UNCORRECTED TRANSCRIPT OF ORAL EVIDENCE To be published as HC 490-iii

House of COMMONS

MINUTES OF EVIDENCE

TAKEN BEFORE

ENVIRONMENTAL AUDIT COMMITTEE

 

 

Budget 2004

 

 

Wednesday 12 May 2004

JOHN HEALEY MP, MR PAUL O'SULLIVAN and MS FIONA JAMES

Evidence heard in Public Questions 176 - 284

 

 

USE OF THE TRANSCRIPT

1.	This is an uncorrected transcript of evidence taken in public and reported to the House. The transcript has been placed on the internet on the authority of the Committee, and copies have been made available by the Vote Office for the use of Members and others.
2.	Any public use of, or reference to, the contents should make clear that neither witnesses nor Members have had the opportunity to correct the record. The transcript is not yet an approved formal record of these proceedings.
3.	Members who receive this for the purpose of correcting questions addressed by them to witnesses are asked to send corrections to the Committee Assistant.
4.	Prospective witnesses may receive this in preparation for any written or oral evidence they may in due course give to the Committee.

 

Oral Evidence

Taken before the Environmental Audit Committee

on Wednesday 12 May 2004

Members present

Mr Peter Ainsworth, in the Chair

Gregory Barker

Mr David Chaytor

Sue Doughty

Paul Flynn

Mr Mark Francois

Mr Simon Thomas

Joan Walley

David Wright

________________

Witnesses: John Healey, a Member of the House, Financial Secretary, Mr Paul O'Sullivan, Head of the Environmental Tax Team, and Ms Fiona James, Head of Environment Branch, HM Treasury, examined.

Q176 Chairman: Thank you very much indeed, Minister, for joining us again. Would you like to introduce your colleagues?

John Healey: By all means, Mr Chairman. This is Paul O'Sullivan. He heads our Environmental and Transport Tax Team in the Treasury. This is Fiona James, who heads the spending team that is responsible in a sense for looking after the Defra departments. If I may say so, I welcome the chance to come before the Committee again, in particular the way this Committee consistently follows the Pre-Budget Report, Budget Report and Spending Review publications that we do in the Treasury from the environmental point of view. I hope in general terms the Committee will see the development of policy through those staging posts for the Treasury in this area in which I am interested, and in which the Committee is interested, as policy work in progress. It is a question of considering measures, introducing them, perhaps evaluating them, and then refining them and developing them further. You can see a number of features of that in the Budget Statement, the Red Book and the Finance Bill we are considering at the moment in Standing Committee.

Q177 Chairman: Thank you. We do indeed take the Treasury seriously, as we should. Perhaps we can go straight into looking at some of these staging posts, because there are organisations which think the staging posts have been moving backwards rather than forwards in recent months. There has been an awful lot of activity around the whole agenda of energy and energy efficiency, as you know; not only the PIU report, the Energy White Paper, the two Treasury consultations, but your own commitment in November, when you were speaking to the Parliamentary Group for Energy Studies, that now was the time for action. Great expectations were raised, and what we find when the Budget finally appears is a reduction in VAT on heat pumps, a landlord's energy savings allowance, and a possible reduction on micro-CHP. That is not an awful lot, is it?

John Healey: Those measures, of course, are directed specifically at the question of household energy efficiency, but in a sense, as you indicated in your remarks there, the Budget and the Pre-Budget Report process are only part of the staging posts in the development of government policy. Very soon after the Budget, at the end of last month, we had publication of the Energy Efficiency Implementation Plan, a very significant extension of our commitment to the Energy Efficiency commitment, that will play a big part in improving levels of energy efficiency in the household sector and, of course, a similar period of the Spending Review, and the question of the Government's investment and relative priorities in this field is an integral part of the Spending Review. The Budget, I think, introduced three significant fiscal measures that will play a part, but they will only play a part in a much wider programme of energy efficiency, in part directed at households, but driven from different parts of government, so simply to concentrate on the Budget measures, I would submit, Mr Chairman, is to concentrate on an important but narrow part of the wider picture.

Q178 Chairman: Perhaps we have a difficulty, because our inquiry is entitled "Budget 2004, Spending Review 2004, the Sustainable Development Strategy", so we are looking specifically at the Budget today, and we will come on and talk about the Spending Review in a moment or two. You said that the fiscal measures introduced in the Budget were significant. I notice that in the Budget Report you have a table, table 7.2, page 173, the Environmental Impact of Budget Measures, but you have not there attempted to quantify the carbon reductions that you are expecting from the landlord's energy saving allowance, and you have not even included the reduction in VAT that you expect to see on ground source heat pumps. You have maintained just this afternoon that these are significant measures, but how can we measure them if you have not?

John Healey: On the landlord's energy saving allowance, because we are still developing, first of all, primary legislation in the Finance Bill, and the detail will follow in the regulation, to be able to quantify the potential carbon or carbon dioxide savings is quite difficult. To give you an indication of both the significance and perhaps the scale of this potential measure, the significance, I think, lies in the fact that we are directing this measure, a new tax relief, at what is by everybody's agreement the most problematic area, that is, private rented accommodation, where it is very difficult to get any sort of leverage on the investments that private landlords make, a sector where the current energy efficiency rating of private rented properties is well below the average, and even further below the average for registered social properties. The significance of it is that we are offering through this tax relief the possibility of deduction against profits from leasing and rental income for capital investment in insulation. This is a very significant change, because at present there is, of course, relief for such capital investments, but only at the point at which the capital gain is realised, in other words, on the sale of the property. So for many landlords that rent their accommodation, this is not a relief that has a very direct incentive for them in terms of improving the energy efficiency and in this particular case the insulation of their properties. This should change the attention that landlords are prepared to give to that. We reckon the cost to the Exchequer, at first estimate, is about £10 million per year. We are doing our preliminary impact work on the basis that if we take the base of private rented accommodation which is not adequately insulated at present at somewhere upwards of 800,000 properties, if we are looking at an increase on the baseline of currently adequately insulated private rented properties of about 10 per cent, that is the sort of nature of the impact that we estimate that we may have with this measure, but clearly, at the outset, before the legislation and the scheme being in place, it is only an estimate. We have not yet been able - and it is a relatively early stage at which to do it - to assess the likely climate change impact of those measures. The final factor to bear in mind, I think, is that once we get this relief in legislation and in operation, it would be possible, and certainly we are prepared to consider the case for extending the capital works that this might apply to beyond the question of any particular cavity wall insulation which this is designed to tackle.

Q179 Mr Chaytor: Could I just come in with a point on the relationship between the cost to the Treasury and the climate change impact? You have said that the impact on the Treasury will be in the order of £10 million per year, but you do not yet know what the climate change impact will be. Would it not be more logical to have worked out what the potential climate change impact of this particular set of measures would be before then translating that into a cost to the Treasury? If the overriding objective is to help the Government meet its CO₂ emissions targets, surely we need to know what contribution investment of this kind in insulation in private rented accommodation can do about it.

John Healey: The aim, Mr Chaytor, is certainly to contribute to the reduction in emissions that drive climate change. The objective of this particular measure is to try and influence change in the behaviour of private rented property owners. Our attention has been first on the sort of incentives that might play that part, and an estimate of the sort of impact that that might have. Clearly, if we achieve the objective of influencing behaviour and therefore investment levels of those that own property for private rental, then we will make the contribution that we need in broader terms to the aim you quite rightly want to keep at the centre.

