Official Report 838KB pdf
Greenhouse Gas Emissions Trading Scheme (Amendment) (No 2) Order 2024 [Draft]
The second item is consideration of a draft statutory instrument. The Greenhouse Gas Emissions Trading Scheme (Amendment) (No 2) Order 2024 makes various changes to the United Kingdom emissions trading scheme. In its report, the Delegated Powers and Law Reform Committee made no comment on the instrument.
I welcome Gillian Martin, the Acting Cabinet Secretary for Net Zero and Energy. I also welcome the Scottish Government officials who are joining us for this item: Mariana Cover, senior policy adviser; and Nanjika Nasiiro, head of just transition policy.
The instrument is laid under the affirmative procedure, which means that it cannot come into force unless the Parliament approves it. Following this evidence session, the committee will be invited to consider a motion to recommend that the instrument be approved. As always, I remind everyone that Scottish Government officials can talk under this item, but not in the debate that follows. I ask the cabinet secretary to make a short opening statement.
Good morning to you, convener, and to the rest of the committee. I am pleased to give evidence supporting the draft instrument to amend the Greenhouse Gas Emissions Trading Scheme Order 2020.
The emissions trading scheme authority, formed by the four UK nations, is implementing changes to strengthen the ETS’s climate ambition. In June last year, the authority published a response to the consultation on developing the UK ETS. It included the following commitments, which are being implemented through the instrument: amending the cap trajectory so that it is better aligned with net zero targets; covering additional emissions in the upstream oil and gas sector; and improving the penalties process, on which we delivered an additional consultation earlier this year.
On the new cap trajectory, in 2023, the authority committed to reduce the ETS cap by 30 per cent by 1 January 2024. That amendment needed approval by the four UK legislatures. Northern Ireland did not have a sitting Assembly at the time, so the authority used powers reserved to His Majesty’s Treasury as a temporary measure to amend the number of allowances to be auctioned from 2024. That ensured that the number of allowances in the market was aligned with the agreed 30 per cent cap reduction. Ms McAllan sent a letter in July 2023 explaining that decision.
Now that Northern Ireland has a functioning Assembly, we are looking to amend the cap through the Climate Change Act 2008, which gives the committee the opportunity to scrutinise the new net zero cap-aligned trajectory. We are also amending the industry cap, which limits the number of free allocations and creates a flexible share on the back of the changes to the cap trajectory.
The instrument also expands the ETS to cover emissions from CO2 venting in the upstream oil and gas sector. CO2 venting—releasing emissions through pipes or vents—was not previously included as an ETS-regulated activity. In contrast, the flaring of CO2—burning the gases before releasing them into the atmosphere—is an ETS-regulated activity. The inclusion of venting in the ETS aims to remove any perverse incentives for operators to vent gas containing CO2 that, if flared, would be exposed to the ETS carbon price.
We are also extending to Northern Ireland legislative changes that were implemented in Scotland, England and Wales during 2023 to ensure that the ETS is consistent across the whole of the UK.
Finally, the instrument will introduce two penalties and amend existing penalties to improve the consistency, proportionality and fairness of the penalty process. I am happy to answer any questions.
Thank you. I am looking around the table and I see that Douglas Lumsden wants to come in.
I was going to ask about venting. What will the order mean in practical terms for companies operating in the North Sea basin?
Effectively, it means that there will be no loophole for getting rid of CO2. At the moment, if you were to flare off any gas, you would have the ETS to cover that. We do not want a situation in which CO2 is being vented into the atmosphere, because that essentially has the same effect as flaring. It means that operations will have to be consistent with not venting CO2. The order is really closing a loophole.
It is my understanding that such venting is not exactly a practice that goes on an awful lot, but the order will remove that loophole in case, as I think that I mentioned in my statement, there is a perverse decision to vent without flaring, to avoid impacting ETS allocations.
Are the operators able to measure that accurately? Is that in place now?
My understanding is that all the emissions that the oil and gas industry produces are measured. They have to do that by law.
Would you not see that as an extra burden on them?
It would not be an extra burden.
Maybe it would be an extra financial burden.
