Subordinate Legislation
Scotland Act 1998 (Agency Arrangements) (Specification) Order 2002 (SSI 2002/261)
Agenda item 2 is consideration of a negative instrument, the Scotland Act 1998 (Agency Arrangements) (Specification) Order 2002 (SI 2002/261). I welcome the Minister for Environment and Rural Development and his officials to the meeting to discuss the instrument.
Members will be aware that Bruce Crawford lodged a motion to annul the instrument last week. A covering note has been circulated with the papers, which sets out the procedure for a debate on a motion to annul. Before members have the opportunity to debate the motion in Bruce Crawford's name, I will give them the opportunity to ask the minister or his officials questions of a technical nature or of clarification. I make it clear to members that if they want to ask a question that it will be necessary for one of the officials to answer, they need to ask it at this stage. Once we get into the debate, only the minister and members will be able to take part.
Before I give members the opportunity to ask questions, I will give the minister the opportunity to make introductory remarks on the order.
Thank you very much. Perhaps it would be helpful if I introduced the officials who are with me this morning. John Holmes and Phillip Wright will deal with environmental matters in relation to the instrument. Charles Stewart Roper is an environmental and energy economist and Murray Sinclair will deal with any legal matters.
I will make a brief introduction, as there seems to have been a little misunderstanding about the nature of the instrument. The terminology is very technical, which is the source of potential misunderstanding.
The background is that the scheme is part of the mechanisms that were allowed under the Kyoto protocol. The medium and longer-term objective is to have trading arrangements that operate at a European level.
The first issue that arose in introducing the scheme in the United Kingdom was the best way to create a market for transmissions within the United Kingdom. When the matter was put out for consultation in 2000, it became clear that companies that were engaged, that could be engaged and that could benefit from and contribute to the scheme recognised that the only sensible way in which to proceed within the UK was to create a UK market. If Scottish companies were constrained to being able to trade emissions only within Scotland, that could seriously disadvantage Scottish companies.
The committee may want to address the economic issues to which I have referred. There is clear evidence that if we have a market in transmissions that is not liquid enough—in which too few transfers are taking place—we will not achieve our objective. That is the first misunderstanding. Eventually, we will move towards a European trading arrangement. There is no benefit in taking a narrower view.
The second issue is that of powers. We are not transferring our powers to Westminster. We are granting Westminster the power to operate the scheme so that a UK market can operate. We will be required to approve the contractual arrangements that are entered into. We are not giving up our powers; we are merely permitting UK ministers to exercise those powers so that a sensible UK market can be developed.
There is a third misunderstanding. Although the instrument is aimed at reducing emissions, it is not inextricably linked to a programme for developing renewable energy. Energy companies are excluded from the emissions regulations and are not part of the trading arrangement. There is no prospect of energy companies making money out of the scheme that could otherwise be diverted to promoting renewables. Changes to the make-up of the energy industry in the United Kingdom, particularly in Scotland, are not really a relevant factor when it comes to operating the scheme.
Having gone out to consultation, having discussed the scheme with industry, having considered the purpose of the scheme and having recognised that it is intended in the short to medium term to become a European trading scheme that would be of serious benefit to companies, we have taken the considered view that allowing Scottish companies to participate in a United Kingdom market would offer wider trading opportunities to Scottish business, which will stimulate greater emissions reductions at lower cost than would be possible under a wholly Scottish scheme. We believe that a UK-wide scheme is in the interests of Scottish business and, more particularly, of the Scottish environment. That is the basis on which we are promoting the instrument.
I thank the minister for his introductory remarks, which will have improved members' understanding of the order. Before we proceed with the debate, I will give members the opportunity to ask questions.
Notwithstanding the advantages that you see a UK market as providing, will it be possible under the arrangements that you propose efficiently and at very little cost to produce separate Scottish figures on emissions?
