Considered in Grand Committee
My Lords, this instrument corrects deficiencies in retained EU law so that the UK can continue controlling the use of ozone-depleting substances and fluorinated greenhouse gases—F-gases—following our exit from the EU.
Almost all uses of ozone-depleting substances, such as chlorofluorocarbons, have been phased out under the United Nations Montreal Protocol. EU legislation implements the United Nations Montreal Protocol agreement by restricting ozone-depleting chemicals to certain limited uses where there are no viable alternatives, such as fire extinguishers on aircraft. Usage is kept below the very low levels permitted by the Montreal Protocol by restricting sales to certain registered companies and by applying quota limits on how much each can sell and use. The legislation also requires all imports and exports to be licensed in order to help monitor global compliance.
F-gases replaced ozone-depleting substances for many uses, including refrigerants, aerosol propellants and other industrial processes. These gases do not damage the ozone layer, but they are still powerful greenhouse gases. EU legislation from 2014 requires a 79% cut in the use of F-gases by 2030. Following our lead, a global agreement came into force this year, amending the Montreal Protocol to phase them down internationally over the next 30 years. Most of the provisions in retained EU law can operate in the UK without amendment. However, crucial elements of these EU regulations would not function without this instrument.
Most importantly, the restriction on the amount of F-gas which can be sold is currently achieved through quota limits placed on importers and producers. These quotas are currently allocated by the European Commission directly to individual businesses that are producing and importing. These regulations transfer quota allocation powers to the Secretary of State and the devolved Administrations. This means establishing UK quota systems which are separate from the EU’s systems. Instead of an importer or producer of F-gases getting a single quota from the Commission limiting how much they sell in the EU28 market, they would get two quotas, one from the Commission for sales on the EU27 market and one from the Environment Agency for sales on the UK market. UK companies will be able to continue exporting F-gases to the EU as long as they establish an office in the EU or appoint a company to represent them. In order to determine the level of UK quotas and ensure that UK supply remains on track to achieve a 79% cut in 2030, all companies supplying the UK were asked to provide independently audited data on how much they placed on the UK market between 2015 and 2017. This period was after the EU quota restrictions were already in place, meaning that the total UK supply will remain within the existing phase-down limits.
The current EU process assigns quotas to individual companies for placing F-gases on the EU28 market rather than to member states for their domestic consumption. This makes it difficult to identify exactly how much gas is supplied to the UK, as some EU-based companies use some of their quota to supply the UK, and some UK companies use theirs to supply customers in the EU. This mismatch between the location of the quota allocation and the place where gas is used means that there is a risk that in splitting the quota system, we no longer get our current share of supply, as some EU companies may choose not to supply the UK in the future. These regulations therefore include a power to adjust companies’ quotas if we find that the overall UK supply of F-gases is below the level it would have been had we not left the EU. This power would be used only where there was evidence of a supply shortfall and where there was a high probability of a significant impact on critical sectors. The power would not be used to increase supply beyond where it would have been had we remained in the EU.
Regarding the specific changes made by this instrument, I would like to highlight a few of the more noteworthy. Regulations 4, 5 and 25 in Part 2, and Regulations 37, 38 and 56 in Part 3 facilitate the transfer of functions to the Secretary of State and the Environment Agency with respect to England, and to devolved authorities with respect to Wales, Scotland and Northern Ireland.
Regulations 7 and 9 reduce the maximum limits for the use of certain ozone-depleting substances to reflect the lower usage in the UK relative to the EU. This is done pro rata based on the population of the UK relative to that of the EU. Regulation 43 enables training certificates issued in EU member states to continue to be recognised in the UK to ensure that EU-trained technicians can continue to work here. Regulation 48 requires the authorities in one part of the UK to consult the authorities in other parts before establishing their own F-gas quota system.
I should now like to bring noble Lords up to date on progress since the Explanatory Memorandum was published. I am delighted to say that on 11 February, the IT system needed to administer UK quotas went live. So far, more than 100 businesses have already registered, including two-thirds of the main suppliers, ensuring that they can continue operating in the UK. On 12 February, a power was approved by your Lordships’ House through the Environment (Amendment etc.) (EU Exit) Regulations 2019 for regulators to charge businesses a fee to cover the cost of operating a UK system. This is in line with the long-established principle that the polluter rather than the taxpayer should pick up the cost of regulating. Although there was no formal duty to consult, Defra officials have engaged with businesses and environmental groups throughout the process. The clear message has been that we should not vary the F-gas phase-down schedule: neither slowing down nor speeding up. We published guidance for businesses in August, December and earlier this month on how the UK system would work, helping them to prepare for exit.
