Select Committee on Scottish Affairs First Report


11. The drinks industry in Scotland: recent regulatory requirements

Climate Change Levy

112. A number of witnesses raised questions about the Climate Change Levy (CCL). Following worldwide concerns over the impact of fossil fuels on the global environment, the CCL became effective in April 2001 with the intention of encouraging a more efficient use of energy across British industry. Reservations were voiced about two points in particular: the additional cost burden and the potentially discriminatory effect on certain parts of the whisky, beer and bottled water sectors. The Trade and Industry Committee remarked in its report on the CCL:

113. The CCL will undoubtedly create a further burden on companies located in the UK. Highland Spring estimated that the CCL might add some £30,000 per annum to its total costs, BLRAS thought that the net cost to the brewing industry was likely to be around £5 million.[155] Scottish and Newcastle plc said that it "faced a bill in excess of £2.3 million in the first year of operation of the levy",[156] compared to a reduction in NI contributions of £62,000.[157] The Government was aware of the potential cost consequence of the CCL, and introduced a rebate scheme designed to alleviate its impact on energy intensive sectors, in return for agreement on energy-saving measures. Industry must bear its own share of the costs of transition to more efficient energy usage.

114. However, it is important that these costs are shared equitably across the industry. The Government's rebate scheme may mean that the additional burden of implementation is not equitably distributed between drinks companies.

115. In the whisky industry, the actual distillation of the spirit qualifies under the scheme, but other on-site activities, such as bottling and packaging, do not. This is because the eligibility criteria require that there must be a "direct association" between the primary process (i.e. distillation) and associated activities (i.e. packaging and bottling). The requirement that whisky must, by law, mature for at least three years before qualifying as Scotch whisky is felt to break the necessary "direct association" and thus disqualifies the associated activities. Other spirits qualify simply because they do not require maturation. Gin and vodka can be bottled and packaged on the day they are produced, and therefore the energy costs qualify for a rebate under the current arrangements. The Head of Excise (Social Regimes) at HM Customs and Excise thought the reason for the maturation process of whisky to be disregarded might be that it was not energy intensive.[158]

116. The SWA also drew attention to other inconsistencies in the rebate scheme. It appears that where bottling and packaging take place on the same site, then this is sufficient evidence that there is a "direct association" between the different stages of the production process. However, where these activities are physically separated, they are not considered as being associated. Scottish and Newcastle plc described itself as a major user of energy dispersed over 2,400 locations "So the company, unlike its sister company Scottish Courage will not come under the terms of the Integrated Pollution Prevention and Control Regulation and is therefore not eligible for a discount on its liabilities under the climate change levy".[159] The Gin and Vodka Association have argued that this aspect of the scheme is "complex and illogical". We agree.

117. The design appears to discriminate against the whisky industry and to some extent the beer industry. It is not apparent to us why the rebate scheme could not be administered in such a way that it takes account of differences between the various types of spirits production and the operational dynamics of companies like Scottish and Newcastle plc.

118. The spirits companies have to concentrate facilities in order to gain economies of scale, with the result that separate parts of the production process may therefore take place at different locations. In its current form, the CCL rebate scheme may therefore penalise the larger and more efficient companies who have undertaken substantial investments designed to increase their cost effectiveness. We can see no logical basis for the distinction between on and off site activities, which seem to be due mainly to bureaucratic convenience. The CCL arrangements are based on prevention of pollution criteria and we accept that lines have to be drawn in order for the Levy to have the desired effect. But if it is clear that in spirits production both bottling and packaging are the inevitable and delayed consequence of distilling (in the same way that cars get painted), then they should qualify for the rebate. The Government has not explained why it has chosen to implement the rebate scheme in its present form. We therefore recommend that the Government recognises that there is a direct association between the various stages of whisky production, and, when operation of the CCL scheme is reviewed, acts to ensure that the rebate scheme treats all spirits production equally and thereby corrects the inherent anomaly.

119. One other anomaly in the design of the CCL rebate scheme affects the bottled water industry. Any food and drink producer can apply for the 80 per cent rebate, but only those who use animal, vegetable or dairy ingredients in their manufacturing process actually qualify. As currently designed, therefore, the scheme specifically excludes natural mineral water, which requires, by definition, that no such ingredients are included. It also means that flavoured bottled waters will qualify, while unflavoured will not. The Head of Excise (Social Regimes) at HM Customs and Excise admitted that some anomalies were apparent in the operation of the CCL,[160] but explained that the reason that bottled water production was not included in the discount category was due again to it not being "on the face of it ... an energy intensive process".[161]

120. But we believe this insensitive application of the rebate scheme has the effect of needlessly discriminating against bottled mineral water producers. Given Scotland's position as the UK's major producer, it works to the detriment of Scottish companies. We therefore further recommend that the Government attends to this discrepancy when the CCL scheme is reviewed.

