Manufacturing Industry and Emissions Trading

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

09:30:00

Mr. Adrian Bailey (West Bromwich, West) (Lab/Co-op)
I applied for the debate because a number of developments made it particularly appropriate to discuss the European Union trading scheme for manufacturing industry now. Before dealing with the substance of the debate, I welcome the Under-Secretary of State for Environment, Food and Rural Affairs, my hon. Friend the Member for Brent, North (Barry Gardiner), who I understand is deputising at the last moment for the Minister for Climate Change and the Environment. Having to respond to a debate on emissions trading at such short notice will be a supreme test of his ministerial multi-tasking ability, but I am sure that he is capable of dealing with it.

As secretary of the all-party group on steel and metal, I speak essentially from the steel producers’ perspective. I used the words “manufacturing industry” in the debate title because there are common issues with other manufacturing sectors; other Members with other specific manufacturing interests will thus be able to join in. My constituency has more foundries than steel companies, but although foundries are not covered by the emissions trading scheme, the issues are still relevant. In the black country, a significant number of jobs still depend on the survival and success of the steel industry.

The Stern report highlighted the potentially catastrophic consequences for the climate if carbon emissions continue unabated. The climate change Bill, the energy White Paper and the EU review of the emissions trading scheme post-2012 provide the United Kingdom with the opportunity to develop a clear climate change policy framework in which industry can plan its future carbon-reducing investments. Central to that is the development of technologies that will lead to reductions in carbon emissions, which will enable manufacturing industry to meet the demands of consumers in developing economies without leading to the consequences outlined in the Stern report. The challenge for the Government is to provide the correct regulatory framework to promote that change.

The UK produces only 2 per cent. of total world emissions, and the greatest challenge is in leading the rest of the world in developing low-carbon economies. The EU emissions trading scheme—the ETS—is a worthy first attempt at providing an international industry and environment regulatory structure designed to reduce carbon emissions. The first phase runs from 2005 to 2007, so it is appropriate now to examine the deficiencies of that phase and to look for improvements in the next phase, which is to run until 2012. During the second phase, we will have the opportunity to research and develop new provisions, not only to reduce emissions in Europe but to provide an example and a model that could be developed for non-EU countries. Not only would that make a significantly greater impact on climate change, but it would offer European industry the opportunity to develop technologies that can be adopted by other countries.

In order to demonstrate the flaws in the first phase of the scheme, it is important to understand its structure and methodology. Companies are allocated a certain number of carbon allowances, based partly on their historical record of carbon emissions and partly on their projected use of carbon in the years to 2012. Any carbon consumption over and above those allowances will mean that companies have to buy carbon credits from other companies that have underused their allocations.

The first flaw in that approach is that companies with a history of less energy-efficient means of steel production receive more credits. The second is that companies seeking to expand production beyond their original projections, to meet rising world demand, will have to buy extra credits to do so, thereby incurring costs in addition to those associated with new investment. In effect, that is an extra financial penalty for companies that want to invest in newer and potentially cleaner processes.

Dr. Hywel Francis (Aberavon) (Lab)
I congratulate my hon. Friend on securing this important debate and on the way in which he has led the all-party group on steel and metal, together with my hon. Friend the Member for Llanelli (Nia Griffith) and my hon. Friend the Member for Sheffield, Hillsborough (Ms Smith), who is the successor to a distinguished former chairman of the all-party group. Will my hon. Friend the Member for West Bromwich, West (Mr. Bailey) address the debate not only to colleagues in Westminster but to steel communities across the UK? Two important issues have arisen from discussions in my constituency and nationally with Corus and trade unions. The first is the need to continue to recognise that the steel industry is strategically important for the United Kingdom. The second is the inconsistent way—

Mrs. Joan Humble (in the Chair)
Order. I ask the hon. Gentleman to resume his seat. He is making a speech rather than a brief intervention. I am sure that his hon. Friend has heard what he has to say.

Mr. Bailey
I understand the thrust of my hon. Friend’s remarks. Although the steel industry may not employ the numbers that it used to, it is still of strategic importance as part of our manufacturing architecture. The European regulations are crucial to its survival, and the steel industry is crucial to the survival of a large section of our manufacturing industry. Many more people than those directly employed in it depend on the steel industry for their jobs.

Bob Spink (Castle Point) (Con)
The hon. Gentleman is right to bring this subject before the House, and I congratulate him. Does he feel that increasing manufacturing costs through the ETS and in other ways might displace production to third world industry, which is less clean and which might damage the atmosphere even more? Is not the real solution what he suggested earlier—technologies to remove carbon from production, such as carbon capture and storage, that apply as much to steel manufacturing as to power generation?

Mr. Bailey
The hon. Gentleman makes a valuable point, and I intend to cover it later in my speech. There are threats and opportunities: if the matter is handled wrongly it will be a problem; if it is handled correctly it will be an opportunity.

The third flaw in the scheme is that is that companies with a history of inefficient technology and higher carbon emissions can compensate for their inability to develop by selling their unused allowances. As a result of decoupling the carbon allowances system from energy efficiency and relating it purely to levels of production, the scheme has developed a number of perverse incentives that hamper investment and production in the UK while contributing little to the reduction of carbon emissions.

That problem was compounded in phase 1 by the national allocation plans of various EU countries. The Commission decided to adopt a decentralised, co-ordinated model that allowed some countries to allocate over-generous allowances to their own companies. The processes for arriving at the level of allowances were not always robust, and they led to weak caps in a number of countries. Only Ireland, the UK, Spain, Austria and Italy set tough targets; other countries over-allocated. Indeed, such was the level of underuse of allowances in some countries that the excess of carbon credits on the open markets actually caused the price to crash. While that may have provided some short-term compensation for overusers of carbon in countries such as the UK, that approach is counter-productive to the ultimate goal of reducing emissions. It is now expected that at the end of phase 1 the majority of countries will have used less than their level of allowances, which seems to negate the purpose of the scheme. It is hardly surprising that the first phase is not expected to yield any net reduction in emissions at all.

I will summarise the shortcomings of the scheme as it operates at the moment. First, it requires Governments to second guess how much steel companies will be producing many years in advance. Secondly, it rewards failing companies and penalises growing companies. Thirdly, there are wide variations across Europe.

Improvements are planned for the second phase, although only time will tell whether they are realised. There is evidence that the current round of national allocation plans is more transparent. It is significant that, so far, nine of the first 10 plans submitted to the European Commission have been rejected because they are not consistent with the Kyoto commitments. The Commission is insisting on plans that will deliver a reduction in carbon emissions of 7 per cent. below those of phase 1. It is essential that the Commission remain robust in its approach, otherwise it will undermine the effectiveness of the scheme as a whole.