The requirements of the EU systems will remain very largely unchanged, so the direct impact of this instrument on businesses is small. Defra has assessed that there will be an additional administrative cost for those companies which have to deal with two quota systems—the UK and the remaining EU—rather than one in the future. This is estimated at about £60,000 per year in aggregate for the 50 or 60 UK companies affected. The Environment Agency will administer the quota and reporting systems and the agency has secured the additional staff needed.
Enforcement arrangements will remain the same as they are under EU regulations, with the Environment Agency and devolved Administration regulators undertaking the same sort of activity as they do at present. We do not expect enforcement costs to increase significantly as the number of companies being regulated will be similar.
Dialogue has continued with the devolved Administrations and I am pleased to say that all have agreed to this instrument. For our exit day preparations, they have also agreed that they will remain part of a single UK-wide system, in particular for the purpose of allocating quotas. That means that, immediately after exit, the Environment Agency will allocate quotas for the whole UK market. Discussions are also progressing well on the longer term governance arrangements for the operation of the system and the joint decision-making process, although this does not need to be in place from day one. Should an Administration wish to diverge from a UK-wide approach in the future, they will need to consult the other Administrations to ensure that preparations on both sides can be made.
I end by pointing out that the legislative powers being returned to the UK from the Commission will be exercised in almost all cases by regulation, enabling significantly greater scrutiny by your Lordships’ House than has previously been the case. I beg to move.
My Lords, I thank the noble Baroness for introducing the instrument and congratulate Defra on having gone live with the system and being much more successful than the Department for Transport with its ferries—hypothetical as they were.
This is a serious subject, so I will not make light of it. We are delighted that the statutory instrument will maintain the continuity of the ambitious targets that are necessary. In researching this, I reminded myself how much more warming fluorinated gasses are than CO2: 23,000 times. The Minister said that it is more powerful. I had to check the figure several times because it seems very large, but they are extremely powerful substances. Ozone-depleting substances were one of the first things on which the world got together and decided to act—very successfully, it seemed.
However, in researching this I also came across a disturbing fact discovered by the University of Bristol, which is that some 40,000 tonnes of carbon tetrachloride are still being emitted, although not by anywhere that Defra is responsible for because it seems to be in the Shandong province of China. However, maybe the FCO would like to take that up, because although the EU and the UK are doing their bit, it seems that China is still emitting 40,000 tonnes of this extremely damaging chemical. You can use it in the production of chlorine, but again, that is a staggering figure. The noble Baroness told us about the continuing search for less damaging alternatives; I think the protocol also agrees that we should allow equipment to continue for its useful life so that we are not replacing things unnecessarily but that at the end of its life, we should go for something that involves a less damaging gas.
I want to ask about a couple of things in the regulations. The noble Baroness kindly explained the UK quota system, which will be UK-wide, and the Environment Agency will negotiate that with the devolved Administrations. However, what happens in the event that the devolved Administrations disagree about how much quota they get? Does she foresee that that will be an issue? The noble Baroness also mentioned that EU-certified technicians will be able to continue to work in the UK, but will it work the other way round—will UK-certified technicians be able to work in the EU? I understand that access to the EU quotas will require an office being set up in the EU to negotiate them and administrate that process. It would be useful to know whether that exchange of technical personnel will be reciprocal, and to know about the quotas. However, other than that, I hope that by 2030, we will have achieved our targets and perhaps even done better than that and moved past them. It concerns me that, according to the University of Bristol study, other areas of the world continue to emit such vast amounts of something that is so damaging to the atmosphere.
I join the noble Baroness in congratulating Defra, both on this regulation and on the very clear Explanatory Memorandum. I know from the useful briefing Defra gave me last summer that it was getting ahead very well with the EU exit regulations, and it is good to see them coming through.
