Net Zero, Energy and Transport Committee [Draft]

Meeting date: Tuesday, October 31, 2023

Official Report 719KB pdf

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Subordinate Legislation

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Greenhouse Gas Emissions Trading Scheme (Amendment) (No 2) Order 2023 [Draft]

Agenda item 2 is consideration of a draft statutory instrument. I am pleased to welcome the Cabinet Secretary for Transport, Net Zero and Just Transition, Màiri McAllan, and from the Scottish Government, Mariana Cover, senior policy adviser, United Kingdom emissions trading scheme; and Lucy Geoghegan, head of unit, net zero economy and carbon markets. Thank you for joining us today.

As the instrument has been laid under the affirmative procedure, it cannot come into force unless the Parliament approves it. Following this evidence session, the committee will be invited under the next agenda item to consider a motion recommending that the instrument be approved. I remind everyone that officials can speak under this agenda item but not in the debate to follow.

I invite the cabinet secretary to make a brief opening statement.

Good morning. Given how complicated the topic can be, I will take the opportunity to make an opening statement, so that I can set things out as simply as I can.

I am pleased to be able to give evidence on the draft affirmative instrument to amend the Greenhouse Gas Emissions Trading Scheme Order 2020. In July, the emissions trading scheme authority, which is formed of the Scottish, UK, Welsh and Northern Irish Governments, published a joint Government response to last year’s consultation. The response contains substantial changes to strengthen the ETS and to better align it with our net zero objectives. We have already brought into law some of the minor decisions that arose from that Government response, via a negative statutory instrument earlier this year. We are now implementing additional—mostly minor—amendments through this affirmative instrument.

The thrust of today’s amendments is to amend the free allocation policies to ensure the correct functioning of the ETS. The committee will remember that free allocations are the allowances that are given for free to operators who are at risk of carbon leakage—that is, the risk of industries moving offshore to jurisdictions with less rigorous carbon policies. Specifically, the instrument would cap the amount of free allocation for the aviation sector. That is being done to amend a current anomaly in the system, whereby data used to allocate free allocations to aircraft operators is inconsistent with current activity levels, resulting in some operators receiving an overallocation of free allowance and creating a competitive distortion.

Today’s provisions, therefore, provide that free allocations will not exceed 100 per cent of the air operator’s verified emissions, and they will be in place until the withdrawal of the aviation free allowance in 2026, which is a separate commitment from the joint response and is, I stress, not being legislated for presently, although I will be happy to keep the committee updated on it.

Two other minor issues are covered in today’s instrument. First, it will introduce an amendment to allow installations with carbon capture and storage to receive free allocations. Again, the issue has arisen as a result of inconsistencies in the legislation whereby it is currently not possible to do that—and, clearly, we see that as lowering the incentive to install carbon capture and storage. As that was never the policy intent, we are changing it.

Secondly—and finally—the instrument contains three technical amendments to the free allocation rules for electricity generation, to more accurately reflect operator activity and to incentivise electricity produced by means of high-efficiency co-generation.

I also want to make a brief point about parliamentary processes. The Senedd and the UK Parliament are running a similar scrutiny process on the matters in today’s order. The Northern Ireland Assembly will do so as soon as it can, but in the meantime the order will apply only to Great Britain. We aim to bring forward in due course the remaining changes to the ETS that are set out in the response, such as expanding the scope of the ETS and phasing out free allocation for aviation.

As I wrote to the committee on 7 July, one of the most significant changes—that of aligning the cap with a net zero trajectory—is currently being taken through the UK Parliament. I would have preferred it to have been taken through the Scottish Parliament in the first instance, but it is a pragmatic, albeit not ideal, response to the fact that there is no sitting Northern Ireland Assembly. As soon as there is one, we will lay the affirmative measures for that provision, and the committee will have the opportunity then to scrutinise it.

That is quite enough by way of opening remarks. My colleagues and I are very happy to take questions.

Thank you, cabinet secretary.

I have a question on aeroplane oversubscription. Was there a huge discrepancy in that respect? Was it being abused considerably?

First, I am not sure that I would use the word “abused”. It was basically an accounting issue whereby the free allocation was offered on the basis of out-of-date activity data. It will differ between operators; some will be far below 100 per cent of their verified emissions, and others will be slightly over. I do not know whether Lucy Geoghegan wants to add anything to that, but the general response would be that the situation differs between operators and that it was a case not of abuse but of the data being out of date and needing to be realigned.

So it was just a paper exercise. Are you saying that there was no trading as a result or that there was no financial benefit from somebody having an overallocation?

No. There would have been an overallocation, and they would have financially benefited from that. However, the cabinet secretary is right that the allocation was based on 2010 activity data. In transitioning from the European Union ETS into the UK ETS, we transitioned the benchmark data, but it did not match the existing activity levels of aircraft operators across the UK. In essence, then, we needed to fix that anomaly.

You have piqued my interest—I am now interested in knowing what the scale of that was. You will probably not be able to give me that information now, and it would be wrong of me to ask the question, but I am sure that you could write to the committee and say what the level was. It would be interesting for us to get a handle on that.

We can certainly look into that, convener. As part of our impact assessments for some of those changes—and more so for some of the wider changes—we have looked at Scotland-specific commercial entities. It is sometimes a little difficult to discuss the commercial details, particularly as there are so few such entities in Scotland, but we have some of that data, and we will happily write to you with what we can.

Cabinet secretary, you mentioned that the free allocation for aviation will be phased out over the coming years. What impact will that have on the aviation industry?

That is a good question, and we have been looking very closely at the issue. The intention is to phase it out, because it is now the view that aviation is not at risk of carbon leakage. That is a change in view that each of the authority members have come to agreement on.

That said, although we agree on the need to phase it out, I have, like you, been asking the question about impact assessments. One of the things that I have put very starkly to my authority partners is the issue of Highlands and Islands connections. However, we are still developing our approach to the phase-out date, which is not until 2026, and assessing the impact.

As you will see in the response, I have won a concession under which the impact on connections to the Highlands and Islands will be considered and any mitigations that are required will be developed. That is still to be done, but as I have said, it is still a few years hence, and I will very much continue to assess the impact on operators and on people who need to get back and forth to remoter parts of the UK.

As there appear to be no further questions, we move to agenda item 3, which is formal consideration of motion S6M-10535. I invite the cabinet secretary to speak to and move the motion.

Motion moved,

That the Net Zero, Energy and Transport Committee recommends that the Greenhouse Gas Emissions Trading Scheme (Amendment) (No 2) Order 2023 [draft] be approved.—[Màiri McAllan]

Members do not seem to have any comments or questions, cabinet secretary, so I must formally ask whether you want to sum up. However, I am not sure that there is much that you can say.

No, there is not, except to ask for the committee’s support. Thank you.

Motion agreed to.

The committee will report on the outcome of the instrument in due course. Are members happy to delegate authority to me, as convener, to finalise the report for publication?

Members indicated agreement.

We look forward to getting the additional information that the cabinet secretary has kindly offered to give us.

Cabinet secretary, I thank you and your officials for attending, and I briefly suspend the meeting to allow for a changeover of witnesses.

09:29 Meeting suspended.  

09:31 On resuming—