Clause 198 - Climate change levy: supplies subject to carbon price support rates etc

Finance Bill – in a Public Bill Committee am 3:00 pm ar 18 Mehefin 2013.

Danfonwch hysbysiad imi am ddadleuon fel hyn

Photo of Catherine McKinnell Catherine McKinnell Shadow Minister (Treasury) 3:00, 18 Mehefin 2013

I beg to move amendment 148, in clause 198, page 116, line 17, at end add—

‘(2) The Chancellor of the Exchequer shall within one year of the passing of this Act provide a report to Parliament on the cumulative impact of the Carbon Price Support rates under Schedule 40 to this Act and changes to the EU Emissions Trading Scheme on the Government’s commitment to reducing carbon emissions.’.

Photo of Sir David Amess Sir David Amess Ceidwadwyr, Southend West

With this it will be convenient to discuss the following:

Clause stand part.

That schedule 40 be the Fortieth schedule to the Bill.

Photo of Catherine McKinnell Catherine McKinnell Shadow Minister (Treasury)

As promised, we will now consider the climate change levy and our amendment to the clause. The issue of the carbon price floor has been much debated, and the explanatory note to the clause sets out the following:

“In order to encourage new and additional investment in low-carbon power generation, the Government announced at Budget 2011 that, following consultation, it would introduce a carbon price floor from 1 April 2013, which it would achieve by amending CCL legislation…Supplies of coal and other solid fossil fuels, gas and LPG used in most forms of electricity generation would become liable to newly created CPS rates of CCL, which would be different from the main CCL rates levied on consumers’ use of these commodities”.

Despite the Government’s intentions and their wish to be the “greenest Government ever”, there are rising concerns about their ability to achieve their commitment to reduce carbon emissions. We therefore tabled the amendment to probe the Minister on what consideration they have given to those concerns and to enable him to explain what they are doing, and will do to, address them. The Minister will be well aware of recent events in the European Parliament regarding the EU emissions trading scheme. I see that rather than going swivel-eyed, many Members are now furrowing their heads down into papers and whatever electronic devices they have to look at rather than engage in what is no doubt a very difficult debate.

Photo of Catherine McKinnell Catherine McKinnell Shadow Minister (Treasury)

I am pleased that the hon. Lady is not.

As the Committee will know, the EU emission trading scheme was launched in 2005 to combat climate change and was heralded as a major pillar of EU climate policy. The scheme works on a cap and trade basis, so a cap or limit is set on the total greenhouse gas emissions allowed by all participants covered by the system. That cap is converted into tradable emissions allowances, which are allocated to participants in the market. Participants who are likely to emit more than their allocation can choose between taking measures to reduce their emissions or buying additional allowances either from the secondary market, such as companies who hold allowances they do not need, or from member state-held auctions. However, in April this year, attempts to deliver a vital reform to the scheme failed thanks to the votes of a majority of Conservative MEPs and one Liberal Democrat MEP in the European Parliament.

Photo of Rory Stewart Rory Stewart Ceidwadwyr, Penrith and The Border

In the interests of proving that not everybody has their head in an electronic device, may I ask the hon. Lady to reflect a little on the fundamental principles underlying this form of carbon purchasing? Would she not agree with Professor Dieter Helm of Oxford university that it would be better to target taxation on the consumption rather than the production of carbon, and that the net effect of taxing the production of carbon in the European Union has simply been to drive carbon-emitting industries to places such as China, meaning that although our production is reduced, our consumption of carbon has significantly increased?

Photo of Catherine McKinnell Catherine McKinnell Shadow Minister (Treasury)

I thank the hon. Gentleman for that considered contribution to the debate. However, we are constrained in this Committee to debate the measures before us. The one before us now is the climate change levy and supplies subject to carbon price support rates, and we are reflecting upon the Government’s approach in this regard. I detect from his comments that he sympathises with the MEPs who voted down reforms to the scheme. I will go on with my comments as, regardless of the merits or non-merits of this approach to reducing carbon emissions, there is still the question of the Government’s intended direction for this policy, which is the purpose of our probing amendment today.

Photo of Ben Gummer Ben Gummer Ceidwadwyr, Ipswich

The hon. Lady is wrong about my hon. Friend. He was making a philosophical point and was not in any way allying himself with the position of Conservatives in the European Parliament. Before she starts making assumptions about the knowledge of the ETS on the Government Benches, I should point out that we are in this mess because of the dilatory approach that the former Secretary of State for Energy and Climate Change—her leader—took to the negotiations on the second round of carbon credits at the end of the previous Administration. It meant that there was a surplus of credits in the market and the scheme collapsed as a result.

