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Emissions Trading Scheme

Volume 448: debated on Thursday 29 June 2006

With permission, Mr Speaker, I should like to make an announcement about the Government’s proposals for the second phase of the EU emissions trading scheme. Today, we are announcing the level of our cap. In due course, we will be presenting to the Commission our full and formal national allocation plan.

The case for tackling climate change, and the human contribution to it, is overwhelming. The scientific consensus is wide and deep, and the political consensus is widening and deepening. The need for international and domestic action, across all aspects of economic and social life, is very strong.

In the UK, we can take pride in the fact that we are projected to cut our emissions of greenhouses gases by 23 to 25 per cent. from 1990 levels over the Kyoto commitment period—nearly double the Kyoto targets. However, UK emissions of carbon dioxide are rising. We remain on track to meet our Kyoto targets, but on current trends, we will fall short of our national goal of a 20 per cent. reduction in CO2 emissions by 2010. Our challenge is to take action now to avoid the environmental and the economic and social costs of inaction.

The EU emissions trading scheme is the cornerstone of a Europe-wide drive to reduce emissions from highly energy-intensive sectors. It currently covers about 11,000 installations across Europe, and companies in the scheme in the UK account for some 45 per cent. of UK carbon dioxide emissions. The ETS gives a clear incentive to industry to invest in low-carbon technologies of the future, but achieves carbon reductions at lowest possible cost.

We are in the second year of the first phase of the scheme. The results from year one have provided a first opportunity to judge allocation against emissions, and most member states' caps for phase 1 do not provide the scarcity that the scheme demands. The UK cap was 245 million tonnes, and our system has worked well. The Government imposed the shortfall in allowances on the electricity supply industry, and all other sectors were allocated according to need. As intended, all but the electricity supply sector are living within their allocations.

The Commission has used the information from the first phase to assess what member states’ caps should be for phase 2, and has set out indicative figures that require substantial cuts from member states. Phase 1 has been, and is, in many ways a trial period. Phase 2 coincides with the first Kyoto period—2008 to 2012—and states that do not take the measures necessary within that period to reach their Kyoto targets will either have to purchase Kyoto allowances and credits from other states or face penalties for missing targets.

In March, in our consultation on the draft national allocation plan, we set out a range of UK reductions of emissions during phase 2, from 3 million tonnes of carbon to 8 million tonnes. At the time of consultation, that was equivalent to a cap of 234 to 252 million allowances a year, which, for the sake of clarity, I should explain represents 234 to 252 million tonnes of carbon dioxide.

I have to report to the House that there have been important changes since we published the draft national allocation plan. Our projections for emissions in 2010 have risen by 3 million tonnes of carbon for the UK as a whole—significantly, because of changes in household numbers—and by 1.1 million tonnes of carbon for the installations covered by the EU emissions trading scheme.

In those circumstances, we believe it is essential to make the maximum effort consistent with the range on which we consulted. In other words, that means reductions of 8 million tonnes of carbon per year below business as usual, which is equivalent to a reduction of 29.3 million tonnes of carbon dioxide. It may help the House if I say that that is roughly equivalent to the carbon emissions of 4.5 million households. This is now, since the change in projections, equivalent to an annual total allocation of 238 million allowances to UK installations covered by the scheme in phase 1. The figures may change slightly to reflect the expansion of the scheme and removal of the installations that emit the smallest amounts of CO2.

We looked carefully at the possible effects on business and consumers before making our final decision. Our intention is that for industrial sectors, including those most open to international competition, allocations should continue to be on the basis of need. In respect of electricity supply, however, the sector is mainly insulated from domestic competition, and is domestically liberalised. That sector's allowances could therefore be set lower and be subject to auctioning.

Phase 2 of the EU ETS allows for a maximum level of auctioning of allowances of 10 per cent. We propose to set the level of auctioning in the UK at 7 per cent. Obviously, the final amount raised by the auction cannot be determined in advance—it depends on the price of carbon—but it will be substantial.

