Thursday 10 June 2021
The Grand Committee met in a hybrid proceeding.
Arrangement of Business
My Lords, the hybrid Grand Committee will now begin. Some Members are here in person, others are participating remotely, but all Members will be treated equally. I ask Members in the Room to respect social distancing. If the capacity of the Committee Room is exceeded or other safety requirements are breached, I will immediately adjourn the Committee. The time limit for the following debate is one hour.
Payment and Electronic Money Institution Insolvency Regulations 2021
Considered in Grand Committee
My Lords, the UK’s payment sector has changed rapidly over the last decade, with an increasing use of card, mobile and electronic wallets to make payments. Firms today range from small remittance firms on the high street to fintech giants with millions of customers.
The growth of the payment sector has offered opportunities to UK businesses and consumers, with many using payment and electronic money institutions not only to make payments but as their transactional banking provider, to access their salaries and savings. Customers are now able to make faster, cheaper and more secure payments. However, as the sector has grown, this has increased the number of customers exposed to risk if these firms fail and enter insolvency.
There is evidence that the existing insolvency regime for payment and electronic money institutions is suboptimal for customers. Recent administration cases involving these types of firm have taken years to resolve, with customers left without access to their money for prolonged periods of time and receiving reduced money as a result of high distribution costs. This legislation therefore proposes to introduce a new special administration regime for payment and electronic money institutions and an extension of provisions under the Financial Services and Markets Act 2000 to these firms. The new regime is modelled on the 2011 special administration regime for investment banks.
HM Treasury conducted a public consultation during December and January and received useful responses from a number of trade bodies, relevant firms and other interested parties. Officials also met with industry groups before and after the consultation and spoke with the Banking Liaison Panel.
These changes will help to make managing insolvency of a firm quicker and clearer, ultimately leading to customers receiving their funds more quickly and giving continuity and confidence to consumers and businesses in the event of a payment and electronic money firm being put into insolvency. The legislation also corrects a minor defect in the recent legislation which transposed and onshored the Bank Recovery and Resolution Directive II.
The special administration regime for payment and electronic money services is a new insolvency process that provides consumer protection objectives and a toolkit for insolvency practitioners to aid them in efficiently managing an insolvent payment or electronic money institution. The key provisions of this regime include: bespoke objectives for an insolvency practitioner to ensure the return of customer funds as soon as reasonably practicable, to engage with the relevant authorities and to either rescue or wind up the institution in the best interests of creditors; continuity of supply provisions that will allow an insolvency practitioner to keep the firm’s key functions operational for customers; provisions to ease the transfer of business processes such that a new firm can take on the incumbent’s business and provide continuity for customers; and bar date provisions to allow the insolvency practitioner to set a deadline for consumers to claim and thus enable an earlier distribution of customer funds.
I note that additional work is required to apply the special administration regime to firms located in Northern Ireland and partnerships or limited liability partnerships located in Scotland. Around 1% of the 1,300 UK payments and electronic money firms are located in Northern Ireland, and there are no firms that are partnerships or LLPs based in Scotland. The Economic Secretary has written to his counterparts in the Northern Ireland Executive and Scottish Government, committing to rectify this as soon as is practicable in future legislation. In the interim period, consumers will still benefit from the changes to the Financial Services and Markets Act and from the protections offered to the 99% of eligible firms, as it does not matter where in the UK the customer is located.
The instrument also provides for Part XXIV of the Financial Services and Markets Act 2000 to be applied to payment and electronic money institution insolvencies. The extension of these provisions will provide the FCA with the same powers to participate and protect consumers in an insolvency process for these sectors as it does for other FCA-supervised firms. This includes the right for the FCA to speak at court hearings regarding the insolvency and a requirement for the administrator to work with the FCA during the insolvency process.
These regulations will provide a modern and effective insolvency process for a world-leading British financial services sub-sector, inspiring confidence from investors and customers alike. I therefore hope that the Committee supports them, and I beg to move.
I call the next speaker, Lord Davies of Brixton. Oh, we cannot hear him, so we will adjourn for five minutes.
My Lords, many thanks to the Minister for her introduction and the opportunity to consider the regulations. I welcome the opportunity to say something about a continuing subject of interest: the significant shift to electronic money that has led to these regulations. As outlined by the Minister, the background to these regulations is the rapid change over recent years with people increasingly using cards, mobiles and electronic wallets to make payments. This shift is now unstoppable and, in general terms, is to be welcomed. The ease of using online technology is a good thing so long as no one gets left behind—but perhaps that is a subject for another day.
We have the Chancellor’s ambition for a digital economy and, only three days ago, the Bank of England published an important discussion paper, New Forms of Digital Money. The paper notes:
“Over the past decade, there has been rapid innovation in how people make payments … The use of physical cash in payments continues to decline, and demand for convenience, especially with regard to e-commerce, has fuelled public appetite for digital payments. Fintech firms, and in some cases big technology firms, are developing alternatives to traditional forms of money.”
The Bank’s paper also notes, crucially in this context, that
“Presently, payments typically rely on the use of either cash or deposits held in commercial banks —referred to as ‘commercial bank money’. If new forms of digital money are to become widely used as a trusted form of retail payments, it is essential that the public can have the same confidence in them as they have in existing forms of money”.
I take it that the Government’s intention in introducing these changes is to help to protect customers in the event of a payment or electronic money institution being put into insolvency, and I welcome that. This in turn will strengthen confidence in the payment and e-money sectors, by improving customer and market outcomes.
I understand that these draft regulations, if made, will create a new special administrative regime for payment and electronic money institutions. The Explanatory Memorandum states that this new regime
“will give insolvency practitioners administering … insolvencies”
at these institutions
“an expanded toolkit. This will allow the insolvency practitioner to keep an insolvent institution operational with the aim of ensuring continuity for consumers and prioritising the return of their funds.”
The Explanatory Memorandum then says that the draft regulations
“will also extend the full suite of Financial Services and Markets Act 2000 … Part 24 provisions to all payment and electronic money institutions entering the standard insolvency process. This will provide”
“with specific powers to participate and protect consumers in the event of an insolvency of a payment or electronic money institution as it does for other FCA supervised firms.”
The implication is that these powers will go well beyond what is in these regulations, so perhaps the Minister could say something about what putting these regulations into a wider context might involve. What is it envisaged that the FCA will undertake that goes beyond these regulations?
I fully support the objectives of the regulations. The return of funds as soon as is reasonably practicable, the timely engagement of system operators and the emphasis on the best interests of the creditors are all obviously right. I admit that, to a considerable extent, I have to take it on trust that the 75 pages we have before us will achieve these objectives. However, it is also clear that they depend in practice on what is meant by “reasonable”, “timely” and “best interests”. Initially, I assumed that these terms will be interpreted by the administrator and are not unique to these circumstances. Can the Minister tell us anything about what discussion of guidance there might be about what these terms mean in the specific circumstances of these institutions? Is this something that will be left to the courts in the end?
Having these objectives set out in the Explanatory Memorandum and the regulations leads to another question: are there any circumstances involving an insolvency where these three objectives do not apply? I do not claim to be an expert in this area. Are there insolvencies where it is not intended that they should be resolved as soon as is reasonably practicable? Are there insolvencies where timely engagement is not appropriate?
More specifically, can the Minister tell us a bit more about the way in which Regulation 12(10) will be used? This relates to small institutions and the wording involves a double negative, which leaves me at a bit of a loss. Do we have information on what specific provisions will be applied to small institutions?
Finally—this is proof that I am paying attention—I can point out what I assume is a typo in the Explanatory Memorandum. Paragraph 3.1 refers to “s34”, which I take to mean the correct Section 234. Even without the typo, I must admit that I struggled with this paragraph. It certainly gives the impression that the Treasury is grasping at straws here, with what appears to be some recursive reasoning. This suggests that, at some stage, despite the statement that these regulations do not need to be consolidated, it would be a good idea to start again—particularly given the growing importance of this area of regulation.
My Lords, I am grateful to the Minister for her introduction of these regulations, which are substantial in length and complexity. The underlying principle, however, is relatively simple and one that we support. I am also grateful to my noble friend Lord Davies of Brixton for keeping us company this afternoon, albeit from a safe distance. The speakers’ list may be short but it is perfectly formed.
Insolvency is a tricky topic. Different rules apply to different forms of insolvency, and such processes are often complex and slow. This inevitably adds to the already strong emotions experienced by all parties when a business relationship breaks down. It is also clear from the reference in paragraph 7.14 of the Explanatory Memorandum that, in extremis, the stability of the UK’s financial system may be at risk. As the Explanatory Memorandum notes, payments in the UK are undergoing rapid transformation, with electronic payments ever more popular. There is a clear justification for this new special administrative regime and the new FCA powers that come with it.
The consultation carried out prior to the regulations being laid cited only a small number of insolvency cases among payment and electronic money institutions. Nevertheless, those cases have been drawn out over many years and, as a rule, customers have not received the money due.
I hope that the Minister will forgive me for raising a contentious issue so soon after the passage of the then Financial Services Bill. Does she agree that concerns around consumer detriment in the insolvency context add to the case for a general duty of care on financial services firms? Can she provide a quick update on work by the Treasury and FCA in that area?