I also wanted to look backwards. In the early 1980s, I was a junior civil servant in what is now Defra, and responsible for research and development in a small way. I went to an interdepartmental meeting to discuss various proposed cuts, one of which was to the British Antarctic Survey. I remember arguing, contrary to my brief, that we should continue to support the survey because I believed in fundamental research and that sometimes you did not just do research near to the final product. Of course, later in my career, history showed that the survey was very important. That is a story I like to tell to youngsters in schools because it shows the importance of R&D.
I was pleased that the Minister described the work Defra had done to look at the impact on business of this regulation. I have just one point of clarification. She mentioned that 100 businesses were being regulated and then said that the estimate was that the cost—I think of the extra administrative system that we have had to bring in because of the transfer—would be £60,000 in aggregate for 50 to 60 companies. I could not understand the difference between the 100 companies that seemed to be affected by the proposal and the cost figure, which, if that is the only cost, seems modest for this important area.
I thank the Minister for her introduction to the order before the Committee and for undertaking prior discussions with her team. As she said, this order, while not specifically made to cover the scenario where the UK leaves the EU without a deal, nevertheless makes provision for a no-deal exit with the repatriation of authorising authorities and regulators. It also corrects a series of deficiencies in retained EU law on ozone-depleting substances under Part 2 and fluorinated greenhouse gases under Part 3. The order therefore maintains the 79% cut on a UK basis, as for example in F-gases between 2015 and 2030, as the Minister stated, by steadily reducing quotas for companies that operate in this field. The order maintains that it will continue.
Although many of the changes introduced through this order on the transfer of powers currently exercised in Europe to the UK are technical in nature, other minor noteworthy changes could be construed as shifts in policy. Labour certainly does not challenge the order and will approve it today.
Although the order was laid in December and subsequently relaid on 6 February following exchanges with the Joint Committee on Statutory Instruments, I understand that it is essentially the same document. The order has not been flagged by your Lordships’ Secondary Legislation Scrutiny Committee, but it is worth recognising that progress has been made in several areas in which there have been concerns and to which the Minister drew attention. However, there are a few questions around these outcomes, which I will highlight for the Minister.
It is good to note that the UK Government and the devolved Administrations have agreed to the repatriation on the basis of a single UK-wide quota. This quota, following dialogue with the relevant companies on how much they place in the UK market, will be set at 12%, roughly aligned with the size of the UK’s population relative to the EU. That the UK’s usage aligns in this way is certainly interesting. Under paragraph 2.8 of the draft Explanatory Memorandum, it is agreed between the Government and the devolved Administrations that, should an Administration wish to diverge from the protocol in the future, they must consult the others before doing so. Have the Government consulted the Commission on whether the EU has also agreed to the 12% and on whether, should the UK in the future wish to diverge in any way from the process agreed in the 1987 Montreal Protocol, it will consult with the EU and others before undertaking any divergence?
Paragraph 6.2 of the Explanatory Memorandum states that the Environment Act 1995 will be amended to include a charging regime under the authority of the Environment Agency on a UK-wide basis. I certainly join others in saying that good progress is being made, with this having happened, but I note that these changes are on a cost recovery basis. Can the Minister confirm, because it was in some divergence to the £60,000 figure she gave in her introductory remarks, that the total amount costed in the other place was estimated at £500,000 per annum for the administrative costs? I understand that the Government have put this out to consultation regarding cost recovery, so I have a few questions for the Minister regarding the scope of that consultation.
Paragraph 6.2 also states that the EU allocation mechanisms for quotas and the format for company reports will not be replicated in the UK, as different IT systems will be established here. I understand that this IT system has also been completed, and I congratulate the Government on that achievement as well; while not wishing to appear churlish, let us hope that it will continue to operate successfully under stress.
Returning to costs and charters, I understand that this set-up cost has been financed through the Government. The Minister in the other place, Dr Coffey, stated:
“Future charges will be for the overall regulation system”.—[Official Report, Commons, Eighth Delegated Legislation Committee, 26/2/19; col. 8.]
Will the Minister clarify what that means for cost recovery? Will there be an element of repayment of capital included in running cost recovery of fees from operating companies? That is, will companies ultimately be charged for this set-up cost?
The Government will also continue paying into the Montreal Protocol assistance fund to help developing nations across the world move to less harmful gases. Can the Minister confirm whether industry will be re-charged any of these contributions? It would be good to understand whether the Government have included either of these potential costs as possible cost recovery items out for consultation.
