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British Steel: EU Emissions Trading Compliance

Volume 659: debated on Wednesday 1 May 2019

I am grateful for the opportunity to make this statement to the House today. I wish to inform the House of a commercial agreement that the Government entered into with British Steel on 24 April. As you know, Mr Speaker, I wanted to update the House at the first available opportunity now that the market-sensitive elements of the resulting transaction have concluded.

The agreement with British Steel relates to its obligations under the EU emissions trading scheme. The ETS requires heavy industry and power producers to obtain and surrender allowances equal to their level of carbon emissions on an annual basis. Companies that are the most exposed to international competition are allocated a proportion of free ETS allowances annually. For years, many companies have used these free allowances to comply with their obligations for the previous year.

Just over four months ago, in December 2018, the European Commission suspended the UK’s ability to auction ETS allowances until the withdrawal agreement is ratified. This was decided in order to maintain the integrity of the European carbon market in the event that the UK left the EU without a deal on 29 March this year. This position means that free allowances for 2019 have not yet been issued.

The withdrawal agreement negotiated with the European Union allows for full and continuing membership of the EU ETS until the end of December 2020. Therefore, once ratified, we will have the full legal basis immediately to issue free 2019 allowances. However, the decision of this House not to vote in favour of the withdrawal agreement means that it has not yet been possible to proceed on this basis. This has meant that UK businesses have unexpectedly, since December, been left without access to 2019 free allowances. All members of this House should reflect on the real-world impacts of decisions that we make in this place, or the lack of them, on the businesses on which many thousands of jobs and whole towns depend.

Despite the continued uncertainty, all UK installations have now met their 2018 obligations in full—before yesterday’s compliance deadline of midnight last night. My Department reminded all participants that they still had a legal duty to meet their obligations for 2018 and that the UK is committed to upholding our environmental standards and continuing to comply fully with European law while we remain a member of the EU.

However, until this week, British Steel had not complied with its obligations. British Steel, as many Members know, employs 4,200 people directly in the UK—in Scunthorpe, Skinningrove and Redcar—and thousands more in its associated supply chains. As the second biggest steel maker in the UK and one of only two integrated steel-making sites in the UK, the assets at Scunthorpe and in the north-east are of significant importance to the UK. They are a major supplier to rail networks across Britain. As the only UK steel plant that produces the rails used on our tracks, they provide almost all those procured by Network Rail, as well as supplying ScotRail, Transport for London and Translink in Northern Ireland, and they export a large volume of their product across Europe.

British Steel approached my Department earlier this year to explain that the absence of the expected 2019 free allowances left it unable to comply with its 2018 obligations. If it had failed to do so by last night’s deadline, it would have attracted an immediate and unremovable fine of £500 million, on top of the continuing liability of about £120 million, putting the company under significant financial strain.

The Government were therefore left with a choice: either to see British Steel be unable to comply with its legally binding obligations, creating a liability of over £600 million; or to consider whether there was a path to allow it to comply within the strict bounds of what is possible under domestic and European law. After careful consideration, the Government took the decision to enter into a short-term bridge facility, valued at about £120 million, under section 7 of the Industrial Development Act 1982, at an interest rate of LIBOR plus 7%.

The effect of this agreement is that the Government have, in the last week, purchased the necessary emissions allowances on behalf of British Steel. In return, under a deed of forfeiture, ownership of the company’s 2019 allowances will now be transferred to the Government once they are released. Through the subsequent sale of these 2019 allowances, we expect the taxpayer to be repaid in full. The 2019 allowances are more than are needed to fulfil the 2018 obligations, and all of them will come to the Government.

The terms of the deal ensure that if the price of allowances were to rise, the taxpayer would receive half of any financial upside once the allowances are sold back into the market. To ensure the taxpayer is protected in the event that allowances were to fall, under the terms of the deal, British Steel has been required to underwrite any shortfall and is covering the cost of arranging the facility. The price of carbon allowances has been rising over the past two years, and the Exchequer received £1.4 billion from auctioning allowances in 2018, up from £533 million in 2017.

