THURSDAY 27 JANUARY 2000
_________
Members present:
Mr Andrew F Bennett, in the Chair
Mr Hilary Benn
Mr Tom Brake
Christine Butler
Mr John Cummings
Mr Brian H Donohoe
Mrs Gwyneth Dunwoody
Mrs Louise Ellman
Mr Clifford Forsythe
Dr Stephen Ladyman
Miss Anne McIntosh
Mr Bill O'Brien
Mr Bill Olner
_________
MR STEPHEN TIMMS, a Member of the House, Financial Secretary to the
Treasury, MR SIMON VIRLEY, Head of the Environmental Tax Team,
Treasury and MS HEATHER MASSEY, Head of Excise Policy Group, Customs
& Excise, examined.
Chairman
1324. Can I welcome you to the Committee. Please introduce
yourself and your team for the record?
(Mr Timms) I am Stephen Timms, I am the Financial Secretary to the
Treasury. I am very pleased to be making my first appearance before this
Committee. On my left is Simon Virley, who is the Head of the Environmental
Tax Team at the Treasury. On my right is Heather Massey, who is the Head of
the Excise Policy Group at Customs & Excise.
1325. Do you want us to go straight to questions or do you want to
make a brief introduction?
(Mr Timms) I am very happy to go straight to questions.
Mr O'Brien
1326. Minister, there have been criticisms about the introduction
of this levy, and people saying it is badly thought out, it limits
environmental benefits and we now have the question of negotiated agreements,
average tax levels allowances. How do you respond to these criticisms?
(Mr Timms) I believe the levy is going to be a very effective element of
the Government's overall climate change programme. I must say I think the
whole process that we have been through is a very good example of how economic
instruments of this kind should be developed, starting with the work
commissioned by the Chancellor from Lord Marshall, working with his task
force, that leading on to a recommendation to the Chancellor in November 1998
and then the proposals in the March Budget and extensive consultations
following that, further proposals in the Pre-Budget Report last November which
were very, very widely welcomed. I think it is increasingly recognised that
we have succeeded in designing an instrument which will have very substantial
environmental benefits and will also not undermine the competitiveness of
United Kingdom firms. Those were our twin objectives at the outset and, I
think, that is what we are going to deliver.
1327. On the negotiated agreements, obviously they are not made
public and people are not aware of what they do contain, there has been
criticism of them from people involved, the chemical industry, and so the
points that you make concerning the advantages of the levy have been
questioned by some of the industries. Today we have heard the National
Farmers Union say that some of their members could lose their businesses and
jobs because of this. This is the kind of criticism we are receiving and will
be in the Report. Do you consider there has to be some question raised in the
Department to meet some of this concern and the anxiety that has been
expressed to us?
(Mr Timms) We have been working very hard to address all of the concerns
that have been raised. When I arrived at the Treasury at the end of July
there were a lot of letters coming across my desk from people expressing
concern. There are now fewer, reflecting, I think, the wide welcome for the
changes and the developments the Chancellor announced in November. On the
negotiated agreements he made a specific point of concern about that. Of
course, those agreements are not yet finalised but they will be made public
when they are. I do not think that those agreements either will give rise,
once they are concluded and made public, to the concerns that you are
referring to.
1328. Many companies have spent a lot of money in energy efficiency
units and reaching the targets, well in excess of the targets but, yes, they
are still being penalised, why is that?
(Mr Timms) The view that we have taken following from Lord Marshall's
work is that there should be greater incentives for all firms to reduce energy
usage and so to reduce emissions. That is the basis on which we have gone
forward as we have. There will not be complete exemptions for firms or
sectors of firms in order that those additional incentives can be provided.
Of course this levying is going to be revenue neutral. All of the money that
is raised through the levying will be recycled to the business, mainly through
the reduction in employers' national insurance contributions. There is no
extra tax revenue raised as a result of it. Many, many firms will be better
off as a result of the package. I do not accept the premise for the criticism
that you are advancing.
Miss McIntosh
1329. If I can return, for a moment, to the negotiated agreements?
Are you saying that the Treasury is still open to a possible negotiation of
agreements with the agricultural industry, bearing in mind that many of their
units are particularly small?
(Mr Timms) There is a number of points there, first of all the basis for
the negotiated agreements is that the negotiations are covered by the EU IPPC
Directive, which includes a number of agricultural sites. There are those
discussions going on currently, leading, I hope, to a negotiated agreement.