A key part of the special administration regime and its expanded toolkit is how so-called asset pools should be treated. Among other things, the regulations deal with the reconciliation process and impose bar dates on claims for relevant funds. While that is all helpful, what does the Minister expect to happen when asset pools are, for want of a better phrase, too shallow for customers to get their money back? What path to recourse, if any, will customers have if they disagree with the court’s determination that the administrator has taken all reasonable measures to initiate contact with affected persons? What additional powers, if any, does the special administrator have compared with those enjoyed under the present regulations? Further, who pays the remuneration and cost of the special administrator? Does any money for such payments come out of the asset pool?
Yesterday, my right honourable friend Pat McFadden asked in the other place why, given the rapid increase in the use of payment and electronic money institutions, they are not covered by the Financial Services Compensation Scheme. He rightly observed that disparities in which institutions are covered by the FSCS mean significant gaps in consumer protection levels. What plans, if any, do the Government have to explore that?
Finally, the Government intend to introduce an additional set of new insolvency rules, in due course, to deal with procedural issues and so forth. Is the Minister able to offer any clarity on the anticipated timescales?
My Lords, I thank both noble Lords for this short but productive discussion on the statutory instrument. This is an important issue and I am glad to have had the opportunity to debate it. They raised a number of points that I will try to cover.
I hope that a potential duty of care or other new duty towards consumers is not too contentious. As the noble Lord, Lord Tunnicliffe, will know, the Financial Services Act required the FCA to consult on whether it should make rules providing that authorised persons owe a duty of care to consumers. In accordance with that, the FCA launched a consultation in May on clear proposals to raise and clarify its expectations of firms’ actions and behaviours, and on any necessary changes to deliver them. The consultation proposes a new consumer duty that seeks to set higher and clearer expectations for the standard of care provided by firms to consumers. The FCA is seeking stakeholder views on its proposals in the ongoing consultation, which is due to close on 31 July.
The noble Lord, Lord Tunnicliffe, also asked what would happen in an insolvency process where asset pools were too shallow for consumers to get their money back. Although the changes made through the statutory instrument will help to ensure that consumers get more of their money back more quickly, the regime will not be able to correct for any previous safeguarding failures that would cause consumers to receive less than all their money back. While the regime should help to make administration more efficient, it cannot itself prevent customer loss if the asset pool is too shallow for any distribution to be made.
The noble Lord, Lord Tunnicliffe, also asked what paths to recourse, if any, consumers would have if they disagreed with the court’s determination that the administrator had taken all reasonable measures to initiate contact with affected persons in the case of the use of the bar date provisions. I am not aware of any further recourse for a customer who feels that the administrator has not taken all reasonable measures to initiate contact with affected persons. However, there are safeguards provided within the regime, such as the objectives of the administrator and the Financial Conduct Authority’s scrutiny of the administrator in its role.
The noble Lord also asked who pays the remuneration and costs of the special administrator, and whether they come out of the asset pool. The rules that will be made subsequent to this SI will consider which costs are to be paid out of the institution’s assets and which are to be paid out of the asset pool. However, the regulations set out that where costs are incurred due to safeguarding failures, they will in the first instance come from an institution’s assets. If an institution’s assets are insufficient to meet these costs, the remaining money will come out of the asset pool.
Both noble Lords raised questions about the Financial Services Compensation Scheme. Payments and e-money firms are not currently covered by the FSCS, as they rightly identified. However, funds held by payment institutions and e-money institutions are required by legislation to be protected via safeguarding. These insolvency regulations will complement and enhance the consumer protections provided by the existing safeguarding regime. Indeed, on 18 May the FCA sent a DCEO letter to all e-money institutions setting out its concerns about those institutions comparing their services to traditional banks, or holding themselves out to be an alternative to banks in their financial promotions. It has asked e-money firms to write to their customers within six weeks to remind them that their money is protected through safeguarding and that FSCS protection does not apply in those cases.
I referred to the further rules that need to be made for the special administration regime, and the noble Lord, Lord Tunnicliffe, asked about the timing of further statutory instruments on that matter. We expect them to be laid in Parliament later this year, following which the changes to the regime are expected to come into full effect.
The noble Lord, Lord Davies, asked about the interpretation of the three objectives for this process. In May, the FCA published further guidance for insolvency practitioners. The special administration regime allows the FCA under certain circumstances to direct the administrator to prioritise a particular objective. Further, if an insolvency practitioner is unclear, it can apply to the court for direction if any meanings are not clear in administering the scheme.
The noble Lord, Lord Davies, was correct in identifying a typo in the Explanatory Memorandum. I apologise to him for that. I do not have the substance of his inquiry on that point before me, so I undertake to write to him and the noble Lord, Lord Tunnicliffe, if there are any remaining questions that I have not answered. With that, I commend the instrument to the Committee.
The Grand Committee stands adjourned until 3.05 pm. I remind Members to sanitise their desks and chairs before leaving the Room.
Arrangement of Business
My Lords, the hybrid Grand Committee will now resume. Some Members are here in person, others are participating remotely, but all Members will be treated equally. I ask Members in the Room to respect social distancing. If the capacity of the Committee Room is exceeded or other safety requirements are breached, I will immediately adjourn the Committee. The time limit for this debate is one hour.
Financial Markets and Insolvency (Transitional Provision) (EU Exit) (Amendment) Regulations 2021
Considered in Grand Committee
My Lords, prior to the end of the transition period, the Treasury undertook a significant programme of legislation, introducing more than 65 statutory instruments under the European Union (Withdrawal) Act 2018. As noble Lords will know, these SIs covered all the essential legislative changes that needed to be in law to ensure we had a coherent and effective financial services regulatory regime at the end of the transition period.
This statutory instrument amends a transitional regime created in an earlier financial services EU exit instrument. It is intended to ensure that the transitional regime continues to provide continuity for UK firms, as was originally intended. The instrument, broadly speaking, concerns insolvency-related protections that are provided to systems under the EU settlement finality directive, or SFD. In this instance, these systems are financial market infrastructure such as central counterparties, central securities depositories and payment systems, which provide essential services and functions relied on by the financial services sector.
Prior to the end of the transition period, if an EEA-based system was designated under the SFD it received specific protections in insolvency law. For example, where a designated system had received funds or securities from a system user—for example, a UK bank—those funds and securities could not be clawed back in the event of the UK bank being subject to insolvency proceedings. Importantly, this framework ensured that these vital elements of the financial plumbing were not at risk when individual members were in insolvency procedures. Now that we have left the EU, providing such insolvency protections is sometimes also a requirement for UK firms’ continued membership of these systems. Designation is therefore important, as it facilitates the smooth functioning of, and confidence in, financial markets.
Under the SI that we are amending today, a UK framework was established for designating any non-UK system so that it can receive settlement finality protections under UK law. It also established a temporary designation regime to provide settlement finality protections for a period of three years to existing designated EEA systems that intended to submit an application under the UK’s framework. The purpose of temporary designation is to allow time for applications to be processed by the Bank of England, while ensuring continuity of access for UK firms to relevant EEA systems.
However, there is a requirement in the temporary designation regime for EEA systems to submit an application under the UK framework by 30 June 2021; they will otherwise lose UK insolvency protections. This instrument amends the consequences for EEA systems failing to submit an application by this deadline. Instead of immediately losing settlement finality protections under the temporary designation regime, EEA systems will retain protections for an additional two years. This ensures that UK firms using those EEA systems have sufficient time to put mitigants in place should access to those systems be impacted.
The Treasury has worked closely with the financial services regulators in the drafting of the EU exit instruments amended by this instrument. We have also engaged extensively with the financial services industry on the instrument to which this SI relates. I also note that the Secondary Legislation Scrutiny Committee has reported on this SI as an instrument of interest.
In summary, the Government believe that the proposed legislation is necessary to ensure continuity for UK firms following the end of the transition period. I hope noble Lords will join me in supporting these regulations. I beg to move.
My Lords, the memorandum for this instrument has been prepared by the Treasury. It contains information for the Joint Committee on Statutory Instruments. The Explanatory Memorandum says:
“This instrument is being made in order to ensure there is a coherent and functioning financial services regulatory regime”
in the UK
“following the end of the Transition Period ... This instrument makes amendments to an earlier financial services EU Exit instrument”
which will address
“deficiencies in retained EU law arising as a result of the UK's withdrawal from the EU, in line with the approach taken in other financial services EU exit instruments under the European Union (Withdrawal) Act 2018”.
“To ensure the legal framework for settlement finality protections continued to operate effectively after the end of the TP, the FM&I Transitional SI introduced a Temporary Designation Regime”
which will ensure
“that non-UK systems benefitting from Settlement Finality Regulations … protection … at the end of the TP will continue to do so for three years from that point. The purpose of the TDR is to allow time for applications from such EEA systems under the UK SFR to be considered by the Bank of England. In order for systems to begin to benefit from the TDR, they were required to notify the Bank of England before the end of the TP that they wished to enter the regime. In order to remain in the TDR, EEA systems are required to submit an application to the Bank of England for SFR designation within 6 months following the end of the TP”.
