Official Report 544KB pdf
Greenhouse Gas Emissions Trading Scheme (Amendment) Order 2026 [Draft]
09:08
Agenda item 2—[Interruption.] It was rude of me not to have acknowledged that Sarah Boyack is attending today as Monica Lennon’s substitute. Thank you, Sarah, for attending.
Agenda item 2 is consideration of the Greenhouse Gas Emissions Trading Scheme (Amendment) Order 2026. This draft statutory instrument makes various changes to the United Kingdom emissions trading scheme. The Delegated Powers and Law Reform Committee made no comment on the instrument in its report. However, it noted that the instrument had been withdrawn and relaid twice: first due to errors that were identified by the responsible minister, and subsequently in response to questions that the committee raised with the Scottish Government.
I welcome to the meeting Gillian Martin, the Cabinet Secretary for Climate Action and Energy, and her supporting officials from the Scottish Government: Lucy Geoghegan, head of unit, net zero economy and carbon markets; Natalie Bertagna, senior policy adviser; and Norman Munro, lawyer.
The instrument has been laid under the affirmative procedure, which means that it cannot come into force unless the Parliament approves it. Following the evidence session, the committee will be invited to consider a motion to recommend the instrument be approved. I remind everyone that the Scottish Government officials can speak under this item but not in the debate that follows.
Cabinet secretary, I think that you would like to make a short opening statement and also allude to an issue that may have appeared last night.
Yes, thank you, convener. I think that it would be helpful for me to make a short statement to take us through the instrument.
I am pleased to provide evidence supporting the draft Greenhouse Gas Emissions Trading Scheme (Amendment) Order 2026. The UK emissions trading scheme authority, which is formed by the four nations of the UK, is implementing changes to strengthen the climate ambition of the ETS while protecting our businesses and industries. These technical changes focus on the methodology for distributing free allocation of UK ETS allowances. This is the UK’s primary policy instrument to address carbon leakage—that is, when emissions move to another jurisdiction with lower carbon prices.
As the committee will be aware, ETS participants must purchase an allowance for each tonne of COthat is emitted. However, some allowances are given free to sectors that are deemed at risk of carbon leakage. The ETS authority has consulted extensively on the free allocation policy to ensure that, crucially, it is working to incentivise emissions reduction and protect energy-intensive trade-exposed industries from the risk of carbon leakage.
The authority published a consultation response in November last year outlining changes for the next free allocation period from 2027, and the instrument will implement the commitments that are included in that response. I will go through each of them.
First, operators can choose whether to exclude activity data for 2020, or 2020 and 2021, from historical activity level calculations to account for Covid-19 impacts. The concerns of stakeholders about the impact of Covid-19 have been heard. Consequently, the instrument will ensure that operators’ historical activity level is representative so that operators do not lose out on free allowances due to the impact of Covid on production in many sectors.
Secondly, the instrument will update the benchmarks that are used to calculate free allocations: it will retain current benchmarks for 2027, with the intention of adopting European Union benchmark values from 2028. This will ensure that recent emissions efficiency improvements are reflected in free allocations, while aligning with the EU—which is the Scottish Government’s position, and called for by stakeholders—to support linking negotiations.
Thirdly, to ensure that all carbon leakage mitigation measures work cohesively, including ETS free allowances and the UK carbon border adjustment mechanism, the instrument will gradually reduce free allocation for sectors that are covered by the UK CBAM—the aluminium, cement, fertiliser, hydrogen, and iron and steel sectors—to ensure a smooth transition for those sectors.
Finally, a clarification to current legislation makes clear to operators of installations that cease to be free allocation installations as a result of either permanent cessation, as is currently provided for, or the surrender or revocation of the operator’s permit, that, even if they cease operations before the end of the relevant scheme year, they are required to report final year activity levels. This requirement will ensure that free allocations align with actual emissions and prevent overallocations.
These technical changes will ensure fairness and accuracy in free allocation distribution, while continuing to support those sectors.
I have to let the committee know that I am aware that the Welsh Senedd’s Legislation, Justice and Constitution Committee has identified a minor error with the instrument. The issue does not impact the operability of the instrument. One word—“period”—should have been erased as it is being replaced by another term.
The authority is working to determine the best option for amending the instrument, seeking resolution at the earliest opportunity, and the Scottish Government is working with other members in the authority to ensure that we improve the ETS SI drafting and legislative process in future. However, as I said, the issue does not have any material impact on the operation of the instrument.
I am happy to answer any questions that the committee might have.
Thank you very much, cabinet secretary. Before I ask any questions, as the instrument relates to fertiliser, I remind members of my entry in the register of members’ interests that I am a farmer in Moray, and I use fertiliser.
To go to the final point, on the drafting error, first, perhaps you could give me some clarity. Although the issue is only with the word “period”, I am told that it has quite a large impact. What is the solution to that? Will all four nations work together to come up with a new SI, which will be laid for the committee to consider? How will you get around the issue?