We will build on the trading scheme agreement and go further. We believe there is a major opportunity for the UK not just to invest in renewable energy, other non-nuclear, low-carbon technologies, and energy efficiency, but to build successful businesses in these fields. We will establish a new environmental transformation fund, held jointly by the Department for Environment, Food and Rural Affairs and the Department of Trade and Industry, administered by my right hon. Friend the Secretary of State for Trade and Industry and myself, to grasp this opportunity. Final details of the scale and scope of the fund will be announced in the spending review for implementation, as in the ETS, in 2008.

The EU emissions trading scheme is also linked to a global carbon market and has been a major driver in its development. Project credits, which are credits generated in developing countries through the clean development mechanism, or in other developed countries by joint implementation projects, may be used to help meet the caps set for operators. The use of these credits provides a further driver for sustainable energy projects in the developing world and for technology transfer. However, member states need to ensure a balance between domestic and international effort. UK companies are already at the forefront of this market, and we want that to continue.

In the UK we are providing for the use of these credits to meet up to 66 per cent.—two thirds—of the effort in phase 2. In effect, that means that 5.3 million tonnes of carbon—19.5 million tonnes of carbon dioxide—from clean development and joint implementation projects can be used, which is equivalent to 8 per cent. of the total cap. All installations in the UK may use project credits to meet emissions up to 8 per cent. of their allocation.

The EU emissions trading scheme has an impact on electricity prices via the cost of carbon allowances, and we have looked at that carefully. It is very important to realise that the cost is driven by the cumulative effect of all member states' decisions, not by the decision of any individual member state for the citizens of that country. Many factors drive electricity prices, including global fuel prices and the weather, but our estimate is that the impact of the proposal, relative to the phase 1 cap, will be a one-off rise in industrial energy prices in the region of 1 per cent., and approximately half that for domestic users.

Our decision to set the cap at the top end of the range of effort on which we consulted sends a clear message that the emissions trading scheme is here to stay; that the Government are committed to making it work, providing clear, progressive rewards for a shift to low-carbon technologies; and that the UK is determined to maintain its leadership role on this issue. Today's decision will set us on course to deliver a 16.2 per cent. reduction in emissions against 1990 levels by 2010. We said when we launched the climate change programme review in March that it was not the last word, and we will use further opportunities, including the energy review and the environmental transformation fund, to help us move progressively towards our 2010 target.

EU member states are required to use emissions trading as a means to deliver their Kyoto protocol commitments. The level of ambition that individual member states set for the reductions to be made by the sectors covered by the emissions trading scheme will be an important element in the price of carbon. Now that member states will need to show that they are meeting their Kyoto targets, and with the Commission having phase 1 emissions data, the UK expects to see more stringent caps enforced in phase 2. We will therefore encourage and support the European Commission in its efforts to ensure, tough caps, to provide greater long-term certainty and to help smooth the running of the system to avoid potential competitive distortions. I spoke to Commissioner Dimas, the Environment Commissioner, this morning to emphasise that point.

Phase 2 also forms an important element in the broader consideration of our long-term carbon policy framework. My right hon. Friend the Trade and Industry Secretary, who is in Geneva today as part of the World Trade Organisation negotiations, will next month be reporting the findings of the energy review in which the Government is reviewing the UK's progress against the medium and long-term Energy White Paper goals, including our 2050 carbon reduction goals, and the options for further steps to achieve them.

My right hon. Friend the Prime Minister has made it clear that climate change is a global problem that requires a global solution. This target for phase 2 will support the development of a global carbon market, and we will therefore continue to work with our EU partners to ensure that negotiations for future commitments under the Kyoto protocol make clear and convincing progress. We will continue to work through the Gleneagles dialogue, launched during the UK presidency of the G8, to search for consensus on practical measures for tackling climate change. The case for taking action is overwhelming; the speed at which the world responds to that case will determine the effectiveness and positive economic impact of our response. Today's announcement takes another step towards our long-term objective of a 60 per cent. reduction in C02 emissions by 2050. I commend it to the House.

I thank the Secretary of State for his statement and for prior notice of what is undeniably its hideously complicated content. As he said, the case for tackling climate change is overwhelming. It is the biggest environmental threat that we face; indeed, I would go further and say that it may well be the biggest threat that we face in our generation of politicians. We strongly support the European emissions trading scheme, and we are concerned to ensure that it works as effectively as possible.