This SI will amend
“the consequences for systems failing to submit an application within 6 months. Instead of immediately losing settlement finality protections under the TDR, systems will retain protections for a period of 30 months following the end of the TP. This ensures that UK firms which are using EEA systems that fail to submit an application for designation under the UK SFR, will have sufficient time to find alternative providers should those systems choose to stop providing services to UK firms”.
My Lords, first, I declare my interests in financial services as in the register, in particular as a director of London Stock Exchange plc. I thank the noble Baroness for the introduction to this instrument. I do not have any objections, as it is pragmatic.
I guess we always knew as we waded through the sea of Brexit SIs—I think it was said there were 65 —that updates and possible extensions would be needed. Although, I am not sure that it was understood, or at least clear to us at the time, how often such changes and extensions would come along and why, but this is one of them. For settlement finality, originally there was to be a separation between those intending to be part of a continuing UK settlement finality system—which had to give notice by the end of this month, with the Bank of England having until 2023 to deal with their applications—and those which did not give such notice and would cease to be part of the system.
That always was a cliff edge in the absence of other measures to ensure migration for those that were going to remain in the system and would therefore have the transitional provisions in place. There did not seem to be any system to manage that migration and make sure that it happened. Now we have until 2023. Both the systems that will join the UK procedures under the Bank of England and those that will be leaving still have until 2023 to enjoy those protections in the event of insolvency.
My concern is whether this will be the end of the story. I accept that migration from one system to another takes time, and I know only too well that industry was slow to make a start, expecting that there would be some kind of ongoing relationship with the EU that would make things all right on the night. Can the Minister now say with any degree of certainty that there will not be a repeating pressure for the 2023 end date to be extended yet again for the systems that are not transitioning into the UK regime? In connection with that, how will businesses using those systems know when it is safe to jump? Will lists of those that have and have not applied to the UKSFR be made public so that there is knowledge about where to move to if you are going to change from system to another? If that does not happen then surely some businesses will come back crying in 2023, saying that they have not done it yet. What will be the response and what monitoring of progress will take place to make sure that does not happen?
As part of that, when will the Bank of England have approved the applications? Will it not be necessary for businesses to know that they have approved systems to transfer to, rather than ones simply awaiting approval? If not, they may fear that they will go to one that is not going to get approval and they will have to change yet again. Until there are approvals, will there not always be reluctance to move and further cliff edges? What incentive is there to move from this run-off system into an as yet unauthorised system that is waiting among the applicants?
I do not really see that this is the end of the legislative story. I do not disagree with what is being done here, but I still do not see that it solves the problem of what the future picture will be for ensuring that everybody has their businesses in the right place. I do not know whether the Treasury has an overview of this now that there has been more time to work out how things are measuring up post Brexit, to make sure that we end in the right place by 2023—or, if needs be, by 2025 or some other date. But it cannot just be “never, never”, where we never manage to get businesses onboarded to the right system and we are therefore always up against a deadline and another extension always come along. I approve of and agree with the pragmatism of our regulators but if it is used to the extreme then, in the end, one undermines the credibility of having separately running UK systems. I wonder whether anything can be said to reassure us that we are not just part of a continuing cycle that will repeat until some far time in the future.
My Lords, I am grateful to the Minister for introducing this SI and to other colleagues who have spoken. As she outlined, the instrument essentially extends protections under the temporary designation regime to give UK firms more time to find alternative providers. This is deemed necessary to ensure continuity of service in cases where domestic firms rely on EEA systems that miss the 30 June deadline for applying to the Bank of England for designation under the UK settlement finality regulations.
While we certainly do not oppose giving UK firms time to
“put proper contingency plans in place”,
as the Explanatory Memorandum puts it, the need for this measure once again calls into question the Government’s approach to Brexit and the practical impacts of their lack of preparedness for our new relationship with Europe. For example, having been desperate to implement their own customs regime, we have debated statutory instruments which immediately disapplied certain rules and procedures, and Ministers had to extend grace periods due to lack of readiness on the ground.
In today’s newspapers, we have read about the continued difficulties around the operation of the Northern Ireland protocol, with talks led by the noble Lord, Lord Frost, supposedly close to breaking down. This would be concerning enough without the reports of unprecedented diplomatic steps taken by the Biden Administration due to their fears for the peace process.
I return to the broad topic of the statutory instrument. Could the Minister provide an update on negotiations with the EU in the field of financial services? Measures such as these are designed to keep the show on the road in the absence of the comprehensive financial services agreement that the Government have promised. While they may afford firms more time to plan, does the Minister acknowledge that it is hard for different parts of the sector to do so when facing so much uncertainty?
My Lords, I thank both the noble Lord and the noble Baroness for their contributions to this debate and for their ongoing participation in debates on financial services and the expertise they bring to them.
As the Committee will know, the Treasury took extensive action to provide certainty for firms around the end of the transition period, and the Government continue to engage extensively with industry. I hope the Committee can rest assured that the Government will continue to do what it takes to ensure that the UK remains the best place in the world to do financial services business.
I am happy to provide the noble Lord, Lord Tunnicliffe, and the noble Baroness, Lady Bowles, with an update on the negotiations with the EU on financial services, although I note that the provisions within this statutory instrument are not subject to any further negotiations or equivalence decisions. Indeed, the EU does not have an equivalence process or a third-country regime for settlement finality, thus the UK created the third-country regime to designate non-UK systems as part of the original statutory instrument.
However, on the broader question of ongoing negotiations on financial services, technical discussions with the EU on the text of the memorandum of understanding on financial services regulatory co-operation have now concluded. The MoU, once signed, will establish the Joint UK-EU Financial Regulatory Forum, which will serve as a platform to facilitate dialogue on financial services issues, including our respective frameworks and any discrete equivalence issues or changes. This is an important step forward in normalising the future relationship on financial services between the UK and the EU. The Treasury is now working to operationalise our future relationship with the EU on financial services, on the basis of the trade and co-operation agreement and the MoU.
In reply to the noble Baroness, Lady Bowles, I say that the original design of the temporary designation regime was to allow three years for the Bank of England to assess all applications for permanent designation under the UK regime. The amendment proposed in this SI does not change that, and we still expect all applications to be assessed by the end of 2023. We expect UK firms that are members of EEA systems which enter into the run-off regime to put contingency plans in place to ensure that they are prepared for any actions that those systems may take as a result of losing UK insolvency protections on 30 June 2023.
The Bank of England publishes a list of all EEA systems that are in the temporary designation regime. The list currently published is of those who notified to enter the regime. After 30 June, only those which submitted an application will remain and a new list will be published so that firms using the services of these organisations will be aware of who has entered the application process, and who has entered the run-off period and does not seek to be designated.
I thank the noble Lords and the noble Baroness once again for this short debate. I commend this instrument to the Committee.
The Grand Committee stands adjourned until 3.40 pm. I remind Members to sanitise their desks and chairs before leaving the Room.
Arrangement of Business
My Lords, the hybrid Grand Committee will now resume. Some Members are here in person, others are participating remotely, but all Members will be treated equally. I ask Members in the Room to respect social distancing. If the capacity of the Committee Room is exceeded or other safety requirements are breached, I will immediately adjourn the Committee. The time limit for the following debate is one hour.
Carbon Budget Order 2021
Considered in Grand Committee
My Lords, I beg to move that this draft order, which was laid before the House on 21 April 2021, be approved. The UK was the first country to enter legally binding long-term carbon budgets into legislation, introduced in 2008 as part of the Climate Change Act. Carbon budgets are set with a view to meeting our target of reducing the UK’s net emissions by at least 100% by 2050. So far, five carbon budgets have been set in law, setting our decarbonisation path through the last decade and the next.
This statutory instrument sets the sixth carbon budget, which will limit the net amount of UK greenhouse gas emissions for the period from 2033 to 2037. The Government are proposing to set the sixth carbon budget at 965 million tonnes of carbon dioxide equivalent, which would reduce greenhouse gas emissions by 78% by the 2033-37 budgetary period, compared to 1990 levels. This is in line with the latest science as the level recommended by our statutory expert advisory body, the Climate Change Committee, and is endorsed by the devolved Administrations.
This is a highly ambitious target and marks a decisive step towards net zero by 2050, achieving well over half of the emissions reductions required between now and 2050 in the next 15 years. It builds on the momentum of our new nationally determined contribution under the Paris Agreement to reduce emissions in 2030 by at least 68% compared to 1990 levels—the highest reduction target made by a major economy to date.
For the first time, the sixth carbon budget will also incorporate the UK’s share of international aviation and shipping emissions; an important part of the Government’s decarbonisation efforts will be to allow for these emissions to be accounted for consistently. We will bring forward the necessary legislative proposals to include these emissions formally, which we aim to do as soon as practicably possible and within one year.
Setting the level for carbon budget 6 is an important step on the path to meeting net zero but we recognise the need to put in place clear actions to meet it. Once the budget is set in law, we will bring forward further policies and proposals. The net-zero strategy, to be published before COP 26, will show how we intend to meet this ambitious target as well as our nationally determined contribution along the way, setting out the Government’s vision for transitioning to a net-zero economy by 2050.
We have already seen the effects of climate change on our planet. Without further preventive measures, this will only get worse. The arguments for decisive action are overwhelming and the consequences of inaction stark. It will lead to rising temperatures and sea levels, extreme weather, damaged ecosystems and reduced productivity of crops. Co-ordinated global action is critical to cutting emissions and mitigating the potentially catastrophic effects on the environment and economies across the world.
