Select Committee on Environmental Audit Minutes of Evidence

Examination of Witnesses (Questions 200 - 219)



  200. Have you attempted to put forward a definition?
  (Mr Walkey) We are putting forward our proposal as an association now. Unfortunately, there are about 60 associations in the second wave, and 60 definitions just means more debate. One definition from your good selves or from the Ministry or from DETR or the Treasury would at least provide a point to the debate rather than 60 points.

  201. Can I just ask then who do you think would have the trust of perhaps yourselves, Treasury and everybody perhaps to do that almost objectively? Would it be someone like the Chartered Institute of Environmental Health? Who would you feel you could trust to look at this in a broad sense if progress has to be made by March? Who would you suggest might be a broker?
  (Ms Waters) It would seem logical to us probably to start with the DTI. What we are looking to do is to protect all those intensive energy users who are competing effectively in global markets. Now, if we start saying that you have got to be energy intensive and export, you start excluding all those companies who, although they do not export, are competing with imports in the UK. If we say, "You have got to be under certain SIC codes", SIC codes are something that you can choose yourselves so that anyone is in. I think the Treasury is the lead department in deciding whom it wants to exclude, but it is DTI which should have the knowledge of how much energy is used in certain industries, whom those industries are trading with, where that trade is competitive and where the impact on those sectors is likely to be a significant negative effect on their competitiveness in their own markets. So the DTI seems like the logical starting point, but from the beginning of this they have seemed rather out of the loop.

  Joan Walley: And yet it is DETR which is doing the negotiations.

Mr Loughton

  202. It sounds to me as though welcome though some of the proposed changes are, unwittingly perhaps the Government has created rather more problems now as to what is going to come within definitions and who is going to qualify for the levy. Let me try and throw out one possible solution. What is preventing the Government, do you think, from simply defining energy intensive by the percentage of the total costs that their energy consumption constitutes within various sectors and firms? Is that too simplistic? Would that be a good starting point or what?
  (Ms Waters) We have certainly suggested that that is a starting point. They seem concerned about which costs you include as production costs and they did at one stage start talking about including capital costs. If you think of something like an industrial gases plant which is built to operate for 20 odd years at enormous capital cost, then you start to get quite difficult variations in what the percentage of energy cost would be, so we have suggested energy as a proportion of operator input costs and we await a good reason why that is not acceptable.
  (Mr Blakey) I think you are driven back to this idea that everybody who wants to should have an agreement and enjoy the exemption because there are of course some net gainers, not in the industries we represent, but there are net gainers. Now, they are not going to think of making an agreement, but nobody who is not, by his own definition, energy intensive and driven by the factors Lisa was just talking about would want to make an agreement and those who are not will not, and it is also the question of equity, I think. If you are having a general taxation for which there are some exemptions, surely one could argue that anyone who can qualify by making an agreement, in equity, should have the opportunity of being exempt.

  203. Well, that is a very interesting point because the energy tax, as I shall be calling it, has an impact for the way that Parliament does its business in the whole field of taxation because I cannot think of any other taxes where civil servants can negotiate with individual businesses within separate sectors the actual rate of tax they will be paying for doing the same thing effectively, and you have already said that glass-makers, whether big or small, may be paying different rates for doing exactly the same thing. Do you think that is completely iniquitous and do you think, without putting leading questions too much, that the industry will regard that as fair and can you foresee pitfalls where after the first few years it is not competitiveness measures against foreign firms, but it is actually competitiveness measures against domestic firms doing the same thing effectively who have been able for whatever technical reasons to negotiate better discounts?
  (Mr Blakey) I do not know about inequities, but it is certainly a novel principle and I quite agree with you that it is not only Parliament that needs to consider the implications of it, but I think business does too and perhaps the ordinary individual, but I do not suppose he will get around to it very often. We do refer in the paper in rather general terms to possible problems arising under the Competition Act in another way and that may extend to European competition laws where the Government would certainly be subject to question and probably censure, if it acted to relieve tax differentially between direct competitors. That, I think, in European terms would be regarded as state aid in the rather perverse way they look at it, but it is perfectly logical, and certainly this question of a level playing field on taxation is something I think where I have no evidence that the Government has really thought it through yet. I may be wrong, but there is no evidence that I have seen.

