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Westminster Hall

Volume 465: debated on Thursday 25 October 2007

Westminster Hall

Thursday 25 October 2007

[Ann Winterton in the Chair]

Emissions Trading

[Relevant documents: The Second Report from the Environmental Audit Committee, Session 2006-07, The EU Emissions Trading Scheme: Lessons for the Future, HC 70, and the Eighth Report from the Committee, Session 2006-07, Emissions Trading: Government Response to the Committee’s Second Report, HC 1072.]

Motion made, and Question proposed, That the sitting be now adjourned—[Mr. Watson.]

I am delighted that this report has been selected for debate this afternoon, and I warmly welcome the Minister and, indeed, the shadow spokesman. We look forward to a dialogue with the Minister and her colleagues about the issues raised in the report. I am particularly glad that both Front-Bench teams are represented by Members who are known to have a genuine and long-standing interest in the subject—in my experience, that is not always the case.

Today’s debate is extremely timely for two principal reasons, the first of which is the growing urgency of the threat of climate change. Every week, there are news items that reinforce the reality of something that many people have long suspected but that has been difficult to prove. Month by month, the scientific evidence grows and it is clear now, even to the most determined climate change deniers, that it is happening. Furthermore, it is pretty clear to those of us who have followed the issue closely for 15 years that it is happening much faster than was originally expected—or perhaps much faster than the scientists who first flagged up the warnings dared to admit that they expected. Certainly, it is proceeding extremely quickly, and it is more and more likely that human activity is one of, if not the main, causes.

Despite the rapidly accumulating evidence, however, about the urgency and causes of climate change, the world’s response continues to be grossly inadequate. Global greenhouse gas emissions are a third higher than they were in 1990, and rising, despite universal agreement that, to keep the concentration of greenhouse gases in the atmosphere at levels consistent with a rise in temperature of no more than 2° C, they need to be lower than they were in 1990, and falling, and despite the nearly universal acceptance—as a result of the very authoritative Stern report—that action now will cost very much less than action later.

Even here in Britain, where successive Governments have played a distinguished and constructive role in leading the international debate for two decades, progress in cutting emissions has faltered. The Government, who admirably set targets for emissions cuts that went beyond those required by the Kyoto treaty, are now struggling to meet those targets and appear unlikely to do so. The limited progress made in cutting emissions during the 1990s, even though the economy was expanding for most of that period—as we all know, that progress was due principally to the dash for gas—has been halted. We have found in several recent years that emissions have risen, not fallen.

The second reason that the debate is very timely is that, potentially, emissions trading is one of the best tools for addressing climate change. In its purest form, emissions trading is a mechanism for directing resources to areas and technologies that cut emissions in the most efficient and cost-effective way. It is, of course, not the only tool for addressing climate change. Market instruments have a big role to play. Britain and some other countries have dipped their toes into the water in respect of market instruments. As it does every year, the Environmental Audit Committee will soon address the pre-Budget report, but given that it has not yet done so, I am speaking personally, rather than for the Committee, when I say that I was very disappointed with the extremely limited measures announced two weeks ago in that report. We are not going anywhere near as far or as fast as we could to use market instruments in this country.

Alongside emissions trading and market instruments, regulation has a role. Climate change is far too big and urgent a problem for us to rely on any one solution; we need to throw every available weapon into the fight. Neither market instruments nor regulations can guarantee a specific and quantifiable cut in greenhouse gas emissions in the way that a cap-and-trade emissions trading system can. Market instruments can incentivise consumers—businesses and individuals—to reduce their carbon footprints. Regulations can require certain processes to be amended, including, for example, vehicle engines. However, they cannot do what emissions trading can. A cap-and-trade scheme can specify a level of greenhouse gas emissions and guarantee, if it is policed and implemented properly, that that level will not be exceeded.

As a member of the Environmental Audit Committee, may I put on the record my appreciation of the way in which the hon. Gentleman chaired the Committee during the preparation of what were extremely technical evidence sessions. We are grateful to him for doing that.

The hon. Gentleman mentioned that the cap-and-trade scheme has the theoretical possibility of delivering results, which is why we should be doing our best to make it successful. However, he is aware, as we all are, of the danger of leakage from a cap-and-trade scheme, which means that this country could meet—

Order. I think that it would help hon. Members if interventions were much shorter. Despite the fact that I awarded Mr. Lazarowicz an honorary doctorate, I must ask him to bring his remarks to a conclusion as quickly as possible.

Would the hon. Gentleman consider the importance of placing a link on how far we can meet our targets by purchasing credits from overseas, because there is a danger that we purchase credits from overseas and then do not take steps to cut emissions in the UK?

I am grateful to the hon. Gentleman for his kind remarks. I appreciate the contribution that he makes to the Committee. I agree with his point, to which I shall refer specifically in a moment or two, and we highlighted it in the report that we issued earlier in the year and returned to it in our comments on the Government’s response. It is true that, to make a cap-and-trade system effective, we require greater political will than has been shown so far in the EU system or any other.

Certainly, we are much more conscious of climate change than we were five years ago. It is equally certain that, five years from now, international alarm about climate change will be much greater than it is today. Then, if not now, the public might be clamouring for the further, tougher and more radical steps that are needed to tackle the problem effectively. The continuing increase in greenhouse gas concentrations in the atmosphere might be such already that dangerous and irreversible climate change is unavoidable. Even if that is not the case, it is very likely that the steps needed to prevent it would involve far greater cuts in greenhouse gas emissions than those in the targets that have been agreed. We talk about cuts of 60 per cent., but it is almost certain that we would need cuts of 90 per cent. by a significantly earlier date, if we are to contain the risk of irreversible climate change. Of course, neither Britain nor anywhere else in the world is anywhere near being on target to achieve even the modest and, in my view, insufficiently challenging targets that we have set ourselves.

That is the background to the Committee’s report and the debate. The importance of the EU emissions trading scheme is that it is the first, and so far only, international trading system to be operating fully. The first three-year phase ends at the end of 2007, so this is a good time to take stock of progress. The importance of the scheme extends far beyond Europe; the whole world is watching to see how the EU ETS works. If it should fail or prove seriously defective, the chances of emissions trading being adopted in other parts of the world might be reduced, although in my view the momentum from the business community in the United States is such that a national US scheme will inevitably start within the next two or three years. Either way, it is vital that we learn the lessons from the first phase of the EU ETS and apply them in the future.

I hope that the Government will be honest and realistic, and not try to over-claim the results so far. Our report highlighted the need for the Government to be more transparent about emissions trading. So far, phase 1 has achieved very little: it has not cut carbon emissions, and it has not achieved a sustainable price for carbon, which would incentivise investment in low-carbon technology. It has failed on the two most important objectives. However, we must not be too harsh. The scheme, by its very existence, has done more than any other scheme elsewhere. It has shown that trading can be undertaken internationally and a market established, which, by themselves, are worthwhile gains.

There are two main flaws in phase 1. First, the national caps were set far too high; indeed, only Britain had to make significant cuts in emissions from its pre-phase 1 levels. Secondly, the allowances were allocated by bureaucratic decision instead of by being optioned. The first flaw has, with pressure from Britain, been partially addressed in phase 2. After a certain amount of haggling, the national caps for phase 2, which were announced after our report was published, were set at more realistic levels, and the forward market price suggests that the reasonable expectation is that phase 2 will force some meaningful reduction in emissions.

The second flaw, however, has been largely unaddressed, because the EU has unfortunately funked the need to introduce more options. Instead, it has set a 10 per cent. limit on the allowances that can be allocated by auction. We must be clear about how damaging that is. Emissions trading will cut emissions on an economically efficient and fair basis only when the trading is on a pure market basis, but the bureaucratic allocation of allowances undermines that purity. It guarantees inefficiency and unfairness in the scheme. We must therefore move as quickly as possible to auction 100 per cent. of allowances. It should be a definite target for phase 3, and we must make progress towards it in the meantime.

One advantage of a 100 per cent. auction is that it removes completely the need for national caps; all that is needed is a single EU-wide cap within which allowances can be bought by businesses in any EU country. The only issue that 100 per cent. auctions raise is what happens to the money that is paid. Business and individual consumers are understandably suspicious that it will just become a giant stealth tax. The money raised from auctioning should therefore be ring-fenced by law and returned to businesses and their customers in the form of lower taxes elsewhere. If those lower taxes were chosen to reward greener choices in the relevant industry, they could be used to incentivise further low-carbon technology.

There is an opportunity and a challenge for the EU with the forthcoming inclusion of aviation in the emissions trading scheme. Airlines are among the most experienced and effective lobbyists of any industry, and aviation will bring American airlines and companies into the EU ETS more directly than ever before. However, there is no reason why there should not be another single EU-wide cap on aviation emissions, which would apply to all domestic flights in the EU. It could and should apply to all flights—passenger and freight aircraft alike—taking off and landing in EU countries. No allowance should be allocated by bureaucrats and none should be given free to the airlines; instead, all should be auctioned.

Individual airlines—there are some honourable ones—that already take the need to reduce their carbon footprint seriously would have nothing to fear from the introduction of such a system. That approach would be the most effective way of using emissions trading to cut overall aviation emissions. Alas, the lobbying process and, I fear, the pleasure that some European Commission officials take in the power that they exercise when allocating allowances mean that such an approach is unlikely to be adopted in quite that form. As our report pointed out, there is a risk that, if the airlines are given the initial allowances free, they will enjoy the same windfall profits that some power companies did when they passed on the notional cost of allowances to their customers, despite having paid nothing for them. If airlines obtain a windfall advantage from a scheme intended to incentivise them to cut emissions, it suggests that neither the EU nor the airline industry is yet sufficiently serious about tackling the threat of climate change.

Reporting was another important concern of the Committee’s report. Owing to the fact that the EU ETS is a trading scheme, firms can achieve their necessary targets for cutting emissions by buying allowances issued to other countries, rather than by cutting emissions. The hon. Member for Edinburgh, North and Leith (Mark Lazarowicz), who has now left the Chamber, made that point earlier. In theory, there is nothing wrong with that situation. The purpose of a market is to allow resources to be allocated efficiently, and the purpose of the EU ETS is to cut emissions globally, as well as locally. If it is cheaper to cut emissions abroad than at home, it makes sense to do so, but we must be honest about the extent to which that is happening. In publishing figures, the Government must distinguish more clearly between actual emissions reductions at UK installations and the purchase of carbon credits by British companies to meet their own reduction targets. There was concern about that in phase 1, because of the over-allocation of allowances to other EU countries, and it impacts directly on how much the system helps us to achieve our domestic targets for emissions cuts.

A related issue is the way in which emissions reductions are calculated. The Committee expressed its concern about the excessive use of business-as-usual projections to provide the baseline against which claims were made about the size of subsequent emissions reductions. The National Audit Office exposed the uncertainties attached to forecasts of future emission levels on a business-as-usual basis, and the Committee strongly believes that the only safe way to proceed is to use absolute figures for actual carbon emissions as the basis for making progress comparisons. Caps that are calculated by reference to business as usual have very little value. I hope that the Minister will persuade her Government colleagues to address the Committee’s concerns about that point in future documents. The pre-Budget report, which was published only two weeks ago, contains some rather misleading statistics.