In the unlikely event that we leave the EU without a deal, we are engaging with the Commission about the implications for our continued participation in the EU ETS. However, should an agreement not be reached, the Government are able to implement a domestic scheme that provides security against the loss of EU-derived allowances. I can confirm to the House that, following the purchase of the necessary allowances, British Steel has been able to comply with its 2018 EU ETS obligations in full.

I want to be clear with the House that the agreement reached with British Steel is a unique one in exceptional circumstances. My Department’s assessment, which has been agreed with the Treasury, shows that the deed of forfeiture offers value for money to the taxpayer, with benefits exceeding the costs—meeting the accounting officer test. This is set against the alternative of British Steel failing to comply and causing a business with an annual turnover of £1.4 billion to have an instant £600 million financial pressure.

This position was supported by the independent Industrial Development Advisory Board, which assessed the proposal in its statutory role and agreed with the value-for-money assessment. I am placing in the Libraries of both Houses a copy of my accounting officer’s letter to the Chair of the Public Accounts Committee and the Comptroller and Auditor General, and I have written to the Chairs of the Business, Energy and Industrial Strategy Committee and of the Treasury Committee. I have been advised that the arrangement is fully compliant with the state aid rules that apply to the steel sector, which require its terms to be commercially comparable.

While this was an unenviable situation to face, the Government believe that the agreement reached with British Steel to ensure that it could comply with its legal obligations represents a responsible course of action. I hope this is a view that Members across this House will also support, and I commend this statement to the House.

A number of industry voices have welcomed this announcement. As Unite the union has commented today, British Steel workers and those in the supply chain will be breathing a sigh of relief at this loan. However, it is regrettable that the Government’s handling of the Brexit negotiations has brought us to this point. The Government have been warned about the uncertainty over the EU ETS for over two years, and the Prime Minister’s threats of a no-deal Brexit for over two years have caused significant uncertainty for the steel sector. UK Steel, the body representing the sector, warned in January that a no-deal Brexit was nothing short of a disaster for the sector, but despite the warnings, the Prime Minister ploughed on and the risks to the viability of our manufacturing sector have been plain to see.

This has had an impact on British industry, as it continues to fight off uncertainty. That is why it is imperative that we continue in this House to work across parties for a solution that will reach a consensus; I know that the Secretary of State is committed to that. But he must also note that this is part of a long track record of this Government standing by as our manufacturing faces increasing pressures, both domestically and internationally.

When Donald Trump imposed a 25% tariff on our steel, the Government’s response was lukewarm at best, and the Prime Minister’s refusal to fight for the sector was telling. The Government’s Trade Bill is set to make the sector even more vulnerable to steel dumping. The Government have been woefully silent on the steel sector deal proposals from industry and unions about the issues that are stifling competition, such as electricity prices: UK industries pay up to 50% more than their European counterparts. Furthermore, the Trade Remedies Authority has been described by the Manufacturing Trade Remedies Alliance as possibly the weakest in the world.

Will the Secretary of State provide some clarity for the steel sector today by describing the measures that his Government will take to ensure that the UK’s low carbon infrastructure, such as offshore wind turbines, and other projects, such as the Royal Navy’s new fleet solid support ships, are built using UK steel? Will he confirm what action he is taking on publishing a steel sector deal and incentivising both public and private investment in the sector? Will he also confirm what action he is taking on business rates and energy costs right across the sector?

This is welcome news, but as I have said it is not enough on its own to provide the certainty and assurances that workers and businesses right across the steel sector need. I know that the Secretary of State shares my belief that steel is one of the jewels in the crown of British manufacturing, and I hope he can assure the House today that this is just the first step in a long list of policies dedicated to supporting the sector going forward.

I thank the hon. Lady for her welcome for the steps that we have taken. She is absolutely right that if a Brexit deal had been agreed, this would not have been necessary: the deal that has been proposed and voted on three times in this House would have made this statement unnecessary. I gently point out to her that the company itself, British Steel, wrote to constituency Members in December last year, when the agreement had been reached in the European Council, saying in terms:

“We believe the deal that has been tabled and agreed with the EU is within the best interest of UK business”

—British Steel—

“and we urge you to think about voting in favour of the deal.”

