Examination of Witnesses (Questions 1340
- 1359)
THURSDAY 27 JANUARY 2000
MR STEPHEN
TIMMS, MR
SIMON VIRLEY
AND MISS
HEATHER MASSIE
Mr Brake
1340. Minister, I have two questions for you.
In a letter to the WWF you said that the levy package will be
revenue neutral for the private sector. We have heard from a stream
of witnesses, the Chemical Industries Association, the NFU, the
CBI, the brick industry, how they are going to be either damaged
or in some cases crucified financially by the Climate Change Levy.
Which companies in the private sector are going to benefit from
the Climate Change Levy?
(Mr Timms) Let me just explain first of all what I
mean by revenue neutrality again. The point I am making is that
there will be no net financial gain to the Treasury as a result
of the introduction of this tax. It is interesting as well to
note that if you look at the effects of the package as a whole,
that is the levy, the reduction in National Insurance employers'
contributions and the support for energy efficiency measures,
it is neutral for the manufacturing sector as well as for the
services sector. We have gone a step further in terms of the neutrality
point than we were able to earlier. Nevertheless, there are going
to be some firms whose levy payment is greater than their reduced
National Insurance contributions and there are other firms for
whom the reverse is the case.
1341. But we have not heard from any of them.
(Mr Timms) There are many. Indeed, I was at a meeting
yesterday of the Major Energy Users' Council representing some
of those you would expect to be losers from the levy package and
they said, "You will not find anyone here who is a gainer
from this package, will you?" and to my relief a couple of
people put their hands up and they were gainers from the package.
Our expectation is that the majority of firms will gain from the
package, but of course those who are making representations, naturally
enough, are those who expect to pay more in levy than they will
reductions. The chemicals industry has been amongst those who
have expressed the greatest pleasure about the changes that were
announced in November. The chemicals industry was very vociferous
in its representations over the summer. Many of the letters that
I had over the summer were from people working in the chemicals
industry. I know one of my colleagues had a thousand letters from
employees in the chemicals industry and there was a very great
sigh of relief when the Chancellor made the announcement in November.
I notice that, for example, the Chief Executive of Bass said following
that announcement, "I would say we are pretty happy with
the way the Government has responded."
1342. I accept that they said it was an improvement.
(Mr Timms) They said more than that. They said that
the threat to the competitiveness of the industry which they had
perceived prior to the announcement had been removed.
1343. What concrete evidence do you have to
support your assertion that by reducing the levy from £1.75
billion to £1 billion you will increase the carbon savings
to 2 million tonnes?
(Mr Timms) It is the package as a whole which is significantly
more environmentally effective, as announced in November, than
the package that was proposed in March. The reason for that is,
firstly, you are right, the levy has been reduced in response
to representations of the kind that you have been referring to,
the take from the levy of £1.75 billion a year to £1
billion a year, but in addition to that we have introduced exemptions
for energies generated from new renewable sources and from good
quality combined heat and power sources. Those two exemptions
between them, by encouraging greater use of combined heat and
power and renewable energy sources with the extra savings in emissions
that will result from that extra use of clean energy sources,
will considerably outweigh the reduction—
Chairman: How much?
Mr Brake
1344. I understand the package as a whole, but
who has done the statistical work, is it the DETR, the DTI, the
Treasury, that backs up your assertion of two million tonnes?
(Mr Timms) The detailed work has been carried out
by DETR and DTI. Shall I just explain how we have reached that
figure of two million? In the package that was associated with
the announcement in March we put a figure of 1.5 million tonnes
a year savings. The reduction from £1.75 billion to £1
billion reduces that figure from 1.5 to one. However, the two
exemptions add an additional half a million tonnes a year carbon
savings each, half a million from renewable exemption, half a
million from the combined heat and power exemption, so we end
up at two rather than the 1.5 that we started with. As a result
of the negotiated agreements we are now confident that they will
deliver a further two million on top of the two million that I
have just been describing.
1345. I am sure the Committee would appreciate
a written note from you so we can see that it is not simply a
case of 1.5 million minus 500,000 equals a million and then you
add a half a million for each of these and that there is more
substance to it than you have been able to outline to the Committee
today.
(Mr Timms) I would be very happy to provide a note,
yes.
