Select Committee on Environmental Audit Fourth Report




64. The main features of the Levy proposals as amended in the 1999 Pre-Budget Report are:

it will be introduced in April 2001.

it will raise £1 billion in revenue.

it will be levied on the industrial use of energy—domestic users will be exempt.

its overall effect will be fiscally neutral as the revenues would be channelled back into business through a cut of 0.3% on employers NI contributions.

£100 million for capital allowances for energy savings investments by industry in the first year, and £50 million energy efficiency fund to promote and stimulate the take-up of new technology.

80 per cent rebates will be available for energy intensive industries which agree targets for improving energy efficiency, and eligibility is restricted to those defined within the European Directive on Integrated Pollution Prevention and Control (IPPC).

there will be specific exemptions from the Levy for certain industrial processes, and for good quality Combined Heat and Power generation (CHP) and renewable sources of electricity (except hydro-electricity).[151]

Overall design of tax

65. We welcome the Government's perseverence in pressing on with the Climate Change Levy in the face of considerable opposition from industry. We share the view expressed by the UK Round Table on Sustainable Development that objections to such environmental measures are often based on too narrow a view of their impact or on disadvantages arising from specific details of the measure rather than from the central principle.[152] The recent changes announced in the 1999 Pre-Budget Report such as the exemptions granted for CHP and renewables appear largely in accord with the previous recommendations we have made and have significantly improved the environmental effectiveness of the Levy as well as reducing its potential impact on international competitiveness.

66. In our Seventh report, 1998-99, we welcomed the proposals of Lord Marshall. However, taking the argument back a stage from the brief he was given, we have concerns over some of the implications of the fundamental decision to implement the levy as a "downstream" tax, as opposed to levying it on fuel inputs. The various exemptions granted—for certain industrial processes, CHP, and renewables—together with the need to calculate a coefficient for electricity to reflect the inefficiencies involved in its production and transfer—certainly add significantly to administrative complexity and may result in anomalies in themselves. We asked the Financial Secretary whether any serious consideration had been given to other options in the design of the tax. He told us that the decision to implement it as a "downstream" measure was taken very early on as an aspect of the Manifesto commitment to exempt the domestic sector, and that this had limited the consideration of other options. He went on to emphasise that the Government attaches a high degree of importance to social policy considerations.[153]

67. The Committee understands the Government's concern about the issue of fuel poverty and has described this issue as a "national scandal".[154] But we have previously recommended in a similar context that a system of tax-free allowances to address issues of distributional impact might be preferable.[155] A variety of organisations questioned whether a decision to exempt permanently the entire domestic sector from the environmental costs of its energy consumption was tenable or indeed equitable given the large variations in consumption between different income households.[156] The Energy Intensive Users Group (EIUG) pointed out that the UK's domestic sector holds enormous potential for cost-efficient energy savings, and that exempting it does not address the Government's concerns about fuel poverty which should undoubtedly be tackled.[157] Similarly, the Institute of Directors pointed to the administrative complexity and risks of this approach, and considered that households were as capable of having their energy-consumption decisions altered by a Levy as businesses. It went on to state that fuel poverty could be better addressed by the independent policy instrument of social security benefits and that there would be no reason to offer special help to all households when the majority of them could afford the Levy and could afford to improve the energy efficiency of their homes.[158]

68. The Committee is particularly concerned about the Government's intentions with regard to the domestic sector in view of the proportion of total emissions it accounts for, the most recent forecasts for growth, and the potential scope for significant savings. We do note, however, that implementing the tax as an "upstream" tax may have led to problems with the importation of electricity from France via the interconnector, because EC regulations may prevent the imposition of a border levy based on the average rate for domestically produced electricity. Finland experienced a similar difficulty in its development of an energy tax, and subsequently revised its implementation partly because of this.[159]