You make a particular point about small sites and that is an issue that we
have addressed. For reasons that I do not entirely know there is an exclusion
from the IPPC Directive for small pig farms, for example. We made it clear
that where a site is excluded solely on the basis of its size then that site
will be eligible for the benefits of a negotiated agreement. The size point
that you raised we have dealt with.
1330. It was my distinct impression that the NFU had not grasped
that this morning. The other point I would like to move on to is, would it
not have been the preferred option, rather than acting unilaterally and
possibly damaging our own industry in anti-competitive terms with competitors
in the rest of Europe and the world, for Britain to put pressure on our
European partners to wait for a European energy tax?
(Mr Timms) That is an interesting proposition. I think anyone waiting
for a European energy tax would have waited a very long time indeed. It is
the case that all of us in the EU have signed up to the Kyoto objectives. All
of the Member States are taking action that they see as necessary to achieve
those targets. Most of the Member States, I think eight is the number so far,
have either introduced or are working-up proposals for an energy tax of some
sort. I think we have been able to design in the United Kingdom a Climate
Change Levy that does not benefit United Kingdom firms as compared with EU
firms. I think realistically the prospect of everybody agreeing with a
Europe-wide tax would be pretty remote, given the history of the much more
modest Energy Products Directive.
1331. If I can put it in a slightly different way, I have a brick
factory in the Vale of York and we have had a written submission from the
brick industry in the United Kingdom, and this one proposal on its own could
possibly shut down the whole of the brick producing industry in this country.
Would it not have been a more novel procedure, rather than clobber those in
a way that is, perhaps, not tax efficient and indeed environmentally friendly,
which this piece of legislation is seeking to do, to actually have gone down
the path of encouraging people to use other alternative energies and to give
tax incentives? I heard of one this morning, that I was not aware of, energy
schemes of alternative energy that could give them some sort of tax incentive.
(Mr Timms) We will be doing that within the Climate Change Levy. The
Climate Change Levy will be very effective environmentally, it is not going
to damage the competitiveness of United Kingdom firms. My understanding is
that brick producers are going to be covered by one of the negotiated
agreements, which will bring an 80 per cent reduction in the amount of levy
that is charged to them. I certainly do not expect problems of the kind you
describe for brick firms. Amongst the proposals that the Chancellor announced
in November was an exemption from the levy for energy generated from new,
renewable sources, precisely what you just advocated, and, indeed, increasing
the incentives for people to use renewable energy. I agree with you, that is
a very worthwhile change in the package and it is one of the matters that has
considerably enhanced the environmental effectiveness of the levy compared
with the proposals that were announced initially.
Mr Donohoe
1332. When you say, Minister, this is tax neutral, how much are you
going to charge for all of the bureaucracy?
(Mr Timms) It is revenue neutral in the sense that all of the money---
1333. How much is the Treasury going to keep for all of the
bureaucracy this levy is going to create? What percentage are you going to the
keep within Treasury?
(Mr Timms) As far as I know we have not yet produced figures for the
administrative costs associated with the levy. What I would say, though, is
that one of the benefits of our proposals is that it is very much less complex
to administer than some of the measures that are being introduced elsewhere
in the EU, some of which involve very large numbers of inspectors going round
and doing all sorts of things, which is not going to be happening as a result
of our proposal. Given that we do have a very important objective, which all
of us signed up to, the need to reduce emissions to achieve the Kyoto targets,
the way that the levy has been designed does have the advantage of
administrative simplicity compared with alternative approaches being taken
elsewhere.
1334. Do you now concede that the original proposals would have
harmed industry to the point of costing a number of jobs?
(Mr Timms) I think it is important to see all of this as a process,
that is right from the start when the Chancellor asked Lord Marshall to carry
out his study and he set up a task force to work with him, the proposals in
the Budget in March and the further proposals in November. All the way
through we have been extremely careful to take very full account of all the
points of view being expressed by businesses and others about how to take this
measure forward. As I said earlier, I think it has been a very effective
process partly for that reason, because we have been careful to listen to what
everybody has said to us at each stage. There is no doubt at all that there
were lots of concerns expressed following the Budget in March. We have taken
very careful note of those and the proposals have been amended as a result.