Photo of Catherine McKinnell Catherine McKinnell Shadow Minister (Treasury)

The hon. Gentleman’s comments lead on nicely to the point I was going on to make, which relates to that vote in the European Parliament. That was vital because the price of carbon had previously crashed due to the surplus of permits on the market. The reforms that were voted on, known as back-loading—strongly supported by the Government—would have propped up the price of carbon in the ETS market by delaying the auction of new emission permits. However, the vote was close enough that the actions of those Tory MEPs and one Liberal Democrat MEP made sure that the reforms did not pass. As a result, the price of carbon has continued to collapse and the EU’s credibility on climate policy has been damaged.

I will quote from what the current Energy Secretary said about the EU’s emissions trading scheme before the vote:

“The current low carbon price, caused by the large over-supply of allowances in the market, risks damaging growth and investment in green technologies. Removing some of these allowances over the next few years would help to restore confidence in the market, before longer-term reforms to strengthen the system can be brought in. An agreement on this now would minimise uncertainty in the market.

Any delay could lead to greater costs in the long-term in meeting the EU’s 2050 objectives and would undermine the move to a low-carbon economy. If back-loading and structural reform are not supported, Member States may adopt unilateral policies to deliver their energy and climate objectives and stimulate investment, creating a complex patchwork of climate legislation across the EU that is inefficient and increases regulatory burdens on industry.

The EU Emissions Trading System…is a cornerstone of climate change policy, which is helping the UK meet its climate change goals and ensures that emission reductions in energy intensive industries are achieved at the lowest cost”.

Those events have had a significant impact on the measures we are debating, because the UK’s carbon price support was supposed to operate in conjunction with the emissions trading scheme to make sure the price of carbon never went below an agreed floor, with the CPS rate set as the difference between the target carbon price and the EU emissions trading scheme carbon price.

The Government have set out the rates up to 2016 in the clause. I think the Minister will agree that they are significantly higher than many in the industry were expecting, with the result that the rate is rising so far at around 100% a year. The Government may seek to justify the rise in carbon floor prices on the basis that they are compensating for the emissions trading scheme’s continued collapse. However, there are several concerns  about the possible consequences of the rise, especially when set against the background of all the problems with the EU emissions trading scheme; that is why our amendment asks the Government to commit to a conducting a review of the impact of the measures.

The first concern is that, with the collapse of the EU emissions trading scheme and the rise of the carbon price floor in the UK, the differential between what the UK pays in carbon taxes and what the rest of the EU will be paying will grow ever wider. Not only could that make our economy less competitive; it could also lead to more companies taking the decision to build new generation plants outside the UK and sell us energy via an interconnector to avoid the carbon floor price, rather than building new plants in the UK. The second concern is that the hike in the carbon floor price will lead to higher household bills as companies simply pass the tax on to consumers.

Those concerns are significant. It would be helpful if the Minister could reassure businesses and consumers by answering some of our questions as well as committing to keeping the impact of the measures under review. First, will the Minister explain why the rates have been rising so rapidly from what was initially announced by the Government? What assessment has he made of the cumulative impact of the collapse of the EU emissions trading scheme and the measures in the clause on the commitment to reducing carbon emissions?

The policy objective for the measures states that the carbon price floor

“is designed to provide an incentive to invest in low-carbon power generation”,

and the summary of impacts notes:

“In Great Britain, these measures are not expected to have any significant economic impacts.”

Photo of Ben Gummer Ben Gummer Ceidwadwyr, Ipswich 3:15, 18 Mehefin 2013

Will the hon. Lady reflect on my point that the reason we are in this mess is partly because of the failure of her party leader to do what he should have done when he was Secretary of State for Energy and Climate Change? I also want to flesh out the Opposition’s position on this matter: do they wish to see a lower carbon floor, or the same one, or a higher one, or a new negotiation—what precisely are they looking for?

Photo of Catherine McKinnell Catherine McKinnell Shadow Minister (Treasury)

I understand the hon. Gentleman’s desire for me to reflect on the past, but our focus is very much on the future. His party is in power and has the power to make a difference to not only this country’s carbon emissions, but the price of energy for ordinary consumers. That is why I am proposing our amendment today, which calls on the Government to keep such issues under review. I understand that the hon. Gentleman wants to flesh out and probe Opposition policy, but that is not in the scope of the amendment or our discussions today.

Photo of Ben Gummer Ben Gummer Ceidwadwyr, Ipswich

The hon. Lady rightly said that the ETS is one of the pillars of the carbon regime that the Europe Union is using to fight climate change. If that is the case, what is the Opposition’s policy on the price that the carbon floor should attract?

