Examination of Witnesses (Questions 1080
- 1099)
WEDNESDAY 26 JANUARY 2000
MR GRAHAM
MASON AND
MS MARGARET
MOGFORD
Mrs Ellman
1080. Do you agree it is important to have a
charge to give an incentive for energy reduction or more efficient
use of energy?
(Mr Mason) There are various ways you could approach
that and, as we will hear later, there is the matter of emissions
trading, but of course you can have carrots as well as sticks.
I think the capital allowance which some companies may qualify
for would be welcome and I think industry would like to see some
carrots as well as sticks. It depends whom you are applying it
to, of course. The energy intensive sectors have every commercial
incentive to look for ways of reducing their energy bill but there
is nonetheless a whole lot of companies out there, perhaps accounting
for as much as 60 per cent of carbon emissions, for whom energy
is a very small proportion of operating costs. The figure I have
seen, some years ago now, is that across the whole of manufacturing,
energy accounts for something like 1 to 1½ per cent of operating
costs, and of course you do have to get management attention when
they have many other things on their minds.
1081. So for those companies are sticks necessary
as well as carrots?
(Mr Mason) It will be an incentive for them but it
will depend really how their individual sums come out, of course.
If they are labour intensive, it may turn out they will be getting
money from the Exchequer rather than paying it in; that they will
have a net advantage rather than a net deficit. You are more likely
to find that, I think, in the service sector than you would in
manufacturing.
(Ms Mogford) Could I add a more general point about
the changes in the Pre-Budget Report? Energy taxes or environmental
taxes are proposed as being a simple way of delivering an environmental
gain. You can see when you look at the amendments and the complication
of definitions of good quality CHP, for example, that it is not
simple when it cuts across other policy objectives. A tax can
be quite a blunt instrument and when you start trying to refine
it you get into a lot of bureaucratic difficulties.
Chairman
1082. I think we fully understand it cannot
be simple. Can I press you on this wire drawing example? That
is very helpful but is it the exception that proves the rule or
are there lots of other examples like wire drawing which do appear
to distort competition?
(Mr Mason) I can only give an impression, Chairman,
but I do not think it is the exception which proves the rule.
It does turn up in other areas. I can think of some energy intensive
sectors which are not subject to IPPC at all but by any definition
they are energy intensive.
1083. Such as?
(Mr Mason) One would be industrial gases where the
energy cost is something like 70 or 80 per cent of operating costs
and some of their sites are not IPPC.
Mr Brake
1084. The Government believes that the Climate
Change Levy is going to save 2 million tonnes of carbon, do you
have any evidence to support that?
(Mr Mason) You can make estimates which fall in negotiated
agreement sectors. It depends on the nature of the agreement.
If they have a carbon cap then you can be quite clear what the
saving is going to be, if they have an energy efficiency per unit
of output, then you have to make allowances for the growth of
the business. So that can be fairly well calculated, I think,
but the difficult part to calculate is the other 60 per cent of
the companies which are low energy users, some quite small companies,
and you have to make all kinds of assessments about elasticity
of demand and how far you are going to get management's attention,
which really depends on the whole package which I think companies
are going to have. If we want to come a little later to the question
of the energy efficiency measures, I think the £50 million
could be very well spent on the smaller companies in particular
which really need to have in some cases quite basic help in terms
of managing their energy bill, even measuring it, before you can
get into things like benefiting from capital allowances. So it
is difficult to form an estimate, even if you are party to all
the information in the government machine, which we are not.
1085. Do you believe that the Government has
chosen a figure which industry is going to have to try and match
through negotiated agreements, or do you feel that the Government
has actually thought it through and come up with a realistic figure?
(Mr Mason) They have obviously thought it through
because at the end of the day they have to meet the Kyoto targets
and make some assumptions, but as I was saying earlier some parts
of the response by business will be more predictable than others.
We imagine that the Climate Change Levy itself will move and be
adapted in time, perhaps in the light of the performance of business,
but, as we may go into later, there is the question of emissions
trading. We are not considering the whole of the package when
we are looking at the Climate Change Levy, which may have a significant
effect, in fact a very significant effect, on the contribution
by business.
1086. Obviously businesses are concerned about
energy costs, do you have any comparative figures between energy
costs here in the UK and in other European Union countries?
(Mr Mason) We have seen some for electricity and it
depends who you are talking about. Of course, there are averages
which would show that probably the UK would be somewhere in the
middle of the range in terms of business users, but if you are
looking at energy intensive companies who tend to have special
deals in all European countries then I think you might find we
are more towards the top of the range though not necessarily right
at the top. So our electricity costs for energy intensive users
do tend to be on the high side, at least that is the message we
get.
1087. What has happened to UK energy costs in
the last ten years?
(Mr Mason) Once again, it will depend who you were
talking about. If you were talking about the middle range of energy
users, people such as brewers, to give an example, you would think
that their electricity prices would be flat or going down, in
some cases going down quite substantially in real terms. As far
as the energy intensive users are concerned, I think the picture
would not be so optimistic for them.
1088. Could you explain that, given that if
they use large amounts of energy surely they can get special deals
which give them an even more advantageous rate than the medium
users?
(Mr Mason) That would be the theory of it, but I can
only report what companies say to us.
1089. Could we come to the subject of negotiated
agreements? What do you expect to be in them and what opportunity
will Members of Parliament or the public have to view what is
in those agreements? What transparency is there going to be?
(Mr Mason) Chairman, not having negotiated one, I
could not say, but I imagine they will be matters for the public
record when they are complete. At the moment, as I understand
it, there were heads of agreement signed just shortly before Christmas.
I do not think the final agreements have been settled, but the
period of time which they are going to cover, for example, is
fairly well known and the fact they have review clauses in them—some
of them every two years or so—I think will be a matter for
the public record.