  204. So you think it is highly possible, if not probable, that one of your members or more may seek to take a case against a competing member within this country to the OFT on the basis of competition?
  (Mr Blakey) Well, I do not know whether that is particularly likely because I think such an aggrieved person would more likely go to the European Commission because you are complaining essentially against the Government in a way. There are issues, I think, and Chris might be able to say something about this, where, for example, if you are going to have a sector target, it probably means that everybody has got to share some information about investment plans, not necessarily, but that is a way to tackle it, which is normally looked on as anti-competitive.
  (Mr Blunt) I think we have tried to avoid that particular pitfall because paper-making is essentially one large energy-consuming process and, therefore, if you know someone's energy reduction plans, you probably know what their business plans are as well because someone in the industry could work it out from an energy plan, so we rather rejected the earlier government models of how negotiated agreements might work. We say that the business plans, and hence the energy plans, of the constituent companies that make up our agreement will be private, held by the Paper Federation and not available to the Government unless we fail to meet our sector target, and I think the Government has accepted that, I am pleased to say, but confidentiality in that area is absolutely critical. It also means that the only way you can reach a negotiated agreement is by some sort of bottom-up process. You cannot pick a figure and then try and get the membership to adopt their part of it, but you actually have to go to the constituent companies and build it back up to a target, and that would be quite difficult for some sectors.

  205. With all of these anomalies, why do you think that the Government has been so committed to using the IPPC list as its criteria for eligibility?
  (Mr Blakey) I think for simplicity of monitoring. The inspectorate will be on the ground of course in due course under IPPC and one of their tasks already is to look at this sort of thing, so I suppose it is minimum resources enforcement which may make it a cheap tax, but not necessarily a fair one.

  Chairman: A traditional Treasury principle!

Mr Gerrard

  206. You mentioned, Mr Blakey, that there will be people who will be winners. Are you referring there to the argument that there will be as a result of this tax some cross-subsidy to other sectors, say, to the financial and banking sectors, for instance?
  (Mr Blakey) Well, you could look at it in that way, and if you do look at it in that way, you could say that it would also have regional implications of course where certain parts of the country which are heavy industrial were subsidising other parts which are not. However, that would not be unique, I suppose, in taxation terms, but it should be realised of course that that is an effect.

  207. Do you think that is an inevitable process of a tax which is there to encourage energy saving?
  (Ms Waters) No, I think our concern is that it does not encourage energy saving in those sectors. Our concern is that their energy bills are such a small proportion of their costs that energy is not such an important issue as it is for intensive users in the manufacturing sectors. If you have just seen a marginal rise in your energy costs and a very large reduction in your employment costs, why are you suddenly going to start focusing on energy? Our main concern is that people like banks, office blocks, the service sector generally, parts of the public sector, such as government offices, why would they focus on energy efficiency? Energy is not a big issue for them, so our big concern is, and the whole point is, that the tax does not achieve this. This idea that you are linking money back through National Insurance contributions is what causes that inevitable effect, and it would be much easier to say that if you are a very intensive user, you are paying a tiny proportion of your energy as tax and if you are a very small energy user, you are paying a far bigger proportion to focus people's attention in the service sectors on their energy bills, and if you were not recycling via the National Insurance contributions, but looking to achieve fiscal neutrality at a far lower sector level rather than saying it is revenue-neutral for business as a whole, then you would probably end up with a much better environmental impact than you are likely to see.

  208. So how would you design that tax? You obviously do not want a tax, by the sounds of it, where the amount of tax will be related directly proportionate to the amount of energy used.
  (Mr Blunt) If I may suggest something, currently with all the changes, assuming agreement, assuming the CHP exemption, we will pay £4½ million a year additional taxation in the paper industry. If we had a system whereby if we agreed the Government's targets and they were stretching them and we effectively got it all back, firstly, we would have more money with which to achieve the targets that we were signing up to and, secondly, we would not be giving money to those companies who do not need it, who have far lower energy bills, to make the investments that they may not make, so if you had a system whereby everyone who was prepared to enter a negotiated agreement, provided it was properly policed and it was properly rigorous, if anyone who is prepared to do it could get their tax back, that would be fiscally neutral.

Mrs Brinton

  209. I actually would like to move things on now to the actual rebate. I think we would all agree that 80 per cent is amazing. What is the reason for that? As I understand it, it is actually to detect industry's ability and competence to compete internationally. Would you agree with that? Is that the reason for the 80 per cent?
  (Mr Blakey) Yes, ultimately. You probably have seen the figures which we have produced on what the effect would be in various industries with them paying the full tax proposed originally and set off only by, as originally proposed, the 0.5 per cent national insurance rebate, and the result of that would have been total ruin for a good many companies beyond any question. There would have been a far larger deficit than their profits could remotely be and there is no means in an internationally competitive market for their product, in which most of them are, of simply passing it on to the customers; there is no way they can do that. Therefore, the Government first of all suggested the 50 per cent rebate in an attempt to meet this and the numbers are still very depressing. You have probably seen the numbers produced and the Government, I may say, should have known this, should have derived all of this from the published statistics without any difficulty, so the 80 per cent, I suppose, is something of a compromise. Certainly there is a difficulty perhaps in positively subsidising companies, which you would do if you said it was a 100 per cent rebate and you still get a national insurance reduction, although that brings some pretty rough and ready answers, I must say. One factor in the Government's thinking might well have been that that is the number the Germans have chosen for a rather similar tax.

