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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.

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.

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.

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.

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. [Gillian Martin has corrected this contribution. See end of report.] If we did not have that, that would put businesses here at a disadvantage.

Yes. If they are high emitting, there are more free allocations associated with their business.

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.

When it comes to their competitors outwith the UK, free allocations will gradually drop from when the new mechanism that the UK is bringing in—the CBAM—is implemented, 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.

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.

Obviously, the CBAM is a UK Government measure, although the four nations are kept in the loop by the UK Government on the direction of travel.

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.[ has corrected this contribution. See end of report.]

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.

I agree with that, but I would also expand it. As you rightly said, the Scottish Parliament agreed to national planning framework 4, which set the narrative that we want to facilitate as much low-carbon energy as possible to reduce our emissions, but also for energy security reasons. The Scottish Government does not have responsibility for energy security, but we have an interest in it. We also have an interest in economic growth in Scotland, making sure that we provide jobs for the future and that we have an energy industry in Scotland that is able to adapt and pivot to new energies.

So, yes, we set a narrative, but Parliament also set a narrative by agreeing to NPF4, which gives guidance to planning authorities throughout the land—at local authority level and more generally—on what is expected in relation to planning applications.

I absolutely agree that community engagement varies. I feel very strongly that that should change. There should be a level playing field, and I do not think that community engagement should be voluntary. Regardless of the type of energy that is being produced or the activity within energy infrastructure, community engagement should be mandatory. There should be very strict guidance associated with what good practice looks like. The Scottish Government does not have the levers in that regard, but we have good practice principles. As I said, through the Planning and Infrastructure Act 2025, we have secured the ability for the Scottish ministers to mandate community engagement, which is a very welcome development, because everything around that used to be voluntary.

Such engagement might mean that company A goes into a community to undertake early engagement, with lots of public meetings and many innovative ways of talking with everyone. The company might also make offers of community benefits, work with the community to give them a percentage share of the profits that are associated with the activity, carry out housing retrofit to bring down people’s bills or give the community some kind of endowment to do things that it wants to do in its area. In such cases, neighbouring communities will look at the opportunity that another community is getting and say, ‘‘That’s great. I wish we had that opportunity as well.’’ That is a very positive story.

However, we might have project B, which is of a very similar nature but which is run by a different company that does not do any of that and leaves a very nasty taste in people’s mouths. As far as the public is concerned, the companies are all tarred with the same brush. All that it takes is one company in one area of Scotland—again, let us say the Highlands and Islands—to leave a very bad taste in people’s mouths: it might fail to act in a way that brings the community with it, avoid engaging with or offering anything to the community, or, worse, promise to do things in that community, but then, once the development is through, the community does not see them for dust. There are a number of companies like that and, in future, should another developer—even if it has good intentions—want to do something, it will be told to take a hike.

All the developers should be held to the same standard, which should be mandated at UK level. I also want community benefit to be mandated at UK level. It should not be voluntary; it should be a statutory obligation, whether for battery storage, solar, hydro or onshore wind. That way, everyone will know what is on offer and what they are getting, and developers will all be held to the same standard. Communities should have that engagement and decide how any benefit is used. That dialogue must happen well before the plans are made—it must take place before the application even goes in. Developers or transmission owners should work with communities, understand their concerns and work with them to find engineering solutions, which can then be put into the plans before they get submitted to the ECU, the council or whichever body it is. Developers or transmission owners must also be held to account on delivering the community benefits that they have promised or said that they will give to the community.

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The devolved Governments and the UK Government have commissioned NESO to develop the strategic spatial energy plan. NESO is also developing a regional energy strategic plan for Scotland. Those documents will help to shape the way in which Scotland’s energy infrastructure will need to develop over the coming decades to meet demand and energy security requirements and to assess things such as cumulative effect.

On an individual project basis, cumulative effect is taken into account by the council that determines the applications—at the moment, those are applications for developments that are under 50MW—and by the ECU.

However, not all applications can be predicted. The convener mentioned battery storage, which is an area that has a lot of speculative players. Communities, including my own community, certainly feel the impact of such speculation. They hear word of particular actors that seek to put forward developments—there are lots of actors and they are all speculating. Not all of those developments will go into the application process, but the speculation is enough to make communities feel worried about the cumulative impact. There is probably far more battery storage speculation out there than developments that will come to fruition, but that does not stop communities feeling a bit helpless.

Community engagement is important, and it should not be voluntary. The Planning and Infrastructure Act 2025 now gives us the opportunity to liaise with all stakeholders, including communities, on what they think community engagement should look like. Once we have taken all that evidence and feedback, we will be in a position to say to developers, “This is the mandatory community engagement that you are now subject to and that you must do, and it has been informed by Scotland-wide consultation.” Such consultation will be done in the way that you suggested should have happened in years gone by.