Select Committee on Environmental Audit Minutes of Evidence


Examination of Witnesses (Questions 260 - 279)

WEDNESDAY 15 DECEMBER 1999

MR PETER AGAR, MR MICHAEL ROBERTS AND MR PAUL EVERETT

  260. In order to overcome those concerns yet at the same time meet our Kyoto commitments, which you agree we need to, what is the way forward? Is it further adjustment to the Levy or radical rethink?
  (Mr Agar) I think the way forward is that the negotiated agreements in particular need to be concluded with the ten sectors and they need to be concluded in a sensible way and our colleagues who preceded us have talked to you in detail about that. We need to widen the eligibility so that other major sectors who are impacted by this can, if they wish, they do not have to but if they wish, as with the automotive sector, come to Government with proposals for a negotiated agreement which would not be, as I said before, costless to them but from their point of view would be a more efficient way than paying the Levy, a more efficient way of reaching greater energy efficiency targets and making their contribution to emissions reduction. There are basic principles which we all agree about negotiated agreements. Clearly they have to be measurable, they have to be auditable, they have to be transparent, they have to be policed in an effective way that convinces everybody that this is not a smoke screen. We all accept that. But, we do believe that sectors, particularly major sectors, ought to be able to come to the Government and the Government ought to be positively encouraging. The meetings that Paul referred to earlier I think have given us the sense that the Government's heart is perhaps not in extending eligibility. It is accepted, that eligibility might be extended and this was referred to in the Pre-Budget Report but I do not think there has been, as yet, a major change of heart by Government to say "We actually positively want to encourage people to come." Those negotiations may not succeed, the Government can say "We are not convinced" by what Paul and his colleagues produce for us, we may not be able to reach an agreement in which case they will have to bear the Levy, but at least we should give them the opportunity to come up with something which is more economically efficient to meet the objective. That must be the objective, Chairman. We have the objective of reaching our emissions targets, but we want to do it at least cost to the economy. It is not in our interest to do it in any other way. It does not change the objective, we simply use the most cost effective way of doing it. That is why in particular we are also leading the efforts on emissions trading, the design of an emissions trading scheme, because we believe that again is complementary to other methods and would give us the objective we require in the most efficient way.

  261. You are saying virtually any sector then which wants to try to strike up an agreement and negotiate an agreement with Government should be able to come forward to do so?
  (Mr Agar) I think in an ideal world that would be the case. I think many sectors would choose not to because it is difficult to organise or because they can see that, as it were, the costs of negotiation and auditing and policing agreements would be perhaps greater than the cost of the Levy. They may choose not to come but certainly we know that some sectors, like the automotive sector, would dearly like to be there and, as Paul mentioned, there were a lot of sectors represented at the earlier meetings. I think there is a good deal of interest now in trying to see where the negotiations can be taken ahead.

  262. Are you concerned that whatever the final definition of an intensive user is there will still be some high user of energy outside that, there will be a loser?
  (Mr Agar) Yes, I think there will be. For example, in food retailing. It is I suppose possible that the major food retailers could as a sector put proposals to the Government and provided that again it can be policed and is measurable and so on in principle perhaps a negotiated agreement might be possible. Certainly food retailers, who have very high refrigeration costs, will continue to be net losers under even current proposals. Of course the point they make is whilst, yes, they have refrigeration because they wish to present their food properly and appropriately to customers in ways which are attractive to them, they also have the kind of refrigeration they have in their stores because of health and food hygiene regulations which are extremely stringent and have become more stringent in terms of temperature control. They have no choice if they want to be in the food retailing business, and I guess we all want food retailers to continue to exist, they have no choice but to have high refrigeration costs in order to meet their legal requirements for freshness and health and safety.

  263. That is not a very good example to use, is it, because we do not have any choice? If it does cost them more we cannot just jet over to Germany and buy our food there.
  (Mr Agar) That is right, yes.

  264. There must be better examples of industries where they would not lose out.
  (Mr Agar) I am sure Paul can add some. To take your point though, it is a good example of a relatively non traded sector in which the costs are real, unless we can find a better way of doing it, and those costs will have to be passed on in some way, either in reduced returns to investors and shareholders or in higher prices at the check-out. Paul, would you like to add some more examples?
  (Mr Everett) The automotive sector is one of the problems, if you like, it is not homogenous. We have a variety, if you like, at the very top. We have big vehicle manufacturers and then as you go down the supply chain there are large global competitor suppliers but they in turn are supplied in the main by SMEs that are nationally based, and they are very small companies. We have a situation where at the top end people have a very easy choice about where they can switch production to, whether it be the vehicle manufacturers themselves or whether it be the very large component suppliers. They operate in the markets, as does the motor industry, across the world. The quality of product that they can get, whether it be from South America or Eastern Europe or wherever, has to be of the same quality that they would get whether they purchased in the UK. Marginal changes in the cost have a significant impact on where people may decide to source from.