Unfortunately, there was not a majority in the House for the deal, and part of the problem was that Opposition Members did not vote for it. I welcome the constructive discussions that the hon. Lady and I have been having to now come to an agreement, but had Opposition Members voted according to the advice of the company, this would not have been necessary.

I also take issue with what the hon. Lady said about standing by. I do not think anyone could describe this initiative as “standing by”—quite the reverse: it is an agile response to an unwelcome situation, and I would have thought that she would commend it. She was not in the House at the time, but I remember well when the steel making on Teesside was substantially closed down, mothballed, during the last Labour Government, without such a response to do what we could to keep it in operation.

On energy prices and suchlike, I should say that under the last Labour Government steel production and employment in steelmaking in this country fell by 50%.

Well, history is important in this because one of the reasons why our electricity prices have been high compared with others is that in the last five years of the previous Labour Government, industrial electricity prices rose by 64%. What we have done since then is provide £291 million in compensation for energy-intensive sectors, to correct some of the inflation that took place during that time.

As the hon. Lady knows and has acknowledged, my firm view is that in a world where manufacturing in this country and its opportunities around the world are undergoing a revival, there is absolutely no reason whatever why British Steel should not make a major contribution to that, right across the country. I am keen that we should conclude a sector deal with the steel sector. There have been important discussions. All sector deals require co-investment from the Government and the companies. No one is keener than I am to conclude one: as I hope is evident from my statement today, I am prepared to act in support of a sector that is important—not just for the economy, but for the towns across the country in whose lives it plays such a prominent role.

If the Government had kept their word and taken us out on 29 March without the withdrawal agreement but tabled a comprehensive free trade agreement, we would not be in this mess. What are the Government going to do to have a proper industrial strategy, which can work only if there are more adequate supplies of much cheaper power?

What my right hon. Friend has said is not the case. Our legal obligations for 2018 would be there, and the company would have to comply. Had we left without a deal, the company would be in the position that it is in.

When it comes to the competitiveness of the UK steel sector, it is clear that the markets are international and, especially in the case of British Steel, very substantially across the continent of Europe. It has been very clear that we need to make sure that we continue to trade on terms at least as favourable as we do at the moment with the European Union, which is why both British Steel as a company and the steel sector have been absolutely clear, in terms, that we need to ratify an agreement such as has been proposed, and we need to do it very quickly.

I thank the Secretary of State for early sight of his statement. I also put on the record my welcome for the action taken by the Government to protect 4,200 jobs; it is really important that we protect the remaining heavy industry and manufacturing facilities in the UK. That said, questions still need to be answered. The Secretary of State confirms that this is a loan, on commercial terms, to avoid the risk of a fine of half a billion pounds to British Steel. To mitigate that risk of a fine, what was to prevent British Steel from just borrowing from the market, given that it is borrowing from the Government on commercial terms? Why did this go to the eleventh hour? It seems that what is almost a gamble has been taken with British Steel in the discussions with the Government. Will the right hon. Gentleman explain that? Were the risks identified when the Government were negotiating the extension to article 50?

In his statement, the Secretary of State talked about the need for Members to reflect on the impact of decisions or non-decisions in this place. That seems like another classic attempt to blame other Members for the Brexit mess we are in. It is not our fault—there has been a lack of leadership from the Government. For two years, the Prime Minister was telling us that no deal was much better than a bad deal, then all of sudden, near the end, it was “my deal or no way at all.” That withdrawal agreement suffered the biggest parliamentary defeat in history. Surely, the Government should have reflected on that, instead of coming back here time and again and blaming this House for the Brexit mess.

The situation is further amplified by the fact that the statement says that in the case of no deal the Government are working with the Commission about future participation in the EU ETS scheme. Surely, if the Government had made preparations for a no-deal Brexit those discussions would have already been concluded and a way forward identified.

How do we get transparency and discussions with Government and industry for companies such as British Steel and Nissan, for which back-door deals were done previously? Who misses out? How are these companies identified? Why, for example, was it left to the SNP Scottish Government, rather than the UK Government, to protect Scottish steel?

Finally, this situation proves the need for proper investment in carbon capture and storage. Peterhead has sufficient storage, and it will be ready to be utilised and operational by 2023-24. That would tie in with the Teesside cluster and help the steel industry. If the Government can find £100 million overnight for a loan, why do they not find further money for direct strategic investment, which will help heavy industry and the low carbon position?