In fairness to the oil and gas industry, it is working hard to reduce production emissions. The order is therefore helpful, because those who are reducing their production emissions will save money as a result.
Okay. Thank you, convener.
A few questions are lining up. Mark Ruskell will be followed by Kevin Stewart.
My understanding is that Norwegian production of gas is lower carbon than our own production of gas, because they have a restriction on venting and flaring. Is that your understanding of the situation? If it is, do the adjustments to the ETS and the overall regime for venting bring us into closer alignment with Norwegian practice and therefore make us more comparable in terms of emissions?
First, I do not know much about the Norwegian sector. If what you are saying is true, obviously the order will bring us in line with that. At the moment there is a kind of loophole, in that operators would have to use their ETS allocations to make up for flaring activities, but not for their venting of any CO2.
It might not stop there, however. We might also look at methane emissions, which might happen in the next couple of years. I am not entirely sure whether the Norwegian sector includes methane as well as CO2. It would be interesting to see whether it does—I will look into that after the meeting. However, from what you are saying, if your understanding of what the Norwegian sector does is correct, the order will bring us more in line with them.
Good morning, cabinet secretary. Can you give us an idea of why venting was missed out in the ETS previously, or is that beyond yer ken?
It is slightly beyond my ken. There was a great emphasis on reducing the amount of flaring—that was the real focus. I would have to look into why venting was missed out, but the order is about correcting that and, as I say, closing that loophole so that we do not have CO2 emissions being vented and going into the atmosphere that do not need to be.
Closing that loophole is grand. It would be interesting to see why it was left in place in the first place. Obviously, that has nothing to do with you, cabinet secretary; it has to do with others.
In some of the questioning, it has been suggested that some other areas have decarbonised to a greater degree than we have. Will there be further moves in the ETS to lead to even greater decarbonisation of the oil and gas sector? What general discussions have you had with the UK Government about further decarbonisation of the sector? Importantly, will the UK Government put in place the right fiscal regime to ensure that that decarbonisation continues apace?
Only a north-easter could ask such an intricate question, which I am pleased to answer. There are a couple of things in there.
Our position is that there must be a fiscal regime in place that allows the oil and gas industry to support its workforce and be instrumental in the transition to net zero. Quite a lot of oil and gas producers are involved in ScotWind licence options, and they support a vast supply chain. There is a well-rehearsed argument that we must ensure that we do not discourage activity in that area because, if we do, the workforce will relocate to other parts of the world, leaving Scotland without the expertise that we need in both the supply chain and the workforce to build out ScotWind and the other industries that will keep us as an energy-producing nation.
Scotland has a good story to tell about decarbonisation, because we have the innovation and targeted oil and gas licensing route. The first licences that have been given through the consenting unit have been for the INTOG scheme, which is about allowing the build-out of floating offshore wind to provide power to existing oil and gas-producing platforms. That means that they can use electricity, rather than diesel, in their production processes, which will markedly reduce production emissions in that area. We are the only part of the UK that has done that, and there are quite a lot of lessons for other oil and gas-producing countries to learn if they are looking to decarbonise their emissions from oil and gas production.
What has happened with INTOG is obviously fantastic.
I have a question about continued dialogue. Do you think that the UK Government is listening to either the oil and gas industry or others regarding what is required not only from a fiscal regime but from a regulatory regime to allow for greater decarbonisation?
Yes and no—it is listening in part. There were warnings from the oil and gas sector that a lot of people would pull out of the North Sea if certain fiscal penalties were put in place around tax, but that did not come to pass in the budget.
However, the extension of producer liability—EPL—has had an impact. For example, we have seen Apache deciding to pull out of the North Sea as a result. Those are existing fields, not new ones. That takes us into the energy space in general. There is still demand in the UK for natural gas, which we still use in the majority of heating. The oil and gas sector still employs 58,000 people, so anything that has a precarious drop-off point because of the fiscal regime is problematic.
As I said, we need a just transition. We know for sure that the amount of oil and gas available in the UK continental shelf is reducing, but we need a managed transition. Any cliff edge in production will mean that we have to import more gas from elsewhere to meet demand and will also lead to a cliff edge for workers. ScotWind has not been built out yet and we do not yet have the jobs to replace those that will be lost. We will have those jobs in the future if we manage the transition well, and the fiscal regime for oil and gas is an important part of that.