1335. As an ex-trade union official you have employed the oldest
tactic in the book, which is to put a claim out and then bring it way down so
that everybody breaths a sigh of relief initially, but what the Treasury are
renowned for, is it not, if we look at the car tax, if we look at the airport
tax, is the salami tactics it will be using over the next ten to 15 years.
You will not be able to give this Committee any assurance that suggests
anything different to the normal practice within the Treasury.
(Mr Timms) That is true. I expect the normal practice in the Treasury
under this Government to continue.
1336. So you are conceding that it is possible that in ten years'
time when industry re-visits this they will see a very much different
situation as a percentage of their business than perhaps they are facing as
a consequence of the Autumn Statement?
(Mr Timms) Let me go back to some of the points you were making
earlier. I want to defend very robustly the process that we have been through
because I think it has been an excellent process. Lots of people have
commented on it and had the opportunity to do that. Those comments have been
very well taken on board by the Treasury.
Mrs Dunwoody
1337. We did not get the impression the horticultural industry
loved you this morning, but perhaps that was a misconception.
(Mr Timms) I made the point earlier than when I arrived at the Treasury
in July my desk was awash with letters from people expressing concern.
Mr Donohoe
1338. It bought off the strongest, that is the point.
(Mr Timms) It is not any more and that is because we have carefully
taken on board the points that have been raised with us through this process.
Nobody is suggesting that this is an easy process. It is a difficult process.
It is very big issues at stake for Britain, for the world and for individual
firms. It is a complex process and I think it has been managed extremely well
and I think it provides a good model for how these things should be done in
the future. On your other point about where we go from here. We have said
that we would anticipate these duty rates will be treated exactly like other
sorts of duty rates and go up in line with inflation, but of course that is
a matter for the Chancellor to decide at each Budget in turn and I imagine,
looking into the long-term future, that is going to depend on what happens
with our climate change programme generally and how effective we are in
meeting the targets that all of us want to see delivered.
Mr Donohoe: There are an awful lot of qualifications in there.
Mr Olner
1339. Given that over the last decade electricity and gas prices to
businesses have fallen by 22 per cent and 44 per cent respectively, why did
you offer so many concessions to different energy users?
(Mr Timms) It has been a commitment from the outset to introduce the
levy in a way that does not undermine the competitiveness of UK firms. We
recognised very early on that that did mean looking carefully at what happened
to energy intensive users, that is why we have facilitated the process of
negotiated agreements and it is now proposed that those who are signed up to
one of those agreements will have a reduction of 80 per cent in their levy
liability. It has been convincingly argued to me and no doubt to this
Committee as well that without a significant reduction in the levy liability
for very heavily energy intensive firms there would have been a serious threat
to their competitive position. We wanted to avoid that and the process that
we have been through I think will succeed in delivering that objective.
1340. I appreciate that you and I have had discussions about this
with me wearing another hat. I have got my environmental hat on today. The
Electricity Association have said that the reform of the electricity trading
arrangements which the DTI has predicted will lead to a ten per cent reduction
in wholesale electricity prices. Has that been factored in to the concessions
that were given or into any part of the levy when it was being designed?
(Mr Timms) Yes, it has been factored into our calculations about what
the savings in emissions will be through the period that we are talking about.
I do not think there is any inconsistency at all between wanting to see a high
degree of competition in the energy market and at the same time introducing
the levy in accordance with the polluter pays principle to ensure that there
is a cost that reflects more fully the environmental consequences of energy
usage and that is what the levy will do.
Mr Brake
1341. 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.
1342. 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 happen with
the way the Government has responded."
1343. 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.
1344. What concrete evidence do you have to support your assertion
that by reducing the levy from œ1.75 billion to œ1 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 œ1.75 billion a year to œ1 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
1345. 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. 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 on. The reduction from œ1.75 billion to œ1
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.
1346. 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
1347. 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
1348. 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
1349. 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
1350. 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
1351. 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
1352. 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.
1353. 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
1354. 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.
1355. 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 fuel on kerosene because of the implications in the
domestic sector of doing that, but we are looking carefully at the options
that are available.
1356. 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.
(Mr Virley) The majority of coastal shipping and the inland waterway
movements of goods 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 fully 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
1357. We were pleased with the increase in the energy efficiency
measures from œ50 million to œ150 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.
1358. 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.
(Ms Massey) 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.
1359. 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
1360. What was the rationale behind choosing œ150 million? Is it
just because it is bigger than œ50 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 œ150 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.
