proposed in the ETS will drive investment decisions by those bigger operators. Are you comfortable that the current caps will ensure the reduction in emissions that you need in order to meet Scotland’s 2030 and 2045 net-zero targets?

I am as comfortable as I can be. The proposed 5 per cent cap is tighter than it would have been in the EU ETS—I remind everyone that it is an interim cap. I argued for that tightening of the emissions cap. I am happy that I have, at least, managed to secure that over a long period.

I have continued to impress on the UK Government that, because of Scotland’s much tighter and more ambitious statutory targets, the UK ETS needs to be more ambitious. I have pressed the UK Government for a timetable on setting a net zero cap as soon as possible after we get the Committee on Climate Change net zero advice, which, unfortunately, we will not get until after the process that we are discussing has been completed. I managed to secure agreement that we would commit to reviewing the cap as rapidly as possible—within nine months of that advice being received—and that we would implement any changes to take effect in January 2024 at the latest.

Mark Ruskell probably does not think that the situation that we are in is ideal, but we are where we are now partly because of the arguments that I made to tighten everything up, make the cap interim, keep it at 5 per cent and have it reviewed it at a particular time. I believe that we are probably in the right place. We are coming out of a massive pandemic emergency—or, at least, I hope that we are coming out of it—and I hope that we are able to effect some kind of recovery. That has to be taken into account with—[Inaudible.]

I would like to pursue that a little bit further with you, in relation to the revised climate change plan. Will there be challenges in relation to Scotland’s UK ETS caps over the period up to 2030? How will they be taken into account?

We will obviously have to look at it all very carefully. The UK ETS works on the basis of a UK-wide cap for a UK-wide market, and the UK targets are somewhat different. As we have discussed, an emissions trading scheme allows the market to determine where to cost-effectively reduce emissions, and emissions will reduce across the whole system in line with the cap.

The bigger the trading scheme—or the bigger the market, if you like—the better and more functional it will be. We need it to work, but it is the not the only thing that we have to address industrial and power emissions. It is incredibly important, but we do not want it to be seen as if it is the only thing. There is, for example, an incentivisation of emissions reduction through reductions in the reserved climate change levy tax, and other mechanisms, approaches and policies will also have a bearing. Managing this is about managing it as best we can.

The Committee on Climate Change has been clear that there are aspects of emissions reduction that are only for the UK Government to set in place, and I frequently refer to the fact that many reserved aspects require to be dealt with if we are going to achieve emissions reductions. I fall back on the phrase that I use: the UK Government needs the Scottish Government to achieve its 2045 target if the UK is going to achieve its 2050 target, but equally, we need the UK to do what it needs to do to get to its 2050 target if we are going to achieve our 2045 target. We have to work in tandem on this.

In all honesty, will it not set us back if we wait until 2024 to adjust the cap and get the right level in place? In effect, will it not mean that the rest of us, who are not covered by the ETS industrial emissions scheme, will have to work harder to reduce emissions?

11:30  

If Mark Ruskell can come up with a solution that involves getting the UK Government to do what we want it to do, and to do it now, I will be pleased to hear it. The reality is that we are trying to do the very best that we can do given what we are currently having to deal with.

With respect, the review of the 5 per cent cap within nine months of receiving the CCC’s advice and implementing the changes was something that I had to press hard to get to. If I had not been able to achieve that, we would not have had anything in that regard.

I find it difficult to envisage how it would have looked if we had not pressed in the way that we did. Arguably, at a bigger-issue level, there will be constant management of competing ambition. There are some issues, but if we do not get the ETS up and running, the situation will be even worse.

I have one final question before we move on to the next item on the agenda. It is about the public-facing concordat among ministers from all four Administrations that would accompany the framework outline agreement, which you mentioned in your letter of 2 June to the committee. When will it be made available, and will it be shared with the committee?

Are you talking about the framework outline agreement?

Yes.

I think that you may have already been sent a letter on that. I suspect that it is sitting in your inbox, because something was shared yesterday in that regard. It has now been cleared by ministers, but perhaps the committee will want to come back to the matter, once it has looked at it. I am sorry that the timing did not work for the committee meeting.

I think that you have got it—it certainly left us, so you should have had it by now. It sets out the principles for joint governance of the framework. It is there or thereabouts, so you may wish to come back to it, in writing or otherwise.

Perhaps I ought to be clearer: the summary note has been shared. The full FOA has to be signed off by all ministers, but you will get that as soon as possible. What you have in your inbox is a summary of what is coming, if that makes sense.

It does. Thank you.

We move to the next agenda item. I invite the cabinet secretary to move motion S5M-22351.

Motion moved,

That the Environment, Climate Change and Land Reform Committee recommends that the Greenhouse Gas Emissions Trading Scheme Order 2020 [draft] be approved.—[Roseanna Cunningham]

If members have no comments, I will put the question, which is that motion S5M-22351 be agreed. If anyone does not agree, please type “No” in the chat box.

I see that the committee agrees to the motion.

I thank the cabinet secretary for her time this morning, and I thank her officials who accompanied her. At our next meeting, on 8 September, the committee will take evidence on our green recovery inquiry.

11:34 Meeting continued in private until 11:59.