Phillip Wright (Scottish Executive Environment and Rural Affairs Department):
We already produce an annual inventory of greenhouse gas emissions. I understand that Robin Harper is asking whether we will be able to estimate or have information on the emissions reductions that are brought about in Scotland as a consequence of the scheme. We will have to explore that. We now have a list of the companies that were successful at last week's auctions. We plan to examine which of those are Scottish companies, which multinational companies have a Scottish presence and so on. We will look into the issue that the member raises, but at the moment we have no formal means of achieving what he seeks.
However, we are interested in obtaining the data for individual privately owned companies.
I thank the minister for his introductory explanation, which was useful, as was the discussion that I had yesterday with some of his officials to try to understand the matter in greater depth. I want to come back to some of the issues that the minister raised. I accept what he said about the energy industry, but I have a point about the effect of the energy market on emissions trading overall. I know that I must ask questions, so I will come back to that issue in the debate.
The Executive note on the order states:
"separate schemes would lead to complexities for those participants operating both north and south of the border and could lead to adverse financial implications for such participants".
Have the financial implications been quantified? What work, if any, has been done on the potential costs of setting up a separate Scottish trading mechanism?
Phillip Wright mentioned the tendering process and the contractual arrangements with the successful tenderer. When the matter was discussed with the UK Government and it was decided to proceed on an agency basis, was the UK Government pressed to ensure that Scottish companies were included on the tender list? What guarantees were extracted from the UK Government on the inclusion on the tender list of Scottish companies before the Executive agreed to the agency arrangement?
Our consultation with the industry did not involve energy companies, but it did involve a large number of companies that have headquarters in Scotland but also operate in England or that have headquarters in England but also operate in Scotland. I do not want to labour that point, but it is important. On the costs, those companies put it to us that a separate scheme and different trading arrangements for Scotland and for England and Wales would mean that companies could trade only within Scotland and/or within England and Wales.
The point was put to us strongly that if we are serious about getting companies that operate north and south of the border to participate in a trading scheme, to require them to have separate arrangements for separate trading would not be the most efficient use of the order. One can argue against that, but that was the view that the companies put to us and our view was informed by how those companies saw the matter.
The cost of separate schemes would be almost the same as the cost of a single scheme. The same amount of administration and the same number of officials would be required to monitor either option. However, given my answer to the first question, that point is unnecessary.
I ask one of my officials to deal with your second question, which was about the undertakings that we received from the UK Government on the eligibility of Scottish companies to tender.
The tendering process was slightly different from Mr Crawford's description of it. It was an open process involving the Department for Environment, Food and Rural Affairs, which advertised widely in the business community and more generally about the emissions trading scheme. It was known that the UK Government was developing such a scheme and DEFRA engaged with businesses throughout the UK. The process became more formal when DEFRA invited notes of interest in participating in the auction. The auction took place last week and lasted for two days. About 30 companies and organisations were successful in bidding. I was surprised to see that the Natural History Museum participated successfully in the auction. The companies offered to make carbon emission reductions in return for the payment of a certain amount of money. The amount to be paid for each tonne of emissions saved varied during the two-day period. The opening figure of £100 fell to £53 and a few pence. The auction process was open and all parties were able to participate.
As the minister said, when one looks at the list of companies—which is in the public domain—one sees companies such as Tesco and Asda, which operate throughout the United Kingdom. If we had separate Scottish and English schemes, those companies would in effect have to split their business activities and work with both schemes, as opposed to working in the context of a full, UK scheme.
I have a couple of quick supplementary questions.
Be as brief as possible.
I will.
Is the trading scheme expected to raise money? If so, how much money is expected? I assume that the trading scheme will be done in similar way to the licence process. I am sure that I am wrong about that, but you can tell me whether that is the case. Were financial arrangements arrived at whereby, because of the Scottish Executive's budget, the scheme was done on an agency basis throughout the UK? If so, what were those financial arrangements?
I will take the first part of the question. I may pass over to John Holmes to deal with the latter part.
Because the scheme is non-statutory, the UK Government introduced a financial incentive. The intention is to invest £215 million over the five years of the scheme, which means £43 million each year. During the auction process, companies and organisations bid for a share of that money. Those bids often signified carbon savings.
