Select Committee on Environmental Audit Minutes of Evidence

Examination of Witnesses (Questions 220 - 232)



Dr Iddon

  220. The Energy Technology Support Unit obviously makes some estimate of the cost-effective savings that can be made by the imposition of the CCL. Presumably you have made some estimates as well of the same thing for your sectors. Could you say something about the difference, if any, between the two sets of estimates?
  (Ms Waters) I think it is worth starting by saying that ETSU will be the first to agree that their data was never designed for the use to which it has been put. The ETSU data is based on a model which assumes unlimited management time and unlimited capital, and oh, we wish, but that is just not the reality. Therefore, in a number of cases that I am aware of, the sectors have found that the data has basically had to be totally reworked and, as Chris said earlier, you are talking in most sectors, because nobody wants to sign an agreement they cannot deliver on, of going back to the bottom and trying to work their way back up and doing it very much on the basis of what is actually technically possible. The other thing ETSU did was assume that every single energy efficiency widget that was possible was put into every plant and the actual reality is that widget A is not consistent with widget B, so you would never put them both into a plant. Therefore, the data is certainly quite significantly wrong if you are looking for cost-effective energy savings. I think it is also worth pointing out that for a number of the sectors particularly in the second wave there is no data. Again we are back to this issue where until they know that they will be included, nobody is putting too much time and effort into doing their agreements. We will certainly expect that we will be making a significant contribution to the Government's commitments as energy intensive users as a whole, but that is not actually a change of business-as-usual for us; improving energy efficiency is very much part of the business anyway. What we need to see is what we are going to deliver compared to what everyone else is going to deliver because at the moment it looks as if we may well be left to save the planet on our own.

  221. As a former chemist, I know all about the laws of thermodynamics and I know too the metallurgical process of particularly aluminium smelting and things like that and steel; you cannot make energy savings with the basic process. However, can you put your hand on your heart and say that out of all the sectors you represent, there are not significant savings to be made and that the imposition of the CCL was necessary to persuade your members to reduce their energy costs for climate change reasons alone, if not for competitive reasons?
  (Mr Blakey) No, we have never said that and I did not say that earlier; on the contrary. As Chris has said, there is always a better way and you will know that there are restrictions, but nobody is 100 per cent efficient and they never will be. Not every furnace in Britain is state of the art. A good many are though. That is the point we are making. By all means, encourage, of course encourage; it is in their financial, commercial interests to be the most efficient. We are not saying that there is nowhere to go and we are not saying that it is perfect, not remotely.
  (Ms Waters) I think we also have a role to play in the wider UK reduction of emissions. We go back to the point that there are other more efficient ways of doing things. If you look at the competition between aluminium and steel in the production of cars, they are both energy-intensive industries and they are both actually working to produce lighter, more fuel-efficient cars, but to do that takes more energy. Another very good example is cans that food comes in with again steel and aluminium. They have been rolling them far thinner to make them lighter to transport to markets, but it is more energy intensive to do that, so whilst you may see increases in energy intensity in some sectors, what we must do is look at the life cycle of these products to ensure that we have the most economic solution for the whole of the product's life rather than just one part of it.

  222. Are sectoral unit efficiency targets guaranteed to produce absolute emission reductions, even where overall growth in the sector is projected?
  (Ms Waters) No.
  (Mr Blunt) Not necessarily. I think if you accept that most of the market areas we are talking about are global, the demand for the products is not necessarily met by national manufacturers and you will not affect national demand for the product and, therefore, it may well be that if you had an absolute target that constrained capacity within the UK, that demand would be met from elsewhere and, therefore, you are merely exporting our CO2 problem to somebody else's CO2 problem. I think what we should be reasonably expecting industry to do is to be as energy efficient as it is possible to be within our current knowledge. That is actually the objective.

  223. Finally, can I turn to emission trading permits. The Pre-Budget Report suggested that in the design of negotiated agreements, these should be taken into account. Can I put it to you that a sector might meet its targets without actually reducing emissions, but by purchasing a number of these permits, so do you think that is possible or not?
  (Ms Waters) I think in the long term we may well see a trading scheme develop. I think the situation at the moment is that we are signing agreements on the basis that we must meet those agreements, not that we can purchase things in or that we are going to shut down plants in order to meet those targets. So the current situation with the agreements, given that trading is not up and running and the agreements have got to be signed to get the rebate, is that those sectors negotiating are doing so to meet their targets. They are not going to bank on possible trading schemes some time in the future. I think yes, we may well see in the longer term the Government pushing us towards absolute targets rather than unit targets and you may well see a trading scheme developing in which intensive users would wish to participate. I think if they were to be in a situation of buying in permits for an absolute target, then that must allow them to grow. The biggest problem with the absolute targets, as Chris said, is that if you hit your limit, all you might do is end up importing steel from China which has no Kyoto commitments and no interest in environmental improvement, so being unable to meet the target in the most efficient way for UK plc would not be a very attractive option for business.

