Examination of Witnesses (Questions 200
WEDNESDAY 15 DECEMBER 1999
BLAKEY OBE, MS
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.
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
(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!
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
(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
(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
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 usewell, 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".
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.
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
(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.
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.