John Holmes (Scottish Executive Environment and Rural Affairs Department):
I think that £3.1 million of the money was allocated to the Scottish block. However, that money has not yet been used for the trading scheme.
Will that money be returned to help to pay for the UK scheme?
That has not happened, but it might.
Okay. I understand. They want to keep this one quiet.
You can keep it in your back pooch.
I have a basic question. What does the word "domestic" mean in the context of the trading scheme? It would help to have that word defined, as it could mean many things to many people.
The word "domestic" refers to the UK context as opposed to the international one. The minister said at the outset that there is also to be a wider, international trading arrangement. That is why we focused on the word "domestic" for the UK scheme.
That is the sort of word that you would know the meaning of if you were involved in the scheme. If you were not, you might think, "Well, it relates to something that goes up the chimney of a hoose." However, "domestic" does not mean that.
Yes.
Will the minister quantify the likely cost to Scottish business of not implementing the order?
The cost would be not just the cost to business; it would be the cost to you, me and everyone in society of continuing to pollute at the level and rate at which we are doing so. However, the figures for that are difficult to pluck from the air.
I meant in the Scottish context, not the UK context.
Our calculations indicated that the market would be so thin in an exclusively Scottish context that there would be insufficient volume for trading. Charles Stewart Roper can assist with that point.
Charles Stewart Roper (Scottish Executive Development Department):
We have not made a detailed assessment for a Scottish context. The scheme's first principles make it clear that it would be much more costly for Scottish companies to be in a ring-fenced Scottish scheme. There would probably not be enough liquidity for a Scottish scheme to get off the ground. Therefore, losses would be focused on individual firms. The trading scheme allows companies that have especially high costs for making emission reductions to sell those reductions to a company that has especially low costs and which can make further reductions. That would allow the total carbon reduction to be made at a lower cost.
It is difficult to assess what the cost would be to Scottish firms of not being part of the UK trading scheme, but the cost would be focused on the firms for which making reductions would be more expensive. The firms that can make carbon savings cheaply would be unable to sell them to other agents. Therefore, there would be significant costs overall.
How will the scheme be monitored? Who will pay for the monitoring? Will the monitoring be carried out on a UK basis or on a Scottish basis?
An emissions trading authority has been established to administer the scheme and the on-going accreditation of companies. The accreditation process involves checking the baseline figures that companies provide. For example, when a company says, "Here are our emissions figures for 1998-99," those figures must be checked. The figures need to be checked at the end of each year before a company is eligible for money back from the Government. The emissions trading authority will administer that at the UK level.
Will the process of emissions trading be monitored at a Scottish level to ensure that the sale or purchase of reductions does not have an undue or imbalanced impact on Scotland's overall emissions position?
To some extent, that question reflects the earlier question on quantitative information on reductions in emissions in Scotland. We need to explore that area. We would need to know something about the reductions before we could address your concerns about the potential implications on other measures to reduce Scotland's greenhouse gas emissions. We will look at that relationship as part of the process.
As was said in response to Robin Harper's question, now that we know some of the companies that are participating, we can get a better handle on the issue.
From the submission, I understand that the system will be effective in driving down emissions from low-cost emitters. What will be the long-term effect on people for whom the costs of reducing emissions is high? When will the system kick in with firms that have relatively high costs in reducing emissions?
The firms that have exceptionally high costs in reducing emissions include not only those in the tender but those that have voluntary agreements under the climate change levy. There is a whole range of industrial sectors that have high energy use.
Instead of making the reductions, firms that face particularly high costs in reducing emissions because of their set-up or plant will, in effect, buy or trade permits from others that have made greater reductions than were required under the agreement. As there will be a significant business cost in buying the permits year on year, there is an increasing incentive to invest in plant that will ultimately make the energy reduction. The system will allow firms to change at their own pace; it provides them with an increasing incentive to do so, but allows them to make an economic judgment about when that is best.
Angus MacKay wants to ask a question. I propose that his be the last question that we take.