Q180 Mr Chaytor: My point is, without a reasonable estimate of the potential CO₂ emissions savings, how does the Treasury know if this particular objective of influencing the behaviour of private landlords is a more worthwhile investment than the reduction of VAT on micro-CHP, for example? I accept your point that you want to change the behaviour of landlords, but changing the behaviour of landlords may not actually deliver the volume of emissions that an alternative measure like, for example, the relief on stamp duty for energy efficiency measures may have done.

John Healey: It may not indeed deliver the volume of emissions savings that we would like to see or that we may in due course need to see, in which case that would form an important part of our consideration about whether we extend it in any way, either extend it, as it have indicated, to different types of capital works, extend it perhaps in terms of the generosity of incentives, extend it or build on it in other ways. The factor at this point that makes us believe that this is a measure that is worth introducing is that, unlike a reduced rate of VAT on ground source heat pumps, here we have a measure which is specifically designed and targeted towards the sector that everybody with concerns in this area agrees is the hard-to-crack sector, hard-to-influence sector, and also the sector that most needs improving in terms of its general performance.

Q181 Chairman: The owner-occupier sector is also important as a major contributor to the problem of climate change and so on. The Energy Savings Trust and the Association for the Conservation of Energy and other organisations have come forward with a series of proposals, none of which, I think it is right to say, you have actually accepted, to tackle domestic energy use. To what extent are you planning to look at stamp duty rebate, for example, in relation to owner-occupied properties?

John Healey: If I may say so, the general point is not entirely correct because the Association for the Conservation of Energy and the Energy Savings Trust welcomed, for instance, the landlord's savings allowance that we have just been discussing.

Q182 Chairman: They did express enormous disappointment.

John Healey: Both made their views known to us as part of the consultation we ran last year, that they would like to see the use of stamp duty in order to encourage the private home owner to do more. It is fair to say - and the Committee may be aware of this - that when we published the results of that consultation, almost half of the 105 that responded to the consultation also mentioned this as a measure they would like to see. The difficulties that led us to set that to one side for the moment really revolve around, first of all, the fact that at present stamp duty is relatively straightforward to administer, it is straightforward to collect, and it does not require much policing to ensure that it is not avoided and that it is collected effectively. Secondly, we have, as the Committee will know, introduced 100 per cent relief from stamp duty for the purchase of residential properties up to a level of £150,000 in the 2,000 most disadvantaged wards n the country, therefore any mechanism that tried to use stamp duty for this purpose would have zero effect in those wards, where in many areas we have many of the properties that most need to be brought up to a more energy-efficient standard. So there are concerns about the complexity and the cost of policing if you tried to use stamp duty for these purposes. There is a concern that it would have no effect in certainly the 2,000 wards in many of which we have properties where this would arguably be most useful. The third reason, in a sense, is the flipside of the reason for which I think the Energy Savings Trust and ACE are interested, which is that the period of six months or so after the purchase of a new property is often the period during which people show the greatest interest in refurbishment, upgrading, re-doing the property they have just bought. The logic that leads them to say a tax incentive at that point might encourage them to do more of this leads us, looked at from the other point of view, to say the danger here, from the Treasury and Government point of view, is that actually you might be incentivising activity that many people would carry out anyway, in other words there would be a danger of a significant deadweight cost.

Q183 Chairman: Yet there remains a serious problem that is not being addressed. I accept the argument about deadweight cost, but if people were doing it already, we would not be having this conversation now.

John Healey: In terms of the areas where in our judgment the need for new policy instruments was most acute, it was the private rented sector. Those that own the properties have very little incentive at the moment to improve insulation and energy-efficiency. They do not generally at the moment, without the sort of new allowance we are putting in place, directly benefit from that.

Q184 Chairman: It will be interesting to see if it works. Can we move on to new housing? Obviously, there is a likelihood of significant new housing development, and the PIU Energy Report recommended that we should move towards zero space heating standards, which basically means hardly any energy output at all because of good insulation. Do you have plans to ensure that the whole standard of energy efficiency is levered up in new house building?

John Healey: Yes. This was touched on in the Barker Review. I think the main point of focus for the Government here is the earlier review of the Building Regulations that the Office of the Deputy Prime Minister is responsible for, where by the end of 2005 we look to have upgraded the Building Regulations, and as part of that there is the potential for ratcheting up the level or the standard of those buildings as part and parcel of that measure, and that is really the point at which we have the greatest purchase and influence on the system, and that is probably the most appropriate focus of attention.

Q185 Chairman: So you are not looking at fiscal measures, for example, which will encourage greater awareness of the benefits of energy efficiency and encouraging the building of more energy-efficient homes?

John Healey: As the Budget document - as this is a Budget inquiry - did indicate, we are interested in the notion of a "green landlord" scheme. In a sense, this is probably not a feasible proposition, at least until we have the home condition surveys more regularly produced, with the fuller range of information for purchasers and sellers, but at that point, where it may be possible to get a more routine assessment of the overall energy efficiency performance of a property, we will be in the business of looking at whether or not that could be underpinned by some of the fiscal measures that perhaps this Committee and others might be interested in.

Q186 Chairman: Are you familiar with the SAP rating system for the energy efficiency of homes?

John Healey: I am aware of it, but I would not claim to be familiar with it.

Q187 Chairman: The Treasury does not have a view, for example, on what would be an appropriate SAP rating for newly built homes?

John Healey: As far as I am aware, we have not taken a particular view about that. That would largely fall to the more expert parts of government, in particular the ODPM, I think.

Q188 Joan Walley: Just thinking about the debate which did not take place in respect of the new clause 3 in yesterday's Housing Bill, I wonder if you are considering having talks with the ODPM in the interests of joined-up government as the Housing Bill goes to the other place.

John Healey: You have the advantage over me, Ms Walley. You know what was in clause 3 of the Housing Bill.

Q189 Joan Walley: It was in relation to energy efficiency and energy efficiency standards.

John Healey: To the extent that these things are discussed and examined across government, we have dealings with the ODPM over this already. Officials are doing that, and in particular, as we look at the sort of policy proposals and programmes the ODPM might be interested in as part of the Spending Review, that degree of discussion is more intense at this stage of the cycle than it is at other stages, but that is not to detract from the general point I make, which is that the lead policy responsibilities and decisions really fall to ODPM rather than Treasury in this particular field.

Q190 Chairman: I do not sense we are getting very far with this, but can I suggest that when you next have discussions with ODPM about these issues, you do put on the agenda a debate about whether or not it would be appropriate to set a minimum SAP rating for newly built homes?

John Healey: I will certainly do that, Mr Chairman.

Q191 Gregory Barker: Minister, combined heat and power: a very, very sorry picture is emerging there. Installed capacity has risen from just under 4,000 MW in 1997 to 4,700 on the latest figures I have. What is even more worrying is that most of that growth was in the late Nineties and CHP capacity has actually declined in the last two years, although the Government has a target of 10,000 MW of electricity by 2010 generated by CHP. Not only has capacity actually declined in the last two years, but investment in further capacity has actually collapsed. Would you agree that the Government is way off beam now with its CHP target, and can you give us a clue as to what the Treasury is actually doing to rectify the collapse in investment?

John Healey: Yes. Mr Barker, I am not quite sure of the source of your data, but it may be helpful, Mr Chairman, to make sure the Committee shares the analysis that has recently been done by Cambridge Econometrics, which essentially has analysed the CHP strategy that we have in place.

