Emissions Trading Schemes: Carbon Leakage Protection

4. Whether he has made a comparative assessment of the adequacy of protection against carbon leakage for energy-intensive industries under the (a) UK emissions trading scheme and (b) EU emissions trading system.

The UK has committed to protecting our industry from carbon leakage, and like other carbon pricing systems, including the EU ETS, we currently provide free allocations to at-risk sectors. We are undertaking a review of both free allocation and carbon leakage policy.

Since it was set up in 2020, the result of the UK emissions trading scheme has been that the cost of carbon allowances has consistently been much higher than in the EU and other competitive countries, partly due to the fact that the net zero policy has led to a reduction in those allowances. That has led to heavy industries such as steel, aluminium and oil refining going abroad, with a loss of jobs and strategic industries. Given the impact that this is having, will the Minister commit first to rejecting the 50% reduction in allowances planned for 2024, and secondly to reforming the cost containment mechanism to make it easier to intervene in future?

I hear what the right hon. Gentleman says. We currently give sectors at risk of carbon leakage a proportion of their allowances for free, to reduce their exposure to the carbon price, with those free allowances being worth billions of pounds per year at current prices. The 2021 “Developing the UK ETS” consultation proposed to guarantee this level of free allocation until 2026, subject to activity level changes. We will consult no later than the end of 2023 on the methodology for distributing free allowances and explore ways to better target free allocations at those most at risk of carbon leakage.