  210. It seems very rough and ready if that is the reason, but this concern in terms of whether firms are going to be able to compete internationally, is this across the board in terms of all the firms that you actually represent or is it just some at a particular edge?
  (Ms Waters) It is going to be very dependent on the outcome of all of these, whether it is IPPC, what counts as good-quality CHP, and all the parts of the negotiated agreements. I think we are still concerned, even with an 80 per cent rebate though, because all you are doing to any of the firms who are signing negotiated agreements is taking money from them. This Government said that the tax was about reducing our energy use—well, they said carbon, but the effect of an energy tax is obviously to try and reduce energy use. Now, if you have already signed an agreement that says, "I am going to do everything that is cost-effective to reduce my energy use", anything that is an economic instrument saying, "Okay, further reduce it, further reduce it" is not a signal that any of these businesses can actually respond to. So the remaining tax liability is effectively money that we are just handing over to the Treasury that we could be spending on improved energy efficiency use, other environmental improvements, product development, research and development, all the things that are part and parcel of remaining competitive in global markets. So our concern is that the 80 per cent, whilst it is significantly better than the 50 per cent originally suggested, is not fiscally neutral and it does leave a number of our members with still quite significant tax liabilities.

  211. Following up a couple of points there, I am still coming back to the fact that I am very, very concerned about actually how that figure, that 80 per cent or 50 per cent or 60 per cent is actually achieved. Is it your opinion that actually rather than somebody just saying, "Well, perhaps we will pick that one because the Germans did", would it be better if there was in fact a unanimous approach towards energy taxation between the developed countries? Should they all be getting down and saying, "Well, let's all do it this way"?
  (Mr Blakey) Certainly, yes, it would help. That is much more clear, of course it is. What has worried us a bit or really quite a lot is the linking of this energy tax with the national insurance rebate. It is possible for the outside observer to think that the original rates and the 50 per cent rebate were intended precisely to match the proposed national insurance rebate. That is all very neat. Perhaps the new arrangements, the new proposals are intended financially to match the new proposed rebate. That should not really be the point. What this should be about is using taxation as efficiently as possible to obtain the desired result, which is a reduction in CO2 emissions essentially, never mind that it happens to balance something else.

  212. Could I just ask you if in this whole area you think that a different sort of "politics" is beginning to come into this and that perhaps decisions are not being taken for just the sensible reasons we have been going through today? In 1996 the then Government set its face very, very firmly against EU efforts actually to introduce uniform energy taxation. Now, is that not all about a particular attitude to Europe and indeed does it not seem that this Government has carried on that particular attitude because it has certainly not embraced it with the change of administration, has it?
  (Ms Waters) Certainly at the time we did not support the adoption of the Directive any more than the British Government did because it was not a better design than a design of this tax. I think we have to be very careful that all business favours the use of economic instruments where those instruments are resulting in economically efficient solutions to the problem and if we are going to see European-level tax, Europe still will have the competitiveness issue and we still have a situation where many of our members, such as English China Clays, are multi-national companies, they are not just European-based and they will be competing with many countries which do not have any Kyoto commitments like the ones that we have. So I think we have to be careful not to say, "Well, a European tax would be better than a UK tax", because that would depend very much on what we come up with at the European level. What we have got to do is try and persuade the Government to go back and say, "Well, the aims of this tax are to reduce CO2 emissions. Let's start looking at how we can tax CO2", and that means we have got to start discussing taxing of the domestic sector and we have got to talk about how to send some long-term signals to the generators. The long-term outlook for the closure of nuclear plant means that somebody is going to have to build some new power stations and at the moment you are not allowed to build gas-fired power stations, so some of these much longer-term issues have got to be considered in how you design these environmental policies to deal with long-term global problems. The UK should be proud of itself; this is not an easy thing to do and at least the UK is trying to meet its targets. If we look at some of our competitor nations, it is not obvious to us that America is not going to be doing much to meet its targets, so credit where credit is due, but let's not think, "Oh, well, we got this right", and sit back and rest on our laurels; we need to refine it.


  213. Taking precisely your point in trying to defend the Government, and I am not a member of the Government, but indeed an opponent of the Government, but trying to defend them, are they not precisely taking your point, that we have to do something about carbon emissions, we have to start somewhere, however rough and ready and crude this may be, and they are in fact using a tax as an enforcement measure? It is not really a tax, but it is an enforcement measure to get you to do something positive over and above what they think you might be doing anyway. Is that not a reasonable point of view?
  (Mr Walkey) It is a reasonable point of view, but they are being selective in who they exclude from the rebate of that tax. We, as a company, have been very forward-looking and as an association. We made conscious decisions over ten years ago to go down the CHP road for that part of our business which has a heat load and by 2003 we shall be 85 per cent supplied by CHP, as an association. We also went down the road of trying to replace thermal units which came under the old IPPC Part B arrangements. If you take the scenario now with IPPC and the criteria for rebates, that would work against companies saying, "I have a process which is IPPC driven, so I can get a rebate. I have got a new process here which will have no emissions at all, but I lose my rebate if I put it in".