Q192 Gregory Barker: DTI 2003.

John Healey: In that case, I will, if the Committee wishes, make sure that you have the details of the recent study that has been done by Cambridge Econometrics. This is an analysis of the CHP strategy that we have in place. It suggests that, as things stand, it will deliver savings of 8,100 MW per year by 2010. That does not take into account the introduction of the EU Emissions Trading Scheme in 2005, which is likely to add another 400 MW. So the assessment of the capacity to deliver of the strategy we have in place already is actually around double the figures that you suggest there, Mr Barker.

Q193 Gregory Barker: You are saying you will easily surpass the 10,000 MW?

John Healey: No. There is a difference still between 10,000 and 8,500.

Q194 Gregory Barker: You are going to reach 8,500, or an additional 8,500? We already have something around 4,000.

John Healey: The target, as you rightly say, that the Government has set is to see through CHP a saving of 10,000 MW per year by 2010. In terms of what we already have in place under the CHP strategy, if you take a mid point of the range, because there is obviously a degree of uncertainty in this sort of modelling, Cambridge Econometrics suggest that we have already in place elements within the strategy that would deliver just over 8,000 MW, 8,100 MW. If you add then something just under 500, round about 400 MW, that they estimate will come from the EU Emissions Trading Scheme, we still have a gap potentially as we look towards 2010 in hitting that CHP target, but it is not a gap of around 6,000 MW as your figures suggest.

Q195 Gregory Barker: So you are still under-shooting. Just so we are clear on the figures, because my figures only go to 2002, the current situation is that it has not changed; we are still at around 4,700 MW of current capacity in CHP. Is that correct?

John Healey: My principal concern in this field is whether or not we have in place the full range of what we need.

Q196 Gregory Barker: Strategies are possibilities.

John Healey: No, they are not, because what has been assessed is what is already committed to and is in place as part of the CHP strategy. This is not what notionally we might achieve if we did other things, because it does not take into account the introduction of new measures that we could bring in, some of which we know will come in, such as the EU ETS in 2005. All I am saying is that the picture may not be as bleak as your figures suggest, and if I can share the latest work with the Committee, the Committee can make a judgment based on the full range of information.

Q197 Gregory Barker: My question was: am I correct in assuming that the current capacity is 4,700?

Mr O'Sullivan: Can I just add to that? My understanding is that it has increased slightly. Obviously, when we provide the study, that gives the figures. Part of that is to do with some of the fiscal incentives we already have in place for combined heat and power that are starting to come through.

Q198 Gregory Barker: We are still less than halfway to the target as things stand, with existing, in-situ capacity.

Mr O'Sullivan: I think there has been an improvement over 2002, but we can provide the figures in the study.

Q199 Gregory Barker: But it is a small increment, ie probably around 5,000.

John Healey: We will provide the figures, but of course, your interest, like ours, is in 2010 and whether we will hit the target. We are sitting here in the early months of 2004.

Q200 Gregory Barker: Moving on to the issue of strategies, will you support the amendment to the Energy Bill exempting CHP from the Renewables Obligation, as indeed Powergen, Innogy, Scottish and Southern Energy all support?

John Healey: No. The Government's approach to this will be to ask the Commons to consider removing the amendment that the Lords made on this during the passage of the Energy Bill through the upper House.

Q201 Gregory Barker: Why?

John Healey: The main concern is this: that the amendment that was passed would take CHP out of the base of the Renewables Obligation. It would therefore give CHP an advantage over other forms of generation. It would reduce the amount of renewables capacity delivered by the Renewables Obligation, but we will revisit this issue as part of the review that we already have in train and planned of the Renewables Obligation and the operation of that in 2005-06.

Q202 Gregory Barker: Given that your strategy, by your own admission, is not going to meet the 10,000 target, would it not make sense to be flexible at this point? The figures that we have been supplied with - and perhaps you would comment on them - show that the cost of RO exemption would be in the region of £66 million. If renewables meet their target, 2.5 million tonnes of carbon will be saved. If CHP meets its target up to 1.5 million tonnes of carbon will be saved. That is 1.5 million tonnes of carbon for just £66 million. Perhaps you would like to comment on the economics of it, which seem compelling.

John Healey: Mr O'Sullivan may want to comment on the figures. I understand the case that you and others make from the narrow perspective of CHP. As I am trying to explain, the Government's approach to this takes into account the wider operation and future of the Renewables Obligation and the wider concerns about the energy market. It is not solely focused on CHP.

Q203 Mr Francois: You mentioned, Minister, a report by Cambridge Econometrics that basically says you are going to hit the target.

John Healey: No. I think I made that clear. The analysis by Cambridge Econometrics, if you take the mid range of the estimates they make, suggests that we have in the strategy already in place, the measures we have already confirmed or have put in place, plus the introduction in 2005 of the EU ETS, the measures that will deliver 8,500 MW. That is still short of the 10,000 target for 2010.

Q204 Mr Francois: So they are suggesting that you are pretty close to the target but will just undershoot.

John Healey: That is a better description.

Q205 Mr Francois: Who commissioned that report?

John Healey: Government.

Q206 Mr Francois: So you paid for a report that says you are just about going to deliver but not quite.

John Healey: Yes, but we went to Cambridge Econometrics because they are a respected, expert and independent academic outfit, and I do not know if by that you are suggesting that somehow they are compromised or have not done an objective job, because I think that is quite a serious suggestion to make.

Q207 Mr Francois: No, I am not suggesting that at all.

John Healey: We commissioned it because we are interested in an external, independent, academic assessment of whether or not we are on track and, if we are not, how far short we may be for the 2010 target.

Q208 Mr Francois: Minister, I am sure they are a fine and upstanding organisation, but it is important to have on the record who paid for the report. Part of the reason for that is because you have referred to the Renewables Obligation itself, ten per cent of our energy generated from renewables by 2010. This Committee looked into that whole issue in considerable detail last year, and we produced a report which was then debated in a fairly lively debate on the floor of the House. The Committee concluded that you are nowhere near it, and do not have a strategy for getting anywhere near it. So there are a number of examples where the Government keeps coming up with these very ambitious targets, that are always going to be achieved or nearly achieved just a few years away, yet when you look at them in detail, you find that actually, there is not really a strategy in place. Why do you keep doing this?

John Healey: I do not accept the contention that there is not a strategy in place. Once your fellow Members of the Committee have a chance to study the latest analysis by Cambridge Econometrics, you may take a judgment on how robust that is, but we are dealing, as this Committee will understand better than anyone else in Parliament, with very long-term challenges with climate change. That is why the targets and the time frames that we have set, in many ways, in historical context, quite unusual for any Government, given the sort of imperatives of the political cycle, are in this case set for 2010. As this Committee knows, the Energy White Paper also set out a trajectory that will take us through to 2020 and 2050, in part, I have to say, in the belief that we need to, and the hope that we can build some sort of cross-party consensus behind the imperative to act on this.

Q209 Mr Francois: It is a cross-party Committee that concluded a year ago that you were absolutely nowhere near it, and there was a cross-party consensus in this Committee on that. How confident are you that you will make up that gap between 8,100 and 10,000 specifically on CHP?

John Healey: I am pretty clear that at some point between now and then we have to do so. To be perfectly blunt, you ask me whether I am confident, sitting here on 12 May 2004, that we will make up that gap, and because I do not have in my back pocket to announce today the specific additional measures which would close that gap, I cannot in all honesty say to you "Of course I am confident." I could be confident more generally, though, that this will remain an important target for government, and as the evidence and experience demonstrates, if we are falling short of the target that we have set, and we need to bring in extra measures in order to close that gap, we will do so. I can give you that degree of assurance.