69. We were also interested in the Government's claim that the tax was now broadly carbon based given the marked exception of the treatment of nuclear power.[160] Nuclear power has its own very serious potential environmental impacts. However, these issues require special attention. In the context of a 'climate change' levy we have to recognise that nuclear power accounts for approximately 30 per cent of all UK electricity generation and that the UK is likely to be dependent on this share for achieving its Kyoto targets. It has been argued that taxing nuclear electricity may accelerate the closure of some of the older nuclear power stations and increase carbon emissions (through substitution by other forms of generation) to the tune of 4 million tonnes of carbon equivalent (MtC) by 2012 or earlier; and that this is just the saving the Government expects to achieve by introducing the Climate Change Levy.[161] The Minister did not accept this point, though he produced no evidence and referred only to the scope for debate about the assumptions involved.[162] In this respect it is particularly unfortunate, as we comment below, that we do not yet have the detailed Climate Change Programme so that we can understand the inter-relationship of the various elements of the strategy by which the Government plans to achieve its targets.

70. We also noted that the Marshall report painted a picture of low and falling energy prices in the UK. In 1996, industrial gas prices were the lowest in the EU and the second lowest in the G7 and between 1990 and 1997 they fell by 46 per cent in real terms—the largest fall in the EU or G7; while industrial electricity prices fell by around 22 per cent in real terms over the same period.[163] The World Wildlife Fund confirmed that the UK has relatively cheap energy prices, and considered that lowering the rate of the levy would dramatically reduce its effectiveness and would hardly compensate for the further fall in energy prices expected as a result of the new electricity trading arrangements.[164] We are therefore very concerned that the impact of the tax in terms of changing behaviour may be considerably weakened or indeed entirely masked by the conflicting signals stemming from an overall reduction in energy costs. Rather surprisingly, the Minister did not see a conflict between the impact of the Levy in putting prices up and the impact of the market in forcing them down, nor did he accept that there was any need to give a steer to the regulator in this respect.[165] He did, however, at least "anticipate" that the amount of tax should be separately identified on customers' bills and we would urge him to ensure that this is indeed the case.[166] In supplementary evidence the Treasury highlighted a previous Parliamentary Answer given by the Financial Secretary which stated that "suppliers will be required to show the amount of climate change levy on invoices if they wish to be eligible for bad debt relief."[167]

71. In view of the fact that many service and financial sectors will be net "winners" from the tax, as they will gain far more through reductions in National Insurance Contributions than they pay in tax, we were interested in what incentives there were for these sectors to alter their behaviour. The Electricity Association pointed out that the Marshall report proposed the Levy as a means of addressing the particular difficulty of encouraging smaller firms to invest in energy efficiency, especially in the service sector; while larger firms could be expected to participate in an emissions trading system.[168] However, the EIUG and the CBI told us that the tax would not provide any incentive for the "winners" to focus on energy costs and reduce them. Both organisations considered that incentives would have been greater if the Levy had been designed to be revenue neutral on a sectoral basis.[169]

72. While we appreciate this argument, we agree with the alternative view that the overall impact of the tax in focussing on energy use and carbon emissions will be weakened if too many exemptions and special treatment of individual sectors are granted. Recent EC research suggests that future energy consumption in offices is rising sharply and may well negate much of the reduction in emissions which environmental policies are seeking to bring about. We feel strongly therefore that there is a need for complementary policies to encourage further energy savings in these sectors.

73. In the 1999 Pre-Budget Report, the Chancellor announced his decision to treble the Government's support for energy efficiency measures under the Climate Change Levy—from £50 million to £150 million—to allow a system of 100 per cent first year capital allowances for energy saving investments to be introduced alongside the £50 million energy efficiency fund announced in the 1999 Budget. This will enable companies to set their eligible capital investment against tax liabilities in the first year rather than defraying it over a number of years. They will, however, incur greater tax liabilities in the following years as the DETR's consultation document indicates "there is no change in the tax paid by the business overall, only in the timing of the relief".[170] Thus, depending on take-up, the measure might cost the Exchequer up to £100 million only in 2001-02, the first year of the Levy, and thereafter—all other things being equal—its true cost will rapidly decrease. This is scarcely a tripling of the on-going commitment to energy efficiency measures. We do welcome the fact that an increased amount will now be recycled, but recommend that the Government considers increasing the public funds available ensuring that it is primarily directed to those sectors and firms which would otherwise have little incentive to invest in further energy saving measures—rather than those sectors which are obliged to do so under the terms of negotiated agreements and EC law.