Such changes are to be welcomed and, if implemented robustly, there is no doubt that they will achieve a reduction of carbon emissions in Europe. However, phase 2 does not address the fundamental flaw in the scheme: the failure to relate carbon credits to energy efficiency. If Europe is to develop to provide an exportable model to reduce carbon emissions worldwide, that flaw must be eliminated in phase 3, which is to start in 2012. The time to consider that is now.

Mr. Robert Goodwill (Scarborough and Whitby) (Con)
The hon. Gentleman talks about reductions in CO2 production; perhaps he should also talk about exports of CO2 production. He mentioned exporting the model of the European scheme, but we are already exporting our emissions to places such as Donetsk in the Ukraine, and to India and China. We should try to move forward internationally rather than regard the European Union as a little fortress, standing on its own.

Mr. Bailey
The hon. Gentleman makes a valuable point, which I shall mention when I sum up.

The steel industry advocates an alternative model that would achieve the objectives relating to carbon emissions without putting UK and European steel manufacturers at a competitive disadvantage to other international manufacturers. The concept, in essence, is that a series of baseline CO2 emission factors would be calculated as an average for the whole of the EU steel industry; those would be varied according to the type of product produced and the type of process used. At the end of the accounting period, each company would have its actual emissions assessed against those baseline figures multiplied by the volume of steel produced. If a company’s performance was worse than the baseline it would need to buy allowances to compensate; if its performance was better it would receive equivalent allowances for sale. That system would reverse the existing perverse incentives.

I emphasise that those are not a set of self-interested proposals advanced by the steel industry. Such an approach was advocated in a paper by the Centre for European Studies in 2005, and was also highlighted in the Institute of Public Policy Research report on the future of the scheme. The report states that,

“a major step forward would be for the European Commission to develop common allowance allocation methods that use benchmarks based on production capacity and best available technology”

I emphasise the last few words. The report goes on to state that,

“This would be a substantial undertaking, requiring extensive data-processing and difficult negotiations. Nevertheless once industry benchmarks had been agreed it might be relatively easy to tighten them”.

Ultimately that must be the right approach. In a world economy where the demand for steel is likely to increase for the foreseeable future, there is little point in curbing steel production and carbon emissions in Europe. Companies in other countries that are not part of any emissions trading scheme can expand their production to fill that gap with processes that are either equally or more carbon intensive.

On the auctioning of carbon credits, in phase 1 member states only had the discretion to auction up to 5 per cent. of allowances, and few did so. In phase 2 that will increase to 10 per cent. There is a body of opinion that says that there should be no free carbon allowances for companies and that they should buy their credits in auction on the open market, as they do any other raw material. There can be no doubt that the auctioning of carbon allowances is the most effective method of allocating carbon resources. However, on the international market, some companies that have to buy carbon credits to expand production will be at a severe competitive disadvantage with other companies outside the scheme that do not have to buy carbon credits. It is estimated that such a policy, even with the currently low carbon prices, would add around £150 million a year to UK steel industry costs and £300 million a year to the UK chemical industries costs. Once again, the consequences could be the export of production to less energy-efficient companies in countries not in such a scheme. We would suffer the double hit of a loss of jobs and production here and potentially higher carbon emissions internationally.

Martin Horwood (Cheltenham) (LD)
I agree with the hon. Gentleman’s analysis. He is highlighting a real problem, but can he explain why benchmarking based on production capacity as opposed to historical emissions, as in the present scheme, would avoid carbon leakage? Surely, even the scheme he advocates would impose costs on some companies, which might avoid those costs by moving to other international locations.

Mr. Bailey
I was not advocating benchmarking based solely on production capacity; cleaner technologies are also important. In effect, if there were a system that incentivised cleaner technologies within the framework of international negotiations, it would be easier to export that model and we would not be at such a relative competitive disadvantage. That is the broad approach that could be adopted.

A further problem is that if there were a single carbon auction market for all manufacturing sectors, certain industries would suffer another disadvantage. Some industries such as steel cannot easily pass on costs to their consumers, whereas others, such as electricity generation, can do so. Industries passing on costs could bid up the price of carbon and cause problems to other users who cannot do so. Those users would suffer a double hit of having to pay both the higher carbon prices driven up by users such as the electricity industry, and the higher electricity prices resulting from the auction.

The subject is complex, with different industries having different priorities, but I believe that a number of principles should underpin the Government’s input to the debate. First, existing provisions should be tightened up to ensure a level playing field throughout Europe. Secondly, future allowances should be based on production and technology, not just output. Thirdly, the EU must press for comparable emissions trading schemes in other industrial blocs in the rest of the world. There are embryonic schemes in various parts of the world, and impetus needs to be given to their development in international negotiations. Fourthly, full auctioning of carbon credits should not take place until there is a critical mass worldwide of companies involved in such schemes. Lastly, carbon auction markets should be sectoral to avoid certain manufacturing sectors being better placed to outbid others. If we take that approach, we can promote energy efficiency in industry in the UK and abroad, and reach our Kyoto targets in Europe. It will also provide a model for other, developing nations in other developing schemes to enable them to play a part in the process.

09:51:00

Nia Griffith (Llanelli) (Lab)
I congratulate my hon. Friend the Member for West Bromwich, West (Mr. Bailey) on securing a debate on this very important topic. It will be no easy task for the Minister who has responsibility for it to negotiate the 2013 phase of the EU emissions trading scheme, and I should be very grateful if the Minister present today would work alongside ministerial colleagues. I am sure that by the end of this debate he will be an expert on many of the issues, and we hope that he will take forward the message from the debate in the tricky negotiations that lie ahead with the large number of EU states that have very different priorities.

As chair of the all-party group on steel and metal, and representing Llanelli, a constituency with a long and proud tradition of steel and metal industries—famously symbolised by its saucepans but perhaps not quite so well known as the home of the first ever brewery in Europe to put beer in cans—I shall concentrate on the metal industries, but I urge the Minister to take into consideration other energy-intensive industries, which face similar issues.

I have long been committed to environmental issues, and industry has made considerable progress over the years both in cleaning itself up and in increasing efficiency. We have come a long way from the days of filthy smog, but now we have to face the much greater challenge of not just cleaning up but trying to reduce emissions.

The EU ETS is the largest multinational greenhouse emissions trading scheme in the world and shows the EU’s determination to tackle climate change and global warming, but it is global warming that we are talking about. It is no good having a scheme that reduces EU emissions by driving industry out of the EU, because emissions, wherever they are produced, will contribute to global warming.

Bob Spink
Will the hon. Lady acknowledge that the ETS proposed by Europe does not reduce emissions until at least 2025 and that that is simply complacent?

