Select Committee on Environmental Audit Minutes of Evidence

Examination of Witnesses (Questions 240 - 259)



  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.


  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.


  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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