The sixth carbon budget demonstrates the UK’s continued leading role in tackling climate change. This target ensures that we are acting consistently with the Paris Agreement temperature goal: to limit global warming to well below 2 degrees centigrade and pursue efforts towards 1.5 degrees centigrade. Importantly, it will allow us to call credibly on others to increase their own efforts, including at this year’s COP 26 summit.
Our ambition to protect the planet goes hand in hand with supporting economic growth across the UK. Between 1990 and 2019, we have grown our economy by more than three-quarters. At the same time, we have cut emissions by more than 40%—again, faster than any other G7 country.
The UK continues to be world-leading in tackling climate change: for example, more than quadrupling renewable electricity generation since 2010, with low-carbon electricity overall now giving us more than 50% of our total generation. The net-zero transition has huge potential to support jobs in low-carbon industries, building on the Prime Minister’s 10-point plan which will mobilise £12 billion of government investment, and potentially three times as much from the private sector, to create and support up to 250,000 more green jobs by 2030.
The sixth carbon budget is a further demonstration of this Government’s dedication to the green industrial revolution and positions the UK as a global leader in green technologies of the future, such as carbon capture and hydrogen. We acknowledge there will be significant costs in reaching this target, but it is clear the cost of inaction is much higher. The Stern review estimated the impacts of unmitigated climate change to be equivalent to 5% to 20% of global GDP.
The net-zero transition also brings significant benefits and opportunities, such as economic growth and jobs in new green sectors, reducing air pollution, enhancing biodiversity and reducing the risks of catastrophic climate change. We expect costs to continue to fall as green technology advances, industries decarbonise and private sector investment grows. Setting the sixth carbon budget will provide a clear signal to businesses, investors and the international community on our efforts to decarbonise.
We understand that ambitious plans across all sectors of the economy are needed to reach our targets. These plans will build on strong recent progress, such as the Prime Minister’s 10-point plan, as well as sector strategies such as the Energy White Paper and the Industrial Decarbonisation Strategy. We will bring forward further bold proposals in the coming months, including a comprehensive net-zero strategy to cut emissions and create new jobs and industries across the country, going further and faster towards building a stronger, more resilient future and protecting our planet for this generation and those to come.
I conclude by stressing the paramount importance of the sixth carbon budget in our efforts to cut emissions and strengthen our strong climate leadership ahead of COP 26. I hope noble Lords will support the statutory instrument. I commend this draft order to the Committee and beg to move.
My Lords, I am pleased to follow my noble friend and to thank him for his clear and concise explanation of the Carbon Budget Order and, in particular, for what he said about the ambitions that will support it by way of decarbonisation strategies and the promotion of a green industrial revolution. These are tremendously important.
As a Conservative, to go all the way back, I was Margaret Thatcher’s last director of research. I am proud of the fact that the Conservative Party has been for 30 years, with perhaps the slight exception of George Osborne as Chancellor of the Exchequer, consistently promoting a clear understanding of the necessity of tackling climate change and delivering on challenging climate change objectives.
I want to make a point about delivery. As paragraph 115 of the impact assessment states
“the policies required to meet the sixth carbon budget levels are as yet undecided”.
All the things that my noble friend referred to are tremendously important and I thoroughly subscribe to the need for us to deliver on carbon capture and storage. I just know, from personal experience, that we spent 20 years trying to deliver that with a commercially sustainable design. We need to deliver new nuclear generation and the limitations we have on that at present are obvious to all. We need to deliver on much more efficient energy storage and hydrogen capacity, and a strategy that enables us to convert to hydrogen in many of our transport systems. All those things are tremendously important and we cannot operate without them; at the same time, we are going to need dramatic fiscal incentives, and those are the points to which I want to refer.
My noble friend Lord Young of Cookham quite rightly pointed in a previous debate to the anomaly of our subscribing to challenging, ambitious decarbonisation targets while at the same time maintaining a freeze on fuel duty. We cannot carry on like this. In a previous debate in Grand Committee, I talked about the necessity of, for example, giving stamp duty relief on energy-efficiency measures in homes. I hope we will see something done on that, because the green homes grant did not work, which is the point we were making at the time.
On 19 May, we had the first auction under the UK Emissions Trading Scheme. I will focus on the importance of developing that as a basis for our decarbonisation strategies and creating a powerful fiscal incentive for decarbonisation. Clearly, this can work; we have seen in the power generation sector that the carbon price support at £18 per metric tonne has enabled us to drive out coal from power generation, but it is not set at a level that will enable us to reduce and eliminate gas-fired, fossil fuel-fired power generation. We need to increase the carbon price support level.
If we are serious about this, we need to accelerate the process of phasing out free allowances under the emissions trading scheme. We need to ensure that the ETS cap on carbon emissions each year is sustaining downward pressure. At the moment, it is in fact set at a higher level than the carbon emissions levels in 2019 and 2020. We must go further and faster. We should raise the floor price from £22; without much notice being taken, the Chancellor raised it from £15 to £22 back in November. We must continue to raise it.
The likely result of all these measures is that we will have a substantial increase in carbon price under the emissions trading scheme. Our industry cannot sustain that unless we have international alignment and, if necessary, carbon border adjustments. The European Union is presently—next week, I think—issuing further detail on its planned legislation for a carbon border adjustment. In the G7 and our international negotiations, it is more important for us to align carbon pricing and the emissions trading schemes than to align corporation tax rates. That is where we should be putting our effort in Carbis Bay. If we can bring other leading economies—mostly notably the Americans, but the Chinese have not yet committed—to an aligned emissions trading scheme, we can escape the trap of carbon border adjustments, which would lead to an endless succession of non-tariff barrier arguments between countries, interfering with free trade.
We really have to see the UK take a lead in the months ahead. We took a lead in Europe on the emissions trading scheme; we must now take a lead alongside Europe and, more importantly, the United States and other leading economies, in creating a carbon pricing and emissions trading scheme which is applicable and effective globally—ideally without carbon border adjustments, but we must legislate for them if necessary.
My Lords, it is a pleasure to follow my noble friend Lord Lansley, 30 years on from when we were both working for Margaret Thatcher. I was Minister for Energy, making a series of energy transition speeches, launching the first non-fossil fuel obligation order. Indeed, this issue has been about for many decades.
There are three issues relating to this order that I would like to draw to the attention of the Grand Committee and the Minister. The first, covered in the outstanding report from the Secondary Legislation Scrutiny Committee, focuses not on the carbon budget which, as has been noted, brings a welcome addition in the form of the inclusion of emissions from international aviation and shipping; instead, it emphasises the need for a much clearer policy framework to clarify government thinking on the policies that will be needed to deliver this and other carbon budgets.
I would be grateful if my noble friend the Minister could confirm when the Government intend to publish the net-zero strategy and say whether it will cover cross-departmental policies to include a significant electrification of sectors such as transport, heating and industry; the continued decarbonisation of the power grid; substantial improvement to energy-efficiency measures in all sectors; large-scale deployment of low-carbon hydrogen carbon capture and storage and GHG removal technologies; increased switching to low-carbon fuels, such as hydrogen or biomass in sectors that are hard to electrify, such as industry, heavy transport, aviation and shipping—to which he referred—and implementation of available abatement options across all sectors that deal with natural resources, for example through afforestation and low-carbon farming practices.
Without such policies—and I appreciate that a number of them have already been touched upon and announced, but not comprehensively, in advance of Glasgow—we will not be able to reach net-zero emissions by 2050. I am sure that my noble friend the Minister will appreciate that for the Committee to agree to this order it is always preferable to be able to review and analyse the mechanisms to be deployed to meet its admirable objectives. In a sense, without that, the order is exposed as a worthy objective but of no further consequence.
As part of that analysis, the second issue that I wish to raise with the Minister is exploratory in nature and follows on from the comments made by my noble friend Lord Lansley. There is no doubt that the increase in atmospheric CO2 and other greenhouse gases is the greatest challenge that the world faces and it is truly global. CO2 respects no boundaries. The CO2 emitted in the UK will have exactly the same impact in, say, India as that produced locally and vice versa.
Many informed experts, including Sir Dick Olver and Simon Ayers, propose that a collection of leading nations promote a global scheme of capped production allowances, co-ordinated not at the level of emitters, which burn fossil fuels for their specific processes, but at the levels of producers of fossil fuels by reference to GWP content. The production allowance is to be progressively auctioned or levied by a periodically updated fee so as to deliver the cap. As has been very clearly stated by my noble friend Lord Lansley, to succeed this has to include the US, China and the European Union. Whichever form of policy we implement, it has to be global.
I believe that producer-level action has a number of clear and significant advantages and think we should still closely study them. One advantage is that the constituency is relatively constrained. There are some 100 global dominant producers; emitters number orders of magnitude higher. Another advantage is that producers are predominantly global and this would therefore facilitate global adoption. They or their customer chains are inescapably engaged with global trading and financial, consumer and political networks, which provide leverage to secure universal producer participation without the contravention of Paris sovereignty principles.