I want to check that I have correctly understood the argument and the figures that have been presented. Are we saying that the UK Government is providing an incentive of £215 million to support the scheme over four years?
Over five years.
If we were to organise a separate Scottish scheme, how much money would be put into that scheme and where would the money come from?
We would either need to find the money ourselves or we would need to bid to the UK Government for a proportionate share. The effect would be that the amount of money for the emissions trading scheme would be restricted.
Even if we got a Barnett share of, say, £21 million, would that exclude Scottish business from the possibility of accessing the balance of the £215 million over the five years?
In effect, yes.
We have been through a fair range of questions, so I propose that we now begin the debate on the motion to annul. I invite Bruce Crawford to move and to speak to the motion. The minister and other members will then have an opportunity to speak.
I would like to comment on the point that Angus MacKay made. We heard from John Holmes that, under the Barnett formula, £3.1 million has been allocated to the Scottish budget to pay for a separate scheme. There appears to be some confusion about whether that money will be paid back. I may be wrong about that; perhaps the minister can deal with the issue in his response.
When I first heard about the proposal—which, on the face of it, although not in reality, appears to hand back powers that are devolved to Scottish ministers—I was surprised and concerned, to say the least. The Executive note does not do much to help MSPs or to make the decision-making process easier. The note extends over a couple of pages, but the arguments are pretty one-sided in favour of a UK emissions trading scheme being operated by the UK Government. No other arguments are discussed or mentioned. No reference is made to the possible advantages of operating a separate Scottish emissions trading scheme designed to meet specific Scottish circumstances. Some of the information that we have received today about the order could usefully have been contained in the Executive note.
I understand fully that we will eventually move to a European trading mechanism; we may end up having a much wider international trading mechanism that extends beyond the European Community. However, at no stage does the note indicate that, because of particular Scottish circumstances, it might be more advantageous in the short term to have a separate Scottish scheme. There may be good arguments supporting the development of a trading mechanism for Scotland, although when the advantages and disadvantages of such a scheme are weighed up against one another, the balance may favour a scheme at UK level.
The Executive note makes a good case for a UK-wide scheme, but some of the arguments that it makes are pretty spurious. For example, the note states:
"The administration of different schemes would be highly complicated for both administrators and participants."
On that basis, we might as well start to unravel the Scotland Act 1998 and hand back the power for dealing with education and health to the UK Government. The argument does not hold water. If there are particular Scottish circumstances, we should take account of them.
It would have been useful if a better note had been provided, so that we could understand the arguments from both sides. MSPs have been left in the daft situation of having to use the negative statutory instrument procedure, which requires the minister to appear before the committee to justify what he is doing. He may have much to justify—we will soon find out. If he can satisfy my concerns, I may not need to press the motion for annulment, but I would like him to address a number of issues.
I fully accept the minister's point that energy companies are not involved in the emissions trading scheme. However, the energy sector is probably one of the largest producers of emissions, so what it does will have a huge impact on the emissions trading market. I will explain that from recent Executive documents.
The Executive's "Scottish Climate Change Programme", which was published in 2000, states:
"The challenge we face in Scotland is clear ... For example, the agriculture, forestry and land use sector accounts for 37% of Scottish and 39% of UK emissions in this area. This is disproportionately high and makes it extremely difficult for us to replicate the emission reduction targets agreed for the UK as a whole."
I understand that agriculture is not treated in the same way under the trading mechanism, but the passage that I have just read out goes some way towards explaining that the background in Scotland is significantly different from that in the UK as a whole. Under the trading scheme, the interests of Scotland will inevitably be peripheral to those of the UK as a whole.
If we fail to introduce a separate scheme in Scotland, will the distinctive needs of Scottish business and of the Scottish environment be jeopardised? I draw the minister's attention to chapter 4 of the Executive's "Scottish Economic Report: January 2002", which is headed "Energy and Carbon Dioxide Emissions Projections for Scotland, 1990-2020". At the end of the opening paragraph, the report mentions the sensitivity of the Scottish market in relation to the energy sector. It says:
"However, due to the small size of the Scottish economy, the results for emissions are extremely sensitive to potential investment changes in the market for electricity generation."