I recognise that the Government have a difficult job in balancing the interests of United Kingdom industry with the need to cut carbon emissions. That becomes even more difficult and complicated in the context of the European Union, where we need to ensure fair competition across all member states and a fair allocation system that is robust and does not distort competition, but which also reduces carbon emissions.

Nobody said that any of this was easy. In that context, does the Secretary of State agree that the plans recently set out by Germany for a 0.6 per cent. cut under its national allocation plan are a matter for concern? Will he urge the EU Commission to make Germany raise its game?

We have argued for the UK to set ambitious targets and we have advocated the greater use of auctioning in the allocation process. In that context, the Secretary of State’s announcement provides some evidence of welcome progress. We are pleased that the Government have opted for the target of cutting 8 million tonnes of carbon, which is at the higher end of the range that they set out earlier this year. However, I note that, since March, the base case projection for business as usual has been revised upward. Does not that suggest that the range of emission cuts should have been revised upward proportionately?

I welcome the announcement that 7 per cent. of the UK’s national allocation plan will be auctioned. It is the way in which the allocations were made in phase 1—the horse trading and deals done behind closed doors—that has led to many of the problems that we have already seen in the working of the emissions trading scheme, and it explains some of the volatility in the market. Auctioning is a good thing, which we support, but has the Secretary of State given any thought to how the money raised from that process might be used? For example, it could be used to compensate the industrial sectors that are particularly exposed to international competitive pressure as a result of the emissions trading scheme.

Will the Secretary of State confirm that under the arrangements for phase 1, the UK power sector made windfall profits of in the region of £1 billion? What plans does he have to address that unacceptable situation in phase 2?

I take note of the plan to establish an environmental transformation fund to encourage UK investment in renewable energy technologies and energy efficiency—an area in which we are sadly lacking in progress and lagging behind our international competitors. We certainly need to encourage effective action on that front and we look forward to seeing the details, but how will the new fund relate to the work already undertaken by the Carbon Trust, the Energy Saving Trust and others? Would it not have been possible to use one of those existing bodies to undertake the functions that the Secretary of State envisages for the new fund?

Does the Secretary of State agree that setting five-year targets causes industry problems in failing to provide the long-term framework that they need to justify the long-term investment that they are being asked to make in carbon technology? Will he argue in favour of longer-term commitments in future?

Does the Secretary of State agree that there is a need for a clearer and more regular reporting system in respect of national progress towards meeting the targets for delivering carbon reduction, which would help to avoid the destabilising volatility that we have recently seen in the carbon market? What plans does he have to promote a more open, transparent and visible means of measuring progress? He made no mention of the plan to include aviation in phase 2 of the emissions trading scheme, so I would be grateful if he updated the House on that issue.

Overall, I congratulate the Secretary of State on winning some of the arguments that his Department has had with the Department of Trade and Industry. His announcement today represents a step in the right direction. I wish him well in the vital effort that needs to be brought to bear to ensure that realistic, robust and equitable allocations are made across the whole of the EU.

I wholly concur with the hon. Gentleman that this is a complicated area and I thank him for his congratulations. I wish him equal success in his doubtless robust discussions with the right hon. Member for Wokingham (Mr. Redwood), whose views on environmental policy are well known, and who I note is not in his place today. The hon. Member for East Surrey (Mr. Ainsworth) is looking confused. He may have forgotten that the right hon. Member for Wokingham is leading the Conservative party’s review of trade and industry policy.

Let me respond to the questions. The hon. Gentleman made an allegation about Germany, but he must be careful—I think that his information came from the BBC website. He said that the German reduction was 0.6 per cent. That is wrong and it is important to correct it. The phase 1 cap in Germany was 499 million tonnes. The proposed second phase cap constitutes a reduction of 17 million tonnes and then a further reduction of 8 million tonnes arising from emissions in 2005. The Commission then said that the German Government will have to get down to 462 million tonnes. The Germans have already committed to a 3 per cent. to 5 per cent. cut and the Commission has suggested going further. I caution the hon. Gentleman to be careful about the 0.6 per cent. figure. New industries are included, but that does not invalidate the work being done. None the less, what I said in my statement holds true, and we are encouraging the Commission to take a robust approach with every single member state.

