Official Report: Minutes of Evidence

The Chairperson (Mr Butler): I welcome Richard Coey, head of the Department's emissions trading policy branch, and Anna McMahon, deputy principal in the emissions trading policy branch. I am sorry for talking as you entered the room. I was not being rude. Will you please brief the Committee?

Ms Anna McMahon (Department of Agriculture, Environment and Rural Affairs): No problem. Thank you for the opportunity to speak to the Committee and provide an overview of the Greenhouse Gas Emissions Trading Scheme (Amendment) (No. 2) Order 2024. Chair, it might be helpful to provide some background to the scheme, as I am conscious that you have taken up post since we last briefed the Committee in April.

It is worth saying at the outset that, as a policy intervention, the policy is an effective decarbonisation scheme. The scheme was established in January 2021, following EU exit, to replace UK participation in the EU scheme. The EU scheme was established in 2005, and the UK participated in that scheme from its inception. The scheme's aim is to encourage greenhouse gas emission reductions by incentivising decarbonisation. The UK emissions trading scheme (ETS) is overseen by the UK ETS Authority, which comprises the UK, Scottish and Welsh Governments and DAERA working together as equal partners to implement and develop the scheme. The scheme works by requiring participants to purchase and surrender a carbon allowance for each ton of carbon dioxide that they emit. The more that they emit, the more they need to buy. Participants who fail to surrender the requisite number of allowances are subject to financial penalties. Under the scheme, a cap is set on the overall number of emissions allowances available for participants, and that cap is reduced, gradually, over time. That is known as the trajectory. The aim is to encourage emissions reductions. Some participants receive a proportion of their allowances for free. That is to help prevent carbon leakage — the relocation of the industry to other parts of the world that either do not have costs for carbon emissions or have a lower carbon price.

The key aims of the scheme are to promote carbon emissions reduction and incentivise participants to invest in clean, low-carbon technologies. Participants face a choice: pay for their emissions by buying allowances or invest in decarbonisation measures that will reduce their CO2 outputs and, in turn, reduce the amount of allowances that they are required to buy. As the allowance cap reduces and the price of carbon rises, it should become more cost-effective for participants to reduce emissions by investing in abatement technology rather than purchasing allowances.

The scheme covers energy-intensive industry, power generation and aviation. Across the UK, there are around 900 participants. In Northern Ireland, there are 19: 17 stationary installations and two airline operators. It is worth mentioning that electricity generators in Northern Ireland continue to participate in the EU ETS under the terms of the Windsor framework. That is to protect the operation of the single electricity market on the island of Ireland. Six electricity generators in Northern Ireland continue to participate in the EU scheme. Any amendments to the EU scheme must be considered in the context of Northern Ireland's continued requirement to align in respect of electricity generation.

From its inception, the UK scheme was designed to be more climate ambitious than the EU scheme, with 5% fewer allowances being made available to purchase than would have been the case had the UK remained in the EU scheme. However, the scheme was not ambitious enough to align the cap of allowances with the net zero objectives of the UK Government and devolved Administrations. Therefore, in spring 2022, the UK ETS Authority consulted on wide-ranging proposals to develop the scheme to increase its climate ambition. The consultation was known as Developing the UK Emissions Trading Scheme. The leading policy proposal was the implementation of a net zero-aligned cap to place the level of available carbon allowances, and the rate at which it declines year-on-year, on the net zero trajectory. The consultation included various other amendments to the scheme; for example, considering a number of technical changes to free allocation policy and calling for evidence on future markets policy to consider the use of a stability mechanism to support market functioning. The response to the consultation was issued in July 2023. In Northern Ireland, agreement to the policy positions in that response was secured under the Northern Ireland (Executive Formation etc) Act in the absence of a sitting Assembly.

The UK ETS and the associated amendments to it are made under the Climate Change Act 2008. Under that Act, legislation that either establishes or amends an emissions trading scheme must be progressed through each of the UK Parliaments. In respect of the UK ETS, that means that each amending statutory instrument must be laid before, and be subjected to scrutiny by, the Northern Ireland Assembly.

I will now speak about the amendments introduced by the Greenhouse Gas Emissions Trading Scheme (Amendment) (No. 2) Order 2024. The Committee was provided with a summary of the amendments in a letter from the departmental Assembly liaison officer (DALO), which was considered at the Committee meeting of 26 September. I will summarise the changes that the legislation will make if it is approved.

It will implement a reduction of the UK ETS cap to align with a net zero trajectory, consistent with net zero objectives. In order to deliver on commitments given in the Government's response to the Developing the UK ETS consultation, to which I have already referred, the number of allowances auctioned from 2024 onwards has already been reduced. That has been facilitated through amendments made to the UK ETS auctioning regulations under the Finance Act 2020. That course of action was taken as it was not possible to table an amendment to the Greenhouse Gas Emissions Trading Scheme (Amendment) Order 2020 on a UK-wide basis while the Assembly was not sitting. Delaying the implementation of the cap reduction would have resulted in a steeper reduction in the availability of allowances from the previous cap to the net zero trajectory.

The legislation will create a flexible reserve of allowances, which will be stocked from allowances such as those that remain unallocated and may have been available to participants for free. That pot could be used, for example, for future market stability purposes. The legislation will also extend to Northern Ireland UK ETS amendments that were implemented in Great Britain to ensure that policy implementation is consistent across the UK. That includes technical changes, namely capping the maximum amount of free allocation that aircraft operators are eligible to receive; amending the classification and free allocation entitlement of electricity generators; and clarifying the treatment of carbon capture and storage plants. No current Northern Ireland installations will be affected by the changes.

