Select Committee on Environmental Audit Minutes of Evidence

Examination of Witnesses (Questions 360 - 379)



  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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