The hon. Gentleman asked about auctioning, but I believe that he was a little confused. As I mentioned in my statement, the auctioning figure is 7 per cent. The hon. Gentleman rather churlishly said that it was some evidence of progress, but given that the maximum was 10 and that the current level is zero, 7 per cent. is a pretty good whack at making the auctioning system work.

The hon. Gentleman also asked where the benefits will go. As I said in my statement, I view the environmental transformation fund as critical for non-nuclear carbon technologies of a range of different kinds. He made a perfectly valid point about ensuring that it is properly integrated with the excellent work of the Carbon Trust and other organisations. As I said, we will set out the details in due course in the spending review and we will certainly ensure that there is proper integration.

The hon. Gentleman then asked about compensation for the most internationally exposed sectors. As I tried to explain, our approach to the whole ETS system is that we allocate to internationally competing sectors on a business as usual basis. It is precisely because of the insulation of the electricity supply sector from international competition and the liberalised nature of the market, which is intended to drive down prices, that we have said that the burden of carbon reduction should be borne by that sector rather than by the internationally competitive sector. The compensation issue does not therefore arise.

Annual reporting is another issue. As the hon. Gentleman knows, my predecessor made a commitment to start it next year and then carry it out annually, so I can confirm that point. He legitimately asked about aviation. I had thought that the issues were complicated enough without getting into that matter, but it is very much on the table and the Government are fully committed to including aviation in the scheme. The Commission has made it clear that it wants to come forward by the end of the year with proposals for how to include the aviation sector in the scheme. It certainly represents a good step forward.

Does my right hon. Friend agree that, although it is a hideously complex area, it must be translated for general public as very good news for the environment? For anyone deeply concerned about global warming, it is indeed good news. Does the Secretary of State agree that seeing evidence of the DTI and DEFRA working together is also good news? Many in the environmental field hope that it means that they will work well together in other difficult areas such as the waste electrical and electronic equipment directive. Will he assure me that all this will not mean a lack of competitive equality between countries like ours that are leading and other countries that are lagging behind?

I can reassure my hon. Friend on all three points. It is good news for the environment and also for the economy. The opportunities for business development in renewables and other low carbon technologies are significant. We must not forget the importance of our manufacturing sector, but we also have a growing environmental technology sector. At the last count, I think that it was worth about 400,000 jobs. I certainly concur with my hon. Friend about that. As for co-operation with the DTI, I can assure him that we fully recognise how vital it is and that the whole Government are committed to it. The energy review, as well as my statement, will provide further evidence of that close co-operation.

I thank the Secretary of State for giving us prior notice of his statement. There is indeed a cross-party consensus on the principle of the emissions trading scheme, but it seems from today’s statement that there is a danger that a good idea will be undermined by poor implementation—not just here, I hasten to add, but in other EU countries, too. Only one EU country, Germany, seems likely to meet the legal deadline for the submission of its national allocation plan. Why is it that here in Britain, where the Government affect to believe that climate change is the greatest issue facing mankind—I certainly believe that it is—we are unable to meet the deadline for our own national allocation plan?

By raising the UK projection of business as usual emissions in 2008 to 1.1 million tonnes of carbon covered by the emissions trading scheme, the Secretary of State is implicitly weakening our commitment to cuts in emissions. Does not that raise the serious question of whether a more objective baseline in the past would have been more sensible than the business-as-usual projections, which have the disadvantage from country to country of being based on far-out projections, which are subject to considerable doubt about the assumptions.

Should not there be a more transparent and open process of peer review for each member state, perhaps with a voting procedure for approval, to ensure that countries make equal sacrifices? Are the reductions that our businesses are being asked to make in line with those elsewhere in the European Union? Are the reductions by business as great or greater than those implied for households and individuals by our Kyoto targets? Fairness, not only between our businesses and other businesses but between our businesses and households, is also important. The Secretary of State said that he had spoken this morning to Commissioner Dimas. Did he receive assurances about those matters?

The statement is silent on the scope of phase 2 and I welcome the Secretary of State’s reassurance to the hon. Member for East Surrey (Mr. Ainsworth) that the Government intend to continue to press for the inclusion of aviation. I should be grateful to hear the Secretary of State’s view on the inclusion of surface transport, especially freight and fleet transport, in the emissions trading scheme.

