HANSARD
Greenhouse Gas Emissions Trading Scheme (Amendment) Order 2026
- Considered in Grand Committee
- 6:18 pm
- Moved by
- That the Grand Committee do consider the Greenhouse Gas Emissions Trading Scheme (Amendment) Order 2026.Relevant document: 47th Report from the Secondary Legislation Scrutiny Committee
- My Lords, this order was laid before Parliament on 16 December 2025.The UK Emissions Trading Scheme, or UK ETS, was established—perhaps I should say “re-established”—under the Climate Change Act 2008 by the Greenhouse Gas Emissions Trading Scheme Order 2020 as a UK-wide greenhouse gas emissions trading scheme, contributing to the UK’s emissions reduction targets and net-zero goal. The scheme is run by the UK ETS Authority, which is a joint body comprising the UK Government and the devolved Governments acting as one. Our aim is to be predictable and responsible guardians of the scheme and its markets.Under the UK ETS, operators are required to monitor, report on and surrender allowances in respect of their greenhouse gas emissions. Although most allowances are purchased at regularly held auctions, operators in certain sectors at risk of carbon leakage are given a number of allowances for free; there are referred to as “free allocations”. Free allocations reduce the exposure to the carbon price for sectors at risk of carbon leakage and reduce the risk that decarbonisation efforts could be undermined by production and the associated emissions moving to other countries.Under the UK ETS, an operator is the person or company with control over an installation. Installations are stationary units at which regulated activities take place. Sub-installations represent operations carried out at an installation for which operators that receive free allocation are required to report activity levels for the purposes of the UK ETS.We have brought forward this statutory instrument to enable important changes and improvements to the scheme. The first change it makes is to enable operators of installations to be able to notify their regulator that they wish their activity data for the 2020 scheme year, or 2020 and 2021 scheme years, to be excluded from the calculation of their historical activity levels for the 2027-30 free allocation period. This is in recognition of the fact that production levels may have been impacted during the Covid-19 pandemic. These operators will be able to notify their regulator during the second stage of the 2027-30 free allocation application, from 1 April 2026 to 30 June 2026, that they wish to exclude their activity data for 2020, or 2020 and 2021.A legal change to the free allocation regulation is needed because existing legislation would require regulators to calculate historical activity levels using activity data from all five years of the baseline period from 2019 to 2023. So, if amendments are not made, there will be no legal basis for regulators to exclude data from 2020, or 2020 and 2021, from the historical activity level calculation for any applicant. Using activity data for these years could result in historical activity levels that do not reflect normal activity, meaning that operators would receive less free allocation than they would otherwise be entitled to receive.
- My Lords, I am grateful to the Minister for so comprehensively outlining the contents of the SI. Once again, I welcome him to the House and his position. We knew each other in the other place over a number of years and I was a great admirer of his during that time. I also welcome my noble friend to his Front Bench position, and I look forward to working with him in that capacity. I congratulate the noble Earl on the Lib Dem Benches for his conversion to a life peerage. We are now equals in that regard.I will take the opportunity to put a few questions to the Minister. I understand that the year 2026 is a stand-alone year before we proceed to 2027 onwards. Is that of particular significance in regard to the changes that the Minister outlined? I understand from paragraph 11 of the Secondary Legislation Scrutiny Committee’s report that, in response to a number of concerns that were raised, the department“emphasised that UK industry and wider stakeholders had ‘repeatedly’ called for linking with the EU ETS”.The committee went to great pains to say:“According to the DESNZ, linking does not mean re-joining and is expected to reduce costs for UK businesses by giving them access to a larger, more liquid market”,and it said that it had published the submission.Perhaps I ought to say that I am a pro-European Conservative, so it would not bother me if we rejoined the EU ETS. I know that I am in a minority of one in the Conservative Party on this point, but I want to put that on the record. It raises the question of why industry will be concerned. As I understand it, the UK ETS is very ambitious and operates with a stricter emissions cap, initially set at 5%, which I understand is higher than that set by the EU ETS. If that is the case, does the Minister agree that there are very strong arguments that the UK industry would wish to follow the EU ETS in this regard?
- 6:30 pm
- Can the Minister say what the costs will be? He ably represented it as almost technical detail that we need not worry too much about, but I understand, particularly from the debate in the other place, that the pace that has been set is already adding over £100 a year—the equivalent of 12%—to the average cost of a household’s electricity bill. I cannot remember if the further increase would be £108 or £138, in another two, three or five years’ time. So is the cost at the moment an additional £100 a year on our household electricity bills—12% of the average—and is it set to rise? Can the Minister put a figure on that?
- Further figures were given in the other place by my right honourable friend Claire Coutinho, who speaks as shadow Secretary of State on these issues. The cost to the wider British economy is an extra £5 billion a year. If that is the case—I do not think these figures were disputed—how can the Minister and the Government argue that this is playing to their growth agenda? I would argue that it is taking money out of the economy and stifling growth in this area.
- I cannot remember whether it was for 18 years, but certainly for the 13 years that I was in the other place I represented the York Handmade Brick Company, which is an outstanding company. Obviously, it is a very high energy user, because it uses a furnace to bake bricks. Does the Minister agree that, by setting such a challenging timescale in the original greenhouse gas emissions trading scheme, we are not just increasing the cost to households and businesses but, regrettably, making businesses like that less competitive? I do not know how expensive it would be to import bricks from another country—heaven forfend—but China, for example, does not have to meet anything like our energy costs. I think most of the EU has lower energy costs.
- I just take this opportunity to ask not just whether it is regrettable how much this is costing us all, in our household bills, and business and industry bills, but whether it is making the country less competitive. With those few remarks, I will be very grateful for the Minister’s response.