09:15
I will bring in Norman Munro, because he knows all the vehicles that might be available to the UK Government. However, the error does not impact the working of the SI at all—it just duplicates the meaning of another term.
Norman, could you take us through the solutions that have been presented?
There is consideration across the UK ETS authority on the appropriate vehicle to correct this error. Vehicles that are being considered include a correction slip and finding a suitable legislative vehicle. This is the UK ETS’s 14th instrument since it was established, so instruments are always available if amendments need to be made at a later point. Those are the two vehicles that are being considered to remedy the error at the earliest convenience.
I will give you the exact phrasing. The issue relates to the term “relevant period”; “scheme year”, which is meant to replace the word “period”, has been inserted, so the extraction of the word “period” is required.
I recognise that the issue is only a single term. I was trying to understand it.
Norman, every day in the Parliament is a learning day for me, because I have never heard of a correction slip. Help me—is that a term that we use in the Scottish Parliament? People might not know it; I certainly do not.
Yes, we use it in the Scottish Parliament. Once an instrument is made and has been laid before the Parliament, a correction slip can be added if an error of a minor nature is perceived. It goes on legislation.gov.uk alongside the instrument, and the necessary amendment is made. A correction slip is often used in areas in which there are parts of the instrument that cannot be amended, such as footnotes.
Does the committee have to consider that? I have been convening committees for 10 years, but I have never come across a correction slip. I am just delving into the issue so that I understand it. Does the committee have to look at it again? Is it like bringing the SI back?
I am afraid that we do not use correction slips an awful lot. More often than not, the intention is to make an amendment through an amending instrument. Correction slips are relatively rare, but my understanding is that they would not undergo formal process as a full instrument would.
Every day is a learning day for you as well, Norman. The clerks tell me that it is not a normal procedure but that it can be done. Once the solution is identified, I would be interested to see the best way to take the matter forward.
From what you said, cabinet secretary, I am getting that you are confident that the instrument can progress, and that you know full well that there are errors, but they could be corrected in the short term. Would that be done before the end of this parliamentary session?
I will need to write to you once we have bottomed out the method by which we will take this forward. We are still looking at the potential methods. Whether we use a correction slip or something else, we will write to let the committee know.
Thank you. I will continue my learning process on how this is done. This SI has had quite a messy birth, given that it was withdrawn a couple of times before we came to it.
Sorry, Sarah, did you have a question on the procedure? You caught my eye.
I did, convener, because I had not heard of a correction slip either, so I wanted some clarification on it. It is useful to have had that clarified on the record that such a matter can be addressed in two ways. Neither is significant, but as long as the solution gets the support of all four nations, it will be workable, and the committee will be informed. Having that on the record is really important.
Thank you, Sarah. The possible difficulty in getting all four nations to agree might extend the process, so the resolution might come after the time that I am in the Parliament, but I hope not.
I turn to the substantive issue. What are the main impacts that Scottish businesses will feel as a result of the changes to the free allocation that are brought about by the instrument?
A business regulatory impact assessment—BRIA—has been done for the instrument. The ETS instrument is designed to protect businesses that have high emissions but that are performing a necessary function in producing what they produce. Free allocations are given to high-emitting businesses that industry needs to operate. Also, the CBAM is coming into force. That will put additional levies on top of imports that are produced in countries that do not have a similar ETS, which will further protect businesses.
All the high-emitting industries in Scotland have substantial free allocations associated with them. When it comes to their competitors outwith the UK, the new mechanism that the UK is bringing in—the CBAM—will be phased in as the free allocations drop, which will effectively protect businesses from competition from imports that come from countries that do not have the same emissions trading function or procedure that we have in the UK. If we did not have that, that would put businesses here at a disadvantage.
So you are pretty sure that the effects on Scottish businesses are actually good and not bad.
Yes. High-emitting businesses will have more free allocations associated with their business.
In the past four or five years, I have heard constantly that things change very quickly, which does not give any certainty for businesses to invest in what they are doing. Does the instrument give businesses in Scotland the certainty that they need to invest in making the changes that they are being required to make?
Yes. The instrument addresses issues that have been brought to the attention of all four Governments. One thing that the instrument does is to mitigate the impact of the two years in which Covid inactivity was highest—the instrument adjusts that so that businesses do not have to take it into account. It also updates the benchmarks that are used for free allocation to reflect emissions efficiency improvements. That involves looking at emissions efficiency for each applicant. The instrument will also enable the reduction of free allocation annually in the period from 2027 to 2030 for some installations that will be covered by the CBAM. It is, in effect, a phased approach for which businesses can plan.
Thank you for explaining what the instrument does. I am looking for you to clarify that final sentence on the record. You believe that the instrument gives businesses certainty to invest in the future and that the scheme will not be changed again. I cannot remember how many iterations the scheme has had.
It is not really in my gift to say what the UK Government will do. Obviously, the ETS and the CBAM are UK Government measures, although the four nations are kept in the loop by the UK Government on the direction of travel.