In the same chapter, the report talks about CO2 emissions. It says:
"As a large contributor of carbon dioxide emissions … the projections for the electricity supply industry … would have to be a significant consideration in the determination of any future Scottish emissions reduction target."
On net exports of electricity and implications for Scottish emissions, the report says:
"Any sensitivity therefore, which suggests that Scotland may import less of its electricity, or indeed export more, than the projections suggest, results in an attendant increase in emissions from the Scottish ESI".
If we export more electricity across the border, we may burn more coal to do so. The electricity industry has a significant effect on the trading mechanism, even though it is not part of it.
On the sensitivity of the electricity market to fluctuations in oil prices, the report concludes that, if oil prices rise, the demand for cheaper electricity from Scotland's coal-fired power stations will also rise. It addresses the distinctive Scottish position and the sensitivity of the Scottish market, repeating the points over and over. I shall not repeat them—members can read the report. In a key, final paragraph, the report says:
"However, due to the small size of the Scottish electricity supply industry … the implied effects on carbon emissions are extremely sensitive to individual investment decisions about plant in Scotland. This would inevitably make it difficult to predict future emissions in Scotland. It follows that any setting and delivering of a Scottish GHG-reduction target would be correspondingly more difficult without the use of direct regulation of power emissions—a policy which would be peculiar to the Scottish economy in UK and European terms."
I would like to hear what guarantees the minister can give about future regulation and about ways of ensuring that the order will not create problems for what the Executive's report describes as a sensitive situation. That was one of the key issues that I considered when making up my mind whether to support the order.
The report also refers to the impact of the green certificates or trading mechanisms on renewables. The issue is important in the context of the minister's responsibility for the promotion of renewables. The report states:
"However, as the ROS and RO can be satisfied without physical connection to renewable energy, but with ‘green' certificates, the actual renewable generation commissioned in Scotland is not determined by the level of the ROS itself."
There is obviously a direct connection between the certificates process and the renewables industry. It is described in the report, but I am not sure that I understand it fully. It would be useful for us to receive an explanation of that before we come to a conclusion.
I am sorry for taking up your time, minister, but the order is highly technical and complicated and members should understand it as fully as they can.
Will you move motion S1M-2776, please?
If I move it, will I have to withdraw it later?
You may withdraw it later if the committee agrees. However, you must move it formally at this stage.
Perhaps my argument is perfect. I move,
That the Transport and the Environment Committee recommends that nothing further be done under the Scotland Act 1998 (Agency Arrangements) (Specification) Order 2002.
Quite properly, we are now into a much broader energy, renewables and emissions debate. Although the order is aimed at assisting and encouraging industry, in a general sense, to reduce emissions, it is not the only measure that is being deployed in the environmental field. There are also, for example, the climate change levy and renewables obligations certificates. There is regret about the fact that the interlinking of the various measures is not as effective and efficient as some might wish, but we have to take those measures at face value.
I do not think that the different natures of emissions and of the structural issues to do with the causes of emissions in Scotland detract from the fact that the order is couched ex-Kyoto and demands a mechanism for trading certificates. Charles Stewart Roper referred to considerations about whether taking the Scottish economy as a whole would mean a sufficiently liquid market in certificates. Such assessments also take account of the different nature of the Scottish economy and the structure of Scottish emissions. Our conclusion—about which we can argue—is that, no matter how the issue is considered, the lack of potential liquidity in the market is likely to give rise to a serious trading problem, simply as a result of the market's size. A range of larger participants in a more liquid market with more money attached to it is more likely to assist Scottish business—that was certainly confirmed by consultation. Clearly, not just people operating cross-border, but people in Scotland believed that a narrow market would not be most likely to meet the scheme's objectives.
