The UK will be the first country in the world to have binding legal targets for greenhouse gas emissions beyond 2020.
To the relief of the low carbon industrial and investment sectors, the government has agreed to adopt the fourth carbon budget for the period 2023-2027 as recommended by the independent Committee for Climate Change last December.
Despite opposition and lobbying for watering down the proposals from other ministers in the Treasury and the BIS, Chris Huhne told Parliament on Tuesday afternoon, that "as advised we propose not to exceed 1950 MtCO2e for the period from 2023 to 2027 - a 50% reduction from 1990 levels".
Huhne said the whole Cabinet is behind the commitment and that it will be done at no additional cost to consumers.
He said: "The government agrees the levels proposed by the CCC to turn the UK into a place attractive to investors in low carbon technology, and send a clear signal abroad of our commitment to low carbon growth and strong momentum to a global deal on climate change."
"We will publish a report later in the year setting out how the target should be met with a revised government carbon plan.
"We will aim to reduce emissions domestically as far as is affordable, but we will keep open the option to make up any shortfall by carbon trading in the future."
Huhne was pressed by MPs several times for clarity on this point and reiterated that "it is our intention to do it completely by domestic cuts", but that because the future is unpredictable the government needs to have the trading option.
Tim Yeo, Tory chair of the cross-party Select Committee on Energy and Climate Change, commented that the sooner the option of purchasing credits is ruled out, the sooner investors will have more confidence.
Huhne noted that since emissions from the power sector are set by the EU cap, if this is not low enough it puts an onerous burden on other sectors to meet the overall target. For this reason, there will be a review of progress in 2014 and, if necessary, the carbon budget will be revised up to fit with the EU cap.
At the same time, he said: "We will argue for an EU goal of 30% reductions in emissions by 2020."
Huhne said that concessions will be made to support energy intensive industries like steel and chemicals. "We want these industries to remain competitive internationally," he said, "so we will be announcing a package of support to reduce the risk from higher energy prices by the end of the year."
He continued: "We're already on track to meet the first three budgets and so we should be on track to meet the fourth.
"We are creating long term clarity for investors, which is placing us on the leading edge of the low carbon revolution. It will create jobs, export opportunities, energy security, growth and prosperity.
"The sector employs 910,000 people already. To those who move first and furthest will come the greatest benefits."
The CCC had recommended that international aviation and shipping be included in the carbon budgets. Under questioning, Huhne said the government is still considering this.
On the question of taxpayers' support for nuclear power, apart from acknowledging that work has begun at Hinckley for a new nuclear power station, Huhne continued the government line that there will be none.
He added that, "if there is to be a nuclear renaissance, the industry must show it can deliver on time and on budget."
In response to a question from his opposition shadow, Meg Hillier, he said that "there will be no plan for road pricing in the life of this Parliament".
Huhne defended the limitation on the Green Investment Bank that it cannot borrow until late 2015 by saying: "It is in the second part of the decade the greatest need for borrowing will be to meet the 2020 target."
Tom Delay, chief executive of the Carbon Trust, welcomed the announcement, saying: "For business this is good news because it will provide what every business wants; greater certainty. It also sends the much needed long term signal to business to compete with each other, to drive new business strategies, to innovate and to drive the mass roll out of low carbon technologies. Now we have set the long-term course we must fine tune the plan to reach it. "
The CCC's recommendations
The 2008 Climate Change Act set a target of 80% reductions in emissions by 2050. Under it, carbon budgets must be set for five year periods, and each must be set at least three budget periods in advance, in order to meet the target.
The first three carbon budgets were set in 2009. The fourth has to be set in law by the end of June.
In the first three carbon budgets, the CCC followed the EU framework and produced two sets of budgets: an Interim budget, to apply before a global deal is reached; and an Intended budget to apply following a global deal on climate change. Both cover all greenhouse gases (GHGs).
The Interim budget requires an emissions reduction of 34% by 2020 relative to 1990 levels (21% relative to 2005), equivalent to an annual reduction of 1.7%.
The Intended budget would require a 42% reduction by 2020 relative to 1990 (31% relative to 2005), equivalent to an annual reduction of 2.6% over the first three budget periods.
The previous government legislated the CCC's first Interim budget in May 2009 and signalled an intention to move to the Intended budgets in future.
There would be significant risks and increased costs for meeting future carbon budgets if policy ambition is tailored to lower reductions in the Interim budget, particularly for the non-traded sector.
Therefore, CCC recommended that the government should tighten the second and third carbon budgets in line with the Intended budget for the non-traded sector.
The CCC also wants the UK to argue for a tightening of the EU ETS cap which constrains traded sector emissions: if and when such tightening is agreed, the UK should then adjust its traded sector budgets onto the Intended path.
The fourth budget is built around the assumption that the Intended third budget is achieved in the non-traded sector, which it considers essential.
The proposed tightened budget requires a 37% reduction in emissions by 2020 relative to 1990.
These are all indicated in the graph above.