Nia Griffith
We have to recognise that we are at least talking about these issues. Whatever people’s views of the EU, at least a number of member states are coming together to discuss the issues and saying, “This is more than something that just one country can solve.” Obviously, the more we can push that out to include a larger number of nations, through initiatives such as the Kyoto agreement and some of the things happening in individual states in the US to influence their Government to come on board, the better. It is very important that we do all that, but we have to start somewhere. We are well aware of the imperfections of the current scheme, which is why we are having this debate and why we want to ensure that, for 2013, we are going in the right direction. It is no good thinking that we can just clear away the dirt from here and have something produced elsewhere, because emissions do not work in that way. Wherever they come from, they affect the whole world.

We need an effective ETS that protects the environment but is pragmatic and does not become just a commercial liability for the UK and the EU. We have a lot to learn. We need to work out how the ETS works and what effect it creates. There have been widely differing interpretations of the scheme from one EU member state to another. Put simply, some Governments have been much more lenient in allocating allowances than others. The UK has been particularly strict. Governments have also used different criteria to set allowances. That is leading to a situation in which companies are tempted to shop around and switch production according to which Government’s criteria will afford them the best advantage. It is frightening enough for us to face the fact of companies switching production across the globe where labour prices are cheaper than anything we could ever replicate in the EU, but when companies are tempted to move production to countries such as the Netherlands, with its comparable costs and high environmental standards, simply because the Dutch Government interpret the ETS differently from the UK Government, clearly we need to re-examine the ETS.

Before I move on to the detail of the ETS, it is important that we stress the need to support research initiatives aimed at developing less polluting technologies. The European steel industry is already working towards that end: 48 European companies and organisations, led by a core group of steel producers including Corus, have entered a major research project with the aim of achieving a significant reduction in CO2 emissions to the atmosphere. The project is called ULCOS—ultra-low CO2 steel making. It is a €44 million, part EU-funded, multi-partner research and development initiative to investigate new steel production processes that would significantly reduce CO2 and other greenhouse gas emissions compared with current production methods. The consortium is further composed of suppliers to the steel industry, research institutes, small and medium-sized businesses, and universities. A 50 per cent. reduction in atmospheric CO2 emissions has been set as the target. We need to commend the members of the consortium on the initiative and support them even more.

The financial support from the EU via framework 6 and the research fund for coal and steel programmes is a laudable first step, but we need to go further. The British steel industry in particular has expressed concerns that as the EU ETS is currently devised—a regional cap and trade system with an underlying allocation process that shifts with each successive phase—there is no real incentive to invest in new, less polluting technologies. In fact, the system as it stands in its initial 2005 to 2007 phase encourages output reduction instead of investment in operational efficiency. In that framework, there is every likelihood that if a new technology such as carbon capture and storage were to be fully developed and subsequently deployed, the future allocation would be reduced, thus negating the value of the investment in generating CO2 credits that can be sold to cover the significant research costs, and leading to a lack of incentive to improve. Instead, we should be trying to increase production at the most energy-efficient plants and ensuring that companies have incentives to invest in the best technology and thus drive down emissions in the long term.

Gregory Barker (Bexhill and Battle) (Con)
The hon. Lady is a very articulate champion for the sector, but she does frequently use the phrase “long term” and she talks about technological development, which is also a long-term issue. If we accept the science that we have a relatively short window—a maximum of 10 years—in which to make a substantial difference in reducing CO2 emissions, does she see these solutions as part of the bearing down on CO2 that we need to do within the next decade?

Nia Griffith
Indeed. We have to accept that there are short-term and long-term goals. We have to use everything that we can because the situation is so grave, but we must be realistic about what we can do in terms of research and development. We are talking about 2013. That is only six years away and we must be realistic about the time that it takes to develop new technologies. We certainly need to look at other sectors, which I shall come to in a moment, in respect of emission reductions.

From 2013 onwards, we need to move to a more sector-based regional baseline and credit system, with allowances for better-than-standard performance. That could provide a much more positive incentive for the commercial implementation of several forms of technology, including carbon capture and storage. Current carbon allocations depend on forecasting how much steel will be produced, but it is often difficult to predict that exactly so many years in advance. We therefore need a scheme that encourages efficiency, regardless of the volume baseline.

The benefits of such a solution are many; efficiency and manufacturing performance in the EU steel sector would become the basis of allocation and that allocation would be adjusted for actual output. The benefits would include the removal of the reliance on imperfect forecasts of output, the development of more efficient installations and the removal of distortions to competition in the EU. Ideally, of course, the more we involve countries outside the EU and develop worldwide systems for reducing emissions, the better.

We now need a scheme that judges each industry sector on the basis of best practice in that sector, rather than an all-encompassing trading scheme for all sectors that fails to take into account the different circumstances in different industries. To be more specific, all-inclusive trading schemes run the risk of failing to reduce overall emissions and causing considerable disparities between those industries that can pass on costs to consumers and those that cannot. 

I congratulate my hon. Friend the Minister for Climate Change and the Environment on his willingness to challenge the aviation industry to face up to climate change. Domestic flights, whether internal to the UK or the EU, are a good example of an industry that could pass on the cost of its carbon allowances to the consumer, because all competitor operators in the EU would be subject to the same scheme. That contrasts sharply with the situation of the steel and manufacturing industries, which face stiff price competition from countries outside the EU, where companies are not subject to the EU scheme. As a result, EU-based companies collapse in the face of competition or move their factories to countries with much more lenient conditions. Either way, that has a devastating effect on our manufacturing industry, in which we have built up skills over many years. That could lead to large job losses and an overdependence on imported steel.

Nor does such a situation do any good in terms of global warming, because the companies involved will continue to produce emissions; indeed, the reverse could be true, as companies take advantage of less stringent conditions outside the EU and produce more emissions than they would have done in the EU. They might also use older and more polluting equipment, and there might be the thorny issue of less generous conditions for workers and less rigorous health and safety expectations. Indeed, more emissions might be produced, because more products would have to be transported around the world.

We therefore need to look carefully at the effects of lumping everyone together in one ETS, under which the price of emissions credits could, for example, rise sharply, as the aviation sector buys in more credits from other sectors. Although it makes sense to expand the number of activities that come under the ETS, we need careful mathematical modelling to determine the possible effects of mixing different sectors together. There is a real danger that we will end up not reducing overall emissions or encouraging industry to develop best practice.

We also need to look at the knock-on effects of having the ETS in one sector on other sectors. For example, electricity does not have a single price in the EU, and there are several reasons for that, some of which are more transparent than others. Again, the ETS gave Governments leeway to apply its provisions in different ways to the electricity generating industry, and that has different knock-on effects on industry in different countries. Electricity generators are not subject to international competition in the same way as manufacturing industry, so they can pass on the full costs of the ETS to the consumer, with considerable effects on high-energy users.

There is also a real risk that high credit prices will lead to substantial political pressure from consumers, the public, national Governments and Brussels to reduce the environmental stringency of the ETS. That would be a catastrophic development, which would take us back several years, to a much more inactive and complacent past. Let me point out, however, that my colleagues in the European Parliament have already expressed their opposition to plans to include aviation in the ETS. Last July, they voted in favour of creating a separate closed or semi-open trading scheme for aviation, in which airlines would buy credits from the ETS on a carefully limited basis.