Mr Forsythe
1361. Minister, what is your view about targeting the rebates on
the levy? Would permitting rebates only for genuinely intensive companies,
as suggested by Friends of the Earth, not improve the environmental
effectiveness of the levy and permit even higher reductions in National
Insurance?
(Mr Timms) I did not hear what Friends of the Earth said.
1362. They were suggesting targeting different companies.
(Mr Timms) The basis that we have adopted for negotiated agreements is
the IPPC basis. I think that is a good basis perhaps primarily because there
is a very strong rationale for it in that sites that are covered by the IPPC
Directive do have a legal obligation on them to operate in an energy efficient
way. That is an extra requirement that firms outside the scope of that
Directive that do not have, but all of the firms that are within the scope of
the Directive do have that requirement imposed upon them. I think it does
make sense to treat all of them in the same way and give them access to
negotiated agreements if they wish to take one up.
1363. Let us suppose there was a company which had got right down
to the bottom and could not save any more energy, it could not do anything
else and another company had massive outputs so that it required a much higher
levy on it. Would it not be fairer if the business which is really efficient
in energy saving terms was treated differently from the one that is very
inefficient in energy saving?
(Mr Timms) It is being treated differently. The extent of investments
that have already been made is being taken account of in the negotiated
agreement process and of course anyone who is using less energy currently than
they otherwise would be also have a lower levy liability as a result.
1364. So there is targeting in actual fact?
(Mr Timms) In that sense, yes. What was set out at the beginning of
the process of negotiated agreements was an assessment of how far each sector
could go to achieve what I understand is referred to as BATNEEC, which is Best
Available Technology Not Entailing Excessive Cost, and clearly that process
depends on how far sectors have already gone towards implementing improved
energy saving technologies.
Chairman
1365. Grandfather rights, how far are they going back? This
question of being credited for what you have done in the past, is that not one
of the issues within these negotiations, that is how much credit you should
get for what you did five or six years ago as opposed to what you did last
year?
(Mr Timms) It was the Energy Technology Support Unit that did the work
of looking at each of the sectors and making an assessment of how far they
could reasonably go on this BATNEEC basis. I am not sure, I do not think
there has been a formal contracting process for investments that have been
made in the past, but clearly how far firms in that sector have already gone
towards what is realistic has been part of the negotiations, but the most
important consideration is how far they can realistically expect to reach as
this process goes on and I think it has been a very effective process. There
is a good degree of consensus between the sectors and ETSU about what can be
delivered through the negotiated agreements as a result of this process.
Mr Forsythe
1366. Minister, the majority of the industrial evidence given to us
argues that integrated pollution prevention and control is not the right
criterion to use and in fact they have called its use "arbitrary",
"artificial", "illogical" and "inequitable". What practical suggestions have
you considered on the potential of extending rebates to sectors falling
outside IPPC that enter into suitable negotiated agreements or emissions
trading arrangements?
(Mr Timms) I think there is a good rationale for using IPPC. I have
given one of the reasons for that already. Another advantage is that it does
provide legal certainty in terms of determining exactly who is and is not able
to enter into a negotiated agreement and that is very important as well, that
everybody knows where they stand. What we have said is that we would be
willing to consider suggestions for alternative definitions along the lines
that you have suggested to target the relief on energy intensive sectors that
are exposed to international competition, but we think there are four concerns
that would need to be met with any such proposal. First of all, there would
need to be a very clear rationale for whatever the extension was. Secondly,
there would need to be legal certainty. Thirdly, it would need to be
relatively simple to administer and not introduce great bureaucracy and,
fourthly, it would need to be consistent with the EU state aid rules. If
sectors or firms want to propose extensions which meet those criteria then we
will be very keen to look at them. Lord Marshall's conclusion, which we have
accepted, is that there is an important part to play for emissions trading
alongside the Climate Change Levy and we are encouraging work on developing
a UK emissions trading scheme in response to that recommendation.
Mrs Ellman
1367. Minister, you seem to be very confident that the Climate
Change Levy will not affect the manufacturing industry adversely. Why are you
so confident and how are you going to monitor what happens?
