Examination of Witnesses (Questions 240
- 259)
WEDNESDAY 15 DECEMBER 1999
MR PETER
AGAR, MR
MICHAEL ROBERTS
AND MR
PAUL EVERETT
240. Do you have any suggestions as to how that
could be better done?
(Mr Roberts) To pick up on your particular point about
inclusion, I think there is a problem here in that clearly the
Department or DETR in particular have focused on what they perceive
to be the most energy-intensive sectors, so we have the lead tranche
of 10 sectors. Now, that is a very energy-intensive process within
the Department and they simply do not have sufficient resource
to focus on getting those negotiated agreements right and then
to try and extend further at this early stage.
241. So you are saying there should be more
people in the DETR to carry out some of these negotiations, particularly
with regard to the second tranche?
(Mr Roberts) With regard to extending the base of
discussion with other sectors, I think that is probably a very
important factor. There have been initial discussions held with
a broader cross-section of industry and there are something like
between 40 and 50 other sectors that had initial discussions,
but they have certainly not had individual bilateral negotiations
with DETR as have the lead 10, and I think that in part is simply
a resource issue.
Chairman
242. How will this question of inclusiveness
affect an industry like the motorcar industry?
(Mr Everett) Our fundamental problem is that IPPC
is the process through regulation and whilst we have many processes,
very few of them are actually covered by IPPC. As an example,
we have something close to 1,000 members and only 35 have some
processes which are covered by IPPC, and it touches on the point
which was made earlier on. Effectively the motor industry, alongside
other industries, have made themselves far more environmentally
friendly over a long period of time and, therefore, do not need
to be monitored in the same way as they perhaps once did. That
is a negative as far as we are concerned. Our difficulty has always
been that it has been very difficult to talk to certainly the
DETR, although that was slightly easier, but certainly almost
impossible to talk to the Treasury. Latterly we have made some
contact and had some meetings with them. We are a large sector.
We like to think we are reasonably professional. We followed through,
we submitted responses to the Marshall Report and to the Government,
the Customs and Excise's first consultation, but we did not hear
anything from the DETR or anybody else until we started to read
in the newspapers and got information from the CBI that they were
actually talking to sectors. The only way we managed to get involved
in those kinds of things was to knock on their door loudly enough
so they had to talk to us. An initial programme, and still going
on with many sectors, are large meetings with lots of sectors
being represented who are being given not much more than general
information about how things are going along. We had a specific
issue. We have said from the start we want to negotiate with Government,
we are happy to. We had what we believed to be a very strong track
record in this area. Just briefly, at a European level, on our
products we have agreed with the European Commission, a 25 per
cent reduction in the average CO2 emissions from new cars. That
was a ground breaking initiative. It alone at a European level
will deliver 15 per cent of the European Union's Kyoto target.
At a national level we estimate that over the next 10 years it
will save four million tonnes of carbon, which is twice what the
Treasury now estimate the Climate Change Levy will bring. In addition
we have voluntary agreements on things like reducing CFCs and
HFCs from air conditioning units on cars. We have voluntary agreements
with the UK Government on the scrapping and recycling of cars
and end of life vehicles. We think we have a track record that
is fairly good in order to negotiate. In addition, according to
the ETSU figures that have been presented, the forecasts are from
1990 to 2000 vehicle engineering as a sector will have reduced
its carbon output by 27 per cent. This is not a record of an industry
that does not care or is not committed. Bluntly, we cannot negotiate
is the message that we have so far received.
Mr Loughton
243. Do you accept that a revenue neutral energy
tax must involve cross-sectoral transfers?
(Mr Agar) Well, it could be designed so that it does
not. You could design the tax in such a way that you could have
revenue neutrality sector by sector. It would be more complex
administratively. The Government has chosen a mechanism which
by necessity implies cross-sectoral distributional impacts, as
you put it.
244. Would it be fairer sector by sector, do
you think, even if it were more complicated?
(Mr Agar) I think our view would be that in principle
it would be more equitable and we would be able to take into account
the particular circumstances of particular sectors. As I said
earlier, our proposition to the Chancellor, prior to the Pre-Budget
statement, was particularly for energy intensive sectors, which
in themselves are of course different one from the other, that
we should look for revenue neutrality. He chose, if you like,
a particular blanket mechanism which gives him approximately that
but certainly does not give perfect revenue neutrality. Michael,
I do not know if there is anything you would like to add?