We need to be careful about the dangers to the environment and UK commercial competitiveness of inflexibly applying the scheme to sensitive industry sectors. We need to be clear about that with our European partners and particularly the European Commission. In some of this country’s industry sectors—steel is undoubtedly one—the inflexible imposition of additional costs can prove lethal. The UK steel industry and steel workers have done everything in the realm of feasibility to drive down costs, and any unreciprocated increase in the cost of production could leave them exposed to fierce competition from low-cost countries in the developing world.

Dr. Francis
My hon. Friend is making a telling case. Has she posed those questions to Ministers from the Department for Environment, Food and Rural Affairs across to the Department of Trade and Industry? If so, has their response been consistent? Implicit in that question is the further question of whether she would agree that we need to take a step backwards and establish a Department of Energy to address these important issues.

Nia Griffith
Initially, the issue was a little cloudy, and we were not sure whether we should have been dealing with DEFRA or the DTI. The important thing, however, is that we are on a learning curve and that Ministers in both sectors need to be well aware of the issues involved. We are all working together in the EU to get the best out of the scheme, although any new scheme will inevitably throw up effects that we had not dreamed of. However, I take the point that energy is such an important issue that we need to give it all possible governmental support, particularly as we work out what to do in the future.

On the issues that we currently face, only 30 per cent. of the world’s steel producing countries have signed up to the obligations in the Kyoto agreement, while 70 per cent. remain outside it. Of those, 50 per cent. are countries such as China, India, Brazil and Korea, which are not covered by Kyoto, and 20 per cent. are countries such as the US, which have not ratified Kyoto.

Martin Horwood
The hon. Lady may not be aware of this, but India, and China are covered by Kyoto, and that is probably true of the other nations, too, although I am not certain about that. They are signatories, although they were not set targets in the first phase.

Nia Griffith
That is the point; they were given different conditions because they are developing countries. That is different from the case of the US, which refused to ratify Kyoto. Those countries are not covered by the same stringent conditions as we are, but they were involved in the negotiations.

Most frighteningly, 90 per cent. of all new capacity is being developed in countries that are not covered by Kyoto. As a G8 country and an influential EU member, the UK must continue to take the lead that it took on Kyoto and use its influence to develop worldwide schemes.

To sum up, I urge the Minister to work with UK and EU colleagues to develop schemes that take an efficient but pragmatic approach to EU emissions trading. Such schemes should involve the development of cleaner technologies, with a recognition that their development needs active support, not only at the research stage but in terms of creating a favourable business context that will render such technologies an attractive option.

Gregory Barker
In the interests of clarity, may I ask a question? When the hon. Lady says “active support”, does she mean subsidy?

Nia Griffith
That is something that we will have to look into. What we are really talking about is incentivisation. The scheme should provide an incentive to produce a certain number of tonnes of steel in a more efficient and more environmentally friendly way, rather than simply reward a reduction in production. We are looking for the best possible practice in the sector.

We should develop a suitable context, which rewards better-than-standard performances and in which people are committed to sustaining such performances. We should also undertake a careful analysis of the problems involved in mixing a range of different activities into the same scheme, when the capacity of the sectors involved to pass on costs is very different. I should appreciate it if the Minister would carefully consider a credit-based system that would help to pre-empt inflation of prices and emissions, and would not run the risk of collapsing under the burden of its own poor planning. We need to develop a flexible credit system that will take into account the need for reciprocity; we also need to realise that the problem is a global one, and that any scheme that fails to address it as such could increase greenhouse gases worldwide. I ask the Minister to take those points on board. I hope that in the difficult negotiation with our EU partners and the worldwide community he will consider carefully how to ensure that each industry will do its best, and that the outcome will not be part of a global muddle with other systems and industries which cannot be comparable.

10:10:00

Ms Angela C. Smith (Sheffield, Hillsborough) (Lab)
I congratulate my hon. Friend the Member for West Bromwich, West (Mr. Bailey) on securing this important debate, and my hon. Friend the Member for Llanelli (Nia Griffith) on her contribution. I shall speak—briefly, I hope—on the steel producers’ perspective on the matter. I am aware that, as my hon. Friend the Member for West Bromwich, West made clear, the debate is relevant to other industries too, but because I represent the great steel city of Sheffield I must focus on the steel industry. The industry is, indeed, still relevant not just to Sheffield but to the whole of South Yorkshire. Rotherham is of course one of the other great producers of steel, even now. I want to echo much of what my hon. Friend said about the emissions trading scheme. Its objectives are worthy, but it has shortcomings, and I hope that the Minister will respond fully and positively to the way forward that he outlined.

My interest in the steel industry arises, of course, from the location of Corus Engineering Steels in my constituency. Corus Engineering Steels is a division of Corus UK. It has two main plants—one in Rotherham, at Aldwarke, and one at Stocksbridge. Stocksbridge is in my constituency and employs between 650 and 700 people. In total, more than 2,000 people work for Corus Engineering Steels in South Yorkshire, so it is incredibly important to the future of the steel industry there. It is critical to my constituents that companies such as CES should be given a level playing field for the emissions trading scheme. An important point that has not yet been made in the debate is that they provide significant high-value, highly skilled employment. The Chancellor has repeatedly made the point that if we are to compete in a global economy we shall have to continue to develop and secure the future of companies such as CES in this country. Not only will we have to develop our young people, so that they may have the skills to continue in those industries; we shall have to allow those industries to keep ahead of the field and to continue their work in securing their top place in the international production of steel and materials for manufacturing.

The products of CES in particular are used for manufacturing precision components by the aerospace, automotive, energy-related and specialist mechanical engineering industries. Remelted steels are used for aerospace and high performance engineering, and quality approvals for their products have been given by British Aerospace, Bosch, Caterpillar, Rolls-Royce and Siemens, to mention only a few. Hon. Members will understand from what I have said that my main concern is that high value and important companies of the kind I am concerned with should be given a future. The importance of that future and of continuing to develop the relevant technologies is recognised by the industry and companies such as CES, whose apprentices undergo a rigorous programme to NVQ level 3. Its employees generally are encouraged to undertake academic study continually, to HNC and degree level. If we are to meet the Chancellor’s objectives of ensuring that this country has a highly skilled work force who are capable of competing in the global economy in the next 20 years, we must do our utmost to ensure that such companies can compete. That is why we want the Government to do their bit to ensure that approaches such as the emissions trading scheme offer a level playing field.

On the environmental front, some hon. Members may be surprised to learn that the specialised steel production industry uses scrap metal for its basic raw material, and is thus a good example of recycling. When we think of recycling we often think of paper and paper-based products, but one of the first, and best, examples of good recycling in this country was in the specialised steels industry. That should be recognised in the context of the emissions trading scheme; the starting point of the industry is the use of materials that would otherwise be difficult to dispose of. I should like the Minister to deal with that point.

