Examination of Witnesses (Questions 360
- 379)
TUESDAY 18 JANUARY 2000
MR STEPHEN
TIMMS MP, MR
SIMON VIRLEY,
MR DAMIEN
MCBRIDE
AND MS
HEATHER MASSIE
360. So you are reconsidering that position?
(Mr Timms) We are looking at it, yes.
361. Also there is a problem in Northern Ireland,
I think, in that regard?
(Mr Timms) Yes, there have been a number of concerns
expressed from Northern Ireland. I met Reg Empey, the Economic
Development Minister from Northern Ireland, a few weeks ago. Again,
we are looking at the issues which he has raised with us.
362. Given that this whole thing has been designed
to meet our Kyoto targets and to reduce carbon emissions, as you
agree, why did you introduce the Climate Change Levy before the
Climate Change Programme had been finalised? It seems to be putting
the cart before the horse.
(Mr Timms) I would not accept that. I have no doubt
at all that the Climate Change Levy is the right thing to do,
it will be an important part of our Climate Change Programme.
I do not see that one should wait with the levy until the document
is produced. I think the right thing to do has been to get on
with it and make some progress, on the basis, I must say, of an
exemplary process of publication of proposals, of discussion,
of consultation and then finalising the conclusions with, as I
have said, some details still to be addressed.
363. If you had had the Climate Change Programme
finalised, you would know the framework within which the Climate
Change Levy should be set and what targets would have to be achieved.
(Mr Timms) All the work on this has been done very
closely in co-operation with the Department of the Environment,
Transport and the Regions, so I think there has been good information
available to us about the thinking across Government about the
programme.
364. None the less, an 18-month or nearly two-year
period has elapsed between the announcement of the principle of
the Climate Change Levy and the Climate Change Programme which
has not yet appeared in its final form. It does seem a long gap
if one is informing the other, as it were.
(Mr Timms) That is because there has been a lot of
consultation and a lot of discussion. I would have thought that
the Committee would agree that it is important to give adequate
consideration to the quite complex issues which we face here.
I think you would probably agree, and I would certainly feel,
that it would have been a mistake to wait until the document was
published and only then to begin the negotiating period, if that
is what you are suggesting. The important thing is to make progress,
as we have done. I think we have done it in a fairly effective
way, and the process has worked extremely well.
365. The Marshall report which all this springs
from did paint a picture, as I am sure you are well aware, of
relatively low and falling energy prices, so that will have an
effect of encouraging the use of energy and therefore of carbon
emissions, whereas you are trying to discourage them by this new
tax. Again, there is a conflict here between what is happening
on the one hand through the regulator and what is happening on
the other hand through the Government, which could indeed cancel
each other out so that once again we shall make no progress.
(Mr Timms) I do not see a conflict on this. You are
right, different things are happening, but the changes which we
are making and the introduction of the Climate Change Levy will
undoubtedly have an impact in reducing emissions. Indeed, the
memorandum which I have supplied to the Committee puts some figures
on that. I think it would be widely agreed that the scale of the
impact of the Climate Change Levy is going to be an important
contribution to our achieving our Kyoto targets.
366. Would it not be sensible to accompany this
by some firm indications to the regulator that he must take into
account issues such as carbon emissions, otherwise your entire
policy could be negatived by what he does?
(Mr Timms) No, I think I would rather put it the other
way around. We need to ensure, as we are doing through the Climate
Change Levy, that we have measures in place to provide a good
level of assurance that we are going to meet the Kyoto targets,
given what is going on in the electricity market some of which
is influenced by Government, though a lot of it is not. That is
the approach which we have taken, taking steps to ensure that
we do meet our Kyoto targets, and we are looking forward quite
soon, I think, to some new DTI figures about the prospects on
that one which I am hopeful will show that we are going to be
able to meet the Kyoto objectives.[2]
Chairman: Thank you.