- My Lords, we welcome this order but I have some important questions to ask the Minister. My party has long argued that a robust, transparent, high-standard carbon market is a cornerstone of any credible pathway to net zero by 2050. When done well, emissions trading cuts carbon at least cost, drives innovation in clean technologies and gives industry the long-term policy certainty that it needs to invest confidently in the green transition.This instrument makes a number of sensible technical adjustments, but this update carries more weight than most of the normal updates. We strongly support all the Covid measures; they are sensible, practical and needed.However, uncertainty persists around our future carbon-market relationship with our closest trading partners. The Government’s own documents show that UK industry has repeatedly called for linking the UK ETS with the EU ETS, which has already been spoken to and which is a step we strongly favour. A stand-alone UK ETS would be smaller and more price volatile, driving up costs for British business compared to the stability and liquidity of a larger linked market. When paired with clean power, deeper market reforms and other measures, a linked system offers real opportunities to cut energy costs, modernise industrial processes and slash emissions.This order moves us towards dynamic alignment by adopting EU benchmarks from 2028, alongside the phase-down of free allocation for CBAM-exposed sectors and by enabling import levies through the UK CBAM. This is the right direction. We cannot ignore the carbon costs embedded in goods we manufacture or import emissions unchecked, but this complex transition demands adaptability, coherence and close management by the Government as we move forward. We remain in a halfway house, following rules we no longer help to write, without gaining the full benefits of a larger carbon market. I seek clear reassurances that the Government are protecting UK industry, working towards positions where we are rule-makers again and ensuring that our needs are recognised and mitigated during the interregnum.
- My Lords, I thank the Minister for introducing this statutory instrument. He generously banked the good will between the noble Earl, Lord Russell, myself and himself yesterday, and I assure him that he will have no need to draw down on that, because I am sure he will disassociate himself from his colleagues in another place when it comes to this scheme.For once, this is a policy that is solely conceived by the Labour Government. It is a straightforward decision by DESNZ to increase carbon taxes on major industrial users which depend on hydrocarbons, particularly gas in the UK industrial market. Many industries have no choice but to use gas, and no alternative firm sources of supply; indeed, they face heavy dependence on high electricity prices to stay in business.The Minister’s speech may sound technical, and it is true that 104 pages covering the order and the Explanatory Memorandum take some digesting, but a reread shows exactly what this statutory instrument does. The good news is that the noble Lord, Lord Lemos, sitting beside the Minister, is a good Lewisham man and he had no difficulty understanding every word of the particular trading scheme order that is before us. He will be able to help the Minister; I see he is already doing so.What does this order do? It reduces the supply of free allowances—the key point that was made by the Minister—and thus it increases the carbon tax cost to many of the UK’s major energy industries in a highly competitive global market. These free allowances have been the mechanisms used to protect businesses such as ceramics, cement and steel from being undercut by cheaper imported products from countries that do not charge carbon taxes.Take the very real example, considered and referred to by the noble Earl, Lord Russell, which was considered in another place yesterday by Gareth Snell, the Labour MP. He focused on the ceramics industry and said that this sector
- 6:45 pm
- Free allowances have been the mechanism that we use to protect businesses, such as cement and steel, from being undercut by cheaper imported products from countries that do not charge carbon taxes. That has meant that those businesses have not faced higher costs from the tax, and therefore neither have consumers. Because of the CBAM, the protection is being moved to a tariff placed on imports at the border, which means that the free allowances in the domestic UK market are being phased out. We should be clear that that means that the carbon tax will now start to be charged on the production of goods produced for the British market that otherwise had been protected by free allowances and British consumers will face higher prices as a result.
- The Government make the high-energy users pay a tax for every tonne of carbon they release during production. Naturally, those taxes are passed straight through to consumers and customers in higher prices. Therefore, if the Government increase the carbon tax, they increase the price of basic goods such as electricity and petrol. The Government know that because, in the impact assessment for this legislation, they admit exactly that: higher carbon taxes will be passed through to consumers as higher prices—for those interested, that is in paragraph 18.8. That means higher energy, food and petrol prices.
- The Government insist that they need to do this because they have decided to link the UK carbon tax scheme to that of the European Union. That was their decision—it was a political choice—and that alone has doubled our carbon tax since the start of last year. We are not talking about a slight increase; we are talking about a tax that has more than doubled in less than a year because of choices of the Government. Doubling the carbon tax has increased electricity bills alone by £4 billion. In fact, the carbon tax imposed by the Government now accounts for over £100 per year, or over 12% of the average electricity bill. The increase is costing the wider British economy an extra £5 billion a year, as was pointed out by my noble friend, and this legislation will pile more costs on to consumers.
- Why are the Government doing this? Who benefits? The Treasury will see an extra £1.8 billion in tax revenue because it has doubled the carbon tax. Through this legislation, by reducing free allowances, it will take even more from ordinary families who are already struggling. That is in fact the entire point: the aim of the carbon tax is to gradually increase costs for British industry until businesses have no choice but to spend hundreds of millions of pounds that they do not have at the moment to decarbonise their production. That is the whole point, otherwise they have to shut down or move abroad. The fact that companies are choosing to do the latter means that there will be no reduction in global emissions, because those businesses are just moving elsewhere. There will be fewer jobs in Britain, certainly, and more businesses in countries that have more polluting regimes—so more carbon in the atmosphere overall.
- The Minister is asking us to approve legislation that, by his own colleagues’ assessment, will hurt industry, fuel inflation and make people poorer. To be clear, the Government are imposing a £5 billion tax rise on the economy every year, in the hope of saving just £160 million a year based on the five-year £800 million Frontier Economics projection. That is incoherent to say the least.