Photo of Catherine McKinnell Catherine McKinnell Shadow Minister (Treasury)

When I said that the ETS is a cornerstone of combating climate change, I was actually quoting a Minister in the hon. Gentleman’s Government.  My comments are focused on what this Government are doing to take on some of the serious challenges posed.

Given the concerns that I have touched on, I am sure that members of the Committee and members of the public would like to know what assessment the Minister has made of the cumulative impact of the collapse of the EU ETS and the level of rates in the measure on the UK’s competitiveness in this sector, on the prospect of investment and on jobs and growth, which must be key focuses for the Government. What assessment has he made of the cumulative impact of the collapse of the EU ETS and the measures in the clause on household bills in the UK? Will the Minister remind us how much the Exchequer is expected to receive in revenue as a result of the carbon price support rates? What consideration has been given to the growing calls for revenue from carbon taxes to be used to fund energy efficiency drives?

Earlier, I read out the Energy Secretary’s statement on the EU ETS. After the vote by his colleagues in the European Parliament, he published a joint statement with eight other European Ministers calling on the Council and Parliament to

“take the urgent steps necessary, working constructively together, to come to a swift resolution of the backloading proposal by July of this year at the latest”.

Can the Minister confirm that it is still Government policy for the carbon price support to operate in conjunction with the EU ETS? If so, will the Minister update us on what the Government are doing to get the EU ETS back on track, and what conversations he or other Ministers have had with those Conservative MEPs who voted against the necessary reform of the scheme to ensure that it does, in fact, have a future?

In the policy objective for this clause, the Government state that the carbon price floor is designed to provide

“greater support and certainty to the carbon price in the UK’s electricity generation sector.”

What impact have such measures, alongside events in the European Parliament in April, had on confidence and certainty in the industry?

Photo of John Pugh John Pugh Democratiaid Rhyddfrydol, Southport

The hon. Lady normally suggests that she asks the Government to do simple things. In this case, she is asking the Government to do something awfully difficult, namely to produce within one year an assessment of the cumulative impact of the EU emissions trading scheme, which is identified as extremely volatile and changeable. I think I was in a Committee room such as this when David Miliband was the Environment Secretary and he was discussing the scheme’s prospects. Since then, it has changed rapidly, has gone through various incarnations and continues to change. In 2012, the European Commission called for further major changes. How can the Government possibly comply with what might on the face of it seem a simple request given her analysis of the scheme on which she wants to know the Government’s policies’ impact?

Photo of Catherine McKinnell Catherine McKinnell Shadow Minister (Treasury)

If the hon. Gentleman reads our amendment, he will see that it calls for the Chancellor to make a report to Parliament on the cumulative impact of the carbon price support rates and changes to the EU emissions trading scheme on the Government’s commitment to reducing carbon emissions and on jobs  and growth. That obviously has to relate to recent events that will impact on jobs and growth, and the Government’s commitment to reducing carbon emissions over the next 12 months.

The Government should not underestimate the important impact of recent events concerning the EU emissions trading scheme on confidence in the market, and confidence to invest in the UK. They should also keep under review what impact that has over the next few months and see whether investment decisions are made that are detrimental to the UK and whether household bills go up as a result of additional taxes being passed on to the consumer.

I appreciate the concern that the hon. Gentleman expresses for the Government and their capacity to do this. I think that ultimately taxpayers will want to know the consequences that recent events at the EU Parliament will have on the ability to move back into economic growth on a sustainable basis to which we are all committed. The Government state they are very much committed to being the greenest Government ever. Let us see that put under review, using the Government’s great resources to take stock of where we are and what changes should be made to put us in a better position.

Photo of Sajid Javid Sajid Javid The Economic Secretary to the Treasury

Clause 198 introduces schedule 40, which consolidates all the primary legislation needed to introduce the UK’s carbon price floor. By way of background, at Budget 2011 we announced the introduction of a carbon price floor from 1 April 2013. The Finance Acts of 2011 and 2012 included the initial primary legislation.

The price floor is an important first step in our electricity market reforms. It will provide an early and credible signal to incentivise investment in our ageing electricity infrastructure. For solid fuels, gas and liquefied petroleum gas, the carbon price floor is achieved by charging carbon price support rates of climate change levy on those fuels when used to generate electricity. For oils used to generate electricity, the carbon price floor is achieved by reducing the amount of fuel duty that is reclaimable on the oil by the carbon price support rates of fuel duty.

Allow me to set out what the schedule does. It consolidates previous legislation into a single schedule, to ensure it is simple to understand, and it also makes a number of changes to previous legislation. First, it sets the carbon price support rates for 2015-16, which are equivalent to £18.08 per tonne of carbon dioxide. Setting those rates two years in advance is in line with our previous commitment and provides certainty for investors by ensuring the carbon price is in line with the trajectory set out at Budget 2011.