74. In his evidence to us, Mr Timms placed much emphasis on the fact that it was right to have one rate for electricity, though CHP and renewables will be exempt and the scope of these exemptions is unclear.[171] There is concern, for example, about the extent to which existing CHP plants will qualify for a rebate and whether any spare capacity from them which is sold to the grid will be subject to tax.[172] The reference to "new" renewables in the Pre-Budget Report is also ambiguous, and we were intrigued by the repeated emphasis which the Minister placed on this phrase in the evidence he gave to us.[173] In this connection, we noted English Nature's concern about the environmental impact of schemes for renewable energy in relation to sites of high nature conservation value; and their call for accompanying research and development programmes focussing on the assessment and mitigation of those impacts.[174]

75. We also noted some concern that the inter-relationship of the levy to other regulatory and fiscal measures had not been adequately taken into account. British Glass referred to the regulations requiring the industry to install electrostatic precipitators, and considered that there was a need for a proper integration of all environmental aspects of energy not just energy savings.[175] Both the EIUG and the CBI made similar points in the evidence they gave to us, pointing to examples where energy costs of production might be greater for one product than for an alternative but might give rise to savings if the entire life-cycle energy costs of the product are evaluated.[176] In a rather different sphere, the Committee noted that current proposals include liquid petroleum gas (LPG) used for heating within the scope of the Levy, and that this may create perverse incentives among many in rural communities to switch to environmentally less friendly fuels such as kerosene. This issue is of still greater concern in Northern Ireland in view of the higher energy prices there and the extent that the Levy might impede further development of a comprehensive gas infrastructure. We were glad to hear that the Government is reconsidering the position specifically on LPG, but we remain concerned that these examples highlight the lack of a strategic and consistent approach to environmental measures.[177]

Forecast carbon savings

76. The latest figures given in the 1999 Pre-Budget Report for the impact of the Levy differ considerably from those given in the last Budget—implying almost a threefold increase in the carbon dioxide savings from 1.5 MtC to 4 MtC (including negotiated agreements) while the overall cost of the Levy has been reduced from £1.75 billion to £1 billion. We were particularly concerned at this 'more rabbit out of less hat' scenario in view of previous assurances given to this Committee that significant changes to figures would not be made in successive policy documents without an explanation.[178] We were grateful to the Minister for explaining the reason for the changes and noted his agreement that the Government must be more transparent in this respect.[179] We remain concerned, however, about the explanation as it is unclear whether the figure of 1.5 MtC in the 1999 Budget excluded the impact, as then envisaged, of negotiated agreements in energy-intensive sectors. We urge the Government to be more explicit and systematic in the disclosure of data and estimates in future policy documentation.

77. We were particularly interested in the extent to which the Levy will deliver savings over and above those which implementation of the IPPC directive would in any case have secured. The Minister suggested that the Levy would deliver an 'extra' 4 MtC, while the Treasury commented that the effect of the negotiated agreements in energy-intensive sectors would result in 2 MtC additional savings over the 'business-as-usual' scenario.[180] It is uncertain whether the latter takes into account the effect of IPPC implementation and therefore what the true "additionality" of the Levy really is. The UK Climate Change Programme Consultation paper estimated possible IPPC savings might amount to 3 MtC by 2010.[181] If the baseline scenario does not take account of this, it would suggest that additional savings from the levy are relatively small.