(Mr Timms) The levy package will be broadly neutral for manufacturing
as a whole and there will not be a net transfer of resources out of
manufacturing and that is a feature of the proposals that were announced in
November. We have listened very very carefully to the concerns that have been
expressed to us by manufacturing and other firms and we have taken full
account of those in the changes that we announced in November and I think that
is why they have been so widely welcomed. Clearly we will keep a very close
eye on these matters as the levy is implemented from April next year and as
things progress. I think we have been able through the proposals in November
really quite successfully both to increase the environmental effectiveness of
the levy and to ensure that there is not a competitive threat to UK firms.
1368. What is the basis of the judgments you are making about the
impacts on manufacturing? Where are you getting your information from and how
are you going to monitor the future?
(Mr Timms) We have obviously done some careful analysis of the effect
on the manufacturing sector. That does involve making some rather broad brush
assumptions because all of this is a little uncertain. In terms of the
environmental benefits, we have erred on the cautious side to make sure that
we are not over-estimating the environmental benefits of the levy. We have
done some careful analysis that I think will stand up, but I certainly
acknowledge the point that nobody knows absolutely precisely what is going to
happen in the years ahead.
1369. Is this departmental analysis or are you discussing this with
the Department of Trade and Industry?
(Mr Timms) It is being discussed jointly between ourselves, DETR and
the DTI, all of us are involved in discussions on these points.
Chairman
1370. You could not send us a copy of this analysis, could you?
(Mr Timms) If the Committee would like me to send some information
about the impact on the manufacturing sector, there is some work that we have
put in hand and I could send the Committee a note on that.
Chairman: I think that would be very helpful.
Dr Ladyman
1371. Energy already costs and so companies are already motivated
to reduce the cost of it. I put it to you that these negotiated agreements
are going to be a cop-out because all they are going to include are things
that people would do anyway.
(Mr Timms) No, I do not think that is the case. As you say, people are
already having to spend money on energy. Will the introduction of the levy
encourage them to use less? That was the nub of the issue that was considered
by Lord Marshall in his report and his conclusion very clearly was that in his
view there probably was a role for an economic instrument and that by
introducing the levy we will be able to encourage people to use less energy.
As far as the negotiated agreements are concerned, I think what the process
has shown is that it has been possible to reach agreements with sectors about
very substantial moves towards the optimum arrangements and we are now
confident that the agreements between them will deliver an additional two
million tonnes of carbon a year savings beyond what would have happened under
a business as usual scenario. I think they will be very effective.
1372. That two million tonnes might well have been two million
tonnes that was going to be saved anyway. You said earlier that you are going
to allow things that people did in the past to be included in the negotiated
agreements. That was action that people took without even the stick of the
Climate Change Levy being used to threaten them. You are certainly not going
to encourage innovation negotiated agreements, are you?
(Mr Timms) I think we certainly are. The whole process has been very
innovative. I think one of the great benefits of the levy has been to focus
a lot of people's attention on just what can be done to reduce energy use.
I think anyone who has taken any part in the negotiating process will
recognise that as a result of this process firms are going a great deal
further than they would have done if the levy had not been around. The two
million tonnes is certainly beyond what would have happened if there had not
been anything of this sort in place.
1373. Let us look at payback times. Yesterday we heard from the
chemical industry that they would be looking at a payback time of around about
four years whereas other witnesses have estimated that we need to look at
payback times of around about eight years if we are going to have real
innovation that is going to drive down energy use. If the negotiated
agreements are so weak that people only need to look at investments that pay
back over four years then they are not serving their purpose, are they?
(Mr Timms) They are certainly not weak. At the outset ETSU set out an
assessment of where it would be realistic for each sector to move to in order
to reduce energy use and to adopt the best available technology in order to
do so. What we have seen coming out of the agreements is a very very
successful process because that is pretty much where the agreements have
reached. So those aspirations were set out independently not by the firms but
by the unit at the beginning and those aspirations have been delivered through
the agreements. I think it has been an excellent process.
1374. If you are going to convince people of this then are you
going to do anything to have these negotiations more publicly held than they
are at the moment? Are you going to publish them ahead of them being signed
on the dotted line? Are you going to involve NGOs in arriving at these
negotiated agreements?
(Mr Timms) There are two things that are going to happen. Firstly,
once the agreements have been concluded they will be published so everybody
will be able to see precisely what is in them. Secondly, we will ensure that
what happens subsequently is independently audited so that there is confidence
right across the community about what is going on.
1375. They are going to be independently audited, but so far as I
am aware at the moment you are not intending to make any differential when you
punish somebody between somebody who just misses his target and somebody who
does not bother at all. They are both going to get punished by the same two
year payment of the full levy.