The advantage is the realisation of substantial production allowance proceeds at the international level whose allocation can incentivise participation in a scheme for the developed world as the least-cost route to securing our future and proceeds to selectively mitigate the impact of the carbon price. The developing world would see significant net inflows under such a scheme as proceeds are eventually allocated likely by population. Finally, producer nations would assist with the inevitable social and economic cost of economy adaptation. The production-level cap on carbon pricing ensures comprehensive, uniform application and no leakage for hard-to-monitor emissions. It is still worthy of consideration while we move forward with the revised European scheme and our response to it. I would appreciate hearing today from my noble friend the Minister whether there is an appetite for a production-level cap on carbon pricing.
Finally, and in raising this issue I declare an interest as chairman and partner of Buckthorn Partners LLP, which invests in the energy transition space, there is real concern that with the impending ban on gas-fired boilers in new-build properties from 2025—which is, as we always counted in the run up to the Olympics Games, only a matter of 180 Mondays away—an important requirement is to move to heat pumps.
Yet if you run a spell-check on Taylor Wimpey’s latest annual report, there is not a single reference to heat pumps in the document. That is not a criticism of Taylor Wimpey; it applies across the board to many of our leading housebuilders. Even the Department for Business, Energy and Industrial Strategy states that
“in many cases the up-front costs of low carbon technologies, such as heat pumps, are currently higher than the technologies they replace.”
So if we are going to end gas in new builds, what are the alternatives that are cost-competitive and practical, overcoming a broad range of barriers, including technical, market-pricing, behavioural, regulatory and socio-political? I would very much appreciate it if the Minister has any observations on this and can cast light on these questions because they will be critical to any new home standard guidance that the Government are looking to work on and will no doubt publish in the near future.
My Lords, it is an extraordinary indication of the priorities of this place that we are considering, briefly, for one hour, with just half a dozen of us taking part, one of the biggest budgets that this Parliament has ever imposed on the British people. The nonchalance with which we embark on breathtakingly complex technological projects and impose those burdens on our fellow citizens I find extraordinary.
The impact assessment states that the cost of this budget will be £651 billion. Can the Minister confirm that that is on top of the costs of the previous five carbon budgets? I will not question the reliability of those figures. They are clearly as uncertain as they are huge and depend on as yet non-existent technologies coming on-stream, and I do not recall any large projects, from Channel Tunnel to HS2—you name it—that has ever come in on time and within budget. Why we should assume the huge array of projects comprising this sixth carbon budget will come in within the sort of cost estimates we have here, I do not know.
Ultimately, all those costs will fall on households—£41.1 billion a year, we are told. That is £1,500 per household per year. Most of those households earn a good deal less than we in this place do. It means that they will have to replace their cars with more expensive cars and dispose of their existing fossil fuel cars for a fraction of what they would otherwise get. It means they have to replace their fossil fuel boilers with heat pumps, at great cost and before they have even had to insulate their homes to ensure that they get a reasonable level of heat, though probably nothing like what they were getting when they relied on gas. It involves us doubling the electricity-generating capacity in this country so that fossil fuel power can be replaced by electric power.
What about the benefits? They are put in this document as even greater—more than £900 billion, as I recall—but none of those benefits will be enjoyed by the people who are paying the costs. The Minister quoted the noble Lord, Lord Stern, as saying that the cost of doing nothing was, I think he said, “equal” to 5% of GDP; actually, he said that it was “equivalent to” 5%.
However, that is taking costs over centuries ahead and smoothing them over the years, regardless of the fact that most of those costs will not accrue for centuries. Even in the most pessimistic forecast by the noble Lord, Lord Stern—the 95th percentile worst forecast—the cumulative costs of doing nothing are less than the cumulative benefits of the early stages of the warming of the climate until beyond 2200. So nobody in this century will benefit from postponing global warming. People in future centuries will but, again, according to the figures from the noble Lord, Lord Stern, those people will be many times better off than us; even the inhabitants of Africa will be better off then than we are now, and that is taking into account the impact of climate change on biodiversity and the environment as well as the market costs of its impact on the economy.
The cost-benefit analysis rightly says that there is a consensus among scientists that we are experiencing global climate change and that this is predominantly due to carbon dioxide and other warming greenhouse gases. That is true; no one disputes that. It then goes on to refer to “catastrophic consequences”. There is very little in the IPCC reports that suggests that there will be catastrophic consequences. If I thought that doing little or nothing or taking a more moderate approach would put at risk the existence of the human race—as Extinction Rebellion implies by its very title—or even cause its immiseration, almost no cost would be too great to avoid that.
However, the IPCC does not say that. In fact, in its economic chapter, it states:
“For most economic sectors, the impact of climate change”—
that is, if we do nothing—
“will be small relative to the impacts of other drivers … Changes in population, age, income, technology, relative prices, lifestyle, regulation, governance, and many other aspects of socioeconomic development will have an impact on the supply and demand of economic goods and services that is large relative to the impact of climate change.”
So, we talk ourselves into fear, claiming that it is based on science, and ignore the main body that we set up to provide us with evidence and forecasts.
Will it be economically and politically possible to put these things through? Initially, the answer is of course yes because the costs will be in the future, but that future is rapidly approaching. I remind noble Lords that every time the cost of trying to mitigate climate change becomes a political issue—be it the gilets jaunes in France, when Macron wanted to put a few extra pence on the cost of diesel, the impact in Holland, where a party that did not even exist became the largest in the municipal elections because it opposed the costs of climate change, or Australia, Canada—Ontario and so on—the public have reacted against the burdens that we so nonchalantly impose on them. I hope that we think twice, thrice, even four times, before we go ahead.
My Lords, it is a privilege to follow such experienced and distinguished noble Lords. I declare my interest in agricultural technology as set out in the register.
The monsoons will shortly start in south Asia. Traditionally, the arrival of the monsoons begins with a festival to celebrate nature and express gratitude for all that the planet gives us, but things are different now. As the climate has changed, so has the mood on the subcontinent. Sadly, the rains that give sustenance have become floods that take lives. So as we think about our carbon budget today, we are reminded of those living with the real effects of climate change around the world.
Our carbon budget is part of an international balance sheet. For us to achieve net zero, carbon offsets must work too. Despite a false start a decade ago, this time round, the voluntary carbon market can be a real success. For this to happen, we need to make some improvements—and quickly. Currently, the entire system of carbon offsets is extremely complex and needs specialist advisers and consultants to navigate it. This desperately needs to be simplified, standardised and made accessible so that income from carbon offsets can directly benefit those changing their practices—particularly those using nature-based solutions and those in low-income countries. This must be done without compromising the quality of credits; the Taskforce on Scaling Voluntary Carbon Markets has proposed a very good set of core carbon principles, which are a useful framework to verify credits. The verification and validation of carbon savings also need to be digitised so they can be rolled out at scale.
We must also recognise that the voluntary market is voluntary, and the institutional investors driving it must be supported. We must fully support the voluntary carbon market. Does my noble friend the Minister agree that we have a duty to make sure that this market works for everyone?
My Lords, I thank the Minister for his clarity in introducing this order. I welcome it, the ambition it sets out and the decision to follow the Climate Change Committee’s recommendations—particularly its recommendation to include the UK’s share of international aviation and shipping. I was concerned that that was not included in the order before us; I am grateful for the Minister’s reassurance that it is simply because of differing statutory deadlines. He said in his letter to me that it would be laid in due course, which was a worryingly vague term, but he has given some clarity today. I thank him for that.
We urgently need to address these issues, not least around aviation. On that point, we are still awaiting the publication of the Government’s net-zero aviation policy. However, the Climate Change Committee has already told us that adequate airport capacity already exists to meet the future levels of demand that are compatible with a pathway to net zero. Does the Minister agree that, until the Government have developed their net-zero strategy for the sector—including a national strategy for airport capacity—the only responsible approach is to impose a moratorium on all airport expansion? If he does not agree with that, can he explain how we can have any chance of meeting the sixth carbon budget unless we are able to take the decisions that are consistent with it?
As I said, the Liberal Democrats very much welcome the ambition of these targets, but we remain concerned that the Government seem much more ambitious about target-setting than they do about action-taking. I do not know whether I am becoming more conservative in my old age or the noble Lord, Lord Lansley, is becoming more liberal, but I agreed with every word—I was going to say almost every word—he said. He will be pleased to know that quite a lot of it is in the Liberal Democrat manifesto.
The noble Lords, Lord Lansley and Lord Moynihan, made the point that delivery is key now. We have had a whole series of target-setting. We have the net-zero target, which I welcome. We now have the 78% target by 2035; we had the 68% target by 2030. These are all good things to point towards. However, they are worthless if we do not actually take action to get there. The noble Lord, Lord Moynihan, said that, without that action plan, they are nothing more than a worthy objective—I agree. It is good to have worthy objectives but it is important to have action.
I agree 100% with the noble Lord, Lord Lansley, that fiscal incentives are absolutely critical. We have to start shaping our fiscal system to take into account what is the biggest economic and existential threat to us. We cannot just keep putting it off. We cannot keep taking decisions that are entirely contrary to the targets we set. The consultation on air passenger duty that the Government have embarked on is completely the wrong approach. We should be reflecting much more along the lines that have been taken in France: they are restricting domestic flights where train journeys can get you there within two and a half hours, I think it is. We should place that on all carbon-emitting domestic flights but we should have an exemption for all clean technologies. That would also be a way of advancing clean technologies in the aviation sector.