78. More generally, we noted the concern expressed by some organisations that the design of the Levy had been based on the selection of a 0.5 per cent reduction in employers' National Insurance contributions (NICs) than by the need to attain a specific level of carbon savings.[182] We were also concerned that the Treasury's latest estimate of carbon savings from the Climate Change Levy and associated measures is so much lower than the figures for likely savings quoted in previous documents.[183] The Marshall report quoted the scope for cost-effective carbon savings in industry to be 6.6 million tonnes, while nearly 11 million tonnes could be saved by implementing all technically possible savings. The Government's UK Climate Change Programme consultation paper estimated that wider use of CHP could achieve savings of around 6 million tonnes of carbon by 2010; while achievement of the 10 per cent target on renewables would contribute a further 5.4 million tonnes. It also suggested that further savings might result from implementation by industry of all cost-effective measures.[184]

79. In this context, the 1999 Pre-Budget Report's forecast of total savings of 4 million tonnes of carbon does not look particularly challenging. The Minister did not agree and told us that he thought we would see, when the latest DTI energy forecast figures were published, that the 4 million tonnes from the Levy was "a very worthwhile contribution to our being able to meet those targets".[185] (We recall the promise by the then Energy Minister in March 1999 that these figures would be published 'very very soon'.[186]) It is also important to remember that the "dash for gas" is likely to have enabled the UK to reduce emissions to 1990 levels in 2000, and that thereafter emission trends are forecast to rise. The following table shows that the Government needs only a 5 MtC reduction by 2010 to meet the Kyoto target, but a reduction of 29 million tonnes to reach the more challenging target of a 20% reduction on CO2 which the Government has set itself. We would therefore urge the Government not to be complacent in view of the magnitude of the task ahead.

Carbon Dioxide
(Million tonnes)
All greenhouse gases
(Million tonnes of carbon equivalent) 
1990 baseline emissions
2000 estimate
2010 "Business as usual" 
2010 Kyoto target (-12.5%)
2010 Government target[187]
Reduction required

80. One of the problems which faced us in assessing the contribution of the Levy is the absence of a strategic plan setting out its inter-relationship with other policy measures and how the Government intends to achieve its overall targets. We appreciate that the Government does not want to delay implementing the Levy, but it is nevertheless unfortunate that it has been introduced before the Climate Change Programme is available. In this respect we disagree with the Minister in his denial that the Government was putting the cart before the horse,[188] and we note that our view is shared by others. The CBI told us that the debate on climate change would have been much better informed if it had been within the context of an overview from the Government of all its policies, including policies towards other sectors such as transport and the domestic sector; and that we could then have seen how the Levy should be designed to fit into a package of policy measures.[189] We trust that the Government's Climate Change Programme will fulfil this requirement and provide a properly auditable framework within which we can monitor progress in meeting the UK's commitments and the credibility of the Government's various proposals.

Incidence of tax and eligibility for rebates

81. Lord Marshall's report, while recommending the introduction of an energy tax, highlighted the need to provide some form of rebate to "energy intensive" users.[190] The 1999 Pre-Budget Report has now announced 80% rebates to those sectors which are energy intensive and which enter into "legally-binding agreements to implement all energy efficiency measures which are cost-effective". It is proposing to use, as the criterion for "energy intensive", those industries and sectors which are covered by the IPPC directive. Bilateral discussions with the 10 main energy intensive sectors commenced shortly after the 1999 Budget, and initial agreements were signed in December 1999. Negotiations are now due to commence with up to 50 other "second-wave" sectors.

82. The Minister told us that the Government was making good progress on the negotiated agreements. He referred to the signing on 20 December 1999 of memoranda of understanding (MoU) with the first wave sectors, and considered this represented a considerable step forward. But he also acknowledged that there was a good deal of work to be done between the MoUs and the final legal agreements, and he hoped that the latter would be completed by the end of March. He also expected outline agreements with the second wave sectors would be completed by the end of February and viewed this as a manageable task.[191]

83. Other witnesses gave a rather different impression of progress. The EIUG told us that, although documents would be signed by the 20 December, they would not regard these as heads of agreement in the normal sense because the detailed terms were still not certain. The fundamental difficulty revolved around eligibility and who was entitled to sign an agreement, but they also pointed to difficulties with energy data as well as problems in Scotland where IPPC and environmental issues were devolved and there appeared to be no obvious mechanism to deal with this.[192] They also pointed out that many companies within the second wave sectors were doing very little work to prepare for negotiations because any effort they put in would be a waste of time and money if they turned out not to be eligible.[193] The CBI told us that the process of negotiating agreements was itself a very effort-intensive process within the department and that the latter did not have sufficient resources to get the first wave agreements right and at the same time extend them at this early stage. This would become particularly acute when the department attempted to enter bilateral negotiations with each second wave sector.[194] In view of the evidence from the EIUG and the CBI that up to 60 sectors, sub-sectors or trade associations may be involved in the second wave, we share the CBI's concern and would express serious reservations about the practicality of Government entering into, administering and monitoring so many contractual agreements.