Mr Francois: It could not be clearer, Minister. Thank you very much.

Q210 Joan Walley: I just wanted to come back to this issue about the Renewables Obligation and the reference that you made to deleting the amendment when the Energy Bill comes back. I wondered how, in the interests of consistency, the Government is taking this approach towards CHP when in respect of extending co-firing of biomass with coal it took a slightly different view. I just wondered how you can argue one way with one and the other way with the other. It seems to be an inconsistency and I would be grateful for some detail of the thinking behind that.

John Healey: I have tried to explain on this narrow issue of CHP and the amendment that was passed in the Lords that the view that we have taken is that it has a wider impact on the more general Renewables Obligation. It has a wider impact on the market and the playing field performance of generation, but when you take a broader view like that, this leads us to believe that this is not the right thing to be supporting from perhaps the narrowly drawn interest of simply wanting to see an extra advantage for CHP.

Q211 Joan Walley: Did that not apply to coal and biomass? Was that not giving that an advantage?

John Healey: Perhaps you could explain how you believe that there is a parallel argument or case around generation from biomass and from coal?

Q212 Joan Walley: It just seems to me that if you are changing the rules in respect of coal and biomass, it would be possible to change the rules in relation to CHP.

John Healey: I think, Mr Chairman, I will have to take this issue away and have a fresh look at it, in that I have not studied the detail of the passage of the Energy Bill or the relative treatment of biomass generation and coal. I will certainly look at that and come back to you.

Q213 Gregory Barker: I have two short questions to finish up on this particular topic, Minister. Given that we are adrift, and we can debate how confident you are or what measures will come up, on the 10 GW target for CHP, will you ensure that that target is incorporated in Defra's PSA?

John Healey: As you will appreciate, when we announce the outcome of the Spending Review, that is the point at which Government confirms the new Public Service Agreements for departments across the board. That is the point at which we will confirm whether or not that will be the case, but I can say to you that we are giving that very serious consideration as part of our Spending Review work, and as part of our assessment in discussion with Defra of what should be appropriate PSA targets for that department.

Q214 Gregory Barker: Would you agree that if you did not do that, it would cast doubt on the comments you have just made about the veracity of the strategy that you have in place?

John Healey: No, I would not agree that it would automatically undermine or cast doubts on the strategy, but I would say again that the Committee's interest is significant. I note that, and say to you that we are examining that as part of the Spending Review process at present.

Q215 Gregory Barker: Finally, what about a target for ODPM for CHP in new housing development?

John Healey: We would give that consideration on the same basis as I have just explained, and at this stage, a couple of months before the outcome of the Spending Review and the confirmation of PSAs, it is difficult for me to say much more than that.

Q216 Chairman: Just related to that, and before we move away from biomass, you are probably aware that the Royal Commission on Environmental Pollution produced a report yesterday making recommendations about the use of biomass in CHP projects. I do not know whether you have had a chance to see that.

John Healey: I have not, but I am aware they published it yesterday and I will certainly take a good look at that.

Q217 Chairman: I think you may find it instructive. They refer to the fractured and misdirected government policies for this important energy source, and they make the point that the strategy has failed to deliver the progress expected. One of their recommendations is that biomass-fired CHP should be installed in all new-build development. There are a few challenges there for you, Minister, and maybe once you have had a chance to absorb their recommendations, you might like to drop us a line setting out your thoughts on their report.

John Healey: Indeed so.

Q218 Mr Chaytor: Minister, could you tell us about your plans to amend the exemption criteria for the Climate Change Levy? Currently the energy-intense users get the 80 per cent exemption, but you are proposing something new.

John Healey: Am I right that you do not mean the exemptions from the Climate Change Levy but the eligibility for Climate Change Agreements for the 80 per cent discount? Currently, as the Committee will be aware, there are some 44 industrial sectors that qualify for the 80 per cent discount on the basis of the sector and sites agreeing climate change targets. The Committee will be aware that the assessment of the operation of these CCAs has demonstrated that they have been really rather more effective than we anticipated, or might have hoped, in delivering emission savings from those sectors, and that the outcome at the first evaluation suggested that the CCAs together, the contribution of those sectors, had exceeded the target almost threefold for the reduction in emissions.

Q219 Mr Chaytor: Do you have some figures on the net reductions in emissions?

John Healey: Yes, I can let you have those, but essentially, it is three times the targeted reductions as a result of the Climate Change Agreements covering those sectors. Clearly, therefore, they have a value and effectiveness based on that in achieving the climate change goals that we have. They are also popular with industry, and we have been under sustained lobbying and reasoned argument, and more general argument, from industry organisations to look at ways of perhaps extending the eligibility. Principally, our concern about the Climate Change Agreements was to allow those sectors which first of all had a high intensity of energy use in order to conduct their business and a degree of exposure to international competition as the main criteria for concern that would lend themselves to the eligibility. On the introduction of the Climate Change Levy and the CCAs, we found that there was not a perfect measure that allowed us to do this, and we used a proxy in a sense for the IPPC. That has worked well but it has been unsatisfactory to the extent that there are a small-ish number of sectors where the energy use is intensive and there are arguments about the degree of competition to which they are exposed. The introduction of the Energy Products Directive and the adoption of that in the European Union last autumn has now given us the framework to say that alongside the established criteria of eligibility for CCAs, we can introduce, as we announced in the Budget, a way of extending the CCAs to sectors that meet both the feature of energy intensive use and exposure to competitive pressures, but tie those criteria to the Energy Products Directive, which what we are proposing to do. We estimate that there may perhaps be 9-12 sectors that could become eligible if they choose to go down the CCA route rather than pay the full Climate Change Levy rate as at present.

Q220 Mr Chaytor: This is quite a turnaround in Treasury policy, is it not?

John Healey: No. We have been very clear really from the outset that we understand that there is an argument for sectors that were not previous eligible for CCAs but we had to find a basis that was consistent, that was legally well based, that met the criteria we had for it and, as I say, the implementation of the Energy Products Directive in Europe has now given us the framework through which we can do that, but that did not exist two years ago.

Q221 Mr Chaytor: What estimate have you made of the cost to the Treasury if all of these sectors currently outside the 80 per cent exemption and outside IPPC now came within it? What is the cost of extending the exemption to these sectors? Equally, what are the likely savings of CO₂ emissions going to be?

Mr O'Sullivan: It was around 20 million. The CCA savings we get in terms of CO₂ will partly depend on the negotiated Climate Change Agreements which Defra will have to make with up to a dozen sectors or so that might be eligible. We do not have a good estimate yet.

Q222 Mr Chaytor: Again, this relates to my earlier intervention about the landlord's tax allowance: does it not always make sense to have an estimate of what the likely CO₂ emission saving is going to be before changing the policy? You will then never know what the cost per tonne of carbon reduction will be, and this could be a hugely expensive way of saving carbon.

John Healey: It is impossible to make that assessment reliably at this point. If up to a dozen sectors become eligible under the new system or the additional system to negotiate Climate Change Agreements, and none of them choose to do so, which is clearly a matter for them, there will be zero impact. Depending, then, on the nature of the agreements that are then struck, and the sort of targets for greater efficiency and emissions reduction that Defra are able to negotiate as part of that process, once again, it will be an obvious feature in the climate change impact if they are in place. It is difficult to do what you are obviously principally interested in from an environmental policy point of view at this stage, except to say the evidence so far from the sectors that have taken this up leads us to believe that it is likely to be an efficient way of trying to make further progress.