The final concern in this regard is about impact assessment. While the Government are satisfied that the cost is de minimis, as the Minister explained, have they assessed whether the new charges could impact on companies’ costs in a way that will affect whether they continue to operate in the UK? Several companies operate across the UK and in the EU, and their quotas will come from both in future. Are the Government satisfied that any disruption will not detrimentally impact on these companies continuing in the UK in such a way that the Government may have to use their new powers of increasing quotas to make up for a closure of any company’s shortfall to maintain the UK in a steady state? In their dialogue with companies when undertaking these regulations, can the Government confirm that companies operating across borders are generally satisfied with the outcome? One element behind this question on reciprocity—mentioned by the noble Baroness, Lady Miller—is whether UK trading certificates and authorisations will be accepted in the EU after exit in the same way, replicating the recognition of EU certificates in the UK.
I am sure that all contributors to this order will agree that these regulations are vital to the safeguarding of the environment across the world. Can the Minister confirm that, despite abiding by the increasing quota restrictions since 2015, these have been effective in reducing emissions? That is, are they working as envisaged, without loopholes appearing such as displacements on to other gases not specified in the protocols?
While these regulations appear technical, they will certainly be important to companies operating in the UK and the EU, especially given the lack of coherent data on how they may be reapportioned in individual quotas. Can the Minister confirm that, through the Government’s discussions, all the operators essentially agree with the regulations and their individual outcomes, and that any potential disputes can be reconciled via due process through the Environment Agency?
I thank all noble Lords who took part in what has turned out to be a very interesting and I hope fairly straightforward debate. I have the answers to nearly all of the questions, which is always an added bonus.
I would like to thank the noble Baroness, Lady Miller, for her congratulations on getting the system up and running. We will take congratulations where we can get them. I was very interested by her observations on the wider environment in relation to ozone depleting substances, F-gases. I have a few responses to the questions that she raised. The UK and other parties raised their serious concerns about carbon tetrachloride in China at the Montreal Protocol meeting last year. China has agreed to take enforcement action. We will continue to monitor the situation and make representations in that area.
The noble Baroness also mentioned an F-gas being 23 times more powerful than carbon dioxide. That is true: there is an F-gas—there are many different types of F-gas—that is 23 times more powerful, called SF6. But this one is rarely used and accounts for less than 3% of F-gas emissions for the UK. It is the HFC emissions that account for 95% of UK F-gas emissions. As the noble Baroness pointed out, many other gases can now be used in various pieces of equipment to the same effect and industries are certainly moving over to those.
I turn now to the detail of the regulations. Going back to the noble Baroness’s point about the devolved Administration, a point that was also raised by the noble Lord, Lord Grantchester, the important thing here, as I mentioned in my opening remarks, is that initially we have this agreement with the devolved Administrations. The Environment Agency will allocate quotas for the whole of the UK. There will basically be one bucket of quota. It will be handed out to individual companies which will then be able to trade their F-gases within a single UK market; it will not be country specific. In the longer term, we need to make sure that that system is very solid, so there will be governance arrangements and joint decision-making. We do not expect there to be divergence in the future, but there may well be. However, the devolved Administrations will not be allowed to diverge without consulting all the other nations in order to make sure that we do not go over the total target, which of course is set for the UK as a whole.
I move on to the certified technicians. This is quite an interesting one, and I certainly had not realised this: there are around 47,000 technicians certified by UK bodies, which is quite a number of individuals. We do not hold figures on how many technicians are working in the UK with EU certificates but, based on the proportion of EU certificates leaving the UK, it could be around 2,000-3,000 people. The point here is that this is clearly a very skilled job, but it also seems to be quite local because it is a practical job in terms of maintaining the pipework, the cylinders and the places where these things are used. At this moment, we cannot guarantee that the EU will accept UK training certificates. We very much hope that we will reach a deal such that it will do so in future. We have made a very open and generous offer to accept the EU training certificates.