Joan Walley
367. Minister, in terms of the actual accuracy
of the carbon savings forecasts which we have from the Treasury,
are you satisfied that the information which is being presented
is accurate? It seems to us that there is some variation between
what was actually set out in the 1999 Budget Report when I think
there was talk of 1.5 million tonnes of carbon a year by 2010
being saved, and then the Pre-Budget Report which talks about
two million tonnes of carbon being saved, plus perhaps as much
as another two million tonnes which could come about as a result
of the agreements. Could you explain how it has virtually trebled
from the one report to the next? Could you explain that for us,
please?
(Mr Timms) Yes, I am very happy to do so. I can reassure
the Committee that there is consistency between the way that those
two sets of figures have been derived. I would make the point—and
I think you are absolutely right—that there is inevitably
some uncertainty about these figures, therefore we have taken
a fairly conservative approach and have adopted conservative figures
about the impact of the levy, but we have done so in a way which
is entirely consistent between the figures which were produced
at the time of the Budget and the figures which were produced
at the time of the Pre-Budget Report. If I can draw your attention
to the table following paragraph 25 of the memorandum which we
have provided for the Committee, I think I can use that to explain
how these figures have changed. The first line of the table puts
a figure of 1 million tonnes on the price effect of the levy as
currently proposed. The 1.5 million tonnes figure which was announced
in the Budget earlier last year was the figure for the price effect
of the levy as then proposed, at a rather higher level than we
currently propose it. So there has been a change from 1.5 to one
in terms of the price effect. However, because of the exemptions
which the Chancellor announced in the Pre-Budget Report, the two
exemptions both give significant additions, in terms of carbon
savings, of about half a million tonnes in each case, so the net
effect is that we have gone up from 1.5 to two. In addition to
that, because we are quite close now to concluding negotiated
agreements with a range of sectors, we think we can put a figure
on the amount of carbon savings which are likely to be generated
as a result of the agreements, and we believe again that we can
confidently put a figure of an additional two million tonnes coming
as a result of those agreements. So adding it all up, we can now
talk in terms of four million as opposed to the 1.5 million which
was quoted in the Budget. I hope the way I have explained it shows
that that does not mean to say that we are saying the levy is
three times more effective, but we are able to take in particular
the negotiated remits into account now in the figures which we
are putting forward and which were announced by the Chancellor
in the Pre-Budget Report.
368. I am very grateful to you for explaining
that. I wish, though, that that had been included in the documents,
because I think one of the important things with this, I am sure
you would agree, is that we should have transparency. If we are
really going to have a grown-up debate about this very difficult
issue of climate change and global warming, is it not important
that there should be this transparency, so that that can actually
be included in the information coming out from the Treasury? Would
you agree with that?
(Mr Timms) I would agree with that, and I am grateful
to the Committee for probing this particular subject and therefore
giving me the opportunity to put that information on the record.
369. Could I just move on slightly, because
I still have a bit of difficulty—I was not very good at
maths—with the overall net figure which you have referred
to, because you said that the overall net effect of this would
be that we could have four million tonnes of savings. However,
if you look at other figures which have been included at various
stages, particularly the 10 per cent target on renewables and
the potential savings which we might have, it looks to us as though
we could be in a much more generous amount of savings than you
have given us, and that in fact it could be much greater. Do you
think that that target of a net gain of four million tonnes is
challenging enough? Could we not actually be going for more?
(Mr Timms) I think four million tonnes will be a significant
contribution to meeting the Kyoto targets. As you know, we have
been anxious to implement the levy in a way which does not undermine
the competitiveness of UK companies. That has been an important
feature of the design process, and I think we have been able to
do that in quite an effective way. However, I would not agree
that four million is too modest a contribution. As we shall see,
I guess, when the DTI figures are published, I think we shall
see that four million tonnes is a very worthwhile contribution
to our being able to meet those targets.