Another of our concerns is the variation in the extent to which different EU countries can use clean development mechanism credits to meet their national targets. There needs to be a consistent figure for the limit on which CDM credits can be used to meet domestic and EU targets. Again, there is nothing wrong in principle with using the CDM, but there must be a clear statement about how much it is used and a realistic limit put on the contribution from that source.

The ETS also raises issues about competitiveness. The hon. Member for Stoke-on-Trent, North (Joan Walley) expressed a particular concern about that during the Committee’s work. Unfortunately, she cannot attend the debate today because she is indisposed. The competitiveness concerns relate to the burdens that may be placed on a business that has to take part in emissions trading when competing with businesses in other parts of the world that may not have the same burden. I recognise that some companies have genuine concerns about that issue, but we must be careful about special pleading from vested interests. In the long term, it is in the interests of British business and individual firms for us to be in the forefront of low-carbon technology. There will be a huge advantage in 10 years’ time for the firms, industries and countries that make the switch to low-carbon technology early on.

I wish to touch briefly on the role that trading could play in the future. Crucial negotiations about the international response to climate change in the post-Kyoto phase are now beginning. It is vital that big emitters, such as China and America, become full participants in that phase, and the use of emissions trading is one way to draw them in. One of the most difficult issues in addressing climate change is equity—how can one fairly apportion the burden of combating a historical problem to which some countries have contributed much more than others, albeit unwittingly? That problem is made more complicated by the fact that the harmful consequences of climate change are also distributed inequitably. A landowner in the Scottish highlands may view the prospect of climate change with more equanimity than a subsistence farmer in a low-lying part of Africa or even a city dweller in Australia—at least, for a generation or two. In the end, the fairest solution must be based on contraction and convergence, as that would even out the amount of greenhouse gas emission for which different countries and individuals are responsible.

Of course, it would be difficult to agree a basis and timetable for working towards a system of contraction and convergence, but the present situation, whereby per capita emissions are 100 times greater in a rich country, such as America, than a poor one, such as Tanzania, is unsustainable. Progress towards contraction and convergence could be facilitated by more international emissions trading. Unlike the alternative measures, such as carbon taxes, whose impact is essentially regressive on those who pay them, emissions trading offers a tool for tackling climate change whose impact is basically progressive.

Does the hon. Gentleman agree that plans for contraction and convergence, or indeed any other framework that the Government have in mind for tackling climate change, should be published, so that we can have a proper public debate about the framework that the UK wants to develop from Bali and become the successor to Kyoto?

I do. The Government, and the previous Secretary of State in particular, performed a great service in the past year by promoting the debate on tradable personal carbon allowances. It would be enormously helpful if the Government could now promote a debate about contraction and convergence in the same way. There is an opportunity for Britain in particular to influence international opinion on such issues, and contraction and convergence is one of the most important areas of future discussion. Now is the time to start that debate, as we begin the post-Kyoto phase.

In my view, contraction and convergence is the only fair way eventually to share out the costs of climate change, and it will be made more achievable by successful international trading systems. I therefore hope that the measures adopted for the post-Kyoto phase will explicitly include an extension of international emissions trading. That is more likely if the EU system functions effectively in the meantime.

A lot is at stake in the next phase of the EU ETS. It is a great pity that some of the opportunities to improve the present scheme were not taken, but there is still time to make further improvements. It is vital to ensure that the aviation industry enters the system in a way that increases the incentives on it to cut its greenhouse gas emissions. It is also vital that the planning for phase 3 of the EU ETS, which will not start for another six years, reflects the concerns that I have mentioned and those that are mentioned in the Committee’s report.

I urge the Minister and the Government to take on board the recommendations in the report, even those that they have not yet publicly welcomed, and I commend it to the House.

I start by apologising to the Minister and her shadow, the hon. Member for Bexhill and Battle (Gregory Barker), as I will have to leave early because of a long-standing speaking engagement in Birmingham. I still have to find the venue on the map and get there.

I thank the Committee’s illustrious Chairman, the hon. Member for South Suffolk (Mr. Yeo), for leaving some things for junior members of the Committee to dwell on. There was a fear that he would cover everything so expertly that we would have nothing left to say, but I wish to cover one or two additional matters.

I support the principle of carbon emissions trading as one of a number of approaches to tackle climate change. I do not share the outright opposition to it of organisations, such as the Corner House, that gave the Committee good, powerful evidence. We must address the concerns that they raised, particularly on assessing the robustness of some so-called abatement projects. The robustness of the ETS is something that I wish to dwell on, as is what may be described as its perverse consequences, which can be serious, as we see in the latest leaked Government document on renewable energy targets.

We cannot examine the EU ETS and assess its effectiveness in isolation from other efforts to reduce greenhouse gas emissions. It is still in its infancy and, as our report demonstrates, it has suffered an abundance of teething problems, many of which stemmed from the over-allocation of permits and inflated projections of business-as-usual forecasts. Now, in the second phase, we can see that some of the problems are being addressed, with tighter caps and with the Commission having reduced many countries’ national allocation plans. That shows that the Commission is learning how to act firmly and responsibly.

But are we truly in a position to justify all the faith that we invest in the single mechanism of the ETS? One reads about it as though it will be the saviour of all our souls and solve all our climate change problems. The Government are forthright in their ambitions for it. In “Global Europe: Meeting the Economic and Security Challenges”, they state:

“Emissions trading is central to the delivery of EU objectives and the EU Emissions Trading Scheme…must become a more effective mechanism for driving change. This will require a more predictable, top-down approach to setting the overall caps for emissions, in line with the EU’s ambitious overall GHG targets, higher levels of auctioning of allowances, and clear long-term signals about future requirements to drive low-carbon investment and innovation. The EU should also seek links with schemes in other economies to develop a truly global carbon market, capable of turning international agreement on targets into rapid, cost-effective action.”

That sounds laudable, and I support that approach so long as the policies to match it are in place. That vision is expanded upon in the document, “Moving to a global low carbon economy: implementing the Stern Review”, published as part of the pre-Budget report bundle. It said that the EU ETS has

“the potential to become the centre of an international emissions trading system encompassing many developed countries and projects from developing economies.”

There is no uncertainty about where the Government want the ETS to go. It is central to their policy; as the Government say in the same report, it is

“the focus of the Government’s carbon pricing policy.”

What is more, they state that it will be one way of avoiding

“the need for more costly measures at Member State level”.

That will have a hint of menace to it for someone from the renewables sector.

As we are always praying in aid the Stern review, let us remember that it stated:

“Carbon pricing alone will not be sufficient to reduce emissions on the scale and pace required.”

So far, if the ETS has worked—it has not really worked all that well—it must be measured against that assessment from Nick Stern. As our report makes it clear, there also remain considerable concerns about the credibility of Government claims about the impact that it will have on reducing carbon emissions, not least claims about the 8 megatons of CO2 that it will allegedly save in phase 2. The section of our report headed

“Phase II will not reduce UK CO2 emissions by the amount stated”

says it all, and makes worrying reading.

That section prompts another question: where are the savings to be made if they are to be classed as real and substantive? One answer is through the clean development mechanism—another fledgling mechanism that has been heavily criticised for not doing what it says on the can. Billions of dollars have been invested in schemes that do not bear scrutiny. Many of the Chinese HFC-23 avoidance schemes that have soaked up those billions of dollars have been complete scams and there has been little evidence of greenhouse gas avoidance additionality. A WWF report published in June said:

“Until credits from these projects run out they will continue to divert funds away from tackling the real challenge—the drive towards a low carbon energy system. Indeed a recent article in Nature indicated that it would cost around €100 million to install scrubbers onto the existing factories producing HFC-23 in the developing world. Yet the same factories look set to make €4.7 billion from the sale of credits into the carbon market—funds which could have been much better spent in assisting the rapidly industrialising countries develop along a lower carbon pathway, and giving access to energy to some of the world’s poorest people.”

I suspect that there is a long way to go before we get those inter-linked mechanisms to work properly. Indeed, non-governmental organisations such as the Corner House believe that they are inherently incapable of being improved to the point of delivering what they are supposed to.

We should pause for a moment and recall the task that we are supposed to be addressing: achieving a safe and sustainable stabilisation of greenhouse gas concentrations in the atmosphere. The EU ETS and every other mechanism should be designed to address that objective, but we are in danger of forgetting it because we are determined to make the ETS and every other global trading system work. The objective is not to create trading systems as an end in themselves.

Every day, every individual, Government Department and carbon market trader should remember what this issue is all about. Sadly, far too many people are too busy, either burying themselves in the detail or working out how much money they can make, to realise that the climate change reality unfolding before our eyes and on our screens is rapidly overtaking us. That message was brought home even more powerfully in the global environment outlook of the United Nations environment programme report that was published today. The report might make us wonder, when we talk about finding the cheapest solutions to climate change, exactly how the people who are suffering from climate change will react. I bet that they will not all be dancing in the streets if they have followed our progress to date.

That brings me to my second area of concern: the possibility of the EU ETS having perverse impacts on other efforts that are designed to meet the challenge of climate change. My hon. Friend the Minister might not have seen the front-page headline in Tuesday’s The Guardian, “Labour’s plan to abandon renewable energy targets”. Indeed, I am sure that she has not. What defamation! I hope that the Government sue The Guardian for libel. Are any Government more committed to renewable energy than the UK Government? I wonder what a judge would make of the case for the prosecution if it went to court. Not much.

I must draw my hon. Friend’s attention to what the Prime Minister said only yesterday, which is that the UK remains absolutely committed to the EU energy target of 20 per cent. by 2020.

I am grateful to the Minister. I looked in Hansard, because someone drew that to my attention. We are incredibly committed to an average EU 20 per cent. renewables target.

I do not want to distract hon. Members into a debate purely on this one issue, but is it true that the Government have been negotiating for a reduction of their target in that respect?

I am not party to such negotiations, but I understand that there is some truth in that, and I shall return to that issue and how it is being addressed.

May I help my hon. Friend to address that intervention? We are committed to an EU-wide energy target. The contribution of individual member states has not yet been decided, so the UK level of contribution could be set at any point.

That is exactly where I was headed, Lady Winterton.

The Guardian story is relevant to the debate because of its comments on the EU ETS. Some of those comments were the journalist’s words and some were part of a leaked report. It said:

“One of the main objections of government to meeting the renewables target set by Mr Blair is that it will undermine the role of the European emission trading scheme.”

The leaked document was quoted as stating that meeting the 20 per cent. renewables target

“crucially undermines the scheme’s credibility…and reduces the incentives to invest in other carbon technologies like nuclear power”.