Mr Olner
1346. Do you think the reduction in National
Insurance is the best way of giving rebates? Do you not think
the whole thing has been messed up by having a Climate Change
Levy along with reductions in National Insurance?
(Mr Timms) No, I do not. I think it is a very good
measure. What we are trying to do and the principle that we set
out at the outset was shifting the burden of taxation from good
things, like employment, to bad things, like pollution and that
is what we are doing with the levy, we are reducing the taxation
on employment and boosting employment thereby—because it
is one of the Government's objectives to increase the number of
people in work—and shifting the burden of taxation on to
solution which all of us want to see reduced. I think it is a
very good approach.
Chairman
1347. But we are shifting it from manufacturing
on to the service sector, are we not?
(Mr Timms) No, we are not. As a result of the changes
announced in November, that is the three elements of the package,
the levy, the reduction in employers' National Insurance contributions
and the additional support for energy efficiency measures, the
impact on the manufacturing sector will be broadly neutral. There
will not be a transfer away from manufacturing. That would have
been the case with the proposals announced in March. It is not
going to be the case now.
Mr Olner
1348. Are we the only country in Europe that
are tackling these Kyoto targets by using National Insurance?
Are others in Europe doing it? You mentioned the Dutch.
(Mr Timms) It is a fairly common approach to have
a reduction in social security contributions commensurate with
energy tax take or whatever it is that is being introduced in
that country.
Mr O'Brien
1349. Having regard for the fact that this levy
is to reduce pollution, are we going to see in the future an escalator?
(Mr Timms) There is certainly no escalator envisaged
at the moment.
Mrs Dunwoody
1350. Is that up until the next Budget?
(Mr Timms) Clearly the Chancellor makes these decisions
one Budget at a time. I think in the long term the decisions the
Chancellor takes in Budgets years into the future will depend
on what happens with the Government's climate change programme
as a whole.
Mr O'Brien
1351. There is no indication as to how the future
rates of the levy will be presented and the length of time? We
are advised that business and industry do require sufficient notice
so that they can Budget for any increases. What you are saying
is that industry will only learn after the Chancellor has made
a statement in his Budget or in the Autumn?
(Mr Timms) My expectation is that the rate of the
levy will rise at least in line with inflation in common with
other fuel duties. I take the point about the need for certainty
in industry. Therefore, we have said that if the rate of the levy
rises by more than inflation for those who have signed up to negotiated
agreements then we recognise that those who are party to those
agreements will need to have further discussions about how to
take those forward. I think we have taken that point on board.
1352. In order for this levy to be effective,
that is to let people know that we are serious about reducing
pollution, should not the cost be reflected on the bills for energy,
electricity, gas?
(Mr Timms) I think they should be and they will be.
I think that is an important point and my expectation is that
there will be a separate entry for the levy on each firm's electricity
bill just pointing out to them how much they can save if they
reduce energy and so contribute to our objectives.
Christine Butler
1353. How can the Government encourage still
further the use of clean fuels, which is what this is all about,
and savings in carbon if it refuses to put a duty on kerosene
and yet imposes the levy on liquid petroleum gas? Liquid petroleum
gas is a much cleaner fuel. It also would impact very heavily
on the farming community who often use LPG containers for pig
usage. We heard this morning of what a state that industry is
in at the moment. It also impacts on social exclusion because
in remote communities LPG is often the form of energy that is
chosen. If we are not careful we could be putting the price up
so high for these users that it would not only damage liquid petroleum
gas, the people in Calor, but it would also have a great impact
on the farming community in outlying and scattered areas.
(Mr Timms) Kerosene is primarily used in domestic
heating systems and we have made it clear that for social policy
reasons we do not want to increase the tax on domestic fuel. So
I anticipate kerosene remaining zero rated. I am aware of the
concern that has been expressed by LPG suppliers. I have met with
the Chief Executive of Calor Gas to talk about this. I had a letter
from him two or three weeks ago acknowledging that we were now
fully aware of the concerns that firms like his have about this
and we are looking currently at whether we need to make some change
in the levy arrangements to address those concerns or not. I do
not know at this stage whether we will or we will not, but we
are looking at them currently.