Q223 Mr Chaytor: Could you tell us broadly how many installations or sites currently have Climate Change Agreements and what is the net reduction in CO₂ emissions that those agreements have brought about? You mentioned three times more than you anticipated, but in real terms, do we have figures, or could you let the Committee know?

John Healey: I certainly can. I cannot remember off the top of my head how many installations are covered by those 44 sectors. I think it is around 10,000 but I can certainly let you have that data, and the CO₂.

Q224 Mr Chaytor: When the Climate Change Levy was introduced, my recollection is that there was a special grant scheme for industrial and commercial users to provide grant aid to implement energy efficiency measures to offset the increased cost of the Climate Change Levy. What has been the take-up of that? My recollection is it was something like £150 million over three years or something of that order, and I vividly remember speaking to large companies in my constituency who were complaining about the Climate Change Levy and saying to them "Yes, well, the levy is the stick but here is the carrot. You can apply for this grant in order to improve the efficiency of energy use in your business." I know of one extremely good example of an engineering company in my constituency that did take up the grant. My question is: what has been the general picture on take-up and what is your general assessment of how firms are responding to the need to introduce insulation measures and generally improve the productivity of their energy usage?

John Healey: I think we may be talking about the portion of the Climate Change Levy that was redirected not to the cut in National Insurance for employers, which, of course, the vast bulk of the levy was directed towards, but was to set up the Carbon Trust. One element of the Carbon Trust's services on offer is indeed grants. It offers a wide range of other ways of assisting companies assess their energy efficiency performance and improve it, including direct advice, including some grants, but also including, interestingly, having some investment capital available. So the Carbon Trust I think is probably the route that your company took.

Q225 Mr Chaytor: The point was that the selling of the policy at the time was that this Budget would be totally available for companies to bid for for energy efficiency measures. I admit this was before the Carbon Trust was established.

John Healey: The principle on introduction of the Climate Change Levy was that this was not about increasing the tax take to the Treasury, hence the across-the-board National Insurance cut to all employers and hence a part of the anticipated levy take being directed to set up the Carbon Trust, grants being part of what they had available. My general assessment, which is what you ask for, is that the Carbon Trust is now really beginning to take off. I think it is really rather an innovative body, that does more than just process grant applications from companies that want to see a slice of public money. It is gaining a greater credibility and profile in the business world. I can certainly let the Committee have the latest annual report from the Trust that would give the sort of data that you are interested in.

Q226 Mr Chaytor: In most companies, in most industries, other than the energy-intensive users, energy consumption will be a comparatively small proportion of total turnover. At the same time, the whole thrust of government approach, in particular DTI approach, I would imagine, as the sponsoring department for the main energy producers, is that maintaining cheap energy is the way to benefit industry. How, from the Treasury's point of view, can you reconcile, on the one hand, the fact that the pressure from one source of government is to constantly drive energy prices down, and thereby maintain them at an insignificant level in terms of the business's turnover, and on the other hand, draw attention to the significance of energy efficiency by fiscal measures to encourage them to implement energy efficiency measures? Is not the reality that the only way firms will start to take energy efficiency seriously is when the price of energy goes up and therefore it becomes a more serious issue for them in terms of their turnover? Is that not the dilemma?

John Healey: I do not think it is as crude as that, but you have very succinctly exemplified what is in many policy areas within government a question of identifying the tensions. The Climate Change Levy is a very interesting one. From the government point of view, you have an interest in seeing the energy consumption costs of industry being as low as possible. It makes businesses more productive, more profitable, more likely to survive, more likely to create jobs and play a part in the successful economy that we want to see. However, we have clearly recognised that competing with that outright economic objective is a concern for the environment, the threat of climate change, and therefore alongside that the rationale for introducing the Climate Change Levy and indeed, with that first-in-the-world economy-wide emissions trading system in the UK, pursuing at the same time an environmental objective. In the design of the Climate Change Levy, we have designed it not as a carbon tax, as some argued, but as a downstream energy tax, principally to avoid the domestic energy user having to pay a part of the levy, because certainly as we came into office in 1997 and considered these issues over the first couple of years, we had a major concern about levels of fuel poverty in the UK, in other words social concerns and objectives, and this is a very good exemplar therefore of the factors that in government and across government need to be balanced, economic concerns and objectives, environmental objectives and social concerns as well. People will take a different view as to whether or not we have struck the right balance, but the evidence suggests, I think, that the introduction of the Climate Change Levy with the Climate Change Agreements, and the operation of the Carbon Trust, has led to both an awareness within industry and an interest and incentive to tackle inefficient energy use, which does not hinge on driving the price up, because in fact the reforms we have made to the energy generation and supply have meant that for some time now we have had low wholesale energy prices. If one takes the research from the CBI on the operation of the Climate Change Levy and Climate Change Agreements, what this demonstrates is that, with the introduction of the Climate Change Levy, 42 per cent of firms either have taken action to improve their energy efficiency or have plans in place to do so. For those that are under the Climate Change Agreement, interestingly, it is double that at 87 per cent. So there are ways of achieving these environmental aims without crudely and simply trying to drive up the price and risk therefore pricing business and jobs out of the UK.

Q227 Mr Chaytor: So you do not accept that if it is not hurting it is not working?

John Healey: I do not accept that it is as crude as that, and I would argue to you that the task of government is to make a more sophisticated judgement that inevitably has to balance a number of competing and potentially conflicting objectives.

Q228 Mr Thomas: While we are on climate change, you will no doubt remember the concerns and interest of this Committee in aviation and the growth of emissions from aviation. How confident are you now that the Government's aim of having aviation as part of the Europe-wide Emissions Trading Scheme by 2008 is going to happen?

John Healey: It is too early to tell, and it is relatively soon after the Aviation White Paper, but we are working hard on that. We have identified it as a priority for the prospective UK presidency of the European Union in the second half of July 2005.

Q229 Mr Thomas: If you do not succeed in that aim - and I have to say that when we recently as a Committee visited Brussels and talked to the Climate Change Policy Unit there we think you will not, but who knows? - what is your other plan? You will remember that the report of this Committee said that the increases in aviation emissions would out-do and outweigh the savings that we have spent the last hour discussing that the Government is achieving. So if you are not going to make 2008, and I sense a slightly cautious approach from you this afternoon, what is Plan B?

John Healey: I hope you are wrong. You will also remember that in the Aviation White Paper we did signal a commitment that we would carry on working and looking at the possibility of short-term instruments that might have an impact on the environmental performance of the aviation industry, and that work is going on.

Q230 Mr Thomas: Does it not strike you as slightly ironic that this week, of course, BA have slapped a surcharge on their tickets due to the fact that oil prices are going up anyway, yet the Government has shied away completely from any such aviation tax itself? Does it not show that the market can stand this after all?

John Healey: Not really. We do have an aviation tax, the Air Passenger Duty, which delivers £800 million a year to the public purse.

Q231 Mr Thomas: But it is not linked to CO₂ savings.