Secondly, it introduces an exemption for electricity generators based in Northern Ireland. That recognises the unique nature of the electricity market in Northern Ireland, which is a joint market with the Republic of Ireland. The exemption will help to support the Northern Irish economy and protect energy security in the region. It will also ensure that carbon emissions in Northern Ireland and the Republic do not increase as a result of the interaction between the carbon price floor and the electricity market there. Finally, it makes a number of technical changes to the administration of the carbon price floor to make the tax fairer and to reduce burdens for those complying with the tax.

At Budget 2013 we announced that energy-intensive industries will continue to receive support in 2015-16, to compensate for the indirect costs of the carbon price floor. That recognises the impact of the CPF on the competitiveness of the UK’s energy-intensive industries and the importance of the industries in supporting the growth of the UK economy.

The CPF is a key commitment for the UK Government in signalling necessary investment in low-carbon electricity generation. Supporting the carbon price will marginally increase the cost of generating electricity, but over the long term the UK stands to benefit from cleaner, cheaper and more reliable sources of low-carbon energy.

Amendment 148 would commit the Government to publishing a report on the impact of the carbon price floor and changes to the European Union emissions trading scheme—ETS—within a year of the Bill’s enactment. The Government continually monitor the impact of policies, and all tax policies are kept under review. An impact assessment on the carbon price floor policy was included in the consultation in December 2010, and the Government have continued to publish tax impact and information notes when changes to the policy have been announced. Five such notes have now been published. The Government will continue to update Parliament on the progress of discussions in Europe on the EU ETS in the usual way. When proposals affect United Kingdom legislation, the Government will consult on the changes, including through making assessments of the impact.

Each year, the Government publish updated projections of future energy use and greenhouse gas emissions in the UK, which take account of the impact of policies such as the carbon price floor and the EU emissions trading system, and allow us to monitor progress towards an emissions reduction target. Certainty in such policies is critical for driving investment and low-carbon electricity generation in the UK. The Government have set out a trajectory for the carbon price floor up to 2013 to provide the necessary certainty. The amendment is therefore unnecessary and would lead to the duplication of work that is done already in the usual course of policy maintenance, so I ask the hon. Member for Newcastle upon Tyne North to withdraw it.

Let me respond to some the questions that the hon. Lady asked. She referred to the impact on UK competitiveness and industry. In 2013, the carbon price floor will add about 2% to the average business electricity bill. In 2011, purchases of energy and water accounted for less than 3% of the total cost of UK manufacturing. In our 2011 autumn statement, we announced a package worth £250 million over the spending review for energy-intensives, and the Budget announced that those policies will continue to 2015-16.

The hon. Lady asked about the impact on households. In 2013, the price floor will add about 1%, or £6, to the average household annual electricity bill. Households in the UK pay the third lowest electricity prices in the EU 15. The UK currently has the lowest rate of VAT on residential energy of all the EU 15, and the total amount paid towards VAT and the cost of energy and climate change policies per unit of residential electricity is among the lowest in the EU 15.

The hon. Lady also asked how the recent fall in the ETS might affect the carbon price support rates for 2013-14 and 2014-15. The recent fall in the ETS rates does not affect those carbon price support rates, so UK industry will benefit from the fall in price in line with its European competitors. As a result of the fall in ETS carbon prices, the Government will collect less—not more—revenue from the ETS carbon price floor. As for the ongoing discussions in the EU on the Commission’s back-loading proposals to which she referred, the UK supports the strengthening of the EU ETS and is engaging with the proposals. The carbon price floor rates for 2013-14, 2014-15 and 2015-16 have been announced and are covered by the Bill, and changes in the carbon price as a result of the decision on back-loading will be taken into consideration when setting the price support rates for 2016-17 and beyond.

I thank my hon. Friends the Members for Penrith and The Border, for Ipswich and for Southport for their contributions. The Government remain committed to supporting the UK carbon price in a cost-effective way so that we have clean, secure supplies of electricity that help to support growth. I therefore hope that the Committee will agree to the clause and schedule.

Photo of Catherine McKinnell Catherine McKinnell Shadow Minister (Treasury) 3:30, 18 Mehefin 2013

I thank the Minister for at least responding to the main worries that have been raised. He reassured us that the Government will keep matters constantly under review and are committed to an ETS that works and produces the economic certainty that is needed to ensure that we have sustainability and the greenest Government ever, so I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Clause 198 ordered to stand part of the Bill.

Schedule 40 agreed to.