The specialised steels industry is committed to improving its energy use and to developing new technologies wherever it can, in both the short and the long term. The question has been raised this morning whether new technologies can be developed quickly enough to deal with the challenges presented by global warming, but we should not forget that very small refinements to the manufacturing process which improve energy efficiency are also important in reducing carbon emissions. The emissions trading scheme should be flexible enough to recognise that.

Many of my constituents and their families rely, even now, on the steel industry for their livelihoods. They value the well paid, highly skilled jobs offered by companies such as CES. It is imperative that the methodology of the emissions trading scheme is reviewed, to create the fair trading conditions that are so critical to the British steel industry—an industry, by the way, that became once again a net exporter of steel in 2005. I do not think that the value of that should be underestimated. For me, coming from a family in which there have been generations of steel workers, but which now has none, that achievement is tremendous. I am proud that that position has been gained after all the problems of the 1980s and 1990s, and I do not want us to lose it. I want us to consolidate it, on the basis of a responsible attitude to emissions trading and the reduction of carbon emissions in the manufacturing process.

As I said earlier, I echo the view of my hon. Friend the Member for West Bromwich, West about the way forward. The shortcomings of the current methodology are that it requires the Government to second-guess how much steel companies will produce for many years ahead and, more than anything, that it rewards failing companies and penalises growing companies such as Corus UK and Corus Engineering Steels. There are wide variations across Europe, never mind internationally, and that is unacceptable. We need a sectoral agreement, as has been outlined by my hon. Friends the Members for West Bromwich, West and for Llanelli, which will de-link allocation from the volumes produced and relate it instead to energy efficiency—on both a small and a large scale. That agreement should be flexible enough to enable improvements in energy efficiency to be recognised, and should be common to all EU member states. Of course we need to remember the EU’s responsibility to exert international pressure for a similar approach.

I hope that the Minister will respond positively and remember the importance of the steel industry, and manufacturing generally, to this country’s future position in a global economy.

Mrs. Joan Humble (in the Chair)
I advise hon. Members that I intend to call the first Front-Bench speaker at 10.30.

10:19:00

Dr. Ashok Kumar (Middlesbrough, South and East Cleveland) (Lab)
I start by congratulating my hon. Friend the Member for West Bromwich, West (Mr. Bailey) on his eloquent testimony in defence of the steel industry. It is a great credit to him that he articulated the case for the steel industry so well. I worked in research and development in that industry for 15 years, when I tried to solve some of the problems that we are discussing. I praise my hon. Friend for securing this debate.

I agree with my hon. Friends about the importance of the steel industry, which we in this country have worked hard to make a success. We have gone through tough times, such as some of the times when I worked in the industry, and now the good times have emerged. I ask my hon. Friend the Minister not to jeopardise all the success and the jobs of people who work in the industry. As someone who represents the Teesside steel industry, where many of my constituents work, I ask him to bear it in mind that several thousand jobs are at stake. He is familiar with the area because he has visited my constituency. However, I want to focus not on the steel industry but on the chemical industry, which is certainly an issue on Teesside. Emissions trading is important for our area and the chemical industry plays an important part in that.

The energy requirement of the UK chemical industry is responsible for only about 4 per cent. of total UK carbon dioxide emissions. Through its trade association, the Chemical Industries Association, the chemical industry has been measuring and improving energy efficiency for many years. In 1997, the CIA was the first trade association to enter into a voluntary agreement with the Government, and it has negotiated a climate change agreement with them. The chemical sector has a target of a revised energy efficiency improvement of 19 per cent. by 2010 from the levels in the base year of 1998, which will bring the total energy efficiency improvement between 1990 and 2010 to 34 per cent. That target is achievable given that the chemical sector has improved its energy efficiency by 19.5 per cent. since 1998. As an engineer, I know the importance of emissions. Given their effect on plant efficiency and product cost, we have to have a technology-led programme for the reduction of emissions because it makes good business sense.

I want to raise two issues with the Minister about the chemical industry in my area. The first is a plea from a chemical company called Terra Nitrogen UK regarding something called joint implementation, which comes under the emissions trading arrangements of the Kyoto protocol. Joint implementation enables companies to undertake projects to reduce greenhouse gas emissions and allows Governments to use the credits against their Kyoto targets or for the company to use them itself within the EU emissions trading scheme. Terra wants our Government to support a domestic joint implementation project, but I am told that they are against that idea. Other EU countries such as Germany and France support such schemes—indeed, France is already developing a regulatory framework for such a scheme—and I ask the Minister to consider the pleas of companies in my area and take this matter up seriously.

The second issue that I want to discuss concerns Centrica, which is committed to participating in the UK’s first complete clean-coal power generation project at a cost of £7.15 million. With its technology development company, Progressive Energy, it has agreed to set up a new energy undertaking called Coastal Energy Ltd, which will seek full consent for the right to construct a new clean-coal power station in Teesside. The project would be the first to combine integrated gasification combined cycle with carbon capture and storage capabilities. That would mean the development of a clean-coal power station to supply electricity for British Gas customers, together with a pipeline and storage project to capture CO2 emissions for under-sea sequestration in the North sea.

Emissions trading is crucial to the financial viability of the project because it will provide a basis for the selling price of captured CO2. Long-term economic certainty over the payback period of the £1 billion investment project is important. Crucially, the project’s CO2 pipeline is likely to be oversized so that it can carry captured CO2 from other large emitters in Tees valley. It is certain that the construction of the power plant, the commissioning of its equipment and the development of the associated offshore pipelines would bring many construction jobs at a difficult time for such jobs in Teesside. Of course, it would also enhance our manufacturing bases in Teesside and the north-east. I hope that the Minister will look at the consents for the scheme which will be coming his way and consider the concerns of the chemical industry in my area that I have mentioned.

I would like to reinforce what my hon. Friends have said about the steel industry and its future. I could have gone on for hours about the importance of the steel industry—

Gregory Barker
The hon. Gentleman is making an interesting, short speech. Does he believe that the success of the Centrica clean-coal plant depends on each sector being segregated within the ETS, or on cross-sectoral emissions trading?

Dr. Kumar
I do not have a fixed view either way. It does not matter which route we follow. Only when we look at the overall problem down the line will we learn whether it has worked. All I will say to the Minister is that he must make the right judgment, as the wrong one could cost us dearly—certainly in industries that we have worked hard to make successful, of which the steel industry is a living example. It was the most profitable industry in the world, but hundreds of thousands of jobs were lost in the 1980s. It is now going through a transition period—I am thinking particularly of Corus. In the spirit of what my hon. Friend the Member for West Bromwich, West and others have said, it is crucial that we consider the importance of steel, especially for our regions, and the fact that the industry has gone through difficult times. I ask the Minister not to jeopardise the success and achievements of Corus and other steel companies when he takes a decision on this matter.