1354. There are three routes so that this and
other problems can be resolved. There could be carbon tuning or
an exemption so we could include something like LPG within the
renewables sector or you equalise things by putting a duty on
to kerosene. I do not know which route you would take, but I suggest
that we should look at exemptions for what is an interim product
in such a way as to move towards renewable and solar energy and
that does supply a niche in the market.
(Mr Timms) We are looking at all the options. I caution
against the likelihood of imposing a tax on kerosene because of
the implications in the domestic sector of doing that, but we
are looking carefully at the options that are available.
1355. Why are you helping the railways and not
helping waterborne freight? You are exempting energy use for freight
by rail but you are not helping coastal shipping.
(Mr Timms) I think the exemption that we have announced
for fuel used in traction for freight rail transport has been
widely welcomed. Clearly it is in all our interests if freight
goes by rail rather than road. I think that is a good point. The
issue about coastal shipping has not been raised with me thus
far.
(Miss Massie) The majority of coastal shipping use
fuel oil or gas oil as the method of propulsion. Under the existing
mineral oils taxation regime the use of oil in these circumstances
is relieved from tax. What the proposal would produce is a level
playing field between the use of electricity by rail freight and
the use of oil by coastal traffic.
Christine Butler: That is why they have not
been included yet. We do want to encourage freight by rail and
water.
Mr O'Brien
1356. We were pleased with the increase in the
energy efficiency measures from £50 million to £150
million and I think the Chancellor has got to be commended for
that. Are we going to see an increase in that in the future? Also,
energy efficiency is directed and targeted at industry. Are we
going to see any of this going into the domestic properties to
reduce loss of energy, to create jobs and to demonstrate that
there is a genuine approach to reducing loss of heating in homes
and reduce carbon?
(Mr Timms) I am grateful for what you said about the
increase in the fund. We have trebled the size of the sum available
for these measures since the Budget in March and that has been
widely welcomed. In terms of the future, that will depend on our
assessment of how things develop. I think it is important we make
sure that any fund of this sort is well used. This is a much larger
sum than has been applied to anything comparable in the past by
Government and we just need to make sure that the money is being
well used before we look seriously at further increases, but if
in the future that seems to be warranted then I have no doubt
the Chancellor would consider that. Your point is about whether
it would be applied to the domestic sector. No, the fund will
be purely for the business sector, but of course there is a programme
of tackling energy efficiency in the domestic sector mainly through
the expanded home energy efficiency scheme and I agree with you
that it is very important that the domestic side is tackled as
well as the business side.
1357. In view of your response that this is
for industry and the fact that the Prime Minister is on record
as wanting a balanced fuel for producing electricity, is any of
this money going towards clean coal technology?
(Mr Timms) We are consulting currently on the scope
for applying the energy efficiency fund. Whether we are looking
within that consultation at clean coal specifically, I am not
sure.
(Mr Virley) There have been some representations on
that issue and that would be one of the means of developing the
energy efficiency fund, in terms of developing low carbon technologies
and the final decisions on that are going to be taken in the Spending
Review 2000.
1358. So there is nothing more firm than the
fact that it is being reviewed? This is a matter that has been
around for years and years, the question of clean coal technology.
I would have thought that it would be high on the agenda because
of the fact that money has been allocated for energy efficiency
and this is one of the areas where we could demonstrate widely
that clean coal technology would help to reduce carbon emissions
and also improve energy efficiency.
(Mr Timms) We only announced the fund in its current
form in November and we started straightaway on a consultation
about how that fund should be applied when it becomes available
from next year. It has not been forgotten about by any means.
It is within the scope of the consultation which is going on along
with other techniques which are promising as well.
Mr Brake
1359. What was the rationale behind choosing
£150 million? Is it just because it is bigger than £50
million?
(Mr Timms) It is indeed. We are responding to a lot
of representations that were made to us that a significantly greater
share of the take should be ploughed back into energy saving investments
and in response to that we trebled the size of the amount of money
involved. It is important that a fund of this kind is well used.
It is a new initiative and therefore I would have been very reluctant
to set aside hundreds of millions on something where we did not
know quite how it was going to pan out. I think £150m strikes
the right balance between a very significant contribution to greater
energy efficiency with making sure that we are moving step by
step in a well planned way, as we have done throughout the climate
change exercise.
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