We welcome the commitment to auctioning. However, why did the Secretary of State select 7 per cent. rather than 6 per cent., 8 per cent., 9 per cent. or 9.5 per cent. instead of the maximum 10 per cent., which is a modest figure? It is also notable that the entire auctioning element will fall on the electricity supply sector, as it is sheltered from trade, as the Secretary of State explained.

We all understand that there is uncertainty and I note the presence on the Front Bench of the Financial Secretary, representing the Treasury’s interest. I suspect that the Government have made projections—it would be appropriate for the Secretary of State to share them with us. Where will the revenue from auctioning accrue? What is his view of, for example, the proposal from some quarters for a revenue-neutral scheme? Does he believe that that might make the proposal more palatable and less prone to distort competition?

I would be grateful to know whether the Secretary of State or any of his colleagues who are involved in the process have had discussions with representatives of the nuclear industry on the matter. Will the likely incentives from the projection of the burden of auctioning on the electricity supply industry be enough to persuade nuclear generators to build new nuclear without further douceurs from the public purse or electricity consumers through higher tariffs?

Only someone with three PhDs and a background in journalism could read the statement and believe that it represents a weakening of our environmental commitment, as the hon. Gentleman alleged. Let me try to cut through the rhetoric—or perhaps the latest phase in his leadership election campaign—

We have a very good leader and we are happy with the next one, who is on his way. We are in a much stronger position than the hon. Gentleman.

Order. It would perhaps help if we could stick to the questions.

I am grateful for your help, Mr. Deputy Speaker, in keeping me on the straight and narrow.

The hon. Gentleman asked about assurances from Commissioner Dimas. I refer him to the commissioner’s public statements in his Financial Times article and his speech to the European Parliament. He repeated those assurances today.

The hon. Gentleman asked about the figure of 7 per cent. and why it was not 8 per cent. or 6 per cent. I am terribly sorry that the hon. Member for Bexhill and Battle (Gregory Barker) finds the subject dull—that was a large yawn. The continuing debate about the extra 20 million tonnes that we wanted as the cap in the first phase weighed with us in making the decision about the figure. The hon. Member for Eastleigh (Chris Huhne) is right to say that, in the end, there is maths and there is judgment. However, the issue that I mentioned was a factor in not going for the full 10 per cent. and opting for 7 per cent.

The hon. Gentleman asked what proportion of electricity supply industry funds would be allocated. I do not have the precise figure but I shall write to him later today. He asked about projected revenue and suggested that there were secret Government projections. Nothing secret or governmental is necessary—there are plenty of public projections. They depend on the price of carbon. If there is €15 a tonne price of carbon, that is worth £150 million.

There are no assumptions built in, but we know that the market assumptions are based on a carbon price of between €15 and €20. A price of €15 a tonne would raise approximately £150 million from a 7 per cent. auction.

The hon. Gentleman asked about the scale and scope of the fund. As I said in the statement, that will be made clear at the time of the spending review. He asked about the nuclear industry—I have not had discussions with it about the matter. His final point about douceurs will have to wait until I consult my dictionary.

Order. I will endeavour to call as many hon. Members as possible, but could we now have brisk questions and answers?

I welcome my right hon. Friend’s statement. It is a truism that anyone who tries to be a leader or go first will be the first to be criticised. That was the case for the United Kingdom in the first phase of the scheme. All the other nations in the EU that followed us last time escaped criticism. I am pleased that that fact has now been recognised.

Will my right hon. Friend hold discussions with electricity suppliers to mitigate the increases in phase 2 of 0.5 per cent. for domestic customers, given that the suppliers made windfall profits in phase 1? They should use them to mitigate the costs on consumers in the second phase.

I think that I am right in saying that the electricity suppliers took advantage of the fact that the industry is vertically integrated to cushion some of the impact on domestic consumers in phase 1. However, I hear what my hon. Friend says and I am sure that the electricity suppliers do, too.