Mr Gerrard

  214. Just following on from that point, you seem to be arguing in your paper for very wide exemptions to the tax entirely because you said that all industries, where energy supplies form part of the chemistry of the process, should have their related energy inputs exempt, but that would seem to me to cover a very, very wide range of industries where there will be energy inputs to the process.
  (Mr Blakey) This is another difficulty that you get by discriminating them. The Government has already announced that it intends to exempt certain processes altogether and certain fuels for certain processes. Well, they happen to be fairly extreme examples, but all our members really are involved in chemistry. An important point of course is that, therefore, they are constrained by the laws of chemistry and physics and nobody is going to change the specific heat of steel, for example, by legislation. Now, that is not to say that companies are perfect; they can make improvements and they do make improvements, but there are diminishing returns. This is the point. Therefore, by all means put pressure on them to get as near 100 per cent efficiency as they possibly can and they almost, by definition, could take these things into account.

Mr Jones

  215. I have been listening quietly as I am a new member to this Committee and you have been making a very serious point about whether these taxes would actually reduce effectively your energy consumption and, therefore, serve the purpose that they are actually designed to do. What is your answer to the point that it may well be that, as a steel manufacturer or a paper manufacturer, you cannot realistically reduce your energy costs because if you could, you would anyway because it is in your interests to do so and, therefore, the tax cannot serve the purpose for which it is intended, but by making your products more expensive, because it hits you hard and you have to transfer that, consumers do sometimes have the option of buying products which are less energy-intensive, or using products in the manufacture of cars or whatever which use less steel or use less paper and in that way their total energy demand would be reduced, although it is not in your interests that it should because it takes away part of the market for your product, but it does serve the purpose for which it is intended, so what is your answer to that?
  (Mr Blunt) I think the first point is that the probability is that if people think our paper is too expensive because we have put the price up because the energy costs are high, they will buy from a country where they do not have that problem. 55 per cent of the paper in this country is imported already and there is no problem in importing paper in this country, so we are a global industry and that is not unusual in any intensive industry. I do not accept the proposition that we are anywhere near the end of the road of energy efficiency and I am quite sure that my successors will look back and say what terribly inefficient people we were 10 or 15 years ago when they had the responsibility that I have. It is a never-ending road; we will always find we are doing better. I do not object to the signal to do better, but I object to meeting the targets and then paying over and above. The other point is that it is not actually an energy tax, but it is some energy is taxed and there is a whole class of energy that is not taxed under the Climate Change Levy proposal and that is liquid fuels, so there are all sorts of strange positions where you have a company which is entitled to a rebate through a negotiated agreement, but cannot get any benefit because he cannot actually access gas, for example.


  216. So you would accept the tax if the rebate was 100 per cent?
  (Mr Blunt) I accept the proposition that we have to meet our Kyoto commitments and I accept the proposition that we should enter into negotiated agreements. I have no problem with that. If we do that, and, by the way, we came to the Government a year before the proposals for the Climate Change Levy suggesting voluntary agreements in this case because we did not need negotiated agreements, but if we enter into these agreements to meet the national commitment, why have a tax? We are doing something new, as the gentleman on the right said, and taxation is no longer an issue about raising money, but it is an issue about changing behaviour; we are all willing to change behaviour and we do not need the tax to beat us with.

  217. Surely the Government does need a means of enforcement?
  (Mr Blunt) Yes, and the enforcement is that if we do not meet our commitments, we get taxed.

  218. That is it then.
  (Mr Blunt) Yes, but if we are prepared to meet our commitments, why tax?

  Chairman: Exactly, so if the rebate was 100 per cent, you would meet it.

Mrs Brinton

  219. I was just wanting to come back on the whole business of the rebate which is actually troubling me quite a lot. How long do you envisage this rebate to be carrying on because certainly, as I have always understood it and read it, rebates actually militate against environmental taxation and what that is going to achieve?
  (Mr Walkey) I think it would be reasonable to say that industry would expect to have rebates as long as the domestic market was not taxed.
  (Mr Blakey) It is difficult to answer your specific question, how long would we expect this to continue, because the answer is that we have no idea, and this is another fault. Lord Marshall made it very clear in his report that the future of the tax, if it was imposed, and he did not recommend that it should be particularly, but it might have a part to play, but if there was one, then future tax raising policy should be set out in advance in a predictable manner, which I understand has happened in some other countries. As far as I know, we have no idea what policy the Government intends to pursue on this.
  (Mr Blunt) The current agreements are written as if they were expiring in 2012.

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