I saw an earlier options paper about what stance we should take in dealing with our European partners in meeting the targets of the EU spring council, and the language is the same. Sheltering behind a flimsy reference to the EU ETS, the Government want to reduce their commitment to renewables. Sadly, it seems that far from striking out to meet the EU 20 per cent. average renewables input by 2020, our objective, which was confirmed on Tuesday’s “Newsnight” programme is

“somewhere between 10 per cent. and 15 per cent.”

If only the retreat stopped there. It turns out that the Government have caught the trading bug in all its glory and have been working behind the scenes to create a market in some form of renewable allowances so that we can buy our way out of doing things, just as the ETS allows us to continue to emit greenhouse gases in the UK. So, that bottom-of-the-range figure for renewables could be even lower. It seems that the Germans have not taken that proposal lightly, as trading in renewable allowances could harm their successful feed-in tariff system that encourages investment in renewables.

The hon. Gentleman makes some powerful points. I know that he does not agree with the Government’s assertion that they need a low renewables target to make the emissions trading scheme work, but does he even understand the logic of that argument? It leaves me perplexed.

There are some issues about how one would price carbon if one spent a lot of taxpayers’ money on renewables, because that might reduce the price of carbon and could take the bottom out of the market. In a letter in today’s The Guardian—a newspaper that I occasionally read—Dr. Jim Watson of the university of Sussex said:

“The government is being disingenuous when it claims the renewable energy target agreed by Tony Blair will undermine the European emissions trading scheme. This will only happen if the caps on carbon emissions already agreed are not adjusted to take a more rapid renewables’ expansion into account…Future caps on carbon emissions should also be tightened so carbon prices do not continue at their present low levels.”

That throws us back to Nick Stern’s comment that we cannot rely on trading schemes to produce the right price for carbon to encourage all the other measures that we have to take.

On the point about the Government seeking to reduce our renewables target, does the hon. Gentleman find it strange that within an overall EU target of 20 per cent., we, on the basis of the argument about the ETS, might be seeking a contribution of less than 20 per cent.? Given the UK’s fabulous renewable resources potential, with our coastline and wind—as a Scot, I well know the weather resources at our disposal—surely we should aim higher than 20 per cent.?

Germany anticipates achieving about 30,000 MW of wind capacity by 2011, and the wind energy industry sees that as realistic. By that time, we, too, will have made big strides forward, but we will have got to only about 7,000 MW of wind capacity. Although we will overtake Portugal in the process, we will still be behind Spain. If Germany and particularly Spain support the EU ETS and good systems for encouraging investment in renewables, I do not see why we cannot join the club. However, the original proposal to introduce legislative designs on renewables by December has been postponed, which raises the question of why. That postponement takes us beyond Bali, and the EU’s position will be weakened at the United Nations framework convention talks in December by the apparent shilly-shallying on the various targets.

The Minister is right that the Government are committed to the 20 per cent. average in Europe, but while that target allows some to progress well, their progress allows us to lag well behind. We should not put all our eggs in one basket. We should have a strong renewables industry that can export and create wealth and many jobs in this country, as it has in Germany. That should also help us to improve the ETS. I am sure that many such synergies could be created, and we should not have documents floating around suggesting that people in certain Departments—not represented here—think otherwise. That is the connection that I have tried to highlight between the two issues that I have discussed this afternoon.

Thank you, Lady Winterton, not least for indulging me when I was temporarily absent from the proceedings. That allowed me to fulfil my democratic duty in Committee and bank the rare experience of enjoying the chairmanship of both Sir Nicholas and Lady Winterton on the same day.

I am pleased to have an opportunity to participate in a debate about this important issue. If the previous Prime Minister was right and climate change is

“the greatest long-term challenge facing the human race”,

we are discussing the main policy tool for responding to that challenge in the UK and Europe. It is the main policy tool because it covers 46 per cent. of emissions in this country and, broadly, across Europe. It is also our main policy tool in responding to the challenge set down in the Stern report of correcting the core market failure to take this thing called carbon, put a price on it and stitch it into the economics of daily life. Finally, the EU ETS is also important, as the Chairman of the Committee noted, because it is seen as something of a guinea pig and as a cornerstone for the long-term vision and ambition of creating a global carbon market. That may have profound implications for the City of London and its opportunity to profit and enhance the prosperity of this country.

The Committee, under the distinguished and experienced chairmanship of my hon. Friend the Member for South Suffolk (Mr. Yeo), has done the House a service in throwing a spotlight on the EU ETS at a pivotal time. On the one hand, the Government are articulating a vision of emissions trading and a desire to move further and faster. In a speech to the Green Alliance earlier this year, the current Prime Minister said:

“My ambition is to build a global carbon market, founded on the EU Emissions Trading Scheme and centred in London.”

On the domestic scene, the Government intend to extend emissions trading through the carbon reduction commitment to companies not covered by the current scheme. As has been said, there is also the important initiative to include aviation in the next phase of the ETS. That is the language that the Government are using.

On the other hand, however, some legitimate and valid voices are sowing seeds of doubt about how effective emissions trading has proved in achieving its core function of significantly reducing emissions. I gather from my contacts with European colleagues, not least through the parliamentary network run by the Global Legislators Organisation for a Balanced Environment, with which the Minister is very familiar, that there are different levels of commitment across Europe to emissions trading. We in this country are pioneers and we tend to be evangelical about the opportunities before us, but Germany, which has a much more ambitious and effective domestic climate change policy on renewables and energy efficiency, attaches less weight to emissions trading. Given that the ETS has no guaranteed life beyond 2012, I fear that we in this country may be too sanguine and complacent about the fragility of this important market mechanism.

The main message from the report is that the scheme needs profound reform, as the Chairman has explained more articulately than I could. As a Conservative, I firmly believe that market mechanisms will find the most cost-effective solutions, but we should be under no illusion that the market that we are discussing is artificial—a cap is set on it and it is set by politicians. The core message from the report and from all the evidence about phase 1 and, to a lesser degree, phase 2—there has been progress—is that the reduction and preferably removal of political risk from the process must be at the heart of reform. At the core of reform should be a steady process of reducing free allowances, because the decision to give away permits to pollute looks increasingly questionable, not least in the light of evidence that UK companies have passed the costs to consumers. UBS, for example, calculates that the first phase of the ETS added 1p to the cost of each kilowatt-hour of electricity, while the Government estimate that it generated windfall profits of £800 million in 2005. As we in this country—at least on the Opposition Benches—begin to articulate the need to reinforce the “polluter pays” principle through the tax system, the decision to give away permits under the scheme looks increasingly untenable.

The report majored on another area of reform, which has not so far been picked up. If it is not possible to move to the ideal scenario of 100 per cent. auctions outlined by the Chairman of the Committee, and if we must live with a process of phasing out free allowances, a consistent methodology must be applied to the giving out of allowances. That was the strongest message that I received on my visit to the Commission in Brussels earlier year to discuss the scheme. Those I spoke to fully acknowledged that the political process is the flaw and they were keen for greater consensus about the need for a consistent and transparent methodology for negotiation, for national allocations and, more importantly, for sector allocations within national allocations. The scheme’s credibility would be greatly enhanced if the scope for political interference in the allocation of permits was reduced.

I have been listening closely to the hon. Gentleman’s argument. Does he not agree that any global carbon market or auction must be disaggregated into sectors to avoid the situation that arose in phase 1, when the energy sector hoovered up the carbon credits and passed on the cost to other industrial sectors, which suffered a double whammy, because they had their own allocations capped and had to pay higher prices as a result of the free allocations to the energy sector? We need some sort of industrial, sectoral approach to avoid perpetuating that situation.

I thank the hon. Gentleman for that intervention and I have a lot of sympathy with it. The issue will become particularly acute in the context of how and when aviation is included, because exactly the same pressures will be brought to bear.

The report and other analysis argue that the Government should be more proactive in arguing for greater transparency in the methodology used for the negotiation and allocation of allowances. For example, we should have the standardisation of sector allowances, which would ideally be based on the development of sector benchmarks for carbon efficiency. In addition, transparent assumptions should underpin any “business as usual” assumptions, and the report is very strong on the inadequacies and risks involved in relying on “business as usual” projections that are not transparent and consistent.

Finally, there should be a common approach to the rules for new entrants to the market; there is currently national discretion to set the rules, which, to my eyes, does not set a level playing field and runs against the grain of the single market. If there is one message that I want the report to send the Minister about the fundamental reform that is required, it is about removing the political risk from the process as we move, I hope, from a system of free allowances to pollute to one of full auctioning of allowances.

Part of the reform, as mentioned by the Committee Chairman, is the need for greater transparency and accountability for the policy. Emissions trading is hugely important, and almost completely invisible to the public. I doubt whether they talk about it much down the Dog and Duck in Congleton; they certainly do not in Ruislip-Northwood, but to some degree they should, because, in a very indirect and arguably almost stealthy way, many of the costs of the scheme are passed on to consumers, but not in a way that is visible to them.

In the context of transparency and open scrutiny, I stress one of the key points in the report, which is that Britain should take a lead in making a much clearer distinction between emission reductions achieved in the UK versus those sourced overseas. I think that many people would be surprised that the Government expect two thirds of the UK’s obligations under phase 2 of the EU emissions trading scheme to be met by the purchase of credits in overseas markets. That is a very high proportion.

Leaving aside for a moment concern about the integrity of those overseas credits, the fundamental issue is to determine the right balance between developed countries, such as the UK, getting their own house in order, and the preservation of our freedom to pursue lower-cost emissions around the world. Arguments based on equity are also finely balanced between the need to channel capital towards the developing world and the unfairness of our picking all the low-hanging fruit. The issue should be out in the open. The thrust of the report was that the matter is too opaque. Someone needs to take the lead on it in Europe, and it should be a Government who pride themselves on taking a lead on climate change across the piece.

I leave a final thought with the Minister. There is concern about the commitment of the new Administration to the climate change agenda. Few people doubted the integrity of the previous Prime Minister in his commitment to the cause, although there was plenty of room for criticism of the delivery. However, there are genuine concerns about the attitude of the new Prime Minister, and they are partly influenced by perceptions of the Treasury’s ambivalence about the agenda under his stewardship. As we have already discussed, worrying signals that have been given about commitment to the renewable energy target, and recent announcements about going back on waste taxes, are creating concern that the new Administration are not as committed to the agenda as the previous one, at a time that is, as the Minister will I am sure agree, critical with respect to the need not only to stabilise emissions—which we have failed to do—but to reduce them significantly. Therefore I see emissions trading and the attitude towards really pragmatic and fundamental reform of the scheme in the critical phase 3 as a test of the Government’s commitment.

Thank you, Lady Winterton, for giving me the opportunity to contribute to the debate. Not surprisingly, as those present are all members of the Committee that produced the report, I tend to agree with the statements of previous speakers, but in contrast to the hon. Member for Ruislip-Northwood (Mr. Hurd) and as a democratic socialist, I am not instinctively attracted to the idea of meeting the greatest challenge that our planet faces, climate change, by creating a new marketplace.