I welcome the statement, but I am sure that the Secretary of State knows that, under the first phase of emissions trading, the clean development mechanism generated many projects that offered credits. That, together with some of the longer-term projections of falling energy prices over the second phase, calls into question the price of carbon and thus companies’ ability to fund the necessary investment to reduce their emissions. What steps can be taken at a European level to try to safeguard the necessary flow of investment to achieve the carbon reductions that are essential if ETS 2 is to be successful?

The first and most urgent priority is to ensure that the signal is given to business that the ETS is here to stay and that it will be stable and long term. That is one of the reasons why I stressed the 2050 goal. Business wants a long-term path. When the corporate leaders group met the Prime Minister and me, it emphasised, perhaps above everything, that it wants to know about the long-term commitment from the Government and the rest of Europe. In the next few months, under the Finnish presidency, we shall work to ensure the commitment to the ETS and therefore to business.

I congratulate my right hon. Friend on the key elements of the statement—the 8 million tonnes, the auction and the environmental transformation fund. They are essential to our climate change programme.

My right hon. Friend referred to the corporate leaders group on climate change, which will be delighted with the announcement. He has united keen environmentalists such as me and leading members of industry. Will he meet the group again to discuss its proposals for hydrogen storage and wave and tidal electricity generation technologies, which could make us a world leader? I believe—and I think that the group does—that they are essential for dealing with the problems that the electricity generating industry faces.

My hon. Friend has an incredibly distinguished record in this field and I am grateful for her kind comments. I can certainly confirm that we are working with the corporate leaders group to establish a work programme to further our discussions. Her point about non-mature industries, such as tidal, was important; when we talk about a level playing field for different forms of renewable energy we must recognise that some forms of renewable energy are more developed than others, and make sure that they all have every chance to develop to the full.

The Secretary of State talked about the corporate leaders group. Could he indicate more accurately how much input there was from industry and commerce in the decisions that the Government have taken? As he may know, I am deeply concerned about the position of the UK manufacturing industry, because we are competing with countries that are not in the least interested in carbon emissions—China and India, for instance, which are our major competitors. How much input was there from industry and how concern is there about the impact of the changes on manufacturing industry and its competitiveness?

I can strongly assure the hon. Gentleman that the consultation in which the Government have been engaged since March has had wide and deep industry involvement. I shall write to him with the exact number of responses that we have received. The hon. Gentleman made some important points about manufacturing; I certainly understand his point about the tough nature of the global competitive market in which manufacturers are working, but I hope that he is reassured by two things in my statement. First, I confirmed that the Government will continue to insulate internationally competitive sectors within the ETS from the burden of carbon reduction—although I emphasise that the extent to which they can reduce their energy use will save them a lot of money, especially at a time of high energy prices. The second aspect of my statement that is relevant to the hon. Gentleman’s legitimate concern about the role of manufacturing industry is that our calculations show a 1 per cent. base case impact on electricity prices of the decision, over the existing cap. One can live on 1 per cent. so one must not dismiss it as being the same as nothing, but given that it is 1 per cent. over the five-year period and not an annual increase, I think that we have struck the right balance both to grow the economy and protect the environment.

In my right hon. Friend’s statement, he said that as we build on the emissions trading scheme we shall create opportunities in the UK for investment in low-carbon technologies. Is he aware that Mitsui Babcock is producing supercritical boilers that are being fitted in China but not in this country? Will he discuss with his hon. Friend the Minister for Energy, who is sitting beside him, what we might do to encourage British generators to invest in that new technology?

My hon. Friend makes a profoundly important point. I think that I am right in saying that there has been an 85 per cent. shift in the UK boiler market towards condensing boilers, which is obviously good for the environment, but I realise that his point was about their production. I shall certainly talk to my hon. Friend the Minister for Energy about that and one or both of us will write to him about what the Government are doing in that regard.

In the Sellar and Yeatman “1066 and All That” sense there is no doubt that the ETS is definitely “a Good Thing”, but it operates over quite short time scales, so can the Secretary of State reassure me that he is talking to his colleagues in the Department of Trade and Industry about how Britain can provide longer time frames for the mechanisms whereby carbon allocations should be set, to enable investors in low-carbon generating techniques the confidence to take informed investment decisions?