John Healey: Precisely. The problem is that it is an aviation tax. It is not actually an instrument which is directed at all to the environmental policy objectives that you and I both share, Mr Thomas, because it has no connection to the environmental performance of the industry. In its current form, it will not play the role that I think this Committee was originally interested in seeing. Some might argue for other reasons there is a case for raising it, but all I would say is that there is not a good environmental argument for looking at Air Passenger Duty as a mechanism to try and internalise the environmental costs of this industry and there is not a good argument for looking at that if one is interested in improving the environmental performance of airlines.

Mr Thomas: No doubt as a Committee we will return to this.

Q232 Chairman: I am sure we will, but just before we move on, you referred just now to some short-term fiscal measures that you were looking at in relation to aviation. Can you just give us a hint of what those might be?

John Healey: I think it is quite difficult for me to do at this stage. All I am saying to the Committee, Mr Chairman, is that that commitment was contained in the Aviation White Paper and that work is still being conducted within government and within the Treasury.

Q233 Chairman: What type of things are we looking at?

John Healey: Some have argued, for instance, the case for looking at Air Passenger Duty and seeing whether it might be reformable so that it could operate as an environmental instrument. There are some restrictions and constraints over our ability to do that, largely as a result, as this Committee will know better than anyone, of the legal framework that restricts the degree of taxation that can be levied on this industry, and a whole web of international agreements, but we have in principle made our position clear, first of all that this is an industry that should be paying its way in terms of its environmental impact, and secondly, the protection that is currently afforded by this web of international conventions and agreements over duty and other taxation on the use of fuel and other activity is no longer justified.

Q234 Chairman: This is, I think, a change of position as far as this Committee is concerned. We have not heard you speaking like this before, and it is intriguing.

John Healey: I think you will probably find the words in the Aviation White Paper. I am not, I am afraid, breaking any new ground here.

Q235 Chairman: We have got used to being told that you did not want to price people off planes.

John Healey: That does remain the case.

Q236 Chairman: Do you know when you might be in a position to say something more concrete about the work that is currently going on in the Treasury?

John Healey: No, but the general pattern and cycle on which the Treasury does this work is tied in general to Pre-Budget Report and Budget announcement.

Chairman: We will watch this space.

Q237 Mr Thomas: I wonder if you can recall a bloke called Brynle Williams.

John Healey: Yes. He is a member of your Assembly now.

Q238 Mr Thomas: Indeed he is, though not of my party.

John Healey: Nor mine.

Q239 Mr Thomas: You will recall that he was leader of the fuel tax protests and he has announced this week that he expects his campaign to restart. Does that not fill you with dread?

John Healey: I think what is interesting about what he is saying is that he is also rather at pains, as an elected politician for a mainstream party, to point out that he will play no part in leading it, unlike in earlier years. I meet very regularly with haulage associations and the haulage industry. I am conscious in particular for hauliers about the impact of fuel prices. At the moment they are clearly being driven by world markets and by the pressures there. They are not being driven by what government can directly control. I am well aware of the tensions and pressures there, but I have to say to you, if you look back at the press cuttings round about this time during the summer last year, you will see Mr Williams making very similar comments in the run-up to Bank Holiday weekends. Certainly I do not want to see any fuel protests. I do not believe they are justified. In a sense, the decisions of these oil companies and the world situation is quite difficult to demonstrate against, even if it is a cause for concern, but we have heard it before from him.

Q240 Mr Thomas: Can you assure this Committee that you will stick by the inflation-linked increases that are expected in September? Fuel tax will go up by those increases as expected, come what may?

John Healey: What the Chancellor announced in the Budget is there in the legislation, and the Finance Bill has been considered both on the floor of the House and the whole House Committee and in Standing Committee and agreed as part of the Finance Bill. All the provisions are in place to go ahead as planned and as announced.

Q241 Mr Thomas: The problem we have here and the interest of this Committee as well is in this link between fiscal incentives and penalties, if you like, and environmental goods. We have just had the report, a month or so ago, on the sustainable development index, which is the barometer that Defra produce, and you will be aware that air quality, pollution has shot up, and the Government acknowledge that. Air pollution is up, road traffic is expected to increase by 20-25 per cent over the next five or six years and, of course, road transport carbon emissions. We have been focusing really on greenhouse gases and climate change here, which are continuing to rise. In the absence of the fuel duty escalator and the absence of any link now between the real cost of motoring and the environmental costs, what sort of strategy do you have now to make sure that the motorist is aware of his or her environmental cost, but also has the incentive to use alternative fuels and alternative methods of transportation?

John Healey: I think the short answer to that lies in the alternative fuels framework that we published in the Pre-Budget Report. That underlines the commitment to support the development of greener fuels and the take-up of those. It also outlines the principles and the process by which we will make judgments about the appropriate type and degree of support the Government is prepared to give. I think our experience, and also some of our plans suggest that the focus for this is not always most effectively at the motorist at the pump, on the garage forecourt. I would point, for instance, to the 0.5p per litre differential that from 1 September we will be introducing on sulphur-free fuels.

Q242 Mr Thomas: That would help pollution but it will not necessarily help emissions.

John Healey: It will. Its immediate impact will be on emissions, on air quality, because sulphur-free is an improvement on the fuel that it will replace, the ultra-low sulphur, but what it will do is to accelerate the development of new engine technologies. When sulphur-free fuel is combined with new vehicle engine technologies, we stand to gain quite a significant advantage in terms of fuel efficiency and therefore have some impact on the climate change emissions that you are also concerned about.

Q243 Mr Thomas: Let us look at some of the alternative fuels that you are trying to support in the Budget. If we start with bio-diesel - and I declare an interest as a diesel car owner - the genius was to invent an engine that ran on vegetable oil in the first place, and oil as such came much later. Any car on the roads today in the United Kingdom can have a mix of bio-diesel and so-called ordinary diesel quite easily without effecting any changes whatsoever. We have a 20 pence incentive in the Budget. I could drive down to London and I would not pass one bio-diesel garage. When can we expect this to be available, as it is already on the Continent, in the United Kingdom. Is 20 pence enough to incentivise the market?

John Healey: We introduced the 20 pence duty discount for bio-diesel in July 2002. At that stage the monthly production of bio-diesel on to the UK market was 150,000 litres. Generally, since then, in recent months, it has been well over 2 million litres, and the number of filling stations at which it is available is increasing.

Q244 Mr Thomas: There is not one in Wales.

John Healey: We are starting from a low base in Britain in terms of our bio-fuels industry in comparison with one or two of the other European Union states and other countries beyond that like Brazil. What we are looking at during this year is a significant increase in capacity of the production of bio-diesel. There is construction already under way of a new plant in Motherwell and plans were recently announced for a new plant in Humber, so I think this is a long-term challenge. The signs of progress are showing but what I have been clear about, and we were clear in the Budget documentation, is that those who simply argue for a greater duty discount in order to see a greater take-up, and in particular the development of the UK bio-fuels industry, may be mistaken, and this was the view your colleagues on the EFRA Committee took. The danger of simply looking at the duty discount as the single instrument to encourage this is that you increase the duty discount and make the UK market more attractive to those that are already set up to produce, in other words, producers in other countries. It already is the case that round about a third of our bio-diesel use in this country is imported. What we need to do and are committed to doing alongside this is not necessarily simply looking at the duty discount, either for bio-diesel or bio-ethanol. We are prepared to look at the role of enhanced capital allowances for investments in this field, and we are already looking at the scope for differential taxation treatment based on the feed stocks for these fuels rather than the end product, which would be a significant departure in this area. Most recently, as part of the consultation that is being led by the Department of Transport, we have gone out to consultation on whether some form of bio-fuels obligation has a role to play in driving up the production in this country, therefore the market share that bio-fuels will take of UK consumption and inevitably then its more widespread availability to the motorist.