Mrs. Joan Humble (in the Chair)
I previously advised Members that I wished to call the first of the Front-Bench spokesmen at 10.30 am, but the hon. Member for Bishop Auckland (Helen Goodman) wishes to speak. If she is very brief, I will call her.

10:28:00

Helen Goodman (Bishop Auckland) (Lab)
I am most grateful, Mrs. Humble, that you have called me to speak at this late moment and I am sorry that I was not here at the beginning of the debate to hear what everyone else had to say. I shall make a few brief points. 

It would clearly be a nonsense to set up a tight regime here that would mean closing down UK and European manufacturing that is relatively efficient in terms of emissions and then importing goods—particularly heavy metals and heavy manufacturing goods—from countries where they are produced inefficiently. I have two suggestions as to how we could deal with that problem.

First, we need proper pricing of shipping and aviation fuel, as that would change the economics of local production—the alternative is the production of goods in faraway places—and would apply equally to people in this country and in Beijing. Secondly, the emissions trading scheme could examine sectoral agreements, so that we do not put financial services into competition with steel production or heavy manufacturing, as any economy needs some of those things. It is necessary to cut the cake horizontally as opposed to vertically, as it were.

10:30:00

Martin Horwood (Cheltenham) (LD)
I congratulate the hon. Member for West Bromwich, West (Mr. Bailey) on securing this crucial debate. He rightly described the European emissions trading scheme as a good first attempt. It has flaws, which we are exploring, but it has put Europe at the leading edge of greenhouse gas action and has focused corporate attention on climate change and CO2 reductions among companies responsible for 46 per cent. of Europe’s CO2 emissions. It incentivises clean technology and a reduction in energy use, but, given the bigger picture, it should do so.

Some pejorative references to fortress Europe were made by the hon. Member for Scarborough and Whitby (Mr. Goodwill), who is no longer in his place, but another advantage of the European emissions trading scheme is its international linkages. It enables companies in places such as the United States of America, and states and projects in the developing world to participate in the wider scheme. It is unfair to say that the ETS reinforces fortress Europe. In effect, it is the first building block of a global scheme, and all the better for that.

The analysis made by the hon. Member for West Bromwich, West was typically astute and his solution sounds logical, as do those made by other hon. Members, when applied to the steel industry alone. In effect, he suggests benchmarks based not on historic emissions but on production capacity, best practice and other analysis. Such a scheme would be complex and could penalise growing companies, and it would be open to the same problems of application between different countries that apply to the current emissions trading scheme.

There is a more fundamental problem with a sectoral approach. Let us consider its application not to steel but to wind energy. Would we say that the least efficient wind energy companies would also be penalised for emissions over their baseline and that that industry would be treated in the same way as much more carbon-intensive or energy-inefficient industries? That example begins to expose the flaw in a segmented, sectoral approach. One of the beauties of the ETS is that it allows flows between sectors. In its simplest and most efficient form, it should steer carbon reductions to the parts of the economy where they can be most cost-effectively and efficiently made in economic terms. The sectoral bureaucracy advocated by some hon. Members would fatally undermine that system.

Valid concerns have been raised, and the scheme must be introduced properly. The Carbon Trust has said:

“Overall our findings do not support the view that the EU ETS threatens the competitiveness of industry in Europe for most sectors, providing that EU Member States take a broadly consistent approach.”

Consistency is important, and the hon. Member for West Bromwich, West pointed out some of the inconsistencies between countries. Any hon. Member wishing to study the WWF’s country-by-country analysis of how national allocation plans have worked is in for an entertaining but depressing read.

Sir Nicholas Stern, using typical economist’s language, said:

“To reap the benefits of emissions trading, deep and liquid markets and well designed rules are important.”

That is right. The importance is not just in terms of economic competitiveness and fairness, because bad rules allow carbon leakage to economies with worse emissions. China is often criticised for its rising manufacturing emissions, but whose goods are being manufactured there? Many of the goods are destined not for Chinese consumers but for western markets.

The Carbon Trust examined the competitiveness threat of the EU ETS and identified two crucial factors—price and allocation, and exposure to competition in various sectors. On price and allocation, it, too, conceded that phase 1 was a bit of a sorry tale. WWF’s analysis shows instances of cheating and of wishful thinking, such as Finland’s counting of emission reductions from nuclear power stations before they have even been built. However, everyone concedes that that was the testing phase in the ETS and that it was never supposed to work perfectly the first time. We were to work out how the thing would happen in practice during that phase.

There is a risk that phase 2, in concentrating on levelling the playing field and ironing out some of the inconsistencies, might encourage countries that performed better in the first round, such as the UK, to take their foot off the accelerator. Friends of the Earth has criticised the Government’s business-as-usual approach in the national allocation plans for phase 2. The Government have reasonably responded that in real terms, when the number of installations is taken into account, a reduction is involved, and I understand that.

There are other indicators that the Government are not pursuing this process quite as aggressively as they could be. Why is the full possible auction allocation of 10 per cent. not being taken up? Why are they planning for only 7 per cent., when Sir Nicholas Stern and many others have shown that encouraging a real market in carbon allowances by the use of auctions contributes to fighting climate change? I would be grateful for the Minister’s answer on that.

The other issue is exposure to competition. The Carbon Trust concedes that some sectors, such as steel and aluminium, are more exposed to competitive forces than others, and that therefore the reassurance that most sectors are not affected might not be true in all scenarios for industries such as steel. That raises a key question: how do we maintain the competitiveness of European industries against carbon cost-free imports and avoid cutting off our carbon-efficient industrial nose to spite the face of the planet?

The Carbon Trust was reassuring about most sectors, but it concedes that steel and aluminium are vulnerable. So, as the hon. Member for West Bromwich, West mentioned, what are we to do about sectors of which the ability to pass on costs to the consumer is limited? As the scheme progresses, the situation will worsen; as carbon allowances become tighter, those companies will face even more competitive pressure. This raises a wider geopolitical issue for the post-Kyoto international agreements: how do we treat countries such as the United States and Australia, which are refusing to play ball? Such countries are not making their own contribution and are making the situation worse in their own right. In addition, they are undermining the efforts of more responsible bodies such as the European Union to find a solution.

Gregory Barker
How would the hon. Gentleman treat such countries?

Martin Horwood
I was just about to say that there are three responses. As various hon. Members who represent steel-producing areas have suggested, the first is that significant support, including investment in research and development, could be provided for industrial processes such as carbon capture, which can enable emissions reductions to take place while maintaining steel production. We could also examine more incentives for the large-scale use of renewable heat and power, such as geothermal energy, at industrial sites.

Gregory Barker
Does the hon. Gentleman mean state-sponsored research and state-subsidy incentives? Is that a spending commitment or is he just recommending that the private sector do those things?