(Mr Timms) This is where the emissions trading arrangements could be
extremely helpful because, of course, a sector that just misses its target
will be able to go into emissions trading arrangements and thereby meet its
target by doing some trading. Ultimately, if nothing happens and if the
target is missed then the ultimate sanction is that the rate of levy payable
will revert to 100 per cent. What I anticipate happening through the
emissions trading arrangements is people being able to trade to avoid that
happening.
Mr Benn
1376. Would you be in favour of the negotiated agreements being
published in draft form to allow others to express a view before they are
finally published in their signed form?
(Mr Timms) These are quite difficult commercial negotiations. I think
it would be very difficult to publish them before they were concluded. I
think it is important that once they have been concluded they are published
so that everybody knows what has been happening and exactly what everyone has
signed themselves up to. I think trying to publish something beforehand would
be difficult given the commercial nature of the discussions.
1377. You are keen on emissions trading, as you said in your
written evidence. Do you think that companies are voluntarily going to accept
an emissions cap if there is not some sort of inducement for them to enter
into in practice?
(Mr Timms) In the situation we have just been discussing where somebody
is about to miss the target in their negotiated agreement I think there would
be a significant incentive for them to be part of a trading arrangement. We
would like to see emissions trading taken up very widely. We have encouraged
the work the Emissions Trading Group is doing and which the CBI is leading on.
I have met Rodney Chase from BP Amoco who is leading that work on a couple of
occasions and I am expected to see him again before too long. I know that one
of the subjects that group is considering is what needs to be done to
encourage firms to take up emissions trading and I will be looking with great
interest at their conclusions.
1378. Some witnesses have said to us they think smaller firms are
not going to be able to participate. The CBI yesterday said they did not
think that was a problem and it is perfectly possible. Do you have a view on
that?
(Mr Timms) My guess is there always will be some firms that are not
able to participate in an emissions trading arrangement. That is one of the
reasons why I think the levy is so important, so we can make sure there is a
greater incentive for everybody to reduce energy emissions. I hope that it
will be possible to develop a framework for trading that can be very very
widely taken up and I think we will see what the group recommends when it
comes forward with its conclusions.
Chairman
1379. Is there not a danger that we are creating jobs in emissions
trading at the expense of the pig farmers?
(Mr Timms) I think trading is quite a benign activity.
1380. And pig farming is not?
(Mr Timms) I think pig farming is also a very benign activity. A
trading mechanism can create incentives for people to behave in the kind of
way that all of us would like them to behave, in a very efficient manner.
1381. Let us turn to state aid. You did just briefly mention it.
It was put to us yesterday that there might be a problem within EU rules in
that some of these rebates might be considered to be state aid. Can you clear
that up for us?
(Mr Timms) Yes. It is the case that we need to obtain agreement from
the EU for the proposals that we are putting forward. We are very optimistic
about the outcome of that process, but we do need to go through that and those
discussions are taking place currently.
1382. So you are optimistic about current negotiations. When will
we know the outcome?
(Mr Timms) Simon, are you able to comment on the timetable for the
process?
(Mr Virley) We would hope to be able to have further announcements
before the legislation is presented to Parliament, which would be shortly
after the Budget.
Dr Ladyman
1383. Nobody is going to trade in emissions unless the cost of the
trade is less than the tax. Therefore, if we are going to allow that sort of
emissions trading to be built in to a process where people who fail to make
their targets are allowed to get out of paying the tax by emissions trading
is that not going to be a disincentive to get involved in this in the first
place? You can reduce your tax bill at the outset by just trading in
emissions and not worry about spending on energy efficiency.
(Mr Timms) I do not think so. I think what we are taking about is a
process taking place at the margin where somebody is just about to miss their
target and then the trading market will determine what the price to be paid
for that trade is.
1384. But that will only work if you have a mechanism to say,
"Okay, you are a marginal failure, we will let you trade and avoid the tax",
and you say to somebody else, "You are not a marginal failure, you did not try
at all, so you are going to pay the tax and you are going to trade." The only
way that is going to work is if you have that power.
(Mr Timms) I do not entirely understand that argument.
Chairman: I think we had better not go too much further in to that
argument. We will leave that as a question hanging in the air. Minister,
your evidence has been very helpful. Thank you.