84. These difficulties mainly arise from the Government's insistence on using the IPPC criterion as a definition of "energy-intensive". The main anomalies from its use are that some major energy sectors and employers, such as the water industries, industrial gases and the China clay industry, are either completely or partially non-eligible; and that within a sector small firms not subject to IPPC either because of their size or because of the particular processes used may be competing against large IPPC-regulated firms. In addition, at the margins there may be a significant number of firms which are substantial users of energy but who are not included.[195]

85. We were intrigued by evidence which seemed to suggest that the Government is still considering and inviting more discussion of the criterion to be used for eligibility.[196] The EIUG told us that they had suggested an alternative proposal, based on energy as a percentage of costs, and— in view of earlier Government concerns about which costs to include—had now suggested energy as a proportion of operator input costs: they awaited a good reason why that is not acceptable.[197] We asked whether there was any organisation which might have the expertise and trust to set out a definition and resolve this issue. The EIUG thought that the DTI should have the knowledge of how much energy is used in certain industries, whom those industries are trading with and competing against, and how significantly a tax would affect their competitiveness; and that the DTI was therefore the logical starting point for a definition of energy intensive but that it had seemed rather out of the loop.[198]

86. We endorse the view that the Government should have played a more active role in exploring other possible definitions of "energy intensive", and we question how consistent the Government's position is on this issue. The 1999 Pre-Budget Report itself stated that eligibility would be extended to small firms who fell below the size thresholds of the IPPC directive so that they would not face unfair competition against larger firms.[199] In his evidence to us, the Minister also referred to the "strong rationale for the IPPC basis while recognising that there may be a case in some instances for looking at an alternative".[200] He also stated that if there were proposals to extend a measure of special treatment for energy-intensive sectors subject to international competition but which are outside IPPC, then he would look at them provided they met the criteria he set out.[201]

87. In response to a specific written question from the Committee, the Treasury admitted that the UK was the only member state to base eligibility for exemptions from an energy tax on the IPPC criterion.[202] Moreover, it is clear that other European countries are implementing such rebates in a variety of different ways—for example, by simply specifying those sectors which were eligible.[203] All these factors seem to us to weaken the constant emphasis which the Minister and the published documentation place on the argument that only the IPPC definition can provide legal certainty. It has also led to considerable uncertainty and some cynicism among industry as to the Government's intentions and how committed it really is to the consideration of alternatives.[204]

88. It would seem that the Government is intending to utilise the Levy as a means of delivering IPPC regulation. This impression is reinforced by the fact that the 1999 Pre-Budget Report refers to the negotiated agreements as requiring "all energy saving measures which are cost-effective"—a very similar criterion to that used by the Environment Agency in implementing IPPC.[205] We also noted the view of the EIUG that the Government was committed to the IPPC criterion because of the simplicity of monitoring it would provide, and that a policy of minimum resources enforcement might make it an administratively cheap tax but not necessarily a fair one.[206] It remains unclear, however, whether meeting a sectoral agreement will exempt individual constituent companies from regulation on a site-by-site basis, and what the legal position would be where a sector has met its overall target but individual companies within it have patently not made the savings which IPPC would require.