(Mr Roberts) I think part of the reason why this has
emerged as an issue is some sense of confusion about what the
objectives are. At the start, and indeed I think you have heard
in the previous session, there was certainly a suspicion that
the guiding objective was to raise a certain amount of money to
finance a cut in employer's contributions through NIC. I think
there has been a shift away from that position to some extent
in the Pre-Budget Report, but not entirely. The Pre-Budget Report
does in fact say that the Government does not want to make all
sectors eligible for negotiated agreements, for example, and one
reason must be to ensure that there is some revenue raised which
can be recycled in some form to other sectors.
245. In your submission, one of the concerns
you still have is revenue neutrality over time needs to be safeguarded.
(Mr Agar) Yes.
246. The Energy Intensive Users have described
as a subsidy the advantage to the employee intensive firms that
NICs are going to bring about. Is that fair?
(Mr Agar) I guess we would use the word "windfall"
probably. In industries such as construction, as it were, we are
not lobbying for reduced taxes other than that we as a business
community always, by and large, lobby for reduced taxes. The construction
industry, as an advantage of a labour intensive industry, will
gain from this. There is an unexpected windfall which they will
have as a sector and the different construction companies will
clearly have different amounts.
247. The windfall tax in reverse to the last
windfall tax.
(Mr Agar) Yes, it will apply to rather different sectors.
248. Interesting. Have you seen any evidence
that the "winners" from this windfall tax are responding
by increasing employment?
(Mr Agar) No, we have seen no evidence of that at
all. To be fair, it is rather early since the levy does not yet
exist and, on the whole, individual companies respond to the world
as it is rather than as it may be. I think it is rather too early
to judge what will be the overall impact. You will be aware that
there have been conflicting macro economic models purporting to
trace what the impact both on the GDP and employment will be and
those do not necessarily move in the same direction, of course.
One can argue, given that the models are based on a whole set
of assumptions, about what will happen over a fairly long period
ahead but I think in something like construction it has to be
said that there is not a huge amount of evidence that construction
demand and the processes by which people build buildings or build
civil engineering works are particularly driven by relatively
small changes in relative prices. Construction demand on the whole
is driven by the macro economic cycle and then by specific issues
like the investment cycle in Government, whether Government is
going to spend a lot on civil engineering projects like roads
and railways. On the whole that is clearly not determined by whether
the construction industry could use its windfall to marginally
reduce its output prices for example. Secondly, the construction
industry, along with everybody else, has been striving to improve
its productivity and efficiency. What clients want, of course,
is buildings put up not only to cost but also to target. Therefore,
just because labour has become a little less expensive as a result
of the NIC reduction does not mean that you are going to replace
highly efficient JCB operators with three more people digging
holes because in order to meet what clients really want in terms
of construction projects, quality and time, probably at the end
of the day it still makes more sense to use a JCB than it does
to replace the JCB with people digging holes.
249. Sure, but related to that there is no real
incentive for the windfall beneficiaries, particularly given the
reducing costs of energy generally anyway over a number of years.
There is no incentive for the winners to make further investment
to reduce their own energy consumption.
(Mr Agar) I guess that would be so. A number of them
will be sensitive to energy costs anyway and, of course, energy
costs are more than just the taxes on it.
250. Sure.
(Mr Agar) Certainly in the construction industry they
will be particularly concerned about the dramatic rise in oil
prices and what that will do for diesel fuel. In my JCB example,
for example, that is going to have an impact which is going to
lead them to consider whether they can use more fuel efficient
vehicles and so on and so forth. The macro economic models, although
they conflict in detail, seem to suggest that the winners' response
in terms of employment will be very, very modest indeed.
251. To take a personnel intensive industry,
financial services industry, there is no incentive as these proposals
are set out at the moment for them to do anything about their
energy consumption?
(Mr Agar) No incentive over and above what they already
have.
252. Indeed, one could make the case that if
they did take on more people, which is unlikely from what you
say, because the windfall would result in that, they might invest
that windfall in improving the air conditioning for the conditions
in their offices which is even more energy intensive than something
of a luxury and obviously quite self-defeating in terms of the
CO2 targets which go with it?