Q245 Mr Thomas: It is interesting and encouraging that you are looking at differentials based on the feed stock, because that could have a doubly beneficial effect, as you are no doubt aware, but one of the problems is not just about the price or the incentive; it is also about the market knowing and investing in that market. You have mentioned the fact that bio-diesel is coming from the Continent at the moment. The announcement in the Budget is to peg the incentives till 2007. Other countries do that slightly differently. For example, Germany has compressed natural gas. It is pretty clear the support is there till 2020. Should we not be giving, as you said earlier, longer term signals to these partner markets? It is not just about demand; it is also about sending signals that this is a long-term profession. For example, what proportion of bio-diesel the Government would like to be seen sold in 2, 3, 4, 5 years' time, whatever, and trying to make sure that the market is aware that incentives will be there so that we develop market in the United Kingdom and for motorists to be confident as well that they can make purchases of new vehicles on the basis that there will be available these alternative fuels.

John Healey: You are certainly right, Mr Thomas, in your general point that the greater degree of certainty about the commitment of government to support these sort of developments, the more attractive the potential investments may become to those who are looking to the UK as a potential location for such investments, because clearly it reduces the risk and therefore reduces the invest premium and the cost of doing so. The commitment to not perhaps pegging the discount, as you suggested, to 2007 but a three-year certainty that the level of support will be at least that until 2007, is in part to encourage the industry to believe that this is a long-term commitment. Cargill, for instance, which is one of the major potential investors and producers in this country, were very clear that they welcomed that move to give the three-year certainty, and the fact that that had an impact on the way that they looked at things. There is then an argument, I think, about whether or not there is a case for going beyond three years. I would just say to the Committee that traditionally in Britain we have done everything on an annual basis, and this marks a pretty fundamental departure in terms of government commitment to this scale of duty discount for three years ahead. It is not immediately synchronised with the political cycle, but it is a very important commitment to be making anyway.

Q246 Mr Thomas: The one area that will not be so happy perhaps with the announcement in the Budget is those producing LPG, because there the discount is coming to an end and the signal is of increases, albeit gradual increases. How confident are you that the LPG market will not now stall?

John Healey: Based on the reaction of those in the industry, not just the LPG Association but also some of the leading players like Calor, that have been in direct contact with me after the Budget, very confident. Just to be clear, and to correct you, if I may, this is not the signal of the end of the discount for LPG; quite the contrary. What we have signalled however is that if one assesses the environmental advantage and gains from LPG, the relative gains simply do not justify in environmental terms the scale of the support we are currently giving. That has been given over the last three years in part because we wanted to see the development of a new industry and infrastructure for road fuel gases in the UK and, unlike with bio-fuels, particularly when they are blended, which is probably the best way ahead for things like bio-diesel, they need a separate infrastructure, they need separate pumps on the forecourt, they need separate delivery for LPG, and it cannot be done in the same way. What the LPG Association are saying and companies like Calor about the judgment we took at the Budget, which is to reduce the duty discount by a penny each of the three years, is that this strikes the right balance in their view, accepting the case that the environmental advantages do not currently justify what is still by far and away the most generous support anywhere in Europe for the LPG industry, but nevertheless, this gradual scaling back of government support is sufficient that it will not jeopardise the investment both the industry and the government have made in building up the road fuel gas industry, where we obviously have to share an interest with them. We do not want to see the investment the government has made, just like they do not want to see their investments, come to nought by a collapse in the industry. That was a major factor in the judgement that we took about the appropriate scaling back but not the ending of the discount.

Q247 Mr Thomas: But are you not sending out a signal here that in the long term - and this might be the right signal, but it would be nice to have it out, if you like -you really think that the best way forward environmentally for alternative fuels is via ethanol, via diesel and LPG was an interim technology that probably will not have a long-term future?

John Healey: No, not at all. We are not really in the business of picking specific products as winners. What we have said very clearly in the Budget documentation and the pre-Budget report as well is that assessment of LPG, for instance, suggests that we need to scale back the level of discount on duty here to a level that is more consistent with the environmental benefits that it brings, and that is the declaration of principle. The decision taken at the Budget was about the appropriate rate of change over the next three years and that is what the Chancellor confirmed.

Q248 Mr Thomas: The other part of the armoury in the Budget as regards these was Excise Duty. You have frozen the rates again this year. It was interesting to hear you refer a little earlier in terms of differentials, because the differentials within the Excise Duty between diesel, petrol and the different emissions and so forth are quite small in real terms. They are not insignificant but they are fairly small. Has the Treasury modelled any different ways forward on this, but perhaps with more significant and more radical differentials coming into Vehicle Excise Duty. Would that have another beneficial impact? It is not just about the fuel that you put in the car; it is also the cost of owning a car on an annual basis, for example.

John Healey: I am not quite following your argument about more radical differentials.

Q249 Mr Thomas: Bigger ones. The difference between a triple A band...

John Healey: You are talking about Vehicle Excise Duty. I beg your pardon. I thought you were talking about Excise Duty, which of course is the duty on fuel.

Q250 Mr Thomas: The difference between £75 and £135 you might say is double but in real terms it could be bigger and have a bigger effect in terms of people's choices.

John Healey: I beg your pardon. I misunderstood your starting proposition. I think the significance of the reforms that were made to the Vehicle Excise Duty system and tying that for all cars that are produced after March 2001 is that it gives signals to the motorist about the sort of vehicles tied to improved environmental performance that we want to encourage. I think common sense would suggest when somebody is buying a new car, the level of Vehicle Excise Duty, even if one doubled the differentials, is likely to be fairly marginal, if not irrelevant to the decision to purchase a new car. Nevertheless, I think it is an important part of the range of features of the tax system we are trying to put in place that is directed towards encouraging people to think about measuring environmental performance. Whilst the impact of VED alone might not be sufficient, when you set that alongside the reforms we have made to company car tax and the impact it appears that has had on the environment, and some of the measures for alternative and greener fuels and the creative use of excise duty rates, for instance, to try and shift the market, as we plan to do for sulphur-free, then I think you build up a picture where across the board use of fiscal instruments where we can is having an impact on the sort of climate change challenges that road transport particularly presents.

Q251 Mr Chaytor: Minister, you say that in the context of the cost of purchasing a new car, which for a small car would be £6,000-7,000, and for a large car would be £20,000-30,000, this is marginal or irrelevant. It is, because the Treasury has made it marginal or irrelevant, and it is just not a factor. The question is, is it hardly worth levying Vehicle Excise Duty, because frankly, if you are writing a cheque for several thousand pounds to buy a car, whether you pay £55 or £95 or £115 a year to run it is absolutely irrelevant, and surely the issue is do we want a proper, progressive environmental vehicle excise duty, in which case the bands need to be bigger, or why not scrap it and put it all on fuel?

John Healey: Two things. First of all, I think it is an important signal within the system that is directed towards encouragement ----

Q252 Mr Chaytor: But it is a signal that the biggest growth in new vehicles is these four-by-four trucks that are trundling round the place.

John Healey: I do not accept the case that therefore one should scrap VED and load it all on to fuel. There remains an important function for the vehicle licensing system. It is part of ensuring we get good registration and information about the vehicles on the road. It is a way of periodically, every 6 or 12 months, being able to run a check on MOT and insurance with all 29 million vehicles that we have on the UK roads. It has formed an important part of the Government being able over the last year or so to pick up more than 800,000 people that have not been following the rules.