The hon. Gentleman started out welcoming the action we have taken and ended up, it seems, withdrawing that support. I will take the first half of his statement at face value and recognise that we have taken action to deal with an unusual and urgent problem, and have done so in a way that I think has displayed some agility. Advice has been taken, which will be fully disclosed to the Committees of the House, on the terms of the agreement and how it can be commercially benchmarked. Clearly, borrowing against allowances with a short period of time before the deadline—it is in the company’s gift and the company’s obligation to comply—requires moving quickly. The judgment we took was that we wanted to make sure we could secure against the possibility of the fine, and do so in a way that was commercially benchmarked. We have done that and it can be scrutinised. The deadline was last night. The fact that I have come immediately to this House to make a statement and publish the accounting officer’s advice I hope illustrates the transparency with which we have proceeded.

On the contingency that this arrangement has had and whether a deal has been approved, I put it as a matter of fact that the reason we had to make this transaction was that we have not, as a House of Commons, agreed a Brexit deal. We have not ratified a Brexit agreement. I said to my opposite number that I welcome the constructive discussions that are taking place. I hope that in the days and weeks ahead, the hon. Gentleman’s party might approach them in the same spirit and try to come to an agreement so that not just the steel industry but every industry in the country can have confidence in the terms of our relationship with Europe in the years to come.

I congratulate the Secretary of State. My experience in government was that the most important things that Secretaries of State do are those least noticed. They are the crises that do not happen. He has, with supreme competence, dealt with what could have been an extraordinarily tricky situation, as all those involved in maintaining British Steel in this country know.

Is the Department taking steps to ensure that when we leave, as I hope, in an orderly way in the relatively near future with an agreement with the EU, there is a proper substitute for the ETS on a domestic basis that will complement the measures that the Secretary of State for Environment, Food and Rural Affairs is taking in a whole realm of cognate spheres?

I am grateful for the endorsement of my right hon. Friend, not least because in the previous Government he played the role he has ascribed to me with some deftness and success on many different occasions. He is absolutely right that agreeing to a withdrawal agreement would allow our continued participation until at least December 2020, giving us the time to put in place different arrangements, which would be in our gift. One reason we felt that it was important that British Steel should comply is that the institutions that drive compliance with emissions reductions targets should be respected. We want to send a clear signal that we expect the targets to be respected and implemented. That will take place while we are a member of the European Union and, as my right hon. Friend indicates, afterwards too.

I welcome the Secretary of State’s decision. Without it, there would be huge job losses in the industry. This crisis at British Steel has been caused by the uncertainty over our future membership of the EU’s emissions trading scheme. Given that half of steel manufacturing in this country is exported to the EU, our relationship with the EU matters hugely for the future. Why did the Government allow us to get into the position where British Steel had to pay upfront for its allowances, even though we remain a member of the EU today? Will the Government confirm what the liability to the ETS will be of British Steel and other UK steel producers should we leave the EU without a deal?

The position we find ourselves in is through no choice of the UK Government. It was the Commission that took the decision to suspend the availability of allowances. We are having constructive discussions with the Commission about the release of the allowances and that is why this arrangement is described accurately as a bridging arrangement. We want and expect to be able to have access to those allowances. Participation in the ETS is not a matter of entitlement. It is not available to countries outside the European Union without special designation, but the discussions we are having are constructive.

On liabilities and the nature of the transaction, I have written to the hon. Lady in her capacity as Chair of the Select Committee. I am very happy to follow that up and to give whatever evidence she needs to scrutinise the transaction.

I welcome the announcement of the support for British Steel, but with the greatest respect, what is the Secretary of State doing to support other UK-based steel companies that have already paid to meet their commitments and could now find themselves at a commercial disadvantage as a result of the action he has taken? Has he taken account of that and will he be able to offer support to other UK-based steel companies?