We cannot go on with a situation where, in 2016, we scrapped the net-zero carbon homes standard. Again, I agree with the noble Lord, Lord Lansley, that one of the good things about climate change policy in this country is that it has been, in general, cross-party. The one real exception was George Osborne’s occupation of the Treasury where, despite a guarantee that they would be the greenest Government in history, throughout the time of the coalition Government, the Treasury was the major obstacle and a lot of promises were made in that regard. I am glad that we have moved on from that time, but we must get back to what should have been the 2016 target.
As the Climate Change Committee points out, since then, we have built a huge number of houses that are going to have to be retrofitted. That makes no sense at all. We have to tackle the building sector. I know the complications and difficulties in that, but we must learn from the mistakes we have made in the past and not keep repeating them. I know that the Minister agrees on that. I suspect that the Treasury is again the problem. The stamp duty relief that the noble Lord, Lord Lansley, mentioned is an idea that must be implemented. We must get on with this stuff to give people incentives; even then, it will be very difficult.
I agree with the noble Lord, Lord Lilley, on one point, if not on many others: that there is a nonchalance about how we are going about this. We must get on with this and we have to be clear about what it means.
This morning, I was speaking to sixth-form students at a Roman Catholic girls’ school. Among the many questions they asked was, “When are adults really going to understand the urgency for action?” I hope that the Minister will understand the urgency for action, not just target-setting.
I am grateful to the Minister for introducing this order today. It is not a moment too soon. We are in the midst of a climate and environmental emergency, and all steps to meet the challenge are welcomed and encouraged.
The strengthening and development of policies are clear imperatives and follow the pathway of Labour’s ground-breaking Climate Change Act 2008. The Conservatives slowed momentum following the majority Cameron victory in 2015 with the result that the UK is no longer on track to meet the fourth and fifth carbon budgets for the years 2023-27 and 2028-32. This carbon budget—the sixth, for 2033-37—necessarily has to reset the pace. I am grateful to the Climate Change Committee for its purposeful determination in recognising the problems and coming forward with robust recommendations. Inevitably, the Government’s slow realisation and slow pace mean that this budget demands deeper and more stringent action to get the UK back on track, not only to meet the old targets but to meet the new pressing targets and the international obligations of the Paris Agreement 2015.
I congratulate the Government on resetting the targets and legislating for net zero by 2050. Following the recommendations of the Climate Change Committee, this order is the next step towards determining that pathway by setting the carbon budget—the maximum volume of greenhouse gas emissions that can be emitted —for the period 2033-37.
Let us recognise that although this is a small step, it is a crucial one. Now the Government must bring forward their policies and proposals for the UK to achieve this. That means the Government must close the existing £22.4 billion gap in net-zero spending, according to Green Alliance, for the duration of this Parliament. They cannot do this through wishful thinking or self-congratulatory soundbites. This is the decisive decade for climate action. The substantial majority of UK emissions must be cut by the end of the 2020s, as the world must get to net zero well before 2050.
The CCC’s recommendations include a more ambitious scenario of 87% rather than 78% reductions by 2035, based on greater public engagement and faster innovation, which reflects the urgency of the situation and the nation’s capacity to respond. Gaps must be filled. I am grateful to the CCC for recommending for the first time making international aviation and shipping—responsible for 10% of UK emissions by 2018 figures—now subject to domestic inclusion in this budget, and to the Government for finally recognising this clear imperative.
Net zero will involve big changes to everybody’s daily lives. The UK can reach the target and stem climate change only with the support of the public, companies, business, the Government and all their agencies, and the devolved Administrations. I thank the International Energy Agency for its international net-zero pathway modelling on a global scale, identifying the annual additions of renewable energy needed, the energy efficiency increases necessary and the technology that is ready or near to market. It recognises battery and energy storage as vital areas for urgent development.
The Government must come forward with far more than a scattergun 10-point plan. Carbon Brief has recognised that, while the UK has committed £8 billion to green recovery this year, Germany has invested £38 billion and France £31 billion, and the US has committed $1 trillion to green initiatives under the President’s green infrastructure plan. The totality of the scattergun 10-point plan promises only £54 billion of public and private investment over the next 10 years put together. Green Alliance estimates that policies announced in 2020 will lead to only 26% of the reductions necessary to get the UK on track to meet its 2030 target.
At the time of the scattergun 10-point plan announcement in November 2020, the Government had a plethora of missing strategy documents which will be needed to map out the necessary policies within a framework to produce a comprehensive agenda so that industry and the public can respond. With the CCC’s recommendations now accepted and enacted in this order, the Government must issue these policy statements as soon as possible.
I thank the Minister for responding with the Government’s energy White Paper and the industrial decarbonisation strategy. Clearly, this order necessitates urgency for the net-zero strategy, which will need to be supplemented by the transport decarbonisation plan, the hydrogen strategy and the heat and buildings strategy, among other things such as a public engagement plan, discussed in your Lordships’ House recently. The Government have promised the necessary net-zero finance review from the Treasury in September.
The noble Lord, Lord Lansley, identified carbon capture and storage, and the noble Lord, Lord Moynihan, identified heat pumps for new homes. Plus, a comprehensive plan now has to be set out, ruling out anomalies in carbon pricing. Can the Minister confirm that the urgency of the situation will be met with the publication of all these strategy documents, with policies, before COP 26 this November? Does he recognise the value of being ready to provide leadership to the conference? Can he tell the Committee how the Government propose to tackle the requirement to include international aviation and shipping in this sixth carbon budget? This is necessarily part of transport, but will it be addressed separately, as it is clearly a more difficult challenge that must now be faced?
The noble Lord, Lord Oates, spoke of the initiatives put forward by the French Government. Will this Government come forward with better solutions for energy efficiency following the collapse of the green homes grant scheme? How do they propose to encourage the uptake of electric vehicles, especially by low and middle-income families, and to remove the up-front costs barrier? Does the Minister favour Labour’s plan to offer interest-free loans for new and used electric vehicles? How will the Government accelerate the rollout of charging points in streets?
Labour calls for a green economic recovery, with the delivery of high-skilled jobs in every part of the UK as part of the drive towards a decarbonised—
I can see that it is 24 seconds past the minute. I have another 15 to 20 seconds to speak, and then I will finish. I thank the noble Baroness, though, for reminding me that the clock is ticking.
Will the Government come forward with a new skills plan? With so many issues to cover and so much urgency needed for ambitious plans, I am pleased to approve the order before the Committee.
First, let me thank noble Lords for their valuable contributions to the debate. I hope that I will be able to provide in my response all the necessary assurances that will enable noble Lords to approve the statutory instrument before us.
As I stated in my opening speech, this SI will set a world-leading target in line with the independent expert advice of the Climate Change Committee and is supported by all four Governments of the UK nations. Carbon budget 6 is an important step towards meeting our 2050 net-zero target, building on our NDC to reduce our emissions in 2030 by at least 68% compared to 1990 levels. It will strengthen our position as a global climate leader going into our G7 and COP 26 presidencies, highlighting our commitment to taking decisive action against climate change. In addition to showing the world that the UK is serious about protecting the health of our planet, it will help to seize the opportunities and benefits that the net-zero transition will bring, not only reducing the risks of catastrophic climate change but leading to economic growth and jobs in new green sectors. The UK can position itself as a global leader in green technologies of the future.
My noble friend Lord Lansley made a number of important points on how we will implement the range of ambitious policies that will be needed as we transition to net zero. He rightly highlighted the need for a clear focus on the delivery of new measures across, for example, carbon capture, energy efficiency and hydrogen. He also highlighted the importance of using all possible policy levers across government to meet our ambitious targets. I agree with him that targets are in and of themselves insufficient. Our net-zero strategy, which is to be published before COP 26, will set out bold proposals to make progress across the economy. We will also set out further proposals throughout the year—for example, our heat and buildings strategy and the transport decarbonisation plan. This will be a bold and ambitious programme of the co-ordinated action needed to end the UK’s road transport greenhouse gas emissions by 2050 and, at the same time, ensure that the transport sector plays its part in delivering our legally binding carbon budgets.
My noble friends Lord Lansley and Lord Moynihan raised the important issue of carbon pricing. The UK is a strong supporter of carbon pricing and a pioneer of carbon markets through both domestic action and our support for the uptake of carbon-pricing schemes around the world. Putting a price on carbon is recognised as an important element of climate change mitigation. It provides a cost-effective and technology-neutral way to reduce emissions, mobilising the private sector. It can of course also offer social and biodiversity benefits.
As COP president, the UK is fully committed to reaching a successful outcome on carbon trading rules at COP 26. This is a fundamental element of the Paris Agreement, enabling parties to co-operate to achieve higher ambition in both adaptation and mitigation actions. We will build on the good progress made at COP 25 in Madrid, working with all parties towards a successful outcome in Glasgow.