I thus surprise myself a little in supporting the EU emissions trading scheme and in arguing that, as our Chairman, the hon. Member for South Suffolk (Mr. Yeo) has said, the market needs to be made freer, with the introduction of 100 per cent. auctioning of allowances in as many sectors as possible. I say that I surprised myself, but I suspect that I did not surprise myself quite as much as the representatives of industry who gave evidence to the Committee last week, in our current inquiry into the climate change levy, surprised themselves when they found themselves arguing for higher environmental taxes rather than emissions trading.

The EU emissions trading scheme seems to me to be the best mechanism that we have yet come up with for putting a price on carbon. Of course, putting a price on carbon was one of the policy tools advocated in the Stern report, as other hon. Members have mentioned. I support the trading scheme as a cornerstone of the policy framework for tackling climate change, as the Government have put it. As we force up the price of carbon, there will, I believe, be an increasing impact on emissions of CO2 and other greenhouse gases. However, we need that cornerstone to complement other policy elements that Stern advocated: technology policy to overcome market failures associated with the research, development and deployment of low-carbon technologies, and measures to encourage behavioural change.

With respect to those other policy elements, I believe that the messages coming from the Government are somewhat disturbing at the moment. I am concerned in particular that we now appear to be limiting our ambitions for the UK contribution to the EU renewable energy target, as has already been mentioned. I am equally worried at apparent moves in the Department for Communities and Local Government to reduce the capacity of local authorities to use local planning policies to increase the contribution of on-site renewables and drive up energy efficiency standards. Those are matters to which our Committee will have to turn its attention in the near future. That is not the main focus of the debate, but as we said in the report, as the Committee Chairman repeated and as the Government agreed in their response, we need to supplement the market mechanism with other measures to deliver the outcomes that we all want.

Reading back over our report some months after its completion, I am surprised how gentle we have been in our assessment of phase 1 of the scheme. Okay, a complex system was set up over a fairly short time scale, with adequate administration, but we could find precious few witnesses or submissions that showed evidence of an actual reduction in carbon emissions as a result of that phase of the scheme. The allocation of allowances to emit carbon was far too generous, resulting in a price that was far too low to have an impact. In fairness to our Government, the UK was an exception. The evidence is that member states deliberately submitted plans that they knew would have little or no effect on the industries involved, within their borders. That was surely irresponsible, given that Stern’s main message was about the urgent need for action. Time has been wasted. Phase 1 could and should have brought about real and significant carbon savings, and despite what the Government say, I do not see that it has.

My worries about the cynical approach adopted by too many of our fellow member states are heightened by the national allocation plan submissions for phase 2. Again, instead of meeting the challenge and accepting the necessity of sacrifice, countries tried to minimise the impact of the scheme on their businesses. There were honourable exceptions, including the UK, and the Government are to be congratulated on putting forward an allocation plan that will have a positive impact.

The other institution that comes out of the preparations for phase 2 with head held high is, of course, the European Commission. If it had not been prepared to stand firm and reject so many allocation plan submissions, the over-allocation of phase 1 could have been repeated, as the Environment Agency predicted in evidence to us from its knowledge of the proposed national plans at the relevant stage. If that had happened, not only would we have failed to drive down carbon emissions between 2008 and 2012, but it could have been a death sentence for the scheme, as people recognised its failure.

The Committee went to Brussels and met various officials who were involved in administering and developing the scheme. I, for one, was very impressed by how seriously those individuals took global warming, how determined they were to make the emissions trading scheme work and how frank they were about the obstacles that they faced in making it work. At this stage, as we say in the report, we cannot know for certain that phase 2 will deliver what we hope and expect, but it has at least a fighting chance, thanks to more realistic national allocation plans.

In my opinion, the clear lesson from cap setting for phases 1 and 2 is that we should move as fast as possible away from the system by which member states propose their own national allocation plans to a system with an EU-wide cap based on clear carbon reduction targets that is transparent in operation and in which national and sectoral allocations are harmonised.

As the report says, the Government are to be congratulated for leading the way on auctioning in phase 2 and for pressing for more in phase 3. I was disappointed, however, that because they oppose hypothecation, they rejected out of hand our suggestion for using auction revenue to help speed up the development and take-up of new carbon technologies. I hope that they will rethink, because we will need to demonstrate in future that income generated by green policies, including green taxes, is used for good green ends. Like the rest of the Committee, I support bringing aviation into the ETS, but the impact of that will depend on the tightness of the cap on aviation emissions. We must also look to the future involvement of the maritime sector.

I shall not refer to the Committee’s recommendations on how to improve the reporting of Government statistics, because that has been dealt with very well by the Committee Chairman and by the hon. Member for Ruislip-Northwood, and I support what they have said. The Committee raised another perhaps related issue that was mentioned earlier by my hon. Friend the Member for Edinburgh, North and Leith (Mark Lazarowicz): the need for the UK and, indeed, other EU member states not to rely heavily on purchasing carbon credits to secure emissions cuts in other parts of the world. To quote an old green motto, we need to “think globally, but act locally”.

I applaud the Government’s intention that the EU emissions trading scheme should evolve and emerge with other schemes, so that a global scheme is established. Like the Committee Chairman and the hon. Member for Morley and Rothwell (Colin Challen), however, I believe that if there is to be any chance of reaching an effective, one-planet approach to the threat of climate change, we need to move as fast as possible to something along the lines of the contraction and convergence model and to gain support for that from around the world. Under that model, emission budgets should be allocated to every nation and progressively amended until rich and poor countries—developed and developing countries—arrive at an equal per capita budget based on an agreed stabilisation level. In developing the ETS, we need to ensure that it facilitates, rather than impedes, progress to such an approach.

I welcome the opportunity to serve under your chairmanship, Lady Winterton, and to contribute to a debate among so many distinguished members of the Environmental Audit Committee. I am a new member of the Committee and I was not involved in the preparation of the report, so I embark on my speech as a Front- Bench spokesman with some hesitation and in the knowledge, which I have acquired from my first few meetings on the Committee, that some great experts on the subject are present.

I agree with a great deal of what has been said, and the context in which the Committee Chairman put the debate is absolutely right. The overall picture on global warming and that for this country is serious. Under this Government, carbon emissions have regrettably increased rather than decreased, and the trend in emissions of both carbon dioxide and the basket of Kyoto greenhouse gases now seems to be a gently upward one. There is a risk that we are becoming complacent. Some Government Ministers—I do not include the Minister in this—have been tempted to repeat the claim that we are on course to meet the Kyoto targets. That might be technically true, given that the dash for gas drastically reduced this country’s carbon emissions many years ago, but the actual current trend is now in the opposite direction, and much more drastic action is needed than is contemplated at present.

The European emissions trading scheme was designed to fulfil the EU’s Kyoto target of an 8 per cent. cut in emissions against 1990 levels by 2012. The Committee Chairman was right to point out that that has set a significant precedent for the whole world by way of an international policy mechanism that really tries to tackle climate change. It has set a particularly important precedent for the United States. I am pleased, therefore, that, although the EU position has not been comprehensively picked up by the United States Government, it has been picked up by many states and cities in the US. That is leading to clear pressure for a national trading scheme in the US as well. Logically, the schemes would link up in the end. It is good to think that the much maligned European Union has been responsible for that global step against the threat of climate change.

It has been common ground among those who have spoken so far that we must be realistic about phase 1. The hon. Member for Gower (Mr. Caton) rightly said that time had been wasted, that on balance the scheme had not cut carbon emissions, and that it had not established—the Committee Chairman said the same—a sustainable carbon price that can exercise real pressure to reduce carbon emissions at the commercial or economic level. We must therefore focus on phase 2, under which national caps will be lower. We hope that that will mean more scarcity and a higher price for carbon, so that there is more such pressure.

However, there are flaws in that approach too, as the Committee Chairman also rightly pointed out, because there is still a limit on auctions. He is entirely in agreement with Liberal Democrat policy in that respect, which is to aim for 100 per cent. auctioning, so that the market can exercise the most efficient pressure on emissions of carbon dioxide, and possibly other greenhouse gases, if they can be included.

Revenue from auctions should be ring fenced and should be used to reduce taxes or invest in low-carbon technologies. There have been other suggestions for the future of the ETS, including expansion to the aviation and maritime sectors. Road transport should be covered too. As the Chairman said, there is a lot more scope to go further and faster in the use of market instruments.

There has been some speculation on the philosophical basis for such ideas from the democratic socialist and democratic conservative points of view. As a democratic liberal, I am enthusiastic about the use of free markets; they are welcome tools and are generally more efficient than Government in driving carbon reduction in the economy. However, they can have pernicious and unintended consequences, and they must be combined with other policies in order to ensure good outcomes. Trading schemes are a necessary but not sufficient part of policy.

The hon. Member for Ruislip-Northwood (Mr. Hurd) described trading schemes as the main policy tool of the Government, but seemed wrongly to cast doubt on the principles behind them, saying that the market is artificial. I do not agree. The Stern report pointed out that the cost of carbon emissions might be a deferred one, but is real. Emissions trading schemes and pricing of carbon in general are trying to reflect in current policy and in current financial and economic calculations a price for carbon for the cost that will impinge on us all if we do not act soon.

The hon. Member for Morley and Rothwell (Colin Challen) put things more poetically. He rightly said that trading schemes should not be seen as the saviour of us all, and he was right to alert us to the weaknesses. He said that clear, long-term signals were needed rather than just targets and mechanisms. That is absolutely right too. Support for and strengthening of the ETS need to be combined with real, practical policies to achieve reduction.

The contrast is with programmes such as the low-carbon buildings programme, which might be the best or worst example, depending on one’s point of view. That programme is important, because households are responsible for 27 per cent. of this country’s emissions. Unfortunately, the kind of “stop-start”, and then “suspend”, approach that has been adopted in that case has completely undermined the local markets for renewable energy and energy efficiency products. I am sure that many hon. Members have had experience of suppliers of such products in our constituencies who have become utterly frustrated with the low-carbon buildings programme and its predecessors. They have provided, not clear, long-term signals, but confused, short-term ones. I hope that the Government are trying to address that at the moment.

I have some suggestions for clear, long-term signals, which all have the virtue of being Liberal Democrat policies, so I am on safe ground. They are designed to create a policy context in which the overall targets and mechanisms are not the only elements, but in which real, practical steps are being taken. One policy has to be that of the international context. Other speakers have mentioned the importance of a post-Kyoto agreement, which is particularly significant in the context of competitiveness. If we impose a pressure on our economies to reduce carbon emissions such that there is financial cost, industries such as the aluminium industry that can relocate—the point has been discussed in this Chamber before—might be forced to move to economies in which carbon emissions do not bear the same costs. We may, in effect, drive industry from a carbon reduction regime to one without those reduction pressures, and make the situation worse by not addressing competitiveness. It is crucial that the next Kyoto phase includes economies such as the USA and Australia, so let us hope that there is progress in that direction. We may have to decide what sanctions to apply to economies that do not play ball in the international framework phases after Kyoto.