370. Can I say that I would not want to undermine
in any way what you have done to bring together the business of
competitiveness and the environmental safeguards which we need,
and I do congratulate you on that, but I wonder whether or not
there is not further progress to be made by actually setting the
Treasury estimates and forecasts alongside what is quoted in the
Climate Change Programme Consultation Paper? I wonder whether
or not there could be more fruitful talks with the DTI, particularly
in respect of renewables and so on, CHP and the negotiated agreements,
to get a more challenging target than that put forward? I would
like to see it bigger.
(Mr Timms) I think we have done all that we can at
this stage in the levy on renewables and good-quality combined
heat and power, because we are exempting them altogether.
371. Could I ask you what you mean by "good-quality
combined heat and power"?
(Mr Timms) You certainly can, yes. The Customs and
Excise has published a note setting out what we mean by that.
Perhaps I can ask Heather, if you would like a little bit more
detail, to set out how we are approaching that.
(Ms Massie) Thank you. We have been working very closely
with the Department of the Environment, Transport and the Regions
on this, and they have been working for some time on a good-quality
index for combined heat and power. They are, I believe, shortly
to issue a consultation document on how the quality index might
be used. It is our intention to link the exemption to the quality
index, so we will be relying on the same definition which the
DTI will be consulting on.
Mr Grieve
372. What is the quality index going to consist
of, Ms Massie? Can you be a bit more specific?
(Ms Massie) My understanding—I am afraid it
is very technical, and I am not a technical expert, I am a tax
expert—is that it looks at the relationship between inputs
and balancing outputs of heat and of electricity, so that the
idea of a good-quality CHP is generally one which is more efficient
than stand-alone means of producing the heat and electricity,
but there has to be a balance, because clearly if you produce
heat then you may not be as efficient as a power-only generator.
(Mr Timms) It is perhaps worth adding, I think, that
there have been important technological developments in this area,
the technology is improving, and some of the new technologies
are very effective indeed in this.
Joan Walley
373. It might be helpful if the Committee could
perhaps have a note on this, as soon as it is possible to produce
one.
(Mr Timms) We shall certainly be happy to do that.
Mr Jones
374. I want to take you back, Minister, to an
answer which you gave to the Chairman in defence of the decision
to go ahead and tax all electrical production equally. You said
that you believe this was the right response. Can I press you
on what you mean by "right", given that the objective
is to meet the Kyoto targets and the reason for Kyoto is to alleviate
the problem of climate change? We know what causes climate change,
although we do not know what the extent will be. We even know
fairly accurately the contribution of various gases. What do you
mean by "right" in taxing various forms of electrical
generation which do not produce any of these gases, in the same
way as you tax ones which do?
(Mr Timms) For ordinary use of electricity you do
not know what the origin of that electricity is, so the practical
way forward is to apply the same rate of levy, irrespective of
the source of the power. However, we have been able to introduce
the exemption we have just been talking about for combined heat
and power, and also there is an exemption for new renewable sources
of energy, but what we are focusing on with those exemptions is
encouraging people to do new things which are less environmentally
damaging than the old things. What we do not want to do is have
a very large deadweight cost which is simply going effectively
as a subsidy from the Government to people who are already doing
things.
375. I fail to understand the logic of that.
If you wish to reduce the total amount of carbon dioxide, what
difference does it make whether these are people who have been
doing good things for some time or they are about to do good things,
if that is the objective? Would it not be more credible if the
Government said, "We wish to reach our Kyoto targets subject
to our desire to maintain what we've got left of the coal industry,
or progressively other people's coal industry as we get more imports"?
(Mr Timms) I think that on the first part of your
question, the point I was wanting to make was that I do not believe
the imposition of the Climate Change Levy is going to make a great
deal of difference in a short period to the extent of nuclear
generation, for example. What we want to use the exemption process
in the Climate Change Levy to do is to incentivise people to do
things differently from what they would otherwise have done, in
a way which is environmentally beneficial. That is why we have
given the exemption for new renewable sources of energy. I think
we have been pretty clear about what the aims of the levy are
and what the starting points for it have been, and I would certainly
defend them before the Committee.