Water Framework Directive

121. The Water Framework Directive (WFD) 2000/60/EC established a framework for Community action in the field of water policy. It is another piece of legislation arising from the recent heightening of environmental concerns. The WFD provisions must be transposed into Scottish law by 2003. The Deputy Minister for Environment and Rural Affairs of the Scottish Executive said that this would be accomplished by the Water Environment and Water Services Bill due to be considered in the Scottish Parliament in 2002.[162] The requirements of the WFD has caused disquiet in some sectors. The WFD was originally proposed by the European Commission in 1997, and was intended, in the light of concerns over global warming, to provide a coordinated mechanism to protect Europe's water supplies. The WFD requires member states to establish abstraction controls, including a register of abstractors and the requirement of prior authorisation for abstraction.[163] Article 11 (3) of the Directive enables member states to allow exemption from control abstractions which have no significant impact on water status.

122. Unlike England and Wales,[164] Scotland currently has no abstraction control system. Landowners in Scotland have a right in common law to abstract from watercourses on or under their land. The introduction of an abstraction system would therefore be a major change in the Scottish situation, although one that would bring it into line with the approach used elsewhere in the UK.

123. The Scottish Executive has said that a way of controlling some abstractions will need to be introduced. It is currently consulting interested parties under the auspices of its paper The Future for Scotland's Waters. The Scottish Executive intends to base its proposals "on the principles of need, risk assessment and proportionality".[165] The Head of the Water Framework Directive team at the Scottish Executive told us:

    "I recognise the importance of the Scotch whisky industry ... in many areas which have an environment with specific needs. [the WFD] will be implemented in a way that meets the local needs of that environment ... where there is no need for abstraction controls that is fine. Essentially, we need to be able to build up a picture and to take it from there and then look at the controls that will be necessary".[166]

The Minister for Environment and Rural Development said that the level of abstraction control would depend on individual cases.[167]

124. Both the whisky industry and bottled water producers were anxious about the potential effects of the implementation of the WFD in Scotland. The SWA was concerned that increased costs following the introduction of the WFD could potentially threaten marginal distilleries.[168] They were also concerned that the WFD was only one part of wider set of controls, the cumulative impact of which may adversely affect whisky's competitive position.[169] Hard evidence was not given in support of either of these claims. Highland Spring argued that bottled water producers should be treated as a special case[170] and raised particular concern over whether licenses would be subject to auction. The British Soft Drinks Association (BSDA) worried that any licencing regime for water abstraction might be the result of "bureaucratic rather than environmental reasons".[171] The BSDA said that it had gathered no information from continental bottled water suppliers (who of course are major competitors of the Scottish bottled water industry) that they too were facing additional measures which could affect their abstraction arrangements.[172] There is a view in the UK, rightly or wrongly, that this country responds with alacrity to the requirements of European directives and obeys the letter of the law, while other EU states are a little more self-interested or piecemeal.

125. The European Commission is determined that the WFD should be properly implemented across the EU. We support this approach, with the proviso that discretion might be allowed where appropriate, and that the same rigorous standards of assessment apply throughout.

126. Much comment was made about the availability, indeed the over-availability, of water in Scotland. During oral evidence, the Scottish Environmental Protection Agency (SEPA) pointed to one or two places in Scotland where there are well-known problems with over-abstraction, but this appeared to apply in only a limited number of areas.[173] Over-abstraction does not currently seem to be a problem across Scotland. This position may change depending on the future progress of global warming. Indeed, SEPA have already detected changes in river flows in Scotland consistent with the climate change models.[174]

127. We believe that the WFD framework contains some useful elements, particularly when viewed in a European, if not a world-wide environmental context. SEPA must continue to monitor the state of river levels and flows in the light of the significance of the water extraction industry in Scotland.

128. Even if some exemptions to abstraction controls are ultimately sanctioned by the Scottish Executive, the establishment of a register of water abstractors, is potentially of benefit to efforts to protect the Scottish environment. The Deputy Minister for Environment and Rural Development told us that "It would be useful to have a register".[175] SEPA were very clear about the importance of this, arguing that knowledge of where abstractions from both ground and surface water are taking place was a very important part of environmental protection.[176] SEPA also argued that the creation of a register could bring some benefits to water users themselves.[177] Under the present system SEPA are not necessarily aware of who is drawing water from any particular source. SEPA pointed to a potential situation where they are unable to inform water users of pollution discharges that could affect water quality, and that a registration system would rectify this. The Minister for Environment and Rural Development spoke in the same vein, emphasising the need to develop a comprehensive picture of water use in Scotland.[178] She also said:

    "We want to seek to reduce some of the fear of the unknown and the worry that there may be some sort of blanket imposition of abstraction controls. As I have explained that will not happen".[179]

129. We would support the Scottish Executive, following its consultation process, in the introduction of a scheme for the registration of water usage. We firmly believe that the resultant increase in information would enhance its ability to protect the Scottish environment against potential future damage arising from climate change.

