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My understanding is that all the emissions that the oil and gas industry produces are measured. They have to do that by law.

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.

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.

I am happy to leave it as it is.

Motion agreed to.

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 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.

It would not be an extra burden.

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.

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.

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.