Martin Horwood
If the hon. Gentleman is to get his chance to speak, I shall have to move on to the other two responses, which are the substantial ones. The first relates to international agreements. There is not time to reinvent the wheel. We do not have the time for a radical redesign of international agreements and trading systems. The next generation of international agreements must be based on Kyoto and on schemes such as the European emissions trading scheme.

Secondly, we must consider plan B for those who do not participate. There has been much talk of the US, China, Brazil and India, but only one of those countries has not ratified Kyoto and only one is responsible for 30 per cent. of historic carbon dioxide emissions. Peter Mandelson recently rejected a French proposal for a tax on imports from non-Kyoto countries, and anything that Peter Mandelson rejects must have something going for it. The proposal for a carbon border tax is mentioned in the Stern report, which concedes that there will be stronger and stronger pressure for that. It could offend purist free traders because there is obviously a risk of protectionism, but we need some form of carbon sanctions against the United States and other countries to provide a powerful boost in those countries for the Chicago climate exchange and the regional greenhouse gas initiative in states such as California which would be able to avoid those penalties and sanctions. It would show that the UK and Europe are taking real leadership in the sector and tackling difficult questions. Real sanctions and border taxes would have to be compatible with World Trade Organisation rules, and would that not be a good test of that organisation’s green credentials? We must show real leadership and I hope that the Minister will encourage us to believe that we are doing so.

10:41:00

Gregory Barker (Bexhill and Battle) (Con)
This has been a surprising, interesting and robust debate, and I have learned something from it. I congratulate the hon. Member for West Bromwich, West (Mr. Bailey) on securing it and on his worthwhile and articulate speech. He put his finger on the central issue at the start when he asked how the UK, which accounts for only 2 per cent. of global emissions, can play a much larger role in leading the rest of the world towards a low-carbon future by pioneering the technology and low-carbon solutions which, on the one hand, avert the worst catastrophic effects of climate change and, on the other, secure economic efficiency and growth? How will the UK square that circle?

I believe that the EU’s emissions trading scheme probably represents our best hope for doing that, but the bottom line is that phase 1 has been an absolute shambles and barely successful. The impact on the carbon price of the nonsense of the national allocation plans in phase 1 shows that it has not worked properly or efficiently, but we must not allow the failure of the early stages to blind us to the potential of the ETS to move forward. It remains our best hope of a free-market, flexible solution that can grow into something not just EU-wide but worldwide, and which offers companies and economies in a free-market context the opportunity to do something about carbon emissions. That will require the EU to put its house in order in double-quick time and our Government to do more to show real leadership in Europe in ensuring that our European partners do not repeat the ridiculous performance with national allocation plans that we saw previously.

The EU in this case is absolutely right to send back with a clipped ear those national allocation plans that merely seem to replicate what happened in phase 1, which overestimated the requirement for their industries. I compliment the Government on coming in at the low end of our own national allocation plan estimates, but unless we all play ball and do that throughout Europe, it will simply not work. We must make it work.

My party often rightly criticises the European Union for invading too far into national domains of competence, but the environment is one of those issues that needs a truly pan-European solution. The environment is an issue on which the European Union can play a worthwhile, added-value, pan-European role, and we must ensure that it does that. If Europe cannot get the environment right, what can it get right? That goes to the heart of what the European Union is for. It is crucial that in going forward the European Union gets it right and that our Government are at the forefront of debate and support the Commission in ensuring that other countries play their part in getting the EU ETS right.

That is not to say that there are no shortcomings with the system. The hon. Member for Llanelli (Nia Griffith) articulately outlined some of the concerns that people have about not allowing our own emissions trading scheme to drive efficient low-carbon business to other parts of the world. However, at the end of the day we must not shirk difficult decisions. There is no pain-free solution to the transformation to a low-carbon economy. There are many opportunities, but there are no pain-free solutions.

Martin Horwood
The hon. Gentleman talks about painful decisions and he was very critical just now about the actual practice of the ETS and the national allocation plans. Does he believe that Britain’s allocation for NAP2 is too high or too low?

Gregory Barker
I believe that, by and large, the Government did a pretty good job, and I said so in my compliment to the Minister. We now need to play a leadership role in backing the Commission and ensuring that the other countries in Europe that have been listed during the debate go back and do what the UK has done. We argued forcefully during the decision process that the Government should come in at the lower end of the scale and, to their credit, that is what they have done. It is right that the Opposition not only criticise the Government but say when they do the right thing, and that is where the Government’s record is to their credit.

I am very interested in the issues that have been flagged up during the debate about long-term development of technological solutions to the problems of climate change. This country has a huge opportunity. We have some of the greatest minds and research establishments, terrific pioneering research and development in industry, great entrepreneurial businesses and business leaders, and extraordinary capital markets in the City of London which show great innovation in funding. However, by and large, we cannot simply wait for long-term technological solutions before we take action. They must go hand in hand. We stand on the threshold of what is widely called a tipping point. The next 10 years will be crucial and we cannot simply delay our solutions to the problems of climate change for 10 or 20 years until we can rely on those solutions. We must get stuck in now and start making real cuts in CO2 in the next five years. That will require the next phase of the EU ETS to start biting.

Nevertheless, I was particularly interested to hear about the developments in the constituency of the hon. Member for Middlesbrough, South and East Cleveland (Dr. Kumar), and the Centrica clean coal power station. I would be interested in learning more about that because, in the long term, it offers real opportunities and that is where Britain can show real leadership to the world. If we can develop a pioneering technological solution involving clean coal and carbon capture and storage, that would offer real solutions for places such as China, which is building many coal-powered stations. We must support the technology and there is a requirement for a public policy framework that allows such building.

The most important thing that the Government can do in public policy is not just to dole out more subsidy, as the Liberal Democrat spokesman suggested, but to promote a framework for a long-term sustainable—

Martin Horwood
Will the hon. Gentleman give way?

Gregory Barker
I cannot give way now.

We must promote a long-term, sustainable and high carbon price. I believe that that is what the hon. Member for Middlesbrough, South and East Cleveland was getting at when he talked about the need for long-term economic certainty.

I shall bring my comments to a conclusion by saying that the Government have done well domestically, but they must do a lot more within the EU to sort out the EU ETS. However, in the long term the scheme holds real potential to grow beyond the EU into an international framework. That represents our best hope for doing something urgently in response to climate change.

10:50:00

The Parliamentary Under-Secretary of State for Environment, Food and Rural Affairs (Barry Gardiner)
I am delighted to respond under your chairmanship, Mrs. Humble, to this important debate. First, I apologise on behalf of my hon. Friend the Minister for Climate Change and the Environment, who cannot be with us this morning because he is attending a Cabinet Sub-Committee meeting about the Climate Change Bill and what it should contain. I hope that for all Members present, it is a reasonable excuse.