Yes, I can, and the work of the Finnish presidency in finalising the European Council’s long-term view about the role of the ETS will be vital.

I congratulate my right hon. Friend on his statement and welcome the announcement of the environmental transformation fund. I am optimistic that it will indeed catalyse greater investment in non-nuclear, low-carbon technologies, energy efficiency and renewable energy. On the basis of the Select Committee inquiry into biofuels, which looked at related areas in terms of investment incentives for business, it seems clear that my right hon. Friend may need to ensure that the Chancellor of the Exchequer in 2008—who may be a different person from now—opens his cheque book wider than he did for other incentive schemes. Does my right hon. Friend the Secretary of State recognise that generous incentives will be needed to get business to invest, for the reasons given by the hon. Member for Mid-Worcestershire (Peter Luff)?

My hon. Friend tempts me into the future of farming, which I spend part of my time addressing, because his point about biofuels is important to the vision of a diversified farming sector—as it is, too, to the future of our environment. The decision of the former Secretary of State for Transport a few months ago, that by 2010, 5 per cent. of all petrol bought will come from a biofuel basis is an important step in the right direction.

The Secretary of State said that allocations for industry will continue to be made on the basis of need. I think that is historical need, so what are his plans to review and reassess that need on a regional basis, given that manufacturing in Wales is a substantially larger part of the economy than elsewhere in the UK?

The hon. Gentleman makes an important point. We have two years to make sure that phase 2 of the scheme works well from 2008. We shall be working closely not only with industry but also with the devolved Administrations to ensure that the scheme appropriately recognises different needs around the country.

If other European countries are to follow a lead set by the UK Government, they will be required not just to set tough national allocation plan targets but also to ensure that their own industries comply with those targets in a transparent way. What measures does my right hon. Friend think should be put in place to ensure that the European Commission can properly monitor the effectiveness of the schemes agreed and the implementation of the caps by all member states in the Union?

My hon. Friend raises a really important point about the difference between phases 1 and 2, which relates to a question put by the hon. Member for Eastleigh (Chris Huhne) that I forgot to answer. Phase 1 was characterised by much uncertainty about existing emission levels in different countries. We now have figures for emissions in every country and the European Commission has said that no country will be allowed to set a cap higher than its current emissions level. For starters, we are in a much, much stronger position. Secondly, my hon. Friend makes an important point about independent monitoring and reporting. Our strong view, which we are discussing with the Commissioner, is that we must do everything we can to strengthen the integrity of the monitoring and other systems.

Why did the Secretary of State not offer an explanation and an apology for the embarrassing shambles last year in the Department he now heads? Figures given to the European Union had to be corrected, but the Commission refused to accept the corrections and we were led into the embarrassing position of taking it to the European Court of Justice to put things right. What confidence can we have that his Department will be able to administer this otherwise thoroughly welcome scheme?

To say that there is grotesque embarrassment is a bit rich, given that we are recognised around Europe as playing a leading role in the emissions trading scheme; but if it is any consolation to the hon. Gentleman, we are working closely with the Department of Trade and Industry to make sure that the expertise of the two Departments results in the successful operation of the scheme.

Major industries in my constituency, such as Corus Engineering Steels, are concerned about the impact of the scheme on their ability to compete. If we are helping to create a genuinely global carbon market, will it be likely to draw in the countries that initially stayed out of the Kyoto process, such as the United States?

My hon. Friend makes an important point. Fortunately, the Minister for Energy is sitting next to me and assures me not only that he is also responsible for steel but that he is a man of steel as well. He recently met Corus to discuss the point raised by my hon. Friend the Member for Sheffield, Hillsborough (Ms Smith) and other issues. Obviously, questions about environmental regulation, the role of climate change agreements and the role that we have set out for the insulation of internationally competitive sectors from the burdens imposed by the scheme are all part of the calculation that we and industry have to make to ensure that we achieve the right balance not only between the economy and the environment, but also between different parts of the economy. My hon. Friend’s commitment to a strong manufacturing sector is shared on both sides of the House and certainly by the Government.