130. The fine balance between appropriate environmental controls and the ability of local industry to be able to function properly can be demonstrated by events in Islay. The island of Islay is a major Scotch whisky distilling area, producing a product with a distinctive flavour. The distilleries there had over a long period discharged aqueous effluent into a local bay, believing that, far from causing environmental damage, the process had enhanced local marine life.[180] Under the auspices of the Waste Water Directive, SEPA assessed the arrangement and proposed an alternative outfall. This involved transportation of waste by road which created, by the increase in heavy road traffic, environmental difficulties of its own.

131. The most recent scientific findings concerning reduced toxicity appear to justify the SEPA view.[181] But it is important that SEPA should implement changes of the sort envisaged with the co-operation of local operators. The cost of producing in remote areas like Islay, where there are few alternative employment opportunities to work in distilleries, should be considered, even if only in terms of the time allowed before any necessary changes are implemented. We therefore welcome the fact that SEPA and Islay distillers have begun to work together to overcome the difficulties. The Minister for Environment and Rural Development said that she was "encouraged by the positive dialogue between SEPA and the Scotch whisky industry".[182] We would encourage SEPA to continue this approach of working in conjunction with local interests in order to find solutions that can satisfy both environmental imperatives and the needs of the local economy.

Control of Major Accident Hazard (COMAH) Regulations

132. SEPA was also involved in one other area that caused some concern to whisky producers, namely the Control of Major Accident Hazard (COMAH) regulations, which came into force on 1st April 1999. COMAH regulations replaced the Control of Industrial Major Accident Hazards regulations 1984 (CIMAH). The main aim of the COMAH regulations is to prevent and mitigate the effects of major accidents involving dangerous substances, which can cause serious damage to people and/or the environment. A "competent authority", which in Scotland is SEPA, in conjunction with the Health and Safety Executive, enforces the COMAH Regulations.[183]

133. SEPA accepted that there was some difference of opinion with the whisky industry on the application of these new regulations.[184] SEPA's opinion is that the industry still needs to deal with the possible environmental consequences that could result from a fire or a major alcohol discharge. The SWA appears to disagree, and points out that it has produced a considerable amount of industry guidance relevant to COMAH, and has developed a Major Accident Prevention Policy "model" for circulation to its members.[185] This is the first year in which the new COMAH guidelines apply, and SEPA argued that both they and the industry are still on a learning curve.[186]

154  Impact on Industry of the Climate Change Levy, Ninth Report from the Trade and Industry Committee, Session 1998-99, HC 678. Back

155  The net cost will be £1m under the rebate scheme. Back

156  HC 114-i, Session 2000-01, p.103, para 4. Back

157  Ibid, para 5. Back

158  HC 324-i, Session 2001-2002, Q.719. Back

159  Ibid. Back

160  Ibid, Q.718. Back

161  Ibid. Back

162  Ibid, Q.674. Back

163  HC 114-iv, Session 2000-01, p.179, para 2.2. Back

164  The control system in England and Wales is operated by the Environment Agency. Back

165  HC 324-i, Session 2001-2002, p.332, para 5. Back

166  Ibid, Q.678. Back

167  Ibid. Back

168  HC 973-ii, Session 1999-2000, p.43, para 7.4. Back

169  Ibid, para 7.5. Back

170  HC 973-i, Session 1999-2000, p.22. Back

171  HC 324-i, Session 2001-2002, p.332, para 5. Back

172  Ibid, para 7. Back

173  HC 114-iv, Session 2000-01, Q.569. Back

174  Ibid, Q.578. Back

175  HC 324-i, Session 2001-2002, Q.681. Back

176  HC 114-iv, Session 2000-01, Q.566. Back

177  Ibid, Q.589. Back

178  HC 324-i, Session 2001-2002, Q.681. Back

179  Ibid, Q.684. Back

180  HC 114-iv, Session 2000-01, Q.593. Back

181  Ibid, p.191. Back

182  HC 324-i, Session 2001-2002, Q.684. Back

183  Background details on the COMAH scheme can be found at Back

184  HC 114-iv, Session 2000-01, Q.595. Back

185  HC 973-ii, Session 1999-2000, p.44, para 9.4. Back

186  HC 114-iv, Session 2000-01, Q.595. Back

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Prepared 28 November 2001