I am always proud of my colleagues, but not for a long time have I been quite so proud of a group of them as I have been during this morning’s debate. I congratulate my hon. Friend the Member for West Bromwich, West (Mr. Bailey) on the way in which he introduced the debate, on the extraordinary way in which he has championed his constituency and its interests, and on the responsible way in which he has done so by setting the issue within the context of climate change as a whole. My hon. Friends the Members for Llanelli (Nia Griffith), for Aberavon (Dr. Francis), for Sheffield, Hillsborough (Ms Smith), for Middlesbrough, South and East Cleveland (Dr. Kumar) and for Bishop Auckland (Helen Goodman) all replicated that when they spoke. It has been a good debate, and the speeches from Opposition Members contributed to the way in which the debate was conducted.

I shall make some general remarks about emissions trading, and then I want to focus on the questions that have been raised. I shall try not to take interventions in the hope that I will get through my remarks and answer all those questions.

Last year there were many positive developments in the EU emissions trading scheme. Phase 1 was always a learning-by-doing phase, recognising that emissions trading had not been tried before on that scale, and that it was likely that there would be lessons to learn. We have heard this morning that that was very much the case. The first significant and positive lesson of phase 1 is that it is possible to take multilateral action to tackle climate change. The EU ETS has been developed and implemented against a tight timetable. Although not all member states were able to meet the challenging timetable, the scheme was operational throughout the majority of the EU by early 2005, demonstrating that it is possible to take swift and decisive action to implement measures to combat climate change.

The first year’s results have reinforced that positive message. They show that the mechanism is viable and that the scheme is functioning as expected. Throughout Europe, operators monitored and reported their verified emissions and surrendered allowances for 2005. Compliance in the UK has been excellent; almost all operators surrendered sufficient allowances within the deadline. The first year of the scheme has shown that there is a solid base on which to build for the future—but by golly we have to build.

Last year was also important for the development of phase 2, in which a key aim was to create as level a playing field as possible for businesses throughout Europe. A key UK priority for phase 2 was to work towards more consistent coverage of emissions sources throughout the EU’s 25 countries in order to reduce the potential for competitive distortions. The UK, in conjunction with industry and other member states, developed consistent definitions of the expansion activities to help ensure consistent coverage of the new activities. The Commission has shown that it is using those definitions when assessing member states’ phase 2 national allocation plans.

In addition to those lessons, the operation of the scheme to date has highlighted many other issues about which member states and the Commission should be aware. Some, such as the handling of market sensitive information, can be and are being carried out now; others such as the scheme’s impact on smaller emitters, however, must be addressed through legislative changes. The Commission’s review of the EU ETS directive is considering them.

Smaller emitters make up the majority of installations covered by the scheme, but they account for only a small proportion of emissions. In 2005 about 60 per cent. of installations in the UK emitted less than 5 per cent. of the UK’s total emissions covered by the EU ETS. That raises questions about whether the associated regulatory burden is appropriate for those installations. The UK has scaled administrative charges and established tiered monitoring and reporting requirements to reduce the regulatory burden on the installations, and we have suggested means to exclude some of the smallest emitters from phase 2. The Commission’s review must consider whether the scheme should capture smaller emitters.

Another lesson learned was the need for a scarcity of emissions allowances. Our debate has touched on the issue, which is vital to the scheme if it is to deliver real emissions reductions and help to deliver the EU’s Kyoto commitments. The first year’s results showed that throughout Europe, emissions were lower than had been anticipated when member states set their emissions cap and allocated their allowances. However, it is evident from emissions results in 2005 that more allowances were available than were required for compliance with the scheme, deflating the value of allowances and, consequently, diminishing the financial incentive to reduce emissions over buying allowances.

Although it is too early to draw firm conclusions with just one year’s data, the results highlight the fact that for future phases it is crucial to set consistently realistic but tough caps throughout the EU. Since scarcity drives the carbon price, it should incentivise industry to deliver real emissions reductions. The Commission has recognised that, and in an announcement in November last year on 10 member states’ plans for phase 2 of the scheme, it asked for further work from a number of them. It is looking for significant further reductions in emissions.

The Commission set out clearly the framework under which it has taken decisions, which the UK welcomes. It has set a standard for the plans that have yet to be submitted and assessed, and it has made clear the importance of using the emissions trading scheme to achieve Kyoto targets and to make good use of the potential for emissions reductions.

Pressures for emissions reductions will increase over the next decade and beyond. It is vital for EU competitiveness that we meet those pressures through mechanisms that do not generate unnecessary regulatory burdens, that allow businesses to make their own choices on priorities, and that minimise the costs of reducing emissions. Trading does that, and it is important to ensure that trading continues to work. In addition, the UK will benefit from being at the forefront of the growing global market for carbon technologies.

During the development of phase 2, several sectors and companies raised the issue of competitiveness. The steel sector is one sector in which international competition is intense. We have consulted extensively with industry throughout the development of our policy, and we take seriously its concerns, which have been so articulately presented in the debate. To date, the signs are that the EU ETS has a promising future.

I shall now try to respond to the questions posed during the debate. My hon. Friend the Member for West Bromwich, West asked one key question, which my hon. Friend the Member for Llanelli also articulated. It was about global warming being global and needing a global solution, and about the danger of exporting emissions rather than reducing them. It is part of the reason why almost full business-as-usual allocations were given to industry. We recognise the concerns: they are about finding the correct balance and about the need to take sufficient but not excessive action. We are working closely with the Commission and third countries such as the USA and Australia to develop that global carbon market, and the Commission is considering the issue in its review.

Within our debate hon. Members asked questions about the need for sector-specific targets. I agree that different sectors face different competition issues, and phases 1 and 2 recognise that through the almost full allocation to all sectors other than the large electricity producers’ sector. The ETS review is also considering the issue.

The UK must play its part in the global effort to tackle climate change, and I was grateful for the consensual spirit adopted by Opposition Members, who noted how, in the circumstances, the Government have responded appropriately through our national allocation plan. The UK has worked to harmonise where possible, and to create as level a playing field as possible for industry. We will continue to do so, targeting and balancing the impact on business with our environmental concerns.

My hon. Friend the Member for Middlesbrough, South and East Cleveland also asked me a question. On carbon capture and storage, we take seriously the issues that he raised with Transco and Centrica in his constituency. I am sure that my colleague the Minister for Climate Change and the Environment will take considerable note of the project as it develops, and that he will work with the Commission to ensure that carbon capture and storage is recognised in phase 2 of the ETS and beyond. We hope that it will provide the necessary clarity for business when pursuing the schemes that my hon. Friend the Member for Middlesbrough, South and East Cleveland outlined.

My hon. Friend also asked about joint implementation projects receiving domestic support. In the time available, I cannot go into that, but I shall ensure that my ministerial colleague is in touch with him.