89. We do not accept, however, the viewpoint expressed by the CBI and the EIUG that negotiated agreements should be available to any company which wished to sign.[207] We have already noted our concern that the Government does not have sufficient resources to draw up and manage a large number of negotiated agreements. There is also the question of obtaining reliable data on existing energy use within each sector or sub-sector and the scope for realistic savings, without which it would be impossible to set feasible but challenging targets. The EIUG themselves told us that data compiled by the Energy Technology Support Unit (ETSU), the Government's energy advisers, was never designed for the use to which it has been put. In a number of sectors it had been found to be quite significantly wrong and had had to be totally re-worked bottom-up on the basis of what was actually technically possible.[208] We were particularly concerned that there were apparently no data for many of the second wave sectors and little prospect of any work to obtain such information.[209]

90. Even aside from these serious practical difficulties, however, widespread exemptions and rebates seriously weaken the principle of environmental taxes such as the Levy and would reduce the long-term incentives for structural changes. They also alter the incidence of the remaining tax burden in a way which would be widely accepted as inequitable. The Minister acknowledged that the overall impact of the 80 per cent rebate, together with the cuts in NICs, would render the Levy fiscally neutral for sectors concluding negotiated agreements, and that the Levy would be broadly neutral for the manufacturing sector as a whole.[210] In return, we noted that these industries are committing themselves to implementing cost-effective reductions in their emissions.

91. The Government has clearly indicated that the size of the rebate is related to concerns about international competitiveness, and this was a concern repeatedly mentioned by industry witnesses.[211] However, given the fact that different member states are implementing rebates in different ways, certain industries in different states may still not compete on an equal footing. In addition, on the basis of independent research carried out by Ecotec, the World Wildlife Fund concluded that fears of how the CCL will affect UK competitiveness have been vastly overstated; and that our major competitors in Europe are already more energy efficient than the UK and face higher or comparable energy costs.[212]

92. However, the Committee does acknowledge that there may be justifiable concerns about international competitiveness. The CBI pointed out that the impact on international competitiveness for some specific sectors and over a short period of time may be a real issue.[213] We also noted that it would be important to ensure that the introduction of the Levy did not simply result in key carbon intensive industries moving overseas—perhaps beyond the ambit of the Kyoto Protocol or the Climate Change Convention as a whole. We therefore accept the need for rebates for a limited number of sectors, though—given our concerns about the extent to which IPPC would in any case have required substantial savings—we are somewhat surprised that the Government has increased the level to 80 per cent. The EIUG considered that rebates were justified as long as the domestic market was not taxed, and they commented on the need for a predictable policy to be set out in advance. They went on to say that they had no idea what policy the Government intends to pursue on this.[214] We entirely endorse the need for a clear statement of policy; but would encourage the Government to gradually reduce the level of rebate over time and work with other EU member states to attempt in the longer term to achieve a more unified approach to environmental taxes.

93. One particular aspect of the negotiated agreements gave us particular concern. In the light of the fact that many of the first wave sectors have opted for efficiency targets rather than absolute targets, we asked the EIUG whether there was any guarantee that the agreements would actually reduce carbon emissions within each sector. They responded firmly that there was none. They were generally dealing in a global market. An absolute target would constrain capacity, and if a sector hit its limit any extra demand could simply result in imports from countries which did not have any Kyoto commitments and no guaranteed interest in environmental management.[215] We are very concerned at the resulting lack of certainty which this implies in terms of meeting UK reduction targets, and would question to what extent the DETR and DTI have modelled future trends for each of these sectors in order to estimate what carbon reductions might actually ensue. The Government should make publically available such data as part of the detailed information accompanying the Climate Change Strategy.


94. English Nature consider it important that clear arrangements are put in place to monitor the effect of the tax on the achievement of the UK targets; and that the Government should give a clear policy signal in advance to the effect that it will adjust if necessary the tax rate and the rebates for the energy intensive sectors in order to achieve the targets.[216] We endorse this view and trust that the Government will ensure that adequate information is regularly provided on the overall impact of the tax across all sectors—not just those with negotiated agreements. This should attempt to assess the impact of the Levy on the economy as a whole, including the extent to which increases in employment as a result of the NIC cuts actually occur, and the inter-relationship with other fiscal and regulatory measures—such as mineral duties—in order to ensure that no perverse incentives arise. In view of the EIUG's comments to us about deficiencies in data and the absence of information for many sectors in the second wave, we also think that there is scope for the Government to improve its monitoring and generate reliable figures on a sectoral basis.