Through my work on energy in the Science and Technology Committee, it is clear to me that the energy production industry is ready to trade carbon emissions for the next 20, 30, 40 or 50 years ad infinitum. The challenge is that there is no long-term framework, so will the Secretary of State let us know why he omitted the longer-term framework from his statement, and will he confirm the admission that the Government are on track to miss their target of carbon emission reductions by 2010?

I would have been happy to give an hour-long lecture on all aspects of energy policy, but today’s announcement was about phase 2 of the scheme, and it might have tried Members’ patience if we had gone further. However, in answer to the question, we have said that we are very clear about the 2050 goal as the guiding line for policy, we are very clear about the need for the EU and all its leaders and Governments to set a clear indication of the longterm direction and we are determined to do that as quickly as possible.

I welcome, with other colleagues, the great step forward represented by today’s statement in terms of carbon saving. Can my right hon. Friend confirm whether there will be a special good-quality combined heat and power sector in the second phase of the NAP? If there is to be a good-quality CHP sector, under the new entrants holdback will he be able to provide new CHP entrants with 100 per cent. of the spreadsheet calculation within that sector?

To answer questions about spreadsheets I am going to have to get my PowerPoint out—[Hon. Members: “Excel.”]—or even my Excel. But my hon. Friend the Minister for Climate Change and the Environment assures me that CHP will be in the scheme. The only thing I would say is that, as I stressed in my statement, there are strong links between the statement today and the energy review, and the energy review will be looking right across the piece at energy need and how to meet it.

At a more granular level, the Rye house power station in my constituency is one of the UK’s top 100 producers of emissions. How is the Secretary of State working with organisations like that to encourage them to burn their fuel more efficiently in the creation of electricity?

The ETS is one way. My right hon. Friend the Secretary of State for Trade and Industry and I had a very useful meeting with the UK Business Council for Sustainable Energy, where we talked about the challenges that are faced by the sector but also the commitment of the sector to ensure that it works in a much more energyefficient way. Two weeks ago I was up in Warrington, looking at a major production facility that is now using 30 per cent. biofuels to help ensure that emissions are curbed as much as possible. Maybe there is something for the hon. Gentleman’s constituents to learn from that.

The Secretary of State may be aware that, in my capacity as secretary to the all-party steel and metals group, I have led deputations to the Minister responsible for steel on issues arising from phase 2, not least the dramatic reduction in carbon allowances that will be made. The industry maintains that both for blast furnaces and electric arc furnaces the spreadsheets on which the calculations have been based are incorrect and have not been drawn up in consultation with the industry. What steps is the Minister taking to ensure that in the consultation with the industry we arrive at targets that will deliver on our overall national target but not compromise the longterm viability of the steelmaking industry in this country?

I do know that my hon. Friend has been a doughty campaigner on behalf of not just his constituents but the steel industry throughout the country and has met my hon. Friend the Minister responsible for steel. I can assure him that if there are disputes about facts, we shall use the forthcoming period to get to the bottom of them and ensure that there is an agreed evidence base on which decisions are made.

Is phase 2 open to European countries that are not members of the European Union, and given that China, India, Brazil and the United States continue to splurge out carbon dioxide at an increasing rate, what progress is being made towards the establishment of a global carbon market?

The hon. Gentleman raises a very interesting point, not just in respect of China and India but perhaps also the 248 US cities that have now committed themselves to the Kyoto targets under something called the Seattle declaration led by the mayor of Seattle, some of which have expressed an interest in joining the scheme. The latest legal advice is that it is not open to non members of the EU. However, I am pleased to report that I hear that there are moves afoot to try to replicate the successes of the EU scheme in other regions of the world.

Is the Secretary of State at all concerned that the EU will not operate the scheme in the way that he thinks it should be operated, given that, when the EU gas liberalisation happened, our continental colleagues completely failed to follow it and householders in this country paid £186 a year extra because of that failure?

I am sure that my hon. Friend the Minister for Energy is still pressing on the gas liberalisation issue—the hon. Gentleman raises an important issue. However, I can say to him that I felt in my discussions with the European Environment Council on Tuesday in Luxembourg that there was widespread recognition that we absolutely had to make the ETS work, because it is the lowest cost way of driving down carbon emissions, and that view was shared not just by member states but in the Commission. We shall be working very hard to ensure that they live up to that commitment.