I turn to the comments made by my noble friend Lady Neville-Rolfe. There was slight confusion or perhaps misunderstanding about the different types of cost that will be incurred with this process. The 50 to 60 businesses are those that most engage with the system. These are the bigger companies that may need to engage in the UK and may have F-gas quotas. There will be many other companies interested in far less and which might have just a tiny quota for some ODSs. The cost to the business of engaging with the system therefore varies enormously, but in aggregate we expect it to be less than £60,000. However, in the interests of transparency I note that some charges may well go back to the suppliers of these gases on the basis that the polluter rather than the taxpayer should pay. The additional cost of the system that the Environment Agency will face is estimated to be around £500,000 per year. If the agency chooses to recover the cost through charging fees, we estimate that it would be spread among 800-1,000 companies right across the UK, the EU and the rest of the world which might need to use the UK system at some stage. This will all be subject to consultation, which has not yet started. The actual cost to each company will vary depending on the extent to which it uses the system. It is not in place at the moment. For the time being, the costs are being met out of funds received for no-deal preparation work.
I turn to some comments made by the noble Lord, Lord Grantchester, on the 12.4%—I presume he was referring to the ODS quota value. The data for how much ODS is used in the UK is not readily available as the amount is very small and this information has not been aggregated at a UK level—it is available only at an EU level. The use of ODS is very small and is probably not worth the time and effort to try to figure it out. Following the global phase-out, it is utterly disproportionate to try to quantify the amount of ODS sold and then compare that to the amount sold in the EU. What will we gain as the phase-down has already happened?
I am not as concerned about that side of things, but on F-gas we have to make sure that we are comfortable. Overestimating how much we use is unlikely; it is more the case that we will underestimate because we have asked all these companies how much they supply to the UK market. They have all sent us their numbers, but it could be that a company has not sent its numbers because it has decided that it will not continue in this market. That is what we have to be concerned about. We will watch that to make sure that we get the right amount of F-gas into the country.
We have been talking to the EU while we have been splitting the quotas, but on divergence from the EU with respect to issues relating to the Montreal protocol, we will, as with all of these issues, be speaking to all of the major partners in the world. We take a very serious leadership role in this.
I return to a question asked by the noble Lord about what happens if a company ceases to trade and so that quota no longer comes into the market. We would have a bucket of quota which can be reallocated to people. It is essential that we make sure that we have the correct supply, but it is also essential to make sure that the phase-down happens within the limits that we are expecting over the coming years, so should a company no longer trade, that quota would be able to be allocated to a separate company.
What has been the impact and has this reduced emissions? It has. We know that the regulations took a little time to come into place—I accept that that was when the EU regulations were put into place. Now that they are in place, the amount of gas being placed on the market is already 37% below 2015 levels, so the EU regulations are having a significant effect. What noble Lords are being asked to approve today is for those EU regulations to be copied over and for some small changes to be made to make sure that they continue to work in the UK and that we too can continue to reduce our usage of F-gases and monitor the very small use of ODSs.
I thank my noble friend for her clarification on the costs. I had one thought: if the Environment Agency was to decide to recover the administrative costs, would it be possible for it to look at charging smaller companies a smaller amount of money? This was done in relation to the changes on data and was very well received. I do not ask for a commitment, but I make that proposal.
I thank my noble friend for that comment—I was going to say that anyway. That would be part of the consultation process with the Environment Agency. It seems like a very good idea, but it should at least assess whether that is a viable option.
I apologise for intervening perhaps a little too early on other Members. While paying great regard to the Minister, who has answered all the points most succinctly and very well, I wanted to get a feel for the impact on these regulations and the discussions Defra has had with the various companies. Has the Minister got a sense, or not, that they are going to cause disruption for companies operating in this field, albeit that they then buy and sell the quota in terms of moving in and out of different countries? I understand that happens already, but is there a sense of disruption to industry causing them some dismay, in bringing the regulations back into the UK?
I apologise to the noble Lord; he asked about that and I forgot to answer. The department has contacted every single supplier across the EU in this process, so we have a strong feeling of where the industry is coming from. We have spoken to key business, industry and environmental representatives as well. For example, the Federation of Environmental Trade Associations is an umbrella trade body representing refrigeration and air conditioning manufacturers and suppliers. We have spoken to the British Refrigeration Association, the air conditioning and refrigeration board and Mexichem, the biggest producer of F-gases in the UK. While there will certainly be some change, I have tried to highlight that the change will not be significant. If a company trades in the UK and the rest of the EU, it will have to apply for two different buckets of quota, but apart from that, much of the system will stay the same.
Committee adjourned at 7.26 pm.