I have many more questions but they would probably take us beyond the order of business for today, so I had better give up.
I was going to say that some of that drifted beyond the boundaries of the instrument. We move to questions from Monica Lennon.
09:30
I will be really dull and just stick to the instrument. I am keen to cover compliance and enforcement.
The instrument introduces two new penalties and changes several existing penalties. Has there been any assessment of what the regulatory regime around that would look like? Are we expecting breaches to be the exception? Would they be quite a rare occurrence?
I hope so.
The regime would be the same one that we have in relation to penalties now. There will be penalties in relation to operating without a permit. There will also be a penalty associated with underreporting, and a deficit penalty if an operator fails to surrender allowances to cover its emissions.
Another important point is that the penalties will change in line with inflation, so there will be an increase in the value associated with them. There are therefore more incentives for people not to breach any of the rules and incur any penalties; it is also about tightening up the penalty regime.
There will certainly be plenty of warning that the ETS is coming into place. We would hope that breaches would be very rare.
Do you have any figures on non-compliance issues to hand?
I do not have them in front of me, but we can ask for them. They would probably be held centrally by the UK Government; we can certainly look into that.
It is helpful that you explained the inflationary increase. The penalty for failure to submit information, for example, is a civil penalty of £5,000, which a big operator might not notice. I was therefore curious to understand how robust the regime has been.
Other things are also happening in order to incentivise decarbonisation. For example, there has been a reduction in the amount of free allocations.
In relation to aviation across the UK, for example, we will have no more free allocations after 2026. That has been loudly trumpeted, and people are building up to it. Some of the larger emitters in that area—particularly in aviation, where there is not much danger of carbon leakage—are preparing for the fact that they will not have any free allocations.
It is about a real tightening up and really aligning the ETS with the net zero ambitions and targets of all four nations of the UK.
That is helpful. It is clear that the instrument tightens things up.
Is it a minor change for regulators in relation to any inspections or proactive work that they do, or are we expecting any capacity issues for them?
None is expected at all.
Okay. It is fair to say that it is business as usual then.
Mark Ruskell wants to come back in.
I know that there was discussion with the previous UK Government about the introduction of a carbon tax. That was an option at one point, although I am not sure whether it was intended to run alongside an ETS or as a replacement of an ETS.
It would be useful to get your thoughts on whether a carbon tax is now off the agenda and whether everything is now completely focused on an ETS.
I note that Norway also has an ETS—presumably aligned with that of the European Union—but that it also has a carbon tax on both its oil and gas sector and the production emissions from oil and gas. The fact that it has an ETS and a carbon tax means that the industry makes a significant contribution to the Norwegian state.
I am interested in where the discussion is. Is a carbon tax on or off the agenda? Are we simply considering this instrument as the main way to decarbonise?
I will be upfront: in the three months that I have been cabinet secretary, I have not had any discussions about a carbon tax. The UK Government has obviously set out its budget, and no carbon tax was mentioned in that, either.
I note that we have the extended producer liability, which I would say is, in fact, a carbon tax on the oil and gas industry.
Given that Mark Ruskell has given me the opportunity to do so, I also note that any money or funds that are gleaned from those kinds of taxes should be used for net zero activities. It is my view that, if emitters are taxed, that money should come back to the Treasury and be allocated to net zero efforts—to the big, expensive things such as decarbonising heat in buildings or decarbonising the gas grid. That is for the UK Government to decide, but, again, I have not had any conversations about a carbon tax.
The carbon border adjustment mechanism goes alongside this. We are working with our UK counterparts, as well as the Treasury, to design the UK carbon border adjustment mechanism, so that it works alongside the UK ETS and does not have any negative impacts or additional costs on Scotland’s exporters. We are still looking at alignment with the EU ETS, and conversations about alignment with the EU are still happening.
A lot is happening in that space, but I have not had a discussion with the UK Government specifically about a carbon tax.
I listened with interest to that exchange about carbon taxes being used to fund net zero. It would be remiss of me not to say that ScotWind was to do that as well, but does not appear to have been used for that either.