We of course make an assessment of the consequences. I think my hon. Friend will see, when he looks at the advice, that it seemed to be the right and responsible decision to ensure that this huge liability of over half a billion pounds did not suddenly crystallise in British Steel. We have a strong relationship with the steel sector. I might mention the industrial energy efficiency fund, worth £315 million. The steel sector is a prime example of how working to improve the efficiency of the technology deployed can help with our emissions reduction targets and reduce the costs of the sector. We are working with all companies in the sector to make that a reality. I know that, in his constituency capacity in south Wales, he takes a big interest in that.

No doubt carbon credits are a useful way of managing carbon emissions, but Brexit or not we need to become carbon-zero in a very short period of time. I wonder whether the Government are actually taking that urgency seriously. What are the Government doing continuing to support the fracking industry, which is a fossil fuel industry? Surely all we do needs to go into renewable energy?

The hon. Lady should know that we have one of the strongest records in the whole world in implementation and delivery of emissions reductions. It is important to acknowledge that mechanisms such as carbon pricing are one of the foundations of that, so it is important that the rules are respected. We are about to have a substantial debate on our next steps. I hope she will contribute to that, as am I. Perhaps we might have some further exchanges later this afternoon.

As important as the continuation of the ETS post Brexit surely is, does my right hon. Friend share the view that the really long-term solution for both heavy industry and a zero-carbon economy is the advent of carbon capture and storage, and hydrogen? What measures are the Government taking to advance those causes?

I agree with that. My hon. Friend gives me an opportunity to respond to what the SNP spokesman, the hon. Member for Kilmarnock and Loudoun (Alan Brown) referred to and I neglected to comment on. My hon. Friend is absolutely right that there is the opportunity for energy-intensive industries that are significant emitters to capture that carbon. We have a competition, which is being run at the moment, and sites such as Teesside have put in very impressive and attractive bids. I and my colleagues in Government want Britain not just to be one of the leading developers of the technology of CCUS, but to implement it to the advantage of our energy-intensive industries.

The term “cliff edge” is probably overused, but there is no doubt that British Steel was taken to the cliff edge on this one, with incredibly last-minute deals and negotiations. What steps will be taken to ensure that lessons are learned from this experience? Could the political declaration on the future relationship be amended to secure a commitment to the ETS? If not, we will end up at another cliff edge at the end of the transition period.

The hon. Gentleman talks about taking us to the cliff edge. It is a legal responsibility on the part of each emitter to comply with its requirements to surrender allowances. Notice was given, and as some of my hon. Friends pointed out, every other company acted on that. We were presented late in the day with a choice I described as unenviable. We responded to that pragmatically, and I detect in the hon. Gentleman’s tone a recognition that this is the right step. To avoid repetition of this situation, the advice from the company and the industry is clear: the House needs to come together, long before 31 October, and agree a withdrawal agreement that would result automatically in the ability to release allowances, not only for this year but for the following year too.

I very much agree with the steps taken by my right hon. Friend. However, is he essentially saying that this whole situation has arisen because the United Kingdom, and specifically our steel industry, is being punished by the European Union, despite our still remaining a member?

I would not put it that way myself. The suspension was put in place because we were liable to leave on 29 March. Given that the year to which the allowances refer is the calendar year from January to December, it was the observation that, as things stood, we were unlikely not to be a member of the scheme for the great majority of that year; now that we have agreed an extension of up to 31 October, that is clearly a different matter. The discussions we have had so far with the Commission have been constructive in recognising our ability to issue new allowances.

To what degree does the Secretary of State agree with the assessment in the Financial Times on 16 April that this situation could have been avoided had the company not sold surplus allowances from previous years, and therefore that this situation is a result of management failure by the private equity firm that owns British Steel for which the public are now expected to pay?

The hon. Gentleman reflects an accurate point: if the allowances had not been sold, they would be available to discharge the liability. This is by no means a unique practice; across industries and firms, it is a fairly common way to proceed. However, it might well command the attention of the House as to whether it is the best way to proceed.

I welcome the Secretary of State’s statement. It will be particularly welcomed by my many constituents who work at the Scunthorpe works, which, as he highlighted, supplies most of the rail network with track, which of course would have to be imported were the Scunthorpe works to close. Does he agree that this highlights that there is a cost to tackling climate change? It is far better that we approach that in a realistic, well-balanced way, such as the Government propose, rather than giving way to unrealistic demands from other groups.