(Mr Agar) Yes, I am not sure whether they would consider
air conditioning to be a luxury.
253. It would be in this place.
(Mr Agar) They might put in more energy efficient
plants, as we have done in our own offices in the CBI. Michael,
do you want to say anything?
(Mr Roberts) At the margin to some extent there is
an incentive because clearly their energy bills will still go
up, they will still be paying more for their electricity, though
that is offset by a lower wage bill or lower NIC contribution.
If they look at their energy bills they may feel that they want
to try to reduce their exposure on that particular element of
their cost base. I think this has always been an issue. For many
years people have said that there are a wide range of different
companies out there for whom energy costs, electricity costs,
are perhaps a few percentage points of overall costs that they
incur and they have had and still will have little incentive to
do anything to reduce their costs. I think the proposal to use
some of the money raised from the Climate Change Levy through
the £50 million for smaller and medium sized firms to the
£100 million for capital allowances is going to be potentially
particularly useful in trying to find ways of incentivising these
firms to do something about their energy bills.
Mrs Brinton
254. Carrying on with the topic of winners and
losers, as I understand it if you have a revenue neutral tax then
the losses of losers unfortunately have to be exactly balanced
by the gains of the winners. Certainly it seems to me that although
the Levy has not been introduced as yet, those who are going to
be gainers and winners from it have totally kept their heads down.
It does not seem to me that an organisation like yourself, the
CBI, have done very much to publicise what those gains are going
to be. Is that because you said earlier the gains are going to
be very much reduced?
(Mr Agar) It is partly because, I think, again it
is going to be modest and widely distributed over a number of
service businesses, for example back offices. The CBI, no doubt,
as an organisation will be a net winner.
255. Right.
(Mr Agar) More importantly, our view has been to take
a total view about the impact on competitiveness and on UK GDP.
Clearly the reason that we have been particularly concerned is
that those sectors which are losers generally speaking are in
trading sectors, they face international competition. Therefore,
the impact of changing their cost base can have quite a significant
feed through, particularly over a long period of time, on the
prosperity of those sectors and their ability to compete in international
markets and their ability to attract further investment. Often
they are foreign owned by overseas investors who have many other
options, many other places to invest. Our focus has been on the
fact that the losers are extremely important to the total economy.
That has been why we have focused on that rather than, as it were,
telling you, telling the world at large, what the net gains to
hairdressing or to back offices is going to be.
256. I would like to turn now to a very definite
loser in all this. I do understand that 50,000 business, and they
are mainly SMEs and mainly based in rural areas, actually use
LPG as a fuel. I understand that LPG—liquified petroleum
gas—is a friendly fuel but it is subject to the Levy while
something more polluting, hydrocarbons, are not. I just want to
ask you if you have made appropriate representation on behalf
of your members who use this fuel because it really seems to me
to be very, very unfair. There is a lot of anger outside about
that.
(Mr Roberts) We have been made aware of that point.
There again might be a perverse consequence that some of these
rural businesses have been persuaded to use oil instead of LPG
as a result. I do not think it has been a major element of our
submissions to Government. I think we may have mentioned it in
the course of some meetings but I am sure the relevant trade association
has raised it also.
(Mr Agar) It is something we will take up now. We
have secured the general principle, at least, from Government
through the exemption of renewables and CHP, which was not in
the original proposals. The Government has now at least conceded
the principle that it needs to distinguish between those fuels
which are relatively friendly in terms of climate change emissions
and those which are not. It took them quite a long time to come
round to that point of view. It seemed extraordinary to us that
renewables and CHPs were not excluded in the original proposals
put out in the March Budget. Your point on LPG is right, I am
sure, and it is one that we will certainly now take up.
257. Thank you very much for that. I am certainly
very encouraged by that response. I hope representations will
be made on that. There seems to me a crazy situation where LPG
is clobbered by this Levy having been cuddled, if you like, in
March by the Chancellor, they are encouraged. It is a very mixed
message. In fact, kerosene, their competitor, which is not such
a friendly fuel at all, has not got the Levy. It does seem to
me that in fact more people will probably turn to kerosene and
therefore we are going to have the loony situation that actually
we have got more CO2 emissions rather than less.