The hon. Gentleman might want to look at the Stern report, which suggests a carbon border tax, although that is not my preferred solution. We need a debate on what sanctions might be possible, and we must talk realistically about what sanctions could be applied to other economies and how to add some cost to non-participation in international schemes.

A second long-term signal might be on particular sectors.

China has taken on a lot of carbon emissions after taking our heavy manufacturing industries. Should we continue to bear the cost of China’s emissions or should that be the producer’s responsibility? A Bill before Congress suggests that a charge of anything up to 15 per cent. should be placed on imports that have not been accounted for within the emissions trading scheme or another approach in the producing country.

The hon. Gentleman makes an important point. China comes in for a great deal of criticism during some debates on climate change, but many of its emissions have resulted from us exporting our industry to China, which manufactures goods, not for the Chinese population, but for western markets. Any equitable international framework must take account of that. The price of carbon should take account of the origins of the companies that are responsible for carbon emissions. In the British context, we must look at the limits or burdens that should be imposed on British companies that are manufacturing goods and emitting carbon overseas. The hon. Gentleman raises an important point.

Does my hon. Friend agree that the whole concept of emissions trading and having a price for carbon is to deal with the anomaly in the system that whether goods are produced in Britain or China, the ultimate consumer does not pay the full cost to the planet or of producing the goods? If charges are applied, the cost should be on the consumer. Anything that creates more of an environmental problem should cost more. That is how the market should work, but we are not yet there with international emissions trading markets.

My hon. Friend has thought a lot about the matter and she is of course right. The beauty of a simple market mechanism is that it applies a price to carbon as universally as possible across the whole economy, and preferably across the whole global economy, so that the approach is equitable.

I shall focus on other long-term signals that we could give in particular markets. One might involve car manufacture. If we set a target at European level that all car manufacturers producing new cars should produce zero-carbon vehicles by 2040, that would be an important long-term signal. At the moment, we have much shorter-term and more modest targets, but that would be realistic and set a clear framework for manufacturers in a particular sector that is responsible for a great deal of carbon emissions to move strongly towards producing zero-carbon products within a specific time.

We could tax road freight, hopefully on an equitable basis so that British road hauliers are not disadvantaged relative to foreign road hauliers, which I know is an issue. That would drive freight from the roads on to rail whenever possible, which, tonne for tonne, produces 90 per cent. fewer emissions.

We could aim for much more ambitious targets on renewable energy. The Liberal Democrats have suggested that by 2050 we should be aiming for 100 per cent. clean energy. That might not be entirely from renewables and could incorporate carbon capture and storage so that fossil fuel sectors in the energy industry would be incentivised to reduce their carbon emissions to zero.

There are targets in the draft climate change Bill. As the Committee Chairman said, they do not seem to chime with the ambitions of policy frameworks such as the emissions trading scheme. At the moment, the target in the draft Bill is a reduction of only 60 per cent. by 2050, which seems ludicrously unambitious. The Committee Chairman suggested that a target of 90 per cent. by an earlier date would be more acceptable. My suggestion is that we should be even more ambitious and set ourselves a target of zero net emissions by 2050, which would be a very clear, long-term policy signal.

We could not reduce absolutely all greenhouse gas emissions to zero in this country, so there would have to be an element of trading and offsetting within the policy framework, but that is the sort of context in which we should see trading and offsetting schemes. They should be part of the solution, not the whole solution. In championing the European emissions trading scheme, the European Union has taken an important first step. We recognise the realistic shortcomings of the scheme, but it is an important contribution to the battle against climate change.

This has been an excellent debate, even if it has not run its full allotted time. The quality of the contributions could not have been bettered. I was particularly impressed by the opening comments of the Committee Chairman, my hon. Friend the Member for South Suffolk (Mr. Yeo), who skilfully outlined the detailed and lengthy report, which I thoroughly commend. It is very much in line with progressive thinking in the Conservative party as we move towards creating our manifesto for the next election. The Committee Chairman rightly reminded us that science tells us that the problem is getting worse faster than we appreciated even quite recently, and matched that by quoting the Stern report, which said that action now costs far less than action later. That theme has run through this debate.

The hon. Member for Edinburgh, North and Leith (Mark Lazarowicz) made a worthwhile contribution, and the hon. Member for Morley and Rothwell (Colin Challen) rightly picked up another theme of the debate. He is not present now, unfortunately, but he said that the emissions trading scheme must be improved, and that it is not the saviour of all our souls, nor is it an end in itself. I shall return to that point.

My hon. Friend the Member for Ruislip-Northwood (Mr. Hurd) rightly focused on the need profoundly to reform the emissions trading scheme, and drilled down to remind us that we must remove political risk and move towards full auctioning if we are to obtain maximum value from the scheme.

The hon. Member for Gower (Mr. Caton) reiterated that the ETS must be seen as a complement to other policy drivers, and not just as part of a game of one-club golf—that is my metaphor, not his. Although he is a self-avowed democratic socialist, which is not something we hear a lot of around here, he made some sensible suggestions.

The hon. Member for Cheltenham (Martin Horwood) produced his own thoughtful list of recommendations, some of which were sensible and some rather more challenging. I look forward to fleshing out the details of those ideas during the passage of the climate change Bill. However, I caution him that although his lofty ambition for a zero-carbon Britain in 2050 makes a great soundbite, if we as politicians come up with ideas that are so incredible and so beyond what people think is possible, there is a danger that they will not take us seriously or believe that those ideas can be achieved, so will not try. It is important to find the right balance, and we can be far more ambitious and stretching than the Government’s inadequate approach, but we must calibrate that ambition so that we do not get so far ahead of the debate and people’s expectations that we begin to lose the plot.

The hon. Gentleman criticised the idea of a zero carbon Britain by 2020 by saying that it is too ambitious a goal, but it is not far removed from the suggestion of a 90 per cent. reduction by an earlier date made by the hon. Member for South Suffolk (Mr. Yeo). What date and what percentage would the hon. Gentleman suggest on behalf of the Conservative party?

I am not going to come out on that matter—I do not have an exact date or number in mind. I was simply making the point that we must be careful—all of us, not only the hon. Gentleman—when calibrating our expectations and the terms of our arguments. If we do that, we can stretch our ambition to cover the furthest possibilities but remain credible, which is an art not a science. I do not wish to stray too far from my point, but my argument is that there is no correct number and no wrong number.

I take issue with the hon. Gentleman’s argument that we should not be ambitious. He said that our ambitions ought to stretch only as far as they are credible. The Environmental Audit Committee this week heard how industry is saying that it cannot go further on carbon emissions, but it also said that when the climate change levy was introduced. Technology moves forward and we must be ambitious—if we confine our ambitions by thinking only of existing technology, we will sell ourselves short and fail to recognise the true challenge.

If the hon. Lady listens to more of my speech, she will realise that I am nothing if not ambitious. My single greatest criticism of the Government concerns their lack of ambition, aspiration, and energy in creating policies to drive the agenda forward. I simply offer the warning that our ambitions must be credible.

To return to the crux of the debate, my hon. Friend the Member for South Suffolk was right to say that the debate is topical this week. Last Friday, the oil price per barrel hit a record $90. We learned this week that seven of Britain’s 16 nuclear power stations are out of operation, which will be music to the ears of the Minister if not her colleagues. On Monday, the Government performed a staggering U-turn on the EU renewable energy commitment of 20 per cent. by 2020, thereby letting it be known that they want the rest of Europe to take the strain. The Government said that the UK would manage only 15 per cent. or perhaps closer to 10 per cent.

I must remind the hon. Gentleman that he is talking about an EU-wide energy target. The Government are signed up and committed to it, but the allocation of the burden to be carried, and contribution to be made, by each country is yet to be decided.

I shall return to that point, but I do not think that people will give any credit to the Government for saying that the UK will be at the bottom of the table when it comes to the allocation of renewable technologies targets. The Minister’s colleagues are on record saying that their target will be between 10 and 15 per cent.

The hon. Gentleman must acknowledge that the UK has been at the bottom of the table for renewables for a long period, including the time for which his party were in Government. We are now making enormous progress on renewables. Our target is to treble the contribution of renewable sources to electricity by 2015. We are in a different situation from that of other European nations, and it is appropriate that the member states and the Commission agree on the contribution that each member state should make.

The Minister is candid on renewables and she is absolutely right—we have been at the bottom of the league tables for the whole period of the Labour Government despite their rhetoric on climate change. She will accept that, internationally, the climate change imperative has held sway over politics for only 10 or 15 years. It is 20 years since Margaret Thatcher first kicked the whole issue off, but only in the past decade has it assumed absolute importance as a driver of public policy.

If we look at what Germany has been able to achieve with its feed-in tariffs—they are based on a different policy model that the Conservatives are pledging to introduce along similar lines—we will see that they are the kind of policy drivers that we need. The UK has performed miserably in the past 10 years under this Government, and we cannot afford to continue with the status quo or to adopt a “business as usual” position. The ETS alone will not provide the required solutions, and the Minister cannot be satisfied with the unambitious target of 10 or 15 per cent. We are supposed to be a leader in Europe; after all, we have one of the largest economies in the region. Will Latvia or Estonia or eastern European fringe countries make up the difference? It would be an abrogation of responsibility and, more importantly, a loss of economic opportunity if we allowed the Government to get their way on the issue.

I shall resist the temptation to quote to the hon. Gentleman the Liberals’ environmental policies going back to the 1970s and 1980s when the Conservatives thought that carbon reduction meant closing coal mines.

On the renewables target, I recall the former Prime Minister, Mr. Blair, expressly stating—he described it as an aspiration—that he wanted 20 per cent. of electricity to be produced by renewables by 2020. Perhaps the hon. Gentleman recalls the same.

I am not an expert on Tony Blair, but I recall him saying that.

Everyone in the House is amazed by the Government’s U-turn and the downgrading of their environmental commitment. Sadly, it does not seem to be out of character with the way in which the Prime Minister is proceeding on environmental matters. The U-turn is all of a piece, as the hon. Gentleman outlined in his own remarks on the watering down of the Merton rule and the disgraceful treatment of the low-carbon building programme. It will be interesting to hear what the Minister has to say about the fact that the Government have put all their eggs, as it were, in the nuclear basket.

Across the piece, there is little ground for hope that the Prime Minister will take climate change seriously. Whatever Tony Blair’s domestic failures, we never doubted his personal commitment to the climate change issue or that he argued forcefully about it on the international stage. Unfortunately, the Prime Minister is not prepared to do so much as that, which is sad for all of us.

We learned about the Government U-turn on the EU renewables target. In addition, some of us read a peer-reviewed article this week that states that atmospheric CO2 levels have grown 35 per cent. faster than expected since 2000 as the effectiveness of existing natural carbon sinks degrades. The effectiveness of the EU emissions trading scheme, both as a carbon reduction tool and as an incentive mechanism for technology development, is more vital than ever.

