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EU: Emissions Trading System (EUC Report)

That is the point; that introduction involved a whole new way of thinking about wealth and prosperity as well as—for most of the time, anyway—being a major boost to the world economy. A worldwide carbon trading scheme would also involve a whole new way of thinking, and the idealists hope that it will represent a major new economy and increased prosperity as well as saving the world. They are idealists, after all. They might eventually be right, but at the moment the Stern review describes the economics of climate change as, ""the greatest market failure the world has seen"." We have a long way to go, and therein lies the problem; how do we get from here to there, particularly now that we are in a worldwide recession and, as has been alluded to, the carbon price has fallen as low as €8 a tonne? It is, however, a road that we have to take. I need only repeat the Stern review mantra that the sooner we take action, the less it will cost us in the long run. Furthermore, we do not need only an EU ETS; we must end up with a worldwide scheme. The EU is responsible for only 14 per cent of the world's CO2 emissions, so a 20 per cent cut on the EU stage would represent only a 3 per cent cut in global emissions. We need a worldwide scheme, and eventually we need to think of a carbon economy that affects not only all businesses but all people. Having said that, my two messages for today are: first, "softly, softly, catchee monkey"; and, secondly, let us try to create a climate of certainty over a long period so that businesses and individuals know where and how to invest over a 20-year period. On the softly, softly front, let me first deal with carbon leakage: that is, there is no point in making an EU industry uncompetitive by slapping carbon costs on to it when the production would merely move to the third world and have no such restraints. The cement and aluminium industries are good examples here. However, we can freeze the present free emission allowances for these businesses and state firmly that these free allowances are going to be gradually reduced between 2013 and 2020. This would give those industries a soft landing in this new economy but with the certainty of a route map for the future. Again on the softly, softly front, I support the CBI belief that the de minimis threshold for a company to fall into the scheme should be raised from the original EU proposal of 10,000 tonnes of CO2 per annum. The CBI went for a minimum of 50,000 tonnes, claiming that while it would remove 70 per cent of business emitters from the scheme, it would actually remove only 5 per cent of emissions. Speaking as someone who has spent much of his political life supporting SMEs, especially small rural businesses, I support this message. The EU and the UK Government have now chosen a threshold of 25,000 tonnes, but I have not seen any statistics on the effect of that figure. All I will say is that it is a dangerous time for the survival of small and medium-sized businesses, and in the UK at any rate they are already going to be affected by the climate change agreement scheme and the carbon reduction commitment. We have to bear in mind in all of this that everyone and every industry will soon be forced to pay higher electricity costs as a result of this scheme. The electricity generating industries will pay for 100 per cent of their allowances from the start of the scheme: thus we will all be affected, come what may, including those industries that are protected by the carbon leakage safety net. In this context, aluminium is a very high electricity usage industry and its world competitive position will be affected in a small way from day one. As an aside—this has been mentioned by most speakers in connection with the electricity generating industry—if non-renewable generators can apply carbon capture technology to their power stations, they too will get free allowances. This is essential, and an effective system of CCS would probably be the most important breakthrough for the whole world—not least in China and India—if it could be made a cost-effective reality. However, as time goes on, I am becoming less and less hopeful of the likelihood of it becoming the norm or even happening at all on any meaningful scale in the near future. I hope that I am wrong and that the exhortations of the noble Lord, Lord Giddens, will have some effect. My softly, softly approach actually goes slightly further than the proposed EU scheme because I believe that every industry, including agriculture and forestry, ought to be included in the long-term plan. I have to declare an interest as a farmer, although no doubt what I am saying will not be very popular with my fellow farmers. New Zealand, which was referred to, has included its agricultural industry in its scheme but says that its agriculture will continue to have free allowances until 2030. However, it is getting its agricultural industry to assess its emissions in kilograms per hectare and thus to establish a baseline for future use. The same ought to apply in the EU. Even if every farm were made to calculate only its current emissions, that would be a first step. Benchmarks would then come into being, thought processes would happen, solutions would be identified, and, eventually, as with all SMEs and microbusinesses—indeed, as with all industries—they too would fall into the net of an ever-developing ETS. Softly, softly, catchee monkey. As for my second point on certainty, the main thrust must be proper auditing and controls. As our chairman said, this must not be a voluntary scheme. It is crucial that the EU enforces the application of the scheme equally in every member state. Without that, it is, frankly, inoperable. We also need certainty as soon as possible on a range of other issues: for instance, in the areas I have already touched on, such as carbon leakage and the de minimis threshold. We need a long-term but well planned market structure of 20 to 30 years for this to work effectively. Another complicated area is that of the emissions-saving projects outside Europe to which other speakers have referred, such as CDMs and the like. The extent to which these could be used to offset domestic obligations will be uncertain until after the Copenhagen conference. That uncertainty must be resolved as soon as possible, as immediate investment worldwide in new carbon-saving processes is vital now for both economic and environmental reasons. My own view—I accept that I am slightly at odds with our report—is that we should be as flexible as we dare over worldwide schemes and access to international credits, without upsetting the discipline of the internal marketplace. That may be a contradiction, but the point I made earlier was that unless this develops into a worldwide scheme, it will not serve much purpose for saving the world. The rules on CDMs must, however, be clear and be rigorously policed. In the past, neither has been the case, and as a result clean investment in third-world countries has fallen into disrepute, which in the long run will be bad news for the future of our planet. Again, the need for underlying certainty through proper enforcement to encourage sound long-term investment is my main point. My final point is about research, which the noble Lord, Lord Giddens, mentioned. We desperately need money for aggressive R&D in this area. It is to be hoped that imposing costs on larger industries will mean that they develop cleaner technologies that might trickle down to smaller businesses. As the noble Lord has said, however, the Government must do their bit on behalf of taxpayers and consumers, who will ultimately have to pay for all the downside risks. The CBI told us that in publicly funded energy R&D we spend about one-third of the EU average as a proportion of GDP. The Government appear to recognise that this is an important area, and they must put their money where their mouth is.