In response to my noble friend Lord Lilley, who rightly raised issues about the costs of the transition, I can say that the costs cited in the impact assessment include the full costs and benefits of the transition to net zero. I recognise that we need to manage the costs of this significant transition carefully but, overall, we expect the costs to be outweighed by significant benefits: reducing polluting emissions as well as bringing fuel savings and improvements to air quality and enhancing biodiversity.
It is of course important that we consider the impacts on the most vulnerable when decarbonising our homes. We are offering additional protections to the vulnerable and fuel poor. The expanded warm home discount and the energy company obligation will provide around £6 billion of support to low-income and vulnerable households between 2022 and 2026—an increase of more than £1.7 billion over that period. Over the last year, we have committed over £1 billion of energy-efficiency funding through the local authority delivery scheme, the home upgrade grant and the social housing decarbonisation fund. This will fund home improvements for low-income households now and over the next two years. Her Majesty’s Treasury is soon to publish its net-zero review and BEIS a call for evidence on energy consumer funding, fairness and affordability, on the costs of reaching net zero and ensuring fairness and affordability in the energy system. These will all inform the Government’s approach to achieving transition in a way that works for households, for businesses and, of course, for the public finances, while at the same time maximising our economic growth opportunities.
In response to the noble Lord, Lord Sarfraz, who asked about carbon off-sets, the UK is working through international fora to set the foundations for a credible global carbon trading system rooted in environmental integrity. As COP president, the UK is fully committed to reaching a successful negotiated outcome on carbon trading rules at COP 26. The UK’s international climate finance is strengthening the international carbon market, helping to reduce emissions and leverage additional investment.
In response to the noble Lord, Lord Oates, who highlighted the importance of delivery and some important considerations, again, we know that setting a target is only a first step and that further action is of course needed. Ahead of COP 26, we are setting out ambitious plans across many key sectors of the economy. These will build on strong recent progress on the Prime Minister’s 10-point plan and will culminate in our net-zero strategy, to be published later in the year.
I am pleased that the noble Lord welcomed the inclusion of international aviation and shipping in the carbon budget, as that of course allows for those emissions to be accounted for consistently with others. The Government take the matter of aviation and their commitments on the environment extremely seriously and the expansion of any airport must always be within the UK’s environmental obligations. By taking immediate steps to drive the uptake of sustainable aviation fuels and investments in R&D to develop zero-emission aircraft, and developing the infrastructure of the future at our airports and seaports, we will make the UK the home of green ships and green planes.
Through the Aerospace Growth Partnership, industry and government have made a joint funding commitment of £3.9 billion for aerospace research and development from 2013 through to 2026. This includes the FlyZero project to study in depth the potential for zero-emission aircraft. We are also investing £125 million in the future flight challenge to enable the use of new forms of green and autonomous aircraft. Further work on sustainable aviation fuels and air traffic control is co-ordinated by the Department for Transport and our partnership with industry through the Jet Zero Council. The Government are planning to consult shortly to update our position on aviation and climate change.
In response to the points made by the noble Lord, Lord Grantchester, who emphasised the points that a number of other noble Lords made about the importance of policy action, I agree that urgent action is needed to address the threat and help secure the UK’s long-term economic security. That is why we are committed to these world-leading targets, and we will bring forward further plans shortly to meet them.
The independent advisers, the Climate Change Committee, are clear that their recommendations have been explicitly designed to reflect the UK’s highest possible ambition within the UK’s particular capabilities as required by the Paris Agreement. Our sector decarbonisation strategies will contain further proposals to put us on track for meeting our carbon budgets and to provide clear direction for different sectors of the economy.
The comprehensive net-zero strategy ahead of COP 26 will set out the Government’s vision for transitioning to a net-zero economy. It will outline our path to meet net zero by 2050 and our emission targets along the way. We are in no doubt about the challenge that this target presents, but it is right that we pursue the highest possible ambition in the face of climate change. This target ensures that we are playing our part in meeting the Paris temperature goal, and we will be urging other countries to follow us and do the same. It is in line with the level recommended by the CCC and it is feasible to meet with substantial efforts across every sector of the economy.
I set out in my opening speech what we have already achieved, and we can make considerable progress in the power sector as we now boast the world’s largest offshore wind capacity. Now we look at the even greater benefits that net zero can bring, such as protecting the planet for future generations, through economic growth and jobs in the new green sectors. This statutory instrument will keep the UK on a credible path to meeting that 2050 net-zero target, seeing well over half of the emissions reduction needed by 2050 in the next 15 years. It will build on the recent momentum to capitalise on the vast opportunities of net zero and will strengthen our ability to urge countries to go further in delivering net zero globally. I commend the draft order to the Committee.
Arrangement of Business
My Lords, the hybrid Grand Committee will now resume. I ask Members in the Room to respect social distancing. If the capacity of the Committee Room is exceeded or other safety requirements are breached, I will immediately adjourn the Committee. If there is a Division in the House, the Committee will adjourn for five minutes. The time limit for the following debate is one hour.
Contracts for Difference (Miscellaneous Amendments) Regulations 2021
Considered in Grand Committee
My Lords, I beg to move that the draft Contracts for Difference (Miscellaneous Amendments) Regulations 2021, which were laid before the House on 12 May this year, be approved.
This draft instrument makes a number of amendments to three separate contracts for difference regulations: the Contracts for Difference (Definition of Eligible Generator) Regulations, the Electricity Market Reform (General) Regulations and the Contracts for Difference (Allocation) Regulations. These amendments will help to support the ambition for the next contracts for difference auction, planned to open in December this year, and will make progress towards our 2050 net-zero target.
The amendments include adding and removing technologies from the list of technologies eligible to compete in a contracts for difference round, strengthening the supply chain plan process and extending the delivery years that can be set for successful projects. They also include some small technical amendments to the non-delivery disincentive rules and capacity cap rules, as well as technical changes to improve the operation and clarity of the allocation regulations. We are proposing these legislative amendments following two public consultations of 13 and nine weeks respectively, in 2020 and earlier this year, during which our proposals received broad support.
The CfD scheme is designed to offer long-term price stabilisation to new low-carbon generators, allowing investment to come forward at a lower cost of capital and therefore at a lower cost to consumers. The scheme typically sees support contracts awarded in a competitive auction process, which has been successful in driving substantial deployment of renewables at scale in Great Britain while rapidly reducing costs to electricity consumers.
The most recent allocation round in 2019 saw contracts awarded to 5.8 gigawatts of new renewable energy projects, with the costs of offshore wind falling by around 30% from the previous allocation round in 2017. This is the first time that renewables are expected to come online below predicted market prices—meaning, of course, a better deal for consumers. The next CfD auction, which is the fourth to date, is planned to open in December 2021. It will be available to both established technologies, such as solar PV and onshore wind, and less established technologies, such as floating offshore wind. Offshore wind will sit in its own newly created third pot.
In October 2020, the Prime Minister announced new plans to accelerate the UK’s progress towards net-zero emissions while making the UK a world leader in clean wind energy. This included the ambition to secure up to 12 gigawatts of renewable electricity capacity in this round, subject to the pipeline of projects expected to bid, which is double that secured in the last round held in 2019. We are laying these amendments today to give certainty to businesses about the basis on which projects will be eligible to take part in the next CfD scheme in advance of the round opening in December.
CfD applicants with a capacity of 300 megawatts or more are currently required to present a supply chain statement to the EMR Delivery Body as part of their application. A statement is provided if a developer can demonstrate to the Secretary of State’s satisfaction that the project will make a material contribution to the development of relevant supply chains. The aim of the policy is to encourage the effective development of open and competitive supply chains and the promotion of innovation and skills in the low-carbon electricity generating sector. The Government believe that the current policy approach needs to be strengthened to boost competitiveness and productivity in places that stand to benefit the most and to harness innovation and invest in skills while driving progress towards the UK’s 2050 net-zero target.
These regulations revise the criteria that the Secretary of State must consider when assessing an application for a supply chain statement. In addition, they create a new stage in the process, requiring a CfD generator to apply for a supply chain implementation statement to demonstrate the extent to which they have delivered on the commitments set out in their original supply chain statement, setting out the process for providing or refusing a supply chain implementation statement.
This supply chain implementation statement will enable an CfD generator to fulfil an operational condition precedent required under a CfD contract. The Low Carbon Contracts Company, as CfD counterparty, may terminate the CfD if this operational condition precedent is not fulfilled by the CfD long-stop date. This requirement will be inserted into the CfD standard terms and conditions for new CfDs awarded from the fourth allocation round.
Biomass conversions have played a material role in helping to meet the UK’s 2020 renewables targets by replacing coal-fired power stations with renewable energy generation. However, as electricity generation has become less carbon intensive, we have reviewed the role of biomass conversions. These regulations remove biomass conversion projects from the list of technologies eligible to apply for a CfD in future allocation rounds.
Allocation rounds, and their associated budgets, can be made available only for projects commissioning in set periods, known as delivery years, which are set before each round opens. In order to run allocation rounds with delivery years after 31 March 2026 and to further provide necessary flexibility to support the level of ambition needed to meet the 2050 net-zero target, we are extending the CfD scheme delivery years until 31 March 2035.