  265. Can I just ask one final question, in view of the many questions that we have heard this morning from yourselves and the previous group, the many questions there are to be resolved. What do you think of the Government's current timescale for getting this tax under way?
  (Mr Agar) I think the timetable for negotiated agreements, even with the 10 sectors that are currently eligible, is extremely tight and, of course, has slipped several times. That is of concern because we do want those negotiated agreements, as I have indicated many times, we would like them to be extended, but those discussions have not even started yet. It is important that we get these negotiated agreements right. They have to be tough but they also have to be fair. You had an earlier conversation about the ETSU projections and whether those were the most appropriate targets for the particular sectors that they apply to, so it is complex and we are on new ground and we want to get it right. So we do have concerns about the timetable and we will certainly be looking very carefully at the proposals in the Finance Bill, assuming that the Chancellor goes ahead in the way that he has indicated in the Pre-Budget statement in March, to ensure that the way in which the Finance Bill is written, the way in which the clauses dealing with rebates are written, do not rule out negotiations continuing on a sensible timetable, that they do not somehow guillotine the thing in a way which would then make it very difficult even for some of the 10 sectors, let alone wider sectors like the automotive sector, to actually negotiate. That would be extremely unreasonable and we would be very concerned if that was the case.

Chairman

  266. Thank you very much indeed, all three of you. It has been extremely helpful.
  (Mr Agar) Thank you very much, Chairman.



Examination of Witness

MR JAMES DICKINSON, Head of Secretariat, Emissions Trading Group, examined.

Chairman

  267. Thank you very much indeed, Mr Dickinson, for coming along this morning. Welcome to the Committee, last but not least.
  (Mr Dickinson) Absolutely.

  268. In terms of emissions trading, it is a very, very important subject which we would like to ask you questions about. Is there anything you would like to say by way of a preliminary statement before we start?
  (Mr Dickinson) Not really. Just by way of introduction as to who I am. I head the secretariat for the ACBE/CBI's Emissions Trading Group, which as you will all be aware, submitted proposals for an emissions trading scheme to Ministers on 27 October. That is the capacity I am here before you in.

  269. Emissions trading is a very important problem, as I have just said, and also a rather complicated one for ordinary people to understand. Perhaps you could begin by explaining in very, very simple terms how you see emissions trading working? As far as I can see you would have some allowable fixed amount of emissions which you could cope with and then each company would have a target within that and you could have trading between companies who did meet their targets and who did not meet their targets. That is roughly it.
  (Mr Dickinson) Yes, essentially that is the idea of emissions trading. Emissions trading aligns very closely with the UK's objective under Kyoto. What it does is it sets absolute limits on the amount of emissions that companies can produce but then gives them the capacity to gain from over-performance against those limits by trading permits to emit to other players. Essentially, if you think about some of the problems you talked about earlier under the negotiated agreements, what emissions trading gives you is the capacity for a company with an absolute limit on emissions to grow because it can grow by buying permits from people who can reduce emissions more efficiently than they can. It gives you the capacity to avoid instances of perverse behaviour where essentially one form of increased emissions leads to better environmental results. It is not preventing that, because essentially it is allowing people to buy in permits to deliver that. This is the thing you talked about earlier. It is a very flexible instrument to allow the UK and business in the UK to deliver the Kyoto targets.

  270. As regards the current situation, what do you think is the minimum response you would require from the Government, say in the Budget next year, to get going?
  (Mr Dickinson) As you say, the key thing is to get the emissions trading process up and running. What is proposed is a voluntary scheme whereby companies volunteer to take on binding emissions reduction targets. If you think about the sectors we are trying to bring in, if you take total UK emissions, the energy intensive sector I think counts for about 10 per cent, under current definitions, of total UK greenhouse gas emissions. What we are looking to bring in is yes to give that sector the ability to trade but also to bring in other industrial sectors, things like the motor sector which has been actively involved in the process in taking on absolute emissions reduction targets; things like the upstream sector, the power sector, the oil and gas sector, which are very substantial emitters. The question then is what form of inducement do those sectors require to take on a commitment, a series of binding emissions reduction targets. The Chancellor in his Pre-Budget statement made a brief reference to a desire on the Government's part to encourage emissions trading. I think what business will be looking for if it is going to engage in substantial costs of setting up an emissions trading scheme is something much more concrete in terms of what form of encouragement is Government looking at, particularly I think the way the business is looking at it some form of financial encouragement will be necessary.