95. The Government has not announced any details about how it plans to monitor negotiated agreements. Responsibility could possibly be assigned to the Environment Agency, or perhaps to ETSU, or even conceivably to independent bodies constituted from within each sector. We noted above that availability of the Agency's inspectorate may have been a factor in adhering to the IPPC criterion, but we remain unclear what its role might be. We were interested in the evidence presented from the paper industry that confidentiality could be a major concern in setting targets if potentially anti-competitive practices are to be avoided.[217] However, we endorse the view of a number of organisations that the Government must ensure adequate transparency and accountability in the monitoring arrangements, and we would be concerned if arguments about confidentiality were used to hide the performance of individual companies within each sector.

Emissions trading

96. In view of the difficulties highlighted above in imposing an energy tax, we feel that there is a particularly strong case for actively pursuing an emissions trading system despite the difficulties involved. As Lord Marshall recognised, this would give the UK relevant experience and a head-start in advance of the development of an international emissions trading system as part of the Kyoto protocol.[218] Trading systems offer in theory the most cost-effective way of reducing emissions, as they take account of the varying ability of each company to make emissions reductions cost-effectively. They also provide confidence about progress towards the reduction target as the amount of permits can easily be controlled.

97. Following the 1999 Budget and sponsored by the Government, the CBI and the Advisory Committee on Business and the Environment (ACBE) set up a joint sub-group, the UK Emissions Trading Group (ETG) to develop a pilot. To some extent, this builds on the internal trading system which BP has been developing for some years. The ETG submitted its proposals to the Government on 27 October 1999.[219] The 1999 Pre-Budget Report recognised the inter-relationship between the Climate Change Levy and the Emissions Trading Scheme, stating that in designing negotiated agreements, the Government will seek to facilitate emissions trading between those firms covered by an agreement.[220]

98. The Committee asked Mr Dickinson, then Secretary of the ETG, what was the minimum response it now required from the Government following the submission of its proposals. He explained that the main objective was not just to offer a trading system to the energy intensive sectors, who were responsible for about 10 per cent of emissions, but to bring in other industrial sectors such as the motor industry and the upstream power generation sector including the oil and gas industries which were substantial emitters. As the trading scheme would be voluntary, there will be no incentive for firms to participate unless there is some form of financial inducement for them to do so. The Committee noted Mr Dickinson's comment that what business would be looking for from the Chancellor before engaging in the substantial costs of setting up an emissions trading scheme was a concrete indication of what form of encouragement the Government is looking at.[221] We noted also the complexity arising from the fact that many of the first wave sectors had opted for efficiency targets rather than absolute targets. While the ETG's proposals envisaged that sectors could be brought into a trading system in the short-term, in the longer term it would be necessary to encourage such sectors to convert to absolute targets to enable a fully fledged trading system to develop.[222] Mr Dickinson also pointed to the need to resolve the inherent tension between the Government's strategic energy policy and the need to reduce emissions.

99. We concluded, therefore, that arrangements for trading are likely to be complex, as it is likely that negotiated agreement holders with efficiency targets will be allowed to participate in addition to those with absolute targets. We also noted the need for more financial inducements, both for those within and without negotiated agreements, to participate in a trading system. As the Levy is already fiscally neutral for many negotiated agreement holders, the addition of further financial inducements might therefore give rise to some presentational problems. However, we consider that the benefits of an efficient trading system are likely to be very significant, and that the Government should provide an adequate response to the ETG's proposals which demonstrates to the industrial and upstream power-generation sectors its commitment to making this work. This should necessarily involve further financial incentives which are sufficient for these sectors to commit themselves to the development of a trading system, and in the longer term the adoption of absolute carbon reduction targets.

Conclusions and recommendations

100. The Committee endorses the principle of introducing a tax in order to reduce carbon dioxide emissions and meet our Kyoto commitments. The changes introduced in the Pre-Budget Report appear broadly in accord with previous recommendations we have made and render the Levy more environmentally effective whilst protecting UK competitiveness. However, we remain concerned at some aspects of the Government's approach, including:

101. We also expect the Government to take prompt action to further the development of an emissions trading system by providing an adequate response to the Emissions Trading Group's proposals which demonstrates to the industrial and upstream power-generation sectors its commitment to making this work. This should necessarily involve further financial incentives which are sufficient for these sectors to commit themselves to the development of a trading system, and in the longer term the adoption of absolute carbon reduction targets.