(Mr Agar) If I might add, Chairman, to that comment.
I think you touch on a more general point which is that of course
the proposals, the original proposals for a Climate Change Levy,
and indeed the Pre-Budget statement, were all done without us
having the benefit of the publication of the Government's overall
strategy on climate change.
Chairman
258. Yes, indeed.
(Mr Agar) The debate I think on climate change, and
whether it is appropriate to have a Levy and how it should best
be designed, would have been much better informed and would have
been a much better debate both in Parliament and outside if we
had been able to do it within the context of the total view from
the Government on all of the policies which include policies towards
other sectors, transport and domestic sectors in particular, on
climate change and how we are to achieve the Kyoto targets. I
think the points you are making about, as it were, differences
between alternative fuels, how we can encourage, for example,
the automotive sector in the use of alternative fuels, particularly
in heavy vehicles, would have been, as it were, on the table in
a rather holistic way and then we could have seen how the Levy
should be designed to fit into a package of policy measures. We
have rather gone about it back to front and that has been a general
concern. You touched on it with that particular example.
Chairman: Mr Agar, you can be assured
that this Committee fully agrees with that point. It is a very
important point too. We have gone about things rather the wrong
way round.
Mr Blizzard
259. During the consultation period on the Levy
the CBI expressed quite serious concerns about the implications
for national competitiveness of UK plc in a global economy. Yet
more recently, last week I believe, your Director-General said
publicly the implications he now believes are likely to be negligible.
Is that in fact the case? Have you changed your view and, if so,
why?
(Mr Agar) No, no we have not changed our view and
I do not think the Director-General has changed his view either.
The speech that you are referring to I think is the one to Forum
for the Future which he gave at the end of November. What he actually
said—and I brought this speech with me to make sure that
I am accurate—first of all he talked about the notion of
competitiveness. It is an academic lecture, it is not a speech.
It is quite a long and comprehensive lecture. He talked about
what the nature of competitiveness really is. He then talked,
and particularly distinguished between the impact on traded sectors
and non traded sectors. He then talked about the impact in aggregates
and, as I have referred to, the models that have been done, whilst
we have severe concerns about some of their assumptions, the overall
macro impact certainly on employment, taking one thing with another
over the long term, is probably relatively modest against the
totality of employment. All of those models also agreed that the
final impact is probably a reduction in GDP, a small modest reduction
in GDP, which comes about, of course, in economic models because
the traded sectors are less competitive. There would be in economic
theory, at least, be an offsetting change in the exchange rate
to maintain equilibrium and that would mean that we would be slightly
less well off than we would otherwise be as a nation. What he
said also, and this is the piece that was missing from your summary
of his speech, was that "... there are still very good arguments
for proceeding with caution because for specific sectors and over
a short to medium term perspective competitiveness is a real issue
in a way that it may not be for the whole economy over the long
term for the reasons that I have just described". So actually
what he was saying was what we have been saying which is in the
way that the original proposals were designed, they had a very
significant impact on internationally traded sectors. Those internationally
traded sectors in many instances are under severe competitive
pressure, certainly in many of the primary industries represented
by the Energy Intensive Users Group. Those are businesses that
operate on very slim margins, so even relatively small changes
in their cost base make quite a significant difference to the
return on investment, which is what in the end drives whether
their owners will invest here or in an aluminium plant somewhere
else in the world. Our concern was also that in other sectors
such as the automotive sector, which effectively operates a global
supply chain, again relatively small changes in the cost base
can lead to quite significant changes in the decision making that
goes on amongst motor manufacturers about where they are going
to procure the components that go into making up motor cars. For
all those reasons—I have just summarised what he said—we
and he remain very concerned about the sectoral impact and particularly
the sectoral impact on traded sectors. That is a very different
concern to then trying to add the whole thing up at the macro
level and recognise that, yes, hairdressers may be net winners
and may employ a few more hairdressers and generate a bit more
GDP and that offsets some of the loss of GDP and loss of employment
and then the exchange rate adjusts to keep the economy in equilibrium
and our total GDP is a little lower than it would otherwise be.
That impact on the traded sector was certainly mentioned in his
speech and it is something which he focused on rather particularly.
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