You commented that very little venting is going on in Scotland. What are you talking about? Can you quantify what “very little” means? How many companies?
I do not think that I said that, because I do not have the numbers on how much CO2 venting is going on in Scotland. I am sorry if I misspoke. I was just saying that the instrument will put the venting of CO2 on the list of actions that will be part of the ETS.
To come back on your ScotWind comment, ScotWind was designed for four reasons: to decarbonise the electricity that we supply to the whole of the UK; to provide an opportunity for Scotland to have a thriving energy sector; to fund net zero work, which I wish it to do—however, I will not pre-empt anything in the budget—and to encourage investment in Scotland, which it is absolutely doing.
My comments about anything that is done on funding from big emitters apply to the whole UK. That is certainly my view of what should happen. However, it is also my view that ScotWind should address those four aspirations. However, I do not want to pre-empt anything that is said in the budget.
Neither do I, but I am sure that we can have a conversation about how the £750 million that was raised from the option payments has been spent—including how much was spent on net zero. However, let us park that.
One concern that I had when I was looking through the briefing was over a suggestion about the trading scheme: that, if the carbon capture, usage and storage scheme went ahead, the cost of the trading units would be kept down. Have you made an assessment of what the cost will be if the CCUS scheme does not go ahead? Will it become very expensive? We have seen that Scottish businesses have already invested a huge amount of money. Have I got that wrong?
I do not quite see the correlation between the ETS costing businesses money and carbon capture, utilisation and storage not going ahead. However, your mention of the possibility of CCUS not going ahead gives me the opportunity to say that it must go ahead. We must get action on the Acorn project’s track status. The Climate Change Committee has made it clear on many occasions that we will not reach our 2045 net zero target if carbon capture and storage does not happen in Scotland. We would also be missing a massive economic opportunity for Scotland, which might align more to your question.
I am sorry to interrupt, cabinet secretary, but, just to help you, I will say that the committee’s papers stated that the ETS impact assessment, which is for the UK, estimated that the scheme would probably cost business £2.4 billion, and that assumes that the carbon capture, usage and storage scheme and hydrogen go ahead as planned. Have you made an assessment of what it will cost businesses in Scotland if those developments are not delivered as planned? I am sorry if I explained that badly.
Now I get you. With regard to a CCUS scheme—we were just talking about oil and gas and particularly about venting—the ability to capture and store carbon will reduce businesses’ costs. If those schemes are not available to the Scottish cluster and all the industries that want to be part of the Scottish cluster, that is a real problem. However, the biggest issue is that we are missing out on a major opportunity to take carbon out of our processes and our atmosphere, which puts 2045 on a bit of a shoogly nail, as the Climate Change Committee has said time and again. Therefore, I will use this opportunity to say that we need track 1 status for the Acorn project as soon as possible.
I was trying to work out the cost to Scottish businesses as a result of the ETS if the Acorn project does not happen.
It would be difficult to quantify the cost at the moment. However, basically, not having a carbon capture and storage scheme available in Scotland will have an impact on emitters.
As there do not appear to be any further questions, we move to agenda item 3, which is the debate on motion S6M-14755. No, it is not—I am sorry. Yes, it is. I am sorry—I almost confused myself, but I was not confused. Agenda item 3 is the debate on motion S6M-14755, which calls on the committee to recommend approval of the draft order.
Cabinet secretary, I invite you to move and speak to the motion.
I will just move the motion.
I move,
That the Net Zero, Energy and Transport Committee recommends that the Greenhouse Gas Emissions Trading Scheme (Amendment) (No. 2) Order 2024 [draft] be approved.
I see that no member wishes to make a contribution. On that basis, I am not entirely convinced that you will need to sum up, cabinet secretary, but, if you want to, I have to give you the opportunity.
I am happy to leave it as it is.
Motion agreed to.
The committee will need to report on the outcome of the instrument in due course. I ask the committee to delegate authority to me, as convener, to approve the draft of the report for publication. Are we agreed?
Members indicated agreement.
I thank the cabinet secretary and her officials.
I suspend the meeting briefly to allow for a changeover of witnesses.
09:42 Meeting suspended.