PBR pp102-105 Back

152   Ev p234 Back

153   QQ352-355 Back

154   Seventh Report 1998-99, HC 159-I, paragraph 46 Back

155   First Report 1997-98, HC547, paragraphs 41 and 44 Back

156   Ev pp 68, 95, 102, 189, 213 Back

157   Ev p102 Back

158   Ev p213 appendix 13 Back

159   International Trade and Climate Change Politics, Earthscan, pp64-65 Back

160   PBR 1999 paragraph 6.34. QQ355-358, 365 Back

161   Q356 Back

162   Q358 Back

163   Economic Instruments and the Business Use of Energy, A report by Lord Marshall, November 1998, p59 Back

164   Ev p188-189 Back

165   Q365-366 Back

166   Q404 Back

167   Ev p154 paragraph 2 Back

168   Ev p182 paragraph 12 Back

169   QQ207, 243-244, 251 Back

170   DETR Energy Efficiency Measures under the Climate Change Levy Package, November 1999, paragraph 33 Back

171   QQ356-358, 374 Back

172   Ev p18 paragraph 2.1, p193 paragraph 1.2. See also QQ370-373 Back

173   QQ356, 374-375. See also Ev p132 paragraph 4, and p193 paragraph 1.2 Back

174   Ev p68 paragraph 4.4 Back

175   Ev p170 Back

176   QQ221, 239 Back

177   QQ256-257, 359-361. Ev p191ff Back

178   Appendix 1, paragraph (f) and HC93, 1998-99, QQ94-95 Back

179   Q367-368 Back

180   Q367. Ev p134 Back

181   UK Climate Change Programme Consultation paper, DETR October 1998, paragraph 101 Back

182   QQ21, 211, 244. Ev p93, 113, 182 Back

183   PBR paragraph 6.34 Back

184   Economic Instruments and the Business Use of Energy, A report by Lord Marshall, November 1998, Annex E (hereafter the 'Marshall report'). See also UK Climate Change Programme Consultation Paper, DETR October 1998, paragraphs 60, 63, 91-93 Back

185   Q369 Back

186   HC159-II, 1998-99, QQ428-429 Back

187   The target of 20% relates to a reduction of CO2 only. See Marshall report, paragraph 3 Back

188   Q362 Back

189   QQ257-258 Back

190   Op. cit. p2 Back

191   QQ384-385, 393 Back

192   QQ191-195, 220 Back

193   Q197 Back

194   QQ240-241. Cf Q265 Back

195   QQ194-205, 242. Ev p101 Back

196   QQ196-200 Back

197   Q202 Back

198   Q201 Back

199   PBR paragraph 6.41. See also Q381 Back

200   Q377 Back

201   Q376 Back

202   Ev p154 paragraph 3 Back

203   Q378 Back

204   Cf Q196 Back

205   Op. cit. paragraph 6.43. The Environment Agency use 'BATNEEC' (Best Available Techniques Not Entailing Excessive Cost). Lord Marshall's report refers to the fact that it is also based on existing processes at sites and is therefore inherently conservative (Marshall paragraph 35) Back

206   Q205 Back

207   QQ202, 261. Ev p101 Back

208   Q220 Back

209   Q220 Back

210   QQ401-402 Back

211   QQ201, 222-224, 259, 264. Ev p96, 116 Back

212   Ev p194 paragraph 3.1-3.2 Back

213   Q259 Back

214   Q219 Back

215   QQ222-223 Back

216   Ev p68 paragraph 4.7 Back

217   Q204 Back

218   Lord Marshall Economic Instruments, November 1998, paragraph 76 Back

219   Ev p218 Back

220   PBR paragraph 6.54 Back

221   Q270 Back

222   QQ271, 280 Back

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