  271. The agreements which are now being negotiated with the 10 biggest and incentive benefit sectors for example, how far would they lead to or how far would they sanction emissions trading?
  (Mr Dickinson) The 10 negotiated agreements currently being set up are primarily being set up on an energy efficient basis, some I believe are taking on absolute targets. They provide companies with binding targets, either for energy efficiency or for emissions and therefore they provide those companies with the capacity to trade. The aspiration is to create a trading scheme which will allow the UK to lead in terms of international emissions trading and that will have to be based on absolute targets. Therefore, although the process of negotiated agreements give that sector of business a basis on which to engage in trading, we will not have a substantially international tradeable scheme unless we can encourage other sectors to come in and take on absolute targets.

Mrs Brinton

  272. I would like to talk about electricity at the moment. As we all know electricity generation is really quite a major source of CO2 emissions and yet it is actually excluded from the Climate Change Levy. Therefore I would have thought it would be very desirable for this to be included in any emissions trading scheme and yet your proposal has very little to say about this. What needs to happen in your opinion for the electricity sector to agree to come on board? How can we encourage this?

  (Mr Dickinson) You are absolutely right that it is very important to bring the electricity sector in. I think we have touched on several times the fact that many sectors take electricity supply. The domestic sector and the service sector are not going to be affected by the Climate Change Levy in any serious way. Therefore, there is no direct encouragement for reduction in emissions. 40 million tonnes of CO2 equivalent—which is a very substantial proportion of the UK output—comes from the electricity sector. Electricity generators were very actively involved in the initiative—perhaps the largest sector represented—and have a keen interest, involvement and training. The difficulties for them are essentially three fold. The first one is that any emissions trading scheme has got to resolve the issue of double counting, so who is responsible for emissions? Is it the person who switches the light switch or is it the person who runs the coal plant, etc.? Clearly it is a shared responsibility so there are some technical questions how you share that. Those are clearly resolvable but we did not have time to resolve them in time when we put the proposals together. That is being actively worked on at the moment by the general emissions sector.

  273. Are you hopeful?
  (Mr Dickinson) There is a technical solution. There are various technical options available, which I am sure I do not want to bore the Committee with.

  274. No.
  (Mr Dickinson) They are being worked on and the question is what is the optimal way forward. The second perhaps more difficult question is the link to Government energy policy. In a sense everybody knows that the electricity sector could reduce emissions by switching to gas or by building more nuclear plants. Clearly these run counter to other policies of the Government at the present moment. Some resolution as to how that conflict is to be dealt with would need to be addressed.

  275. Could I just come in on that, you have mentioned switching to gas, would you be in favour of an early lifting of the moratorium on gas fired power stations?
  (Mr Dickinson) From an environmental point of view—

  276. Yes?
  (Mr Dickinson)—clearly switching from coal to gas generation leads to lower greenhouse gas emissions from power. I will leave my personal opinion as to whether we should support the coal industry out of it. They are clearly conflicting Government policy goals.

  277. Yes.
  (Mr Dickinson) From a pure environmental view, lifting the moratorium would be helpful. Briefly on the third issue to resolve it which is perhaps the most difficult is again the question of inducement. If we ask generators to take on binding caps on their emissions, that will engage them if they are serious caps, which are going to lead to different results from what would have happened otherwise, that will engage them in both costs and risk. At present they have no access to a negotiated agreement because they are not paying CCL. So they have no direct inducement to participate in a binding obligation of that sort. One of the issues we are working on very actively with the Treasury and other elements of Government at the moment is what form of inducement can be put in place for the power sector, for the oil and gas sector and for other industrial sectors who do pay CCL but maybe will not have access to negotiated agreements.

Mr Gerrard

  278. Could I just ask what form do you think that inducement might take, a rebate from the Levy for instance?
  (Mr Dickinson) There are various forms being debated at the moment. A rebate from the Levy is nice because it is directly linked to the Climate Change Levy which people understand is an environmental tax. Clearly it does not help the power sector or the oil and gas sector to take on those sort of targets because they do not pay the Levy in the first place. We are looking at other options ranging from direct performance incentives to more general tax incentives in the form of investment. Currently we are debating a whole range of options to see which are the most efficient.

  279. Would you see that inducement as something which was on-going or simply a one off to get people into the scheme?
  (Mr Dickinson) I think with all these things, business when it is looking at taking on an obligation will look at the long term cash flows which arise from the obligation of the long term cost it is taking on and a long term benefit of taking that on. This could either be an on-going support in the form of a performance incentive or a tax rebate or it could be a one off inducement but no, if business is taking on an obligation to cap emissions to 2012, it is really a question of how does Government want to induce that, does it want to induce that up front with a higher up front cost or does it want to have a lower support over time.


 
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