1090. So you want them to be in the public domain
and will be quite happy for them to be monitored?
(Mr Mason) The individual site might raise matters
of sensitivity, but as far as the performance of the individual
sectors are concerned, I do not think that would cause any difficulty
for business at all.
1091. Do you expect there to be penalties, either
for firms which do not deliver on the negotiated agreements or
for those which are delivering nothing or are outside the agreements?
(Mr Mason) As I understand it, they will be deprived
of the waiver for the Climate Change Levy if they fail to perform,
but there are issues there of course about by how much you fail
to deliver. If it is just a minor point, should you immediately
lose all of the rebate on the levy or should it be a significant
amount? But there are ways in which the under-performers and the
over-performers will be able to be helped within the framework
of these agreements if there is a UK emissions trading scheme
up and running.
Mr Stevenson
1092. Could I press you on that a bit more,
Mr Mason? These negotiated agreements seem to have been reached
by umbrella organisations like the Chemical Industries Association,
and within those there are bound to be firms which over the years
have invested heavily and made great progress and therefore the
scope for those companies to make further real progress is rather
less than those which have done nothing, the so-called free-riders.
(Mr Mason) Yes.
1093. How is this to be applied? Do you envisage
that there will be across-the-board cuts in those industries or
will there be burden sharing? How are those firms which have less
scope for making the progress which overall has been sought in
the agreements, because they have invested heavily in the past,
going to be protected and not penalised?
(Mr Mason) I fully take your point that some companies
or sectors have a better record of energy saving than others,
but as I understand it there have been different types of agreements
under negotiation. Some of them are on a site-by-site basis, in
which case there is no scope for free-riding, but where they have
been done on a sectoral basis where, as you say, some companies
have invested and had a better performance historically than others,
there will be scope for that. That will be a matter, I suppose,
for the sector itself as to how it is going to be dealt with.
Once again, the emissions trading scheme may have scope for ironing
out those differences so that the under-performers will be able
to buy from the over-performers, if you like.
1094. It may be a matter for the sector itself
in the negotiated agreements which are reached as to how that
will be dealt with, but you seem to indicate some concern that
there is an issue there which perhaps the Committee ought to be
looking at and perhaps consider in its conclusions. Would that
be fair? Or do you think there can be problems such as the ones
which have been described which can be adequately dealt with in
the agreements themselves?
(Mr Mason) I imagine the sectors themselves where
there are not site-specific agreements will be quite anxious to
do that, because the trade associations are speaking on behalf
of all their members and they will be anxious to have arrangements
made so that the under-performers do perform and that an undue
burden is not put on others. It will only be when the agreements
themselves are fully negotiated that one can make a judgment on
that point.
Mr Benn
1095. How much support is there in industry
for the idea of an emissions trading scheme? What is your assessment
of that?
(Ms Mogford) The Emissions Trading Group was set up
jointly by ACBE, the Advisory Committee on Business and the Environment,
which tends to have members from big companies, and the CBI. It
initially started with some 30 companies, three government departments—the
DTI, DETR and Treasury—and one or two specialist organisations
like the International Petroleum Exchange. We have kept the Emissions
Trading Group fairly tight at around 30 to 35 companies and that
is because we have worked very hard to develop the rules and it
really is not the stage, when you are still developing the outline
proposals, to go out and sell it to other businesses. We are about
to reach that stage. So up to now we have had a number of companies
coming to us, only those which have come to us have joined, we
have not gone looking for members. The CBI has had their first
workshop of trade associations where there were eight or nine
trade associations, at least, represented, of which most were
interested. The CBI is taking it around the country to about eight
or more regional workshops. It would be wrong to suggest that
emissions trading is agenda item number one on Boards of UK companies
at the moment, but I think I am right in saying in my company
and in other companies it is moving out from the environmental
managers towards commercial managers and the management teams;
it is getting on the radar screen of senior management. Already
we are beginning to see contracts for the supply of energy, for
example, which have clauses in them which say, "Any credits
accruing from emissions reductions should be reserved to ..."
one or other party in the contract. That is simply companies protecting
their position but it is beginning to show that commercial and
contract managers know this is on the horizon and it is coming.
It may not come next year but it will come and in long-term contract
supplies you have to be prepared for emissions trading and value
to emissions reductions belonging to one or other party in the
contract.
1096. Even though that would involve legally
binding reduction targets?
(Ms Mogford) There is already emissions trading in
the United States and in Canada on values alone and we are being
pushed quite hard by brokers from Wall Street for big companies
to get involved in this bilateral grey market, if you like. This
is entirely risk management, this is buying emissions in order
that they might be of value further down the line.
1097. Is it really realistic to think that smaller
companies will be able to participate?
(Ms Mogford) In the first instance, I think it would
be reasonable to suggest that an emissions trading scheme can
get off the ground with the large emitters. In principle, there
is no reason why any size company cannot get involved. The decision
can be based on the transaction costs, the administrative burden,
of knowing what your emissions were, working out whether or not
you meet your cap and delivering that, and whether that is worth
the money you could make on emissions trading, and for small companies
it may not be worthwhile. But farmers are small companies and
they trade milk quotas. Small companies often do think it is worth
getting involved in the market if there is a market there and
they think they have something of value. The other way of looking
at it is that there will be nothing to stop trade associations
maybe trading on behalf of their members, or regional development
companies trading, and groupings of small companies could get
involved in trading.
1098. One could argue it is slightly easier
to measure how much milk you have produced rather than your emissions.
(Ms Mogford) Yes.
1099. The Government's view is that emissions
trading and the Climate Change Levy are complementary. You do
not seem to agree with that.
(Ms Mogford) No. I think if you were deciding an emissions
trading scheme for the UK, you would not have started with the
Climate Change Levy.
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