I am grateful for my hon. Friend’s welcome. I know that his constituents would have faced a worrying time had this liability crystallised on the company. In fact, British Steel has free allowances to cover its emissions. It is not a question of this being, as it were, a punitive tax; because British Steel operates in an internationally competitive sector, it has allowances to cover the costs that it incurs. It is a question of matching up the timing of the new allowances with its obligations. In this case, we found a way to square that circle.

Today’s statement is about specific support for British Steel, and I completely understand the position we are in. However, as the hon. Member for Monmouth (David T. C. Davies) said, other companies out there that have incurred significant costs will ask what support the Government might offer to them. What will the Minister say to them?

The hon. Lady will know that, through the industrial strategy and our work with particular sectors, we have a strong record of investing in the future potential of industries. Steel is part of that, but as she will know, we have increasingly deep working relationships—whether with the automotive, life sciences or the creative industries, or other sectors such as construction—to make sure that we capitalise on our strengths in this country, which are innovation and discovery, putting ourselves at the cutting edge. That is available and is being well exploited across the economy. I hope and expect that the steel industry will be part of that investment in the capability and capacity to prosper in the future.

I thank the Secretary of State for his statement and his support for British Steel. The steel industry, by its very nature, has very high energy costs. What action is my right hon. Friend or his Department taking to reduce those costs and, in parallel, to reduce pollution from the steel industry, which is very important for the future of the United Kingdom?

I mentioned—it was announced in the spring financial statement—a new industrial energy efficiency fund worth a third of a billion pounds to partner with energy-intensive businesses in changing and upgrading their technology, so that they both consume less energy, and therefore have lower costs, and also produce lower emissions. As I said to the shadow Secretary of State, since 2013 we have provided nearly £300 million to energy-intensive industries in compensation for some of the effects of high costs. However, the way forward is energy efficiency, and that is the commitment that we made and backed in the financial statement.

I welcome this measure but, again, it is a reaction to potential failure, rather than a proper, coherent plan for the industry. That needs to be gripped robustly. Does the Minister accept that there is insufficient capacity within the European emissions trading scheme to provide free credits to companies subject to anti-competitive measures, dumping and distortions caused by firms trading outside the ETS? We need to increase the level playing field available to British Steel operating in that sphere, in which it is subject to distortions caused by firms outside the ETS.

The hon. Gentleman is right that we need to be vigorous in our trade defence mechanisms. Steel is a sector that all Members know is subject, and has been over the years, to dumping by global competitors. Through the G20 forum in particular, at which I have represented our country, we have been vigorous in pressing for the strongest measures against anti-competitive practices such as that, and we will continue to do so in the future.

I apologise for not bobbing, Mr Speaker; my back is showing my age and its abuse on the rugby field over the years, so I waited until the very last moment.

I think the Secretary of State has handled this brilliantly well. There was a danger that we stepped in really early on, as suggested by Opposition Members. The market needs to sort this—companies have obligations—and only as a last resort should taxpayers’ money be brought into the equation.

I am grateful to my right hon. Friend. He is absolutely right, and I do not want to say from the Dispatch Box that I have engaged again in this type of transaction. The obligations are with the company, and it would obviously have been much better had it been able to discharge them itself. However, sometimes we have to take decisions in office based on the evidence of the consequences. I felt, and was supported by advice that I received, that the responsible action in this case was to make this facility available, with the security that we have obtained, and to do so in time to allow the company to meet its obligations by the deadline.

British Steel workers will be glad that the Government have stepped in here, but in Wales 9,000 jobs rely on this whole sector, and many workers and their families in south Wales will be troubled by the wider situation. Can the Secretary of State please confirm whether the new fleet solid support ships will be built with UK steel?

The question of procurement is a very important one. We have changed the rules so that local economic, social and environmental impact can be taken into account in those procurement decisions, and we have also published for full disclosure for every Department and arm’s length body the details of what steel they procure.

As the hon. Gentleman knows, we cannot specify under the procurement regulations that the work should go to a particular firm, but we can make it possible to take in local effects and be transparent as to the decisions taken. Within the legal constraints, which the industry and the unions well understand, we are acting to make sure that the process is much more public than it has ever been before.