The ETS is not new. The UK ETS was a replacement for the EU ETS as a result of Brexit—it was brought in by the previous UK Government to replace that mechanism. That was because it was understood that, if we did not have a replacement, that would leave businesses vulnerable. There has been a long period since the end of the previous session of Parliament, when I was sat in the chair that you are in now. At that time, five years ago, we were looking at the implementation of a UK ETS to replace the EU one, because we were exiting the EU. That is a great deal of notice. I guess that the uncertainty at that point, five years ago, would have been about whether the UK ETS was going to work but, of course, it has been working for the past five years.
Okay. I am looking to see whether any other committee member has a question.
Fertilisers are within the scope of the instrument. I just want to get some assurance that there will not be an increase in the cost of fertilisers to our farmers when this comes into play.
I do not see that the instrument would have any effect on the cost of fertiliser. It is difficult for me to predict what will happen in the markets, but, as a result of this instrument, the free allocation to businesses that manufacture in high-emitting areas in the UK will continue to be protected. Obviously, quite a lot of fertiliser is imported. In fact, I think that the vast majority of fertiliser is imported. Whatever happens in other countries will be the thing that drives any price increases. Of course, as a result of the CBAM, there is a fairness associated with any imports that come from countries that do not have an ETS. A fertilising company that was set up in the UK would not be put at a disadvantage because another country from which we were importing fertiliser had the advantage of not having to be involved in an ETS.
Will the instrument make any changes to the cost of imported fertiliser?
I could not possibly answer that. I do not know what will make changes to the cost. There will be other factors involved in the cost of fertiliser, not least the cost of fuel, which has an impact on the cost of anything that is imported.
I understand that there are other factors, but I am asking whether there is anything in this instrument that will increase the cost of fertiliser to our farming community.
I find it impossible to say with any certainty what it will do to the cost of anything. My officials can maybe come in and assist me, but, according to the business impact assessment that has been done on the instrument, it is about protecting businesses in the UK. There are many factors that would increase the cost of fertiliser, not least energy security issues or global impacts, but I do not see the instrument making any material difference in that respect.
Cabinet secretary, Lucy Geoghegan keeps looking for an opportunity to come in. It is not for me to bring her in, but just in case you want to.
I will back up what the cabinet secretary said and clarify what is in the SI. It is about how free allocations that are given to any UK fertilising producers will be phased out gradually over a nine-year period as the UK CBAM is introduced, so that the price difference does not impact the costs that are applied to imported fertiliser. As the cabinet secretary said, whatever happens to the cost of imported fertiliser is down to the UK CBAM, which is a UK Government reserved policy area.
Which is not part of this SI.
It is not part of this SI.
Okay, thank you.
I will follow up on the question that the convener asked about the extent to which the instrument will incentivise businesses to invest now, given the changes that are going to take place incrementally, but actually quite significantly, over the next few years. I was thinking particularly about the hydrogen sector and the discussions about grey, green and blue hydrogen. To what extent will the instrument support investment now because these changes are taking place?
I am not entirely sure that this particular instrument does anything to incentivise or otherwise. It is not really about that. As Lucy has just said, the main thing is the phasing out of the free allocations as the CBAM is brought in. If there is any incentivisation, it is about the fact that, for example, we are not disadvantaging hydrogen producers in this country in favour of importers of hydrogen that comes from more high-emitting processes. I really do not think that the SI does anything in the way of incentivisation. It really is about protecting and, as has been pointed out, giving fair notice of the CBAM implementation and the gradual phasing out of the free allocations in a way that will not put businesses at a disadvantage.
Cabinet secretary, I note what you said about the drafting error in the instrument being a minor change. Before we move on to the next stage, if you wanted to pause and bring the instrument back next week when you have had a chance to look at it, I, as convener of the committee, would take every opportunity to allow you to do that. However, if you feel confident that it is a minor issue and you want to move the motion today, I will not stand in your way. All I am saying is that we will do what we can to help you with that minor drafting error if you request the time from us, so do not feel that you have to go to the next stage.
I will move it today because not doing so would have an implication for all four Administrations. I would like to move forward.
Our decision on the instrument has to be made by 10 February, so we could do that next week. I have made the offer, cabinet secretary, and you have made your decision. That is fine.
Motion moved,
That the Net Zero, Energy and Transport Committee recommends that the Greenhouse Gas Emissions Trading Scheme (Amendment) Order 2026 [draft] be approved.—[Gillian Martin]
Do any members want to make a contribution at this stage? Most of the debate has been had, especially about the drafting area.
As there are no comments, I assume that the cabinet secretary’s summing up and response to the debate will be very limited.
I have no need to sum up.
Motion agreed to.
Before we finish, I invite the committee to delegate authority to me as convener to approve a draft of our report on the instrument for publication. Are we all happy with that?
Members indicated agreement.
I thank the cabinet secretary and her officials, and I suspend the meeting briefly to allow a changeover of witnesses.
09:31
Meeting suspended.
09:40
On resuming—
Air adhart
Draft Climate Change Plan