Q253 Mr Chaytor: So the environmental dimension is really the least significant factor of it; it is about maintaining legal controls over tax and insurance and all the rest of it.

John Healey: I think the environmental structure is a useful part of the design of the VED. I think it was an important reform to make at the time. I think it gives a signal, but I would not argue that it is a strong enough influence over the purchasing decisions for new vehicles which, as you say, are a very significant investment, and generally turn more decisively on other factors than the annual road licence cost.

Q254 Chairman: The problem is that it is a signal that most people cannot see, and even if they do, they do not obey. I have one automotive-related issue to put to you. It concerns HFCs, which are used in cooling systems. You will be aware, I think, of the various moves going on in Europe and the discussions about phasing out F-gases and so on and so forth. I just wondered whether the Treasury had given any consideration at all to taxing HFCs in a way which reflects the extraordinary damage that they can do in terms of global warming, often much greater than CO₂.

Mr O'Sullivan: Obviously, we have the interest in this across Europe. This is one where we have largely looked to Defra to advise us on whether a regulatory approach is a better solution to HFCs or whether this is something where tax might make a big difference. If we were advised that that was the case, and it would be a cost-effective way of tackling this, we would certainly want to think about that.

Q255 Chairman: Have you asked Defra, and are you in discussions about this?

Mr O'Sullivan: We are in regular discussions about what they can advise for their Budget submissions. I am quite happy to take this up with them.

Q256 Chairman: The answer is that the Treasury is not currently looking at taxing HFCs to reflect the contribution they make towards climate change?

Mr O'Sullivan: As I said, this is one where we would look to Defra to advise us on the best way of doing this.

Q257 David Wright: Minister, can I return to the Barker Review and cover the tax issues within Barker. Clearly, Barker envisages around about 23,000 new homes per year coming on stream if the process can be got right, and of course, the balance between greenfield and brownfield development is crucial, and the Government has made some moves forward, of course: 60 per cent of properties are now being developed on brownfield land. That is positive. Could you touch briefly though on the difficulties around VAT treatment in relation to brownfield and greenfield development and why you have not considered a re-examination of those issues on VAT? What challenges do you think there are environmentally with such a large-scale development programme?

John Healey: In a way, I think the Barker Review bears reading for the assessment she made and the judgment she came to on this proposition on VAT as much as it does for the measures that she recommended. The reservations that she had principally on VAT as a measure to try and capture the profit or the gain as part of developing was that firstly, there is an issue that although VAT is a national tax, it is levied within quite a rigid framework that is set at the European level. When one looks at the situation in the UK, where the whole question of housing and land supply, relative costs, is very variable across regions and within regions, there is first of all a concern that simply looking at VAT to deliver this may not give us the flexibility that would suit us best. Certainly when you look at the regional differences in the gain that is there to be had from housing developments, if you had a flat rate of VAT, the proportion that that would be in south Yorkshire compared to south Devon, for instance, would be very different as a proportion of the total development gain, and indeed, the house prices at the end of it. It is not terribly flexible, nor is it likely to be a measure that is well suited to our particular circumstances in Britain. That is why she ended up recommending a planning gain supplement as the best fiscal measure for recovering for the public purse and, to follow her argument, therefore, funds to invest in housing supply, to take that in some way out of the gains that are made in the property development process.

Q258 David Wright: Do you see any difficulty in developing that proposal? I am assuming it would be levied when planning permission by consent was gained on a greenfield site. Is it going to be particularly complex to manage? It would be interesting to hear what you have to say about whether we could actually green it up in terms of a wider perspective, for example, if a developer were committed to providing very energy-efficient housing on a greenfield site, would there be a case for reducing the tax levy? Could we use that tax to incentivise developers who are committed to developing on greenfield sites to make the housing they build more sustainable?

John Healey: The short answer to your two questions is that our view of it as a proposal is that it is not going to be straightforward but that it is feasible to develop. Secondly, if you follow one of the arguments that Barker makes when she argues for flexibility in the way that it is designed and implemented, and she cites, for instance, the potential for flexible rates in some way for brownfield versus greenfield, then in principle, if the arguments for incentivising particular forms of development or particular locations for development were sufficiently strong, there is no reason in theory essentially why you could not design such a measure in a way that was flexible enough to build in those sorts of objectives.

Q259 David Wright: So the Government would examine a proposal, say, if you took a 10-hectare site, and there was a proposal to build large, very poor energy-efficient houses or an alternative proposal to build a high-density very sustainable development, you would see an opportunity to incentives the developer to go for the latter option by using this as a device?

John Healey: I would encourage this Committee, if it is interested, or any interest group that wants to pursue that sort of argument, to develop the case for that and put it to us as part of the consultation and discussions that we are now having on the feasibility of a planning gain supplement. If it is put to us, we will certainly consider it.

Q260 David Wright: Can I put it to you then, Minister?

John Healey: My word of caution would be this: you asked me before whether we saw any problems with doing this. The sort of problems that have bedevilled previous attempts to introduce such a fiscal measure as this include complexity, and the more finely tuned the objectives you want want to meet through this, the greater degree of complexity you risk in introducing it. There is a judgment to be taken there and clearly with complexity comes cost of administration. The other features that have tended to be the flaws of similar measures in the past or similar attempts in the past include setting the rates at a punitive level that discourages development rather than encouraging the right development in the right places. Secondly, there is the problem with hoarding and land banking based on the belief that the government that introduced it was not long for this world and that a change of government might bring a change of policy and therefore it was worth sitting tight on land rather than releasing it for development, which clearly would not help us very much, therefore, the importance of trying to achieve through this process some degree of political consensus. Finally, there was in the past a problem with widespread avoidance, and you would expect a Treasury and Customs Minister to say that that will inevitably be a feature of the judgment that we take about the feasibility and, if it seems sensible, the design for the planning gain supplement as Barker has recommended.

Q261 David Wright: What is the earliest point at which you could bring it in, Minister?

John Healey: Barker has set a range of recommendations and challenges here. I think she would argue and we would accept that they ought to be introduced as a package, and we are looking at a period of perhaps 18 months working through all this to the point where we might then be in a position to introduce these measures.

Q262 Mr Francois: Minister, with regard to the development land tax, Friends of the Earth were extremely critical of Barker. They did think this was from their perspective the one potentially valuable suggestion in the entire report. Where would the money go to? Would the suggestion be that revenue raised from it would go to the centre for redistribution by government or would the suggestion be that the revenue would go to local authorities, as it does in the current manner with section 106?

John Healey: The open answer at the moment, Mr Francois, is that that is a matter for discussion as part of the work and later decision. Kate Barker was very clear that her idea of a planning gain supplement was in her terms what she would regard as a fair means of releasing resources from the gains that come with development to local communities so they can share in the value of that development. That was essentially the rationale she proposed for it. It is an open matter at present. My own inclination is that if we can avoid a transmission via the centre, and it makes sense not to do so, that would obviously be an advantage. In terms of section 106, what she argued was that as you introduced the planning gain supplement, that was the fair and direct way of local communities benefiting from development and that should therefore be scaled right back. The understandable reaction from the industry is that conceptually this is a better way of doing it. At the moment the operation of section 106 is quite uncertain. It does not necessarily deliver to local communities significant benefit and does not necessarily produce a greater investment