The Government have confirmed a series of more ambitious targets for offshore wind, including a boost to the Government’s previous target to deliver up to 30 gigawatts of offshore wind to delivering 40 gigawatts by 2030, and a new ambition for 1 gigawatt of this 40 gigawatts target to come from floating offshore wind. This is due to widespread agreement that floating offshore wind will play an important role in helping the UK to meet its longer-term decarbonisation targets.
This technology is in an earlier phase of development, making it currently more costly than offshore wind that is attached to the seabed. It is therefore appropriate for floating offshore wind projects to be recognised as a distinct technology within the CfD scheme; one subject to its own administrative maximum strike price and eligible to take part in pot 2 auctions alongside other less-established technologies. These regulations therefore establish floating offshore wind projects as a category of technology eligible to take part in the CfD scheme and compete alongside other less-established technologies. In doing so, we deliver on one of our manifesto commitments.
The UK’s new 2050 net-zero emissions and carbon budget 6 targets mean that we will continue to require substantial amounts of new, low-carbon power sources to be built before 2050. These changes ensure that CfD allocation rounds can best support an increase in the pace of deployment of new renewable electricity generation needed to achieve our ambitions while continuing to consider value for money for consumers. Subject to the will of Parliament, these arrangements will come into force on the day after the regulations are made. I commend the regulations to the House.
My Lords, I feel privileged to be in this very elite grouping discussing this statutory instrument. However, the limited number of us participating should not take away from the importance of what is proposed here. I hope the Minister will be pleased that I welcome these regulations without a “but”. I have an “and” and some questions, but overall I think the regulations are very welcome.
As the Explanatory Memorandum points out, the private-law contract nature of CfDs provides the certainty needed for investment in these green technologies. It is very important that we get this part right. It is the CfDs that have led to such a dramatic reduction in the cost, for example, of offshore wind.
I welcome the fact that the regulations will remove biomass conversion from future allocation rounds, which seems sensible, and that floating offshore wind will be put into a separate pot. I hope that, in future, CfDs may be extended beyond just this sector so that we can look at how they—or similar mechanisms to provide certainty—might be applied to technologies such as green hydrogen. That is an important thing for the Government to look into.
The regulations, as the Minister pointed out, strengthen the supply chain policy, which is aimed at a more open and competitive supply chain and at promoting innovation and skills. I welcome that but, given that the Secretary of State has the power to refuse to provide an eligible generator with such a statement, can the Minister give us some understanding of the basis on which such refusals would be made?
Paragraph 7.11 of the Explanatory Memorandum explains:
“These Regulations also extend the confidentiality provisions relating to the disclosure of information that may damage the commercial interests of any other person”.
I do not think the Minister touched on this in his opening remarks; can he explain why that change is felt to be needed now? I am suspicious of extending confidentiality provisions beyond what is absolutely necessary.
I was going to criticise the lack of clarity in paragraph 7.12 of the Explanatory Memorandum, which seemed almost incomprehensible to me, but then the Minister read it out almost word for word. I do not think that particularly helped to explain anything. Can he perhaps ensure that these Explanatory Memoranda explain things a bit better?
I have a couple of further points. Paragraph 7.27 states:
“These Regulations amend the Allocation Regulations by amending the way the budget operates to provide the flexibility to decide … whether each capacity cap, maximum and/or minimum … would be applied as a ‘soft’ or as a ‘hard’ constraint.”
What will the considerations be in determining whether a hard or soft constraint will be applied, as that was not clear to me?
Finally, paragraph 7.30 makes it clear that the regulations are amended to make it
“explicit that the overall budget, both monetary and capacity may be varied using a budget revision notice.”
Can the Minister tell us what that does for the level of certainty he referred to in his statement as being extremely important for industry? I note from the consultation responses that there was a good deal of concern about this change. The Government argue that it is not a change but simply makes something explicit. I am a little sceptical about that argument on the basis that, if the Government had the power to do it anyway, I suspect they would not be giving themselves the power to do it. Can he give us some more information on that?
However, as I said at the start, on behalf of the Liberal Democrats, we welcome these proposals. We welcome the extension of the period, which will give greater certainty, and are pleased that the regulations have been brought before the Grand Committee.
Once again, I thank the Minister for his explanation of the regulations before the Committee today. They amend a number of regulations covering contracts for difference, as well as the general regulations for electricity market reform.
The aforementioned contracts for difference cover the definition of eligible generator by removing biomass as a qualifying generation to apply for a CFD. I welcome this change, as biomass has largely fulfilled its purpose of replacing coal-fired power stations with renewable energy fuel. Now that electricity generation has become less carbon intensive, continued supply of woodchip has caused controversial activity to be reassessed.
In relation to contracts for difference regulations, these regulations also amend the allocation regulations by including floating offshore wind as eligible to apply for CfD funding. Through the consultation process, other minor improvements and better drafting to aid clarity have also been identified, such as supply chain plans and period definitions to application rounds to provide better certainty to applicants. Thus these regulations bring many improvements and developments to the CfD process. As an initiative to incentivise investment in low-carbon electricity generation and bring forward renewable sources of energy while improving affordability for consumers and maintaining energy security during energy market reform, the CfD regime has been largely a huge success. While there has been controversy over the setting of strike prices for specific technologies, the mass deployment of renewables has led to more competitive renewable generation and better energy efficiency. The consultation process has been very productive and the resulting redrafting of guidance is also very welcome. Can the Minister give any indication of when National Grid and the Low Carbon Contracts Company will publish their updates to reflect these changes? In turn, the Minister’s department intends to publish an updated version of its supply chain plan guidance. Will the Minister commit to publishing it well in advance of the next CfD allocation round?
Floating offshore wind is an interesting development that the Government have identified as potentially a very productive new source of energy generation. Will the Minister expand a bit on the operation of pot 2 as a separate budget for less-established technologies to which floating offshore wind will have to apply? What is the size of this pot in relation to the more recognised pot to which established technologies would apply? What have been the relative awards total between the two pots in the past and what is the breakdown of those awards? I will be happy to receive a letter with more detailed information from the Minister rather than take up the Committee’s time now. I merely wish to understand how new technologies are supported in relation to the generality of technologies and when a new technology will graduate, and by what defining characteristics, from one pot to another. Can the Minister say in any meaningful way at the moment what strike price might be awarded to offshore floating wind in relation to strike prices for the various stages of conventional fixed offshore wind? With that, I approve the regulations before the Committee.
I thank both noble Lords, the gallant duo, for turning up to debate an important statutory instrument this afternoon. As I set out in my opening speech, decarbonising the power sector is a vital part of the UK’s effort to meet its world-leading net-zero target. While we cannot, of course, predict exactly what the generating mix will look like in 2050, we can be fairly confident that renewables will play a key role alongside firm or flexible low-carbon generating capacity, such as carbon capture, usage and storage technology and nuclear power. Net zero defines what we must achieve by 2050 but, as pointed out in the previous debate, not how to get there. We must take the necessary decisions now to deliver the resilient, low-cost, low-carbon power system that we will need to reach net zero.
The noble Lord, Lord Oates, asked about the circumstances should a developer not obtain a supply chain plan statement. If a developer fails to make ambitious, feasible and measurable commitments in a supply chain plan, it may not receive an SCP statement. However, it will have the opportunity to resubmit its application before the auction begins. Subsequently we expect that commitments made should be met. If a developer fails to implement the majority of its commitments in a supply chain plan, its CfD contract may be terminated. However, the termination of a CfD contract is very much a last resort. The purpose of the monitoring process is to support the implementation of a supply chain plan commitment that developers have freely entered into. It is in the best interests of both the Government and the developer that that chain plan commitments are implemented.
In response to the question on making explicit powers under the budget revision, we are seeking to make explicit our existing powers and not to add any new powers. Although in the May 2020 consultation we proposed making changes to clarify our ability to amend the overall budget—meaning the monetary budget—and add the ability to amend a supply cap, on reflection, we consider that we already have the power to amend the capacity cap due to the fact that the definition of “overall budget” includes both the monetary and capacity budget. Therefore, both proposed changes would make explicit existing powers which, although they exist, we consider not clear enough for stakeholders.
The noble Lord also asked about soft constraints. When deciding whether a capacity cap—maximum or minimum—should apply as a soft or hard constraint in an allocation round, we will consider what we are trying to achieve from the round generally or for specific individual technologies, including in terms of how much new capacity is supported. We also want to ensure value for money by creating competitive tension between bidders.
The noble Lord, Lord Grantchester, asked about the strike price for FOW. We will publish specific allocation round parameters in due course. We typically announce the auction parameters four to six months in advance in a draft budget notice and draft allocation framework although, of course, the exact timing differs between rounds.
On the noble Lord’s question about SCP guidance, that has been published in draft and a final version will be published in the next couple of months. The noble Lord asked a couple of other questions but, if he will forgive me, I will write to him with more detailed answers.
The changes in these regulations are varied but they are essential to ensure that CfD allocation rounds can best support the increase in the pace of renewable deployment needed to achieve our net-zero ambitions, while continuing to consider value for money for consumers. They must be made now ahead of the next CfD allocation round, which is planned for December this year, so that developers have certainty as to who will be eligible to take part and on what basis. I therefore commend the regulations to the Committee.
That completes the business of the Grand Committee this afternoon. I remind Members to sanitise their desks and chairs.
Committee adjourned at 5.02 pm.