The sensitivity of the problem of emissions from the energy sector was correctly identified. I suppose that that sensitivity almost explains why the energy sector is dealt with on its own. We must understand one important and difficult concept, particularly in respect of measures that might ultimately have European implications—sulphur dioxide and nitrogen oxide are regarded as pollutants that directly impact on a local area, but CO2 emissions are considered far more globally. In that respect, there is a greater belief that one should consider where one might be displacing. For example, it might be simple for us to turn a key on Cockenzie or Longannet but, in the present economic climate, the chances are that that would fire up coal-burning stations in England. That is not a nationalist point—I am speaking from a real concern about CO2 emissions. Simply displacing the problem 300 miles south will not meet the Kyoto obligations. Actions need to be co-ordinated. Those are the reasons why the energy sector is not included in the order.
The instrument on renewables, which was before a committee of the Parliament only, I think, two weeks ago, is far more directed at dramatically increasing renewables. The Executive is wholly committed to that. Our economic team's projections are that pursuing that line and producing energy as a result of using renewables certificates will mean that the cost to the consumer will be even across the piece so that the renewable energy cost will not be disadvantaged. That means that dependence on fossil-burning fuels can be driven out.
I do not disagree with Bruce Crawford that both issues are extremely important, but the arguments should be separated slightly. We must focus on the potential for industrial sectors to drive down emissions that emanate from Scotland and Scottish business other than from the energy sector, which is dealt with separately. Renewables are another separate, but linked issue. The renewables obligation has been set up and targets have been set. From the available evidence, I hope that we can increase those targets—that would be everybody's ambition. We must consider the grid, the natural heritage and the state of technology, particularly in wind generation. We are working on that. Those are the key elements.
I appreciate Bruce Crawford's wider concerns, which are perfectly proper. We will manage eventually to integrate these issues a little more throughout the UK and, perhaps, throughout Europe. At the moment, we must concentrate on the aim of the order, which is to give a financial incentive to businesses. As Robin Harper rightly identified, initially we went for the cheapest solution with renewables. Only now are we beginning to consider means that are technically more efficient, but more costly. Similarly, the order means that initially we will deal with those for whom reducing emissions is cheaper and easier, but, as was explained, we will begin to produce economic incentives to invest in equipment that will drive down emissions for those for whom reduction is more costly.
Members who wish to participate in the debate should indicate so now. Does no one wish to participate? Robin Harper will dive in.
I have just one sentence. The minister has made his case.
I presume that the minister does not wish to respond to Robin Harper's wise contribution. I invite Bruce Crawford to respond to the debate and to indicate whether he wishes to press the motion.
Thank you, minister. That was useful. You gave us a broader view of the issue and how the order links into it.
The Renewables Obligation (Scotland) Order 2002 made a significant difference. Those who are involved in the renewables sector—certainly, those to whom I spoke yesterday—have welcomed it. However, the recent changes in connection charges that the Office of Gas and Electricity Markets made to pay for the upgrading of the grid in the longer term are having a significant impact on small wind farm developers—for example, those who want to build a 100 megawatt facility in Scotland must pay a connection charge of up to about £1 million.
Please be more diligent in addressing the order. I was quite lenient during your first contribution.
You were also lenient with the minister.
The minister was responding to your contribution.
I will try to be helpful. My final point is that we must examine the implications of the Ministry of Defence's decisions on the future of renewables. Although I take on board what the minister said in relation to the overall picture on the emissions trading scheme, I make a plea for the briefs to be more expansive and to give more information when we deal with such processes in the future. Nonetheless, this morning's process has been useful. I ask to withdraw the motion.
Motion, by agreement, withdrawn.
You almost made me not do that, convener. I nearly pressed the matter to a vote.
You have got me worried.
I thank the minister and his officials for attending and I thank Bruce Crawford for participating in our deliberations. We will consider item 3 in private. I expect that that will last only about 10 minutes. I say that for the benefit of members of the press and the public who wish to come back for the final part of the meeting. Nora Radcliffe will be the convener for the remainder of the meeting.
Meeting continued in private.
Meeting continued in public.