Mr Jones: I was not attacking the aims
of the scheme, just the way it was being implemented. Thank you,
Minister.
Dr Iddon
376. Minister, I want to turn now to the energy-intensive
sectors and ask you first of all why the Government has been so
committed to the IPPC Directive as a source of definition for
"energy-intensive" industry"?
(Mr Timms) It does have a number of advantages. First
of all, it has a very clear rationale because the sites which
are covered by the Directive are required to operate in an energy-efficient
manner, with inspections, and non-IPPC sites do not have those
requirements placed upon them. In addition, the Directive does
provide legal certainty from the point of view of determining
which sectors are eligible or are not eligible to enter into negotiated
agreements. Both of those, I think, are important considerations.
I do want to make the point to the Committee that we remain willing
to consider suggestions for alternative definitions which would
target the relief on energy-intensive sectors exposed to international
competition, but if we were to accept any alternative, there are
four requirements which we have said would need to apply to that.
Firstly, there would need to be a clear rationale for what that
alternative was. Secondly, it would have to provide legal certainty,
as I have said IPPC does. Thirdly, it would have to be administratively
straightforward. Fourthly, it would have to be consistent with
the EU rules on State aids. If there were proposals brought forward
which met those four considerations, then we would be willing
to have a look at those.
377. That leads me to the question, did the
Government consider other alternatives rather than, as you have
just said, go out and seek alternatives?
(Mr Timms) Yes, we did. I think I am going to answer
that question in a way that I have answered one or two of the
earlier ones. We did a very thorough exercise in looking at all
the possibilities when the design of the levy was being drawn
up, but, for the reasons which I have given, we concluded that
there was a very strong rationale for the IPPC basis which we
adopted, while recognising that there may be a case in some instances
for looking at an alternative; but we need to be very clear about
what the requirements for any such alternatives would be.
378. How are the other European countries which
are heading in this direction of CCL handling this question of
energy-intensive industries? What kind of definitions are they
using?
(Mr Timms) My understanding—and I shall ask
Simon to comment on this—is that there is quite a wide variety
of approaches being taken on that point and on a number of other
features of the way these taxes are being introduced. It is important
to make the point that a lot of countries are going to need to
be introducing measures of this sort. There are something like
eight EU countries going down this road. It is certainly not just
the United Kingdom. People have sometimes made comments suggesting
that we were exceptional in this regard, but we are not. I shall
ask Simon to comment on the approaches which are being taken to
energy-intensive industries elsewhere.
(Mr Virley) As the Financial Secretary indicated,
it has been different treatments in different countries, and that
has reflected the particular circumstances which each country
has faced. Some countries have gone for just a broad sector definition
and have just determined which sectors are eligible and which
are not. It is true to say that the EU State aids rules put some
limitations as to how far you can extend the eligibility in terms
of being focused on those sectors which are energy intensive and
exposed to international competition. As the Minister has indicated,
we think the IPPC Directive provides a good rationale for them
for that.[3]
379. We have been very edgy, of course, about
competitiveness all the way through this discussion. It has just
been mentioned that almost each European country which has got
into this debate is adopting a different approach. The Chairman
referred earlier to some dealing with the carbon tax. We are dealing
with it differently. There are so many differences across the
European Union that it begs the question why did the European
Union not get to grips with this as a whole, I suppose rather
than allow each individual country to thrash about in this way?
(Mr Timms) There already is, of course, the Energy
Products Directive which is an EU proposal. If that is adopted,
it will set minimum future rates on a range of energy products.
The history of that Directive I think provides the answer to your
question. It has been extremely difficult to get agreement on
it across the EU, and I think that realistically if we are to
make progress in meeting the Kyoto targets in the timetable which
has been set, the only practical way to do that is for each country
to make its own arrangements, rather than wait for what is bound
to be an extremely long process for some common EU process to
be adopted.
2 See supplementary memorandum from HM Treasury, p151-153. Back
3
See supplementary memorandum from HM Treasury, p151-153. Back
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