The Order will extend the scope of the scheme to include flights from Northern Ireland to Switzerland. Presently, only flights from Great Britain to Switzerland are within the scope of the scheme. That will ensure uniformity of approach across the UK. On a UK-wide basis, it will expand the scope of the scheme to include CO2 venting process emissions from the upstream oil and gas sector, removing any perverse incentive for operators to vent CO2 to avoid costs. At present, that does not affect any Northern Ireland installations. The Order will introduce a civil penalty for a failure to submit information to regulators, and a deficit notice for instances where participants fail to surrender sufficient allowances for their emissions by the surrender deadline. It also introduces amendments to ensure a more consistent approach by regulators in the application of such penalties.

Those are the main elements of the legislation. The amendments are mainly of a technical and operational nature and implement a net zero-aligned emissions cap. That emissions cap is consistent with the UK and devolved Administrations' decarbonisation trajectories for the sectors that fall within scope of the legislation. The Order does not extend the scope of the scheme to additional industrial sectors.

I thank members for their time and their interest in the scheme and amending Order. I hand over to my colleague Richard Coey to take any questions that members may have.

Mr Richard Coey (Department of Agriculture, Environment and Rural Affairs): I have nothing further to add to what Anna said. I am happy to take any questions that members might have on the ETS in general or the amending Order.

The Chairperson (Mr Butler): Thank you, Anna and Richard. It was really good of you to recognise that I am pretty new to the post. Your briefing was pretty good, but there is still quite a bit for me to get my head around.

The draft Order extends to Northern Ireland the provision that applies in GB, as you pointed out. Obviously, we were unable to apply it over the past few years when we did not have the Assembly. During that time, were there any difficulties in operating the scheme or any variances?

Mr Coey: There were not, because the amendments were applied on a GB-only basis at the time, and they currently do not affect any Northern Ireland installations. The amendments made were on the capping of aviation-free allocations to 100% of aviation emissions. We have two aviation registered operators in Northern Ireland, but neither receives the free allocation, so they were not affected by the change.

As for the changes on electricity generation, there is a proposed amendment whereby electricity generators that do not currently receive any free allocation could be eligible for free allocation if they produce electricity by high efficiency cogeneration, which, basically, involves the recovery of heat from the electricity generation process. None of our electricity generators does that. In any case, our electricity generators still participate in the EU scheme, under the terms of the Windsor framework, so they are not affected by that amendment.

The one amendment that applies is the inclusion of flights from Great Britain to Switzerland within the scope of the scheme. Up to now, flights from Northern Ireland to Switzerland were not within the scope of the scheme. I am not aware of the exact percentage, but, in the overall scheme of things, quite a small percentage of flights from the UK to Switzerland originate in Northern Ireland.

The Chairperson (Mr Butler): OK, thank you. I have a question on the carbon capture activities. The paper talks about the clarification:

I am just trying to understand how that applies to an installation in Northern Ireland.

Mr Coey: Apologies, I can cover that. That is another thing that has been extended to Northern Ireland.

At the minute, if an installation carries out a registered activity that requires it to purchase and surrender allowances and, on the same site, captures those allowances for permanent geological storage, there is no provision for it to avail itself of free allocation for the emissions that are not being captured. The amendment allows for installations that are carrying out a registered activity but are also storing to be eligible for those emissions that are not being captured. There are no such installations in Northern Ireland, and I am not sure whether there are very many, if any, such installations across the rest of the UK. So, that does not apply to Northern Ireland at the minute.

The Chairperson (Mr Butler): I am just trying to get my head around that. Is it like incentivisation for carbon capture on site? It is an environmental plus, and the legislation almost offers an incentive: you will not be penalised if you capture, and you still can qualify for —.

Mr Coey: Yes. There has been a bit of press coverage on that recently. The UK Government recognise that carbon capture will be needed to help us meet our net zero objectives. It is about not discouraging folks from installing capture plants.

The Chairperson (Mr Butler): OK. Members, I have no further questions. I know that you have had some previous engagement on the legislation. Are there any other questions for the witnesses?

Mr McGlone: I have a brief one. You mentioned flights. How do you capture and assess the impact of flights? Is that offset? If so, how is that done?

Mr Coey: The aviation operators, in the same way as stationary installations, have to continually monitor their emissions. Once a year, they need to submit their emissions to their respective regulator — in Northern Ireland, that is the Northern Ireland Environment Agency — for assessment. If the regulator is satisfied that that is a true representation of the previous year's emissions, they will be requested to declare an emissions allowance for every ton of carbon that they emitted.

Mr McGlone: Are military flights included in that?

Mr Coey: There are certain exemptions. I will have to get back to you on exactly what they are.

Mr McGlone: That would be helpful.

Mr Coey: There is a weight exemption; I know that.

Mr McGlone: Does it include domestic military and foreign military flights?

Mr Coey: I will check that out.

Mr McGlone: OK. Thank you.

The Chairperson (Mr Butler): Thank you very much, Richard and Anna. I really appreciate that. I will do a bit more reading to get my head around the issue. It is very interesting and useful for us.

Mr Coey: Thank you.

Ms McMahon: Thank you.