  224. Some people have suggested that by the imposition of the CCL, we might produce a rather radical restructuring of industry in this country or any country that adopted a similar tax in order to make industry less carbon energy-intensive. Can you project that that might happen by the way the Government is imposing the CCL in this country?
  (Mr Blakey) We have got many pressures which we have already talked about, commercial pressures, for people to reduce their energy consumption and the CCL arguably reinforces that. The specific point on carbon I think is difficult to answer. If you take smelting of iron ore, for example, somebody may well one of these days find a way of doing it without coke, but it is not on the horizon at the moment. If somebody does and it only costs half as much, it will not matter whether the CCL is there or not; everybody will beat a path to his door without any prompting from anywhere else. Electricity is obviously a very large source of carbon dioxide, electrical generation. To talk about nuclear generation seems sort of taboo these days, but, as Lisa mentioned, they do have a finite life and, after all, a third of our electricity comes from nuclear sources at the moment, so how will they be replaced? That is not really a question which the CCL bears on. It could be made to bear on it, but, as presently designed, it does not.
  (Ms Waters) I think we would still be extremely worried, particularly for those sectors who are just below us in energy intensity and who will not be signing agreements. So, for example, engineering companies, I think we are concerned that they will still face a significant tax liability and may well be tempted to start shutting down, relocating offshore in the longer term. I do not think it is a signal that says, "We in the UK love manufacturers so please come and be based here", but certainly it would be useful, I think, for us all to know what the Government thinks the effects are going to be, that with these tax rates which have been set, what sort of energy reduction are we expecting from which sectors and let's monitor it, and what are we thinking the tax effect will be, what will all the regional impacts be? We have never seen any of these bits of data and I think it is extremely important that that data comes out into the public domain so that we can monitor this. One of our big concerns has always been that energy demand is not terribly elastic, so you can move the price up and down quite a lot and in actual fact people do not go and consume large quantities more or less, so we need to monitor what the impact of this tax is because we may well find that the cost to some sectors is a cost that the UK is not prepared to pay.

Mr Blizzard

  225. How will the energy savings or carbon emission reductions identified in these negotiated agreements actually be monitored and verified? Do you know?
  (Mr Blunt) Yes. We will be required to report, I assume on an annual basis, although that is not entirely clear yet, on the industry's performance against its target. That process will be available for audit in its entirety to government.

  226. So you talk about across an industry, so does that mean that trade organisations will have to do this?
  (Mr Blunt) The probability is that our trade organisation possibly by setting up an independent auditing company will collect information from the people who are participants in that agreement and that information will be reported to government at the agreed milestone dates within the agreements as to the performance we have actually achieved and all of that will be auditable.

  227. So this independent auditor is something you envisage being set up by the industry itself?
  (Mr Blunt) No, the independent auditor will be appointed by the Government, I think.

  228. Have you any ideas who would be in a good position, if there are any existing bodies, or who do you think should be the independent auditor?
  (Mr Blunt) I am not sure I have a view, but I would not be surprised if the Government would ask ETSU to do it.

  229. Obviously the trade organisations are going to have a role, so what about where you have got more than one trade association in an industry or in fact important members who are not part of a trade association?
  (Mr Blunt) We are required as a term of the agreement to let in anyone who could reasonably be said to be a party to the agreement, whether they are members of a trade association or not, and that is not a problem. It is open to all people in our industry, whether they choose to be members of the trade association or not. Equally, if there are people who are in a trade association who do not wish to participate, although I cannot think why they would not, they do not have to.
  (Ms Waters) In the cases where companies fall under a number of sectors, it seems to have been left to the companies to decide which sector would be best, and I think that in some cases that will be based on the fact that we are a smaller sector and it is easier for us to come up with a reasonable number than it is for some of the very large sectors, particularly sectors who have a number, say, four or five, very big companies that are very intensive in the sector, who are going to make up 80 per cent of their energy use in the sector and then the smaller companies behind where it is obviously more difficult to come up with something realistic, so it has very sensibly been left pretty much to the companies.

  230. What about if the targets that were contained in the negotiated agreements actually were not met, despite the best endeavours, best efforts? Presumably the only sanction is to cancel the rebate or do you have any views as to whether there should be any other form of sanction or whatever or what problems could arise there?
  (Mr Blakey) I think the most difficult problem with that is how do you distinguish between marginal failure and gross failure and that could be very important in the sort of sectors that Lisa was talking about where you have got five big ones and six little ones and the five big ones do an absolutely super job and they are let down by the six little ones. That sort of philosophical question, I think, has really not been resolved. It certainly is on the table.
  (Mr Blunt) It has been partly resolved. If you have a sector agreement and that is backed up by what are called "participation agreements", which are, if you are like, every individual company's share of the overall target, then if the sector fails, then those individual companies which have met their commitments can still keep the rebate or discount. That, I think, is clear. It is those companies who have failed and how they are treated and how you differentiate, as Mr Blakey said, between the people who have tried very, very hard, but who are either over-ambitious or unlucky as against those people who really did not care and had no intention of meeting their commitments.

  231. What would your proposed solution be? You would probably not wish to go down that road, but if you had to, what would you say?
  (Mr Blunt) I think at the end of the day it is not something you can write down in a legal agreement. Someone has to get a bit judgmental about whether the individual companies concerned have actually tried and, if you like, the auditors have to go in and you have to go and plead your case, and I think if you can persuade the Secretary of State that you have actually been very good, but unlucky, then I think you should keep your discount or at least be put on probation. There must be an appropriate mechanism for differentiating.

  232. Is there any idea of having a kind of variable degree of rebate to distinguish between marginal failure and gross failure?
  (Ms Waters) A number of sectors have suggested that they could face a higher rate of tax on the amount they have effectively missed by, so the more you miss, the higher your tax bill would end up being. Otherwise, you would have a situation where once you failed by possibly as much as a kilowatt, you have failed, so you might as well do what you like, so we want to encourage continued efficiency. I think it is worth noting that they have had that problem in the Dutch system with agreements whereby the Government and industry agreed what they were going to do, how they were going to do it, the companies went away and did everything they were asked, and it did not achieve the level of savings that the equivalent of ETSU thought theoretically possible. So we are going to have to address this, and I think something along the lines of the Dutch system, checking that you have done what was sensible and reasonable to try and meet your targets as a means of judging failure rather than the final numbers may well be needed.

  Chairman: Well, thank you very much indeed. There are obviously a lot of issues to be resolved. That was very interesting and I hope useful from your point of view, which it certainly was from ours.

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