I commend the Environmental Audit Committee on its excellent work and the Conservatives recognise that the ETS is an invaluable tool. It is an excellent way in which to marshal the power of the markets for the public good. I acknowledge that phase 1 has been a failure—too many credits were handed out for free, which effectively gave industry a licence to pollute. My hon. Friend the Member for Ruislip-Northwood said that as a result of that mistake, UK utilities have made around £800 million in windfall profits. Ultimately, that was a political rather than a market failure.

Phase 2 looks stronger, and I give credit to the Government for their part in it. It happened under Tony Blair’s premiership, but the Government nevertheless argued for more robust allocations.

Does the hon. Gentleman agree that to pursue that robust stance in phase 2 in the EU, Britain had to take a leading role and be accepted as a leading player in the EU? Will he comment on his party’s position in prosecuting that role and policy?

The hon. Gentleman is right. The environment is one of the key core functions and areas of expertise of the EU. It is a classic example of where the EU can act in a way that no nation on its own can act and where we are all much better by recognising the communality of our interest. That only makes me more frustrated when the EU gets involved in all sorts of areas where it has no writ and its competencies are clearly unwarranted, but that is an argument for another day.

The second phase has resulted in greater market confidence, which is already reflected in forward carbon pricing of more than €20, but we must do better in the third phase. I will not go into detail, but the Conservative party quality of life commission under Zac Goldsmith and my right hon. Friend the Member for Suffolk, Coastal (Mr. Gummer) reported very similar findings to the EAC report as to how we can do better in the third phase. The latter rightly concluded that the Government must be clearer about why phase 1 of the ETS was not a success.

To have public confidence in the ETS going forward, there must be transparency. Are declared reductions for absolute or for “business as usual” targets? Are declared reductions for CO2 or other greenhouse gases? Are declared reductions happening in the UK or abroad? It should not take a parliamentary Committee report to extract clarity from the Department for Environment, Food and Rural Affairs about how it calculates its emissions reductions. What chance do the ordinary public have to understand the complexities of the ETS targets if it takes the Government this amount of time and this number of attempts to explain their processes to us?

From speaking to interested members of the public, I know that one of the most important questions on which clarity is needed to ensure public trust in the ETS is whether the scheme is causing emissions reductions within the EU or merely allowing us to pay other countries to do our cleaning up for us. The Government have announced that phase 2 will result in a reduction of 8 million tonnes of carbon, they hope, from Britain’s “business as usual” projections, but 5.3 million tonnes, or two thirds, of that UK carbon reduction will take place not only outside the UK but outside the EU—in the developing world, where it is cheaper per tonne of carbon to make the reduction.

The EAC was correct to recommend—and I am glad that DEFRA accepted the recommendation—that all future communication of these emissions reductions should clarify what proportion of the reductions takes place in the UK and what proportion is simply funded by the UK, but takes place elsewhere in the world.

I fully accept the reality that one tonne of carbon saved in China is atmospherically exactly the same as one tonne saved in Britain, and I recognise the virtue in the fact that a properly functioning market will provide reductions at the cheapest price available, wherever the reduction may be found. However, I believe that it is important that we ask ourselves what the long-term implications are of Britain buying its way out of the majority of its emissions. The ETS is not just an international offsetting tool. It is designed to encourage behavioural change in Europe and to incentivise technology development in our own economy. The ETS was not designed merely to act as a conduit for us to pay others to change while we continue in our old ways with an unreconstructed hydrocarbon-dependent economic model.

This week, the Government announced that they were lowering their sights in relation to their own renewable technology targets. They are even going below the average in Europe—no surprises there. What I did find extraordinary—this was referred to in the debate—was that the leaked paper from the Department for Business, Enterprise and Regulatory Reform stated that the Government’s concern was that increasing Britain’s renewable energy capacity would

“undermine the credibility of the EU ETS and reduce the incentives to invest in other”

low

“carbon technologies like nuclear power”.

Does the Minister believe that it is right to lower our renewables target in Europe because it is likely to undermine the incentives to invest in low-carbon technologies, and that nuclear power is one of the low-carbon technologies that should be the beneficiary of such an exercise? The Government, if that paper is to be believed, believe that if we increase our renewable energy production, that will undermine the carbon market. Does the Minister believe that the ETS would be undermined by more renewable technology? In effect, that is what this boils down to.

Further to that, why are the Government keen to secure the future of nuclear power as part of that mix? Is it, as the comments in the Department for Business, Enterprise and Regulatory Reform document seem to imply, on the basis of special favours? We can only deduce from the Government’s fuzzy logic that they are willing to forego Britain’s place at the forefront of a global green energy revolution in order to keep the carbon market secure so that they can continue to buy Britain’s way out of its carbon budgets for the indefinite future. Achieving two thirds of our national carbon reduction by 2012 by buying offsets abroad, as the Government are currently doing, will not lead to behavioural change, nor incentivise British business. It will not deliver the change that Britain needs; it will leave Britain lagging behind on competitiveness.

The leaked document also acknowledged that reducing emissions through renewable energy sources was “expensive” and came with “severe practical difficulties”. Getting to 9 per cent. from our current 2 per cent. by 2020 would cost £4 billion, according to the leaked report. In other words, the Government would rather pay others to bring down our emissions for us—they would rather the taxpayer continues to buy our way out of the problem—while our economy continues to grow with dirty infrastructure and ever-increasing emissions.

As the carbon price rises and our domestic reductions do not keep pace with our economic growth, the offsetting policy implicit in the ETS will become increasingly expensive. Sadly, there could be few better examples of the new Prime Minister’s outdated thinking on climate change than those latest revelations. To follow that route will make Britain a hostage to fortune, as we lock in the infrastructure of our old ways and our old hydrocarbon fix for the next generation, while the costs of offsetting those ways will become increasingly expensive in the carbon markets, however efficiently the ETS works—all that while we fall behind in competitiveness at home.

The Conservative party wants Britain to lead with dynamic industrial change, to lead the global economy and to face up to the changes that we need to make, not to subcontract this economic opportunity to competing economies in the developing world.

When defending the Government’s renewables target U-turn on “Newsnight” on Tuesday, the Minister for Energy said that, at the end of the day, renewables was a means to an end and that the end was bringing down carbon emissions. That is where the Minister and the Government have got it wrong—it is where the Prime Minister has got it wrong. Renewables are not only about bringing down carbon emissions; they also constitute a huge opportunity. That is about using this challenge as an opportunity to reskill our economy and to gain first-mover advantage in what will probably be the fastest-growing market of the 21st century. It is about making Britain a leader in the new energy economy as we led in the old energy economy in the North sea in the second half of the 20th century. We will not achieve that by buying our reductions at the cheapest price that we can find in the developing world year after year. That is not leadership—it is just bottling out.

The EAC report is very well informed and argued. I hope that the Government will read it carefully. They have shown themselves to be adept at adopting other people’s ideas in a relatively short time. I hope that although this may not be as eye catching and headline grabbing as other ideas that they have purloined, they will nevertheless give it the consideration that it is due and undertake a sensible policy review as a result.

I congratulate the hon. Member for South Suffolk (Mr. Yeo) on his presentation and all the Committee members on an extremely useful report. It is a welcome contribution to the development of emissions trading policy. As he and many others have acknowledged, the Government regard the EU emissions trading scheme as the cornerstone of our framework to tackle climate change. The Environmental Audit Committee asks some important questions in its report.

The need for market scarcity is an important lesson of the report. We can achieve cost-effective emission reductions only with a suitable carbon price—I think that we are all agreed on that. I share the Committee’s view that the European Commission’s decisions on member state phase 2 caps are very encouraging. They show a clear determination to deliver a carbon price that will increase confidence in the scheme.

A key aspect of pricing carbon within the economy is ensuring that business takes into account the full price of carbon when making investment decisions. That is why we are pushing for increased levels of auctioning in future phases. As a number of hon. Members have mentioned, the EAC recommends 100 per cent. auctioning in the long term. The Government consider auctioning very important, which is why we are pressing for a review of the scheme. We would like to see a minimum level of auctioning, not a maximum as at present, in the directive from phase 3. The hon. Members for South Suffolk and for Ruislip-Northwood (Mr. Hurd) raised questions about that, and I want to make it absolutely clear that we agree with their sentiments, are pressing for that and hope to achieve it. We also want member states to be able to set higher limits for auctioning than whatever floor the Commission might set. It is important, not least for capturing the windfall profits resulting from free allowances.

However, I am sorry to tell the hon. Members who raised the issue, including my hon. Friend the Member for Gower (Mr. Caton) and the hon. Member for Cheltenham (Martin Horwood), that we cannot agree about the Government’s hypothecating the moneys raised through such auctioning. Hypothecation does not guarantee value for money, it can be distortionary and is not general Government practice, although hon. Members will know that we have accepted in our taxation system that in general, we should incentivise and reward the goods in our society and tax, penalise or disincentivise the bads. That is a fundamental underlying principle.

I understand why the Government have reservations about hypothecation and would not want it to become a more general principle in Government policy, but does the Minister acknowledge that there is a public confidence issue about green taxes that I am afraid might have been exacerbated by the Prime Minister in his previous role as Chancellor of the Exchequer? There is a perception that green taxes are just about lining the Exchequer’s pockets. For green taxes in particular, we must perhaps advance the case of hypothecation more.

I understand entirely, but the fact is that it is a trading mechanism. The public would find it quite difficult to understand, and they are not sufficiently involved in it.

Business is certainly involved, but business understands the principles perfectly well. Businesses that use auction systems would understand that the revenues from auctioning would return in general taxation to the Government. That is absolutely the norm as far as business is concerned. I do not think that the hon. Gentleman makes his case well. I agree that we need to work much more on public communication and explain when we levy certain taxes or charges that they are specifically designed to change behaviour. I think that he would agree that that is an important principle in bringing about environmental change, and I agree with his general concerns.

I am grateful to the Minister for giving way, and I welcome high levels of auctioning as well as minimum levels, but I must press her on the use of proceeds from auction. There is no disguising the fact that that will be an additional cost on British and European business. Is it the Government’s policy to be sanguine about that, or is there a commitment that any further levels of auctioning will be cost-neutral for British business in the round?

Any further discussion will have to be left to my colleagues, particularly my hon. Friend the Minister for the Environment. I apologise for the fact that he could not be here; hon. Members will appreciate that he is in Bali for preparations. The process also involves Ministers from the Department for Business, Enterprise and Regulatory Reform. They will hear this debate and will want to consider the points made.

I recognise the concerns raised in the report about the competitiveness implications for industry; the hon. Gentleman is one of the hon. Members who raised the issue. The UK is keen to work with other member states and the Commission to develop a more harmonised approach to the scheme. The EAC report recommends that to protect UK competitiveness and prevent carbon leakage, Government should develop trade agreements. We feel that the way forward is to create incentives by opening up trade in new technologies and developing an international carbon market.

The EU ETS needs to provide business with flexibility to make reductions where they are most cost-effective. That might mean that a proportion of emission reductions delivered by the UK cap will not occur within the UK. They might occur within the EU or outside it through the clean development mechanism. A number of hon. Members have mentioned that. I stress that such reductions are made and paid for by the UK economy, even though they occur in other countries. The problem that we face is global, and it is appropriate to contribute to bringing low-carbon technologies to other countries. We are counting such reductions in a transparent and open way.

The Committee highlighted the need for greater transparency in a number of recommendations. The Government agree that it is important to the scheme’s success that the market operates transparently and that we learn the lessons of phase 1, especially the need for market scarcity in phase 2 and beyond. Consequently, we have pressed hard for tight caps in phase 2 and are supporting the Commission in delivering them. Hon. Members will know that some other member states are contesting it, but we are supporting the Commission in that matter.

Our main aim for the review of the scheme is achieving the market scarcity necessary to reduce emissions. Similarly, we see the need for transparency in reporting. The climate change Bill will be key to achieving that, as enhanced transparency will be provided by annual reporting from both a Select Committee on climate change and Government.

The EAC report is critical of how Government have presented our emissions figures. I acknowledge that if the Government are to count overseas savings towards domestic targets, we must be clear and open about the number of savings purchased. We have endeavoured to do that in Government reporting. For example, our annual report to Parliament in July this year presented emission figures in a way that showed the number of allowances brought in from the EU ETS. A number of hon. Members have raised that issue. I refer to our response to recommendation 24, on page 31 of the Government response, which shows clearly that we produce data on both UK CO2 reductions and total reductions funded by the UK here and abroad. The EAC recently stated that the value of carbon credits is only as real as the trading scheme that issues them is effective.

Questions were asked about the value of phase 1 and the suggestion that UK industry is merely buying hot air. Those are valid concerns. Indeed, they are the primary reason why we pushed for market scarcity in phase 2. However, it is difficult for the Government to make a judgment about the real value of any allowance. It is not the Government’s place to say whether the market price is right. It could also lead to a limited incentive to use tight caps if member states cannot count emissions reductions from the EU ETS towards their national targets.

The way forward is for the EU ETS to open up the whole carbon market. That can be done by expanding the scheme to new sectors and gases, and through linking the scheme to other trading schemes around the world. That could lead to greater investment in low carbon technology in developing countries, and it could deliver reductions at the least cost. Linking the EU ETS to other trading schemes will encourage countries to work together, which we should all consider to be essential. Only by working together can we fight global climate change.

I shall now address some of the specific points raised during the debate. The hon. Member for South Suffolk spoke about including aviation emissions in the EU ETS, and auctioning them in a way that would not give the airlines the opportunity to make windfall profits. We agree that if aviation enters the scheme, there would have to be a greater use of auctioning. The hon. Gentleman will know that the UK has pressed repeatedly for aviation emissions to be included in the EU ETS. At the moment, if airlines pass through the costs of allowances and make windfall profits, the Government need to assess the evidence on what the costs would be in order to influence the debate on auctioning the limits. We are saying that there would have to be auctioning, but the extent of the auctioning in relation to aviation would clearly need to be determined by further research.

The hon. Gentleman also asked about “business as usual” projections, and whether we should use absolute figures. The Government agree that there are uncertainties in using such projections. In phase 2, projects were fully consulted on and were scrutinised by an independent auditor. Such projections can indicate the level of scarcity in the scheme; in effect, that gives important indications on what the carbon price should be. We accept the uncertainty, but we believe that it can be a useful guide.

The hon. Member for South Suffolk and my hon. Friend the Member for Morley and Rothwell (Colin Challen) asked about the need for a consistent figure on limiting the use of clean development mechanism credits. The United Kingdom has taken a keen interest in CDM, and we have worked hard to make the mechanisms more effective and accountable. We asked for a limit on CDM credits for the EU ETS. Each member state proposed limits, some of which were reduced by the Commission. We sought and won a limit of 8 per cent. of the free allocation and 93 per cent. of the electricity sector. We are pushing for limits in the EU ETS in phase 3 on that very topic.

My hon. Friend also asked about other measures, saying that we should be careful not to think that the EU ETS was the only solution to our difficulties. The Government agree. I remind the House that the Stern review suggests that three elements are involved: the first is carbon pricing; the second is technology policy; and the third is measures to overcome barriers to behaviour change in fields such as energy efficiency. We are committed to that. We accept the Stern analysis and we are doing various things in all those areas.

If the Minister accepts the imperative of energy efficiency, why has the Treasury cut the surplus in the energy efficiency budget?

I am not the Minister responsible for that, so I would have to check, but I understand that we have changed schemes rather than cut them. If we end one scheme, we may introduce something better—something that will go further. I will happily write to the hon. Gentleman on the matter.

My hon. Friend spoke of contraction and convergence, as did my hon. Friend the Member for West Bromwich, West (Mr. Bailey) in an intervention. There is currently no international consensus on that approach. We believe that it could be a way forward and certainly merits attention, but other options are more favourable.

I am sorry to say that the consensus that so often exists in such debates—over the years, I have worked with many of the Members here today—was somewhat broken and soured by the hon. Member for Bexhill and Battle (Gregory Barker). He endeavoured to make a number of party political points, as did the hon. Member for Cheltenham. The Government would be delighted if either party were to produce an action plan to achieve a carbon economy of 80 per cent. or 90 per cent.—or even a zero-carbon economy. However, we have to be credible and realistic about what can be achieved.

It is vital that people understand the low level of renewable energy that existed in this country when Labour came to office; there was hardly any, except for the long-standing hydro schemes in Scotland. We have made huge efforts, and we have a target of 15 per cent. for electricity generation by 2015. The hon. Member for Cheltenham said that the Prime Minister had talked of 20 per cent. electricity coming from renewables by 2020. He was correct about our aspirations for renewable generation of electricity by 2020. No one has resiled from that.

The debate about the EU target is completely different. It is about the supply of energy as a whole; it is not about electricity production alone but about all sectors, including transport and heat. It is a very different situation, bearing in mind that the UK is now at 2 per cent. We would be very happy to receive recommendations on how to proceed at a faster pace and how to achieve more. We remain committed to the 20 per cent. EU-wide target. Many other member states have a much higher renewable energy supply and many of them will find it as easy or as difficult as us to move forward. There needs to be a balance, but a balance will be found. We have made a proper commitment to doing that and we remain committed.

I will happily send the Minister our recommendations on how to achieve the ambitious targets that we have set out, which would achieve reductions in unclean energy and electricity generation. The hon. Lady was right to make that distinction. A crucial part of that is using other clean technologies as transitional phases, as I mentioned, until we can increase the overall level of renewables. One such transitional technology might be clean carbon capture and storage. Would the Minister support a massive increase in its use if it can be supported through research and development?

I wish that the hon. Gentleman were giving credit to the Government on this point. We are the people who have put the Government and all their energies behind the development of carbon capture and storage. We have promoted that internationally and set up a competition. We are doing everything possible. We have already written the terms of the competition, which will be about producing a post-coal generation carbon capture process. We have chosen that because we know that China and India will continue for many decades with coal-fired power stations. The only hope is that we produce a technology that will help them secure a reduction in CO2 emissions at the same time as bringing their people out of poverty through energy generation.

The hon. Gentleman is right. We want it and we will have it. We have done more than any other Government to secure that end result. However, it is enormously expensive, so we will wish to seek support from the whole of the House on its roll-out to agree that this is a way forward and that it would be appropriate to invest more in it.

There is a clear reason why the UK is at 2 per cent., as the Minister rightly said, and why progress on renewables has been so poor: it is the renewables obligation. The largest beneficiary of the RO over the past 10 years, or the period in which it has been alive, has been landfilled methane gas, which has been sucking in a huge amount in public subsidy. Contrast that with a different public policy in Germany for feed-in tariffs. At long last, the Government are starting to change.

I think perhaps that the hon. Gentleman needs to look at the achievement of our Kyoto emissions targets and compare that with Germany. I think that different mechanisms achieve different results. We have made a good effort and are meeting our international obligations on CO2 targets. We started without renewables, or effectively with limited renewables, except for the historic hydro in Scotland, because of the previous Administration’s total failure to understand the developments in this new technology. We are reviewing the renewables obligation. It is going to change substantially and I am convinced that it will give a new impetus to the development of new kinds—new forms—of renewable technologies.

The hon. Member for Ruislip-Northwood said that we needed a consistent, transparent methodology for giving out allowances with less scope for political interference. He will not be surprised that we agree with that sentiment. There should be greater harmonisation of the allocation and future free allocation should be based on benchmarking. It is particularly important that we have harmonised rules for new entrants’ allocations from phase 3. The hon. Gentleman can rest assured that we are with him. With that approach added to much more auctioning, we would be able to make much further progress.

Both the hon. Gentleman and my hon. Friend the Member for Edinburgh, North and Leith (Mark Lazarowicz) mentioned the need for a sectoral approach in allocating allowances and said that energy producers should not get a disproportionate number and be allowed to pass on the cost to other sectors. Again, we agree with that. Some pressure was put on the electricity producers in terms of the cap and they took a cut in allowances in phase 1. In phase 2, allowances for auctioning will be taken from that sector and in doing so we will be putting special pressure on them. I think that that is what hon. Members would want. In other sectors, there is allocation on a business-as-usual basis.

The hon. Gentleman turned away for a moment from his good all-party credentials and questioned the commitment of the present Administration on climate change. In questioning the commitment of the Prime Minister, he is speaking of a man who, as treasurer, provided all the instruments that have been used to drive down CO2 emissions, increase renewables and make a real difference in getting this country on a path to a low-carbon economy. The hon. Gentleman will remember that the Prime Minister, when he was Chancellor, introduced the climate change levy, the first really important instrument in this regard, which the hon. Gentleman’s party has consistently opposed.

Let me also remind the hon. Gentleman that it was the present Prime Minister, when Chancellor, who commissioned the Stern report. I know that the hon. Gentleman knows this because he and I have travelled to conferences together around the world, and the Stern report is considered a seminal work on climate change dialogue.

I am glad that the shadow Minister agrees with this. The Stern report has transformed thinking. I have not only been to the conferences that we have all attended—in Washington, for example—but I have been in Africa, where people have heard of the Stern report and have suddenly understood, through its approach, the relationship between their economies, the developed economies and global climate change.

My hon. Friend the Member for Gower talked about bringing the maritime sector into the EU ETS. We in the UK Government have been pressing the International Maritime Organisation to address the contribution of the maritime sector to climate change and are investigating options regarding shipping in the EU ETS. So, again, we are on to this in so many sectors, including international aviation. It is the UK that has been pressing for Europe to go further and we are doing it again on the issue of maritime emissions.

I am not sure whether it was my hon. Friend or the hon. Member for Cheltenham who asked about bringing surface transport into the EU ETS. [Interruption.] Sorry, it was the hon. Member for Cheltenham who mentioned that. I know my geography, but it is difficult to make all the notes at the speed one needs to. Potentially, surface transport could be included in the EU ETS. However, that is not the only instrument; there are others. The hon. Gentleman mentioned the standards of manufacture for vehicles. These are important mechanisms through which we can get reductions. We are happy to explore that, but we would also need to have regard to how it would affect other sectors and the mechanism overall.

The Minister is expanding on what the Government are seeking to include in the emissions trading scheme. She may be aware of research from the Institute of Public Policy Research, published in December 2006, which showed that 50 per cent. of the installations included in the ETS account for only 0.8 per cent. of emissions. Does she recognise that that may represent a strong case for rationalising the scheme and excluding small emitters and, in doing so, may reduce the bureaucratic burden on British business? Are the Government, in addition to looking to expand the scheme, considering the opportunity to rationalise it?

I think that that might be likely, but because I am not the Minister responsible I will undertake, if I may, to write to the hon. Gentleman or to get my colleague to write to him.

I think that I have dealt with the concerns of the hon. Member for Bexhill and Battle about transparency by referring him to the report. He talked about buying our way out of emissions. Of course, there is no question of our doing that. The issue is tightening the cap. We were the only member state to put forward a cap that was accepted by the Commission. We are the people who want to drive down emissions through tight caps and that is the way in which we will ensure that we deal with the issues that he raised, and particularly with whether it is right to lower our renewables target so that we do not undermine the EU ETS. The more we have renewables, the more it is necessary to drive down the cap. That is how it works. It is not substituting one for the other. We want to and will increase renewables and in doing so we will continue with the EU ETS and will seek to have tighter caps so that we achieve real reductions, whether here or in other countries.

I hope that I have been able to address most of the issues that have arisen during the debate. If I have not, I am sure that hon. Members will let me know and we will see whether we can respond appropriately. The EU emissions trading scheme is approaching the end of its landmark first phase, as we have all acknowledged. The Committee correctly points out that important lessons have been learned from that initial phase. Those lessons are vital to ensure that a scheme can deliver emission reductions cost effectively.

We need to use the solid base that phase 1 has provided when building for the future scheme. The scheme can be the basis of a global carbon market. An effective trading scheme can be a springboard for new impetus for the international community to tackle climate change. The Environmental Audit Committee’s report states that emissions trading should not be seen as a miracle cure for global warming, and I share that view. Avoiding dangerous climate change will involve hard choices from Government, business and individuals.

In the UK, we have shown international leadership in fighting climate change. We have done so through the Kyoto conferences and we will do so again in Bali. We are also introducing the Climate Change (Effects) Bill. Nothing could be a more important signal to the rest of the world that we take the subject seriously. No other country is imposing on itself the emissions limits that we will impose in the UK. People say that 60 per cent. is unambitious, but they merely have to consider how we can achieve that 60 per cent. by 2050 to know that it is very ambitious. Notwithstanding that, if Members say that the aim should be 80 per cent., 90 per cent. or even zero, they can rest assured that we will bring forward in our legislation—I hope that we will have all of their support—a means by which an independent judgment can be made about whether 60 per cent. is the right target or whether it should be higher. We will have an independent climate change committee of experts who will advise the Government on whether we have it right.

The Commission has followed many of the UK’s examples. It has a greenhouse gas emission target for 2020 and a commitment that if we can reach a global agreement, instead of 20 per cent. by 2020, the EU will move to a target of 30 per cent. As I have said, we have led the way in pressing for tight, fair and robust caps for phase 2 of the scheme. Our efforts have led to a renewal of confidence in the EU ETS for phase 2 and beyond. There is consensus in the UK across Government, business and non-governmental organisations that the scheme is a key part of a long-term policy framework to reduce emissions. Many countries, both in and outside the EU, see emissions trading as the way forward to help to drive emissions reductions. It is important that the scheme sets an excellent example. We are heading in the right direction and I am grateful to the Committee for its serious, lengthy and probably quite difficult deliberations and for the good advice with which it has been able to provide us.

I am conscious that I now stand between colleagues and their enjoyment of a low-carbon weekend. I will not comment on the whole debate, because the Minister has done so very thoroughly, but I want to say how much I appreciate those colleagues from the Environmental Audit Committee who have attended, some of whom have spoken and others have intervened. That has been helpful and supportive and shows how much importance we attach to the report.

I am grateful to the Minister for her kind remarks and generous comments about the report and for those about me and the Committee’s work. She is well respected and well known for her commitment to the environment, and I pay tribute to her for the continuing interest that she has shown in these issues. However, I cannot miss the opportunity of commenting on one or two of her responses. I recall from the distant past that the job of a Minister of State is usually to defend the indefensible decisions of the Government that the Secretary of State does not want to be tarnished with, and I fear that that has been her lot this afternoon, too.

I agree with much of what the Minister said. I wholeheartedly welcome her acceptance that the EU ETS needs greater market scarcity if we are to achieve the sustainable carbon price that we all want. That is absolutely right. I am delighted that Britain will push for more auctioning, and the Government are right to call for a minimum, rather than a maximum, level of auctioning. That is absolutely essential. I am also glad that she recognises that aviation should be subject to more auctioning than has been applied to the rest of the EU ETS. It is good that Britain has pressed for aviation to be included in the ETS, but that will not be good enough if we do not get it in on the right terms. I welcome the Government’s continued interest in that.

I was disappointed by the rejection of hypothecation of revenue from auctions. That is certainly, predictably, the view of the Treasury. It should not be a view that any other Department accepts; it should be the subject of a much more bitter Whitehall battle. I should like to see some leaks about the views of DEFRA and other Departments, attacking the Treasury for its Jesuitical refusal to allow the hypothecation of revenue from auctions. Incidentally, the view is not consistent. We have a television tax that masquerades as the licence fee whose proceeds are hypothecated to one particularly extravagant organisation known as the BBC. Even the climate change levy has an element of hypothecation about its proceeds.

I was pleased that the Minister accepted that business-as-usual projections contained some uncertainties, but I urge her and her colleagues to reconsider the details of what we have said about that and the presentation of the figures. I have doubts. I remember that in the distant past, when inflation was high, public spending predictions used to be produced on what was called funny money, which built inflation into the system. We are in danger of doing the same thing with business-as-usual projections for emissions.

On contraction and convergence, the hon. Member for Morley and Rothwell (Colin Challen) will be as disappointed as I was by what the Minister said about there being no international consensus. Of course there is no international consensus. That is exactly the situation in which I want the British Government to give a lead. They should get out there and start selling that concept to ensure that the post-Kyoto conclusion at least acknowledges—we are not going to get there in 10 years—that as the long-term goal. That is the only fair way, in 30 or 40 years, for the world to distribute the burden of dealing with climate change. The Government have a great opportunity. As I have said, they have shown leadership, particularly under the previous Prime Minister, as did the Government under Margaret Thatcher. That has exercised a great influence on the world’s view of these matters, and there is a great opportunity to do the same thing with contraction and convergence.

Targets excited a certain amount of comment and controversy. To be fair to my hon. Friend the Member for Bexhill and Battle (Gregory Barker), I think that it was I who said that targets should be 80 or 90 per cent., rather than him. He did not express a precise view about that. I suspect that he might have a view privately, but he is, no doubt, awaiting the final conclusions of the shadow Cabinet on whether it could commit to those levels.

I share slightly the reservations expressed about the endorsement by the hon. Member for Cheltenham (Martin Horwood) of a 100 per cent. target. It is important to remain credible. There are many areas in which we could meet zero emissions targets. The built environment is a prime example; we are being utterly feeble in not getting there much more quickly. Also, on surface transport, we might get very close to 100 per cent., but that is difficult to envisage in some areas. Although it is an admirable goal, I suspect that, at least in the short term, we might find it easier to persuade people to sign up to an 80 or 90 per cent. target than to a 100 per cent. target.

My criticism of the 60 per cent. target is not that it is unambitious. Clearly, it is very ambitious, and at the moment we are not on track to meet it. My criticism is that the science shows that it is inadequate—60 per cent. by 2050 will almost certainly result in an increase in temperature of up to 3 or 4° C, or possibly even 5 or 6° C. The sooner that we recognise that and accept the science the better. The hon. Member for Morley and Rothwell made this point: we must not get hung up on cutting emissions. The focus should be on the overall carbon budget and on the concentration of greenhouse gases in the atmosphere. It is already 50 per cent., which is about the level that has prevailed over the course of human occupation of the planet. It is quite likely that that level is dangerous, but it is increasing at two or three parts per million. Within 20 years, therefore, we shall certainly be at dangerous levels. That is why this situation is very much more urgent than has been recognised.

People who talk about the survival of the planet are making a mistake as well. This is not about the survival of the planet; the planet existed long before human beings. This is about the survival of one species—humanity. The planet will continue after we have disappeared. We arrived very late in the history of the planet, and we might disappear early as well.

To revert to the debate, on carbon capture and storage, to use the Minister’s words, if all the Government’s energies are being used to promote the issue internationally and to set up competitions and so on, I wonder at how little energy the Government have. It is true that no country is doing anything like enough on carbon capture and storage. It is certain that countries such as China and India will burn their huge coal reserves, and unless the world succeeds in tackling carbon capture and storage, almost all our other efforts will be wasted. That is the sine qua non. Without the technologies to deal with the problem cost-effectively, we are almost certainly done for. I am saying not that Britain has done worse than other countries, but that the efforts of all countries have been scandalously inadequate.

I do not want to embarrass the Minister, but by the look on her face, she agrees that she made the best fist that she could for the Government. Incidentally, I welcome the very recent announcements, but a great deal more needs to be done. I shall touch on the commitment of the Prime Minister to climate change. There was the climate change levy, and there were some encouraging early signs during his stewardship of the Treasury, but I am afraid that the past five years have been pretty disappointing. The freezing of the escalator on fuel duty and the failure to grasp all sorts of opportunities to use the tax system, on a revenue neutral basis, to encourage greener choices were extremely disappointing. Those were great missed opportunities. He has a chance to put that right, but the latest pre-Budget report was introduced three months after he took over as Prime Minister, and although it clearly showed his willingness to listen to views put forward by other parties, it is a pity that he did not listen to those on promoting greener transport choices through the tax system, for example.

To conclude on a positive note, I believe that the report is important and valuable, and it contains a lot of good recommendations. I am grateful to the Government for their printed response and for much of what the Minister said this afternoon. I wish her every success; I hope that she will be a Trojan horse within the Government for members of the Committee and lean on her ministerial colleagues to get them to move in the direction in which I am sure, in private, she would like to move. I believe that this country will have to move in that direction before very long, and the sooner that we do it, the bigger the advantage that Britain will have politically, environmentally and in business as well.

Question put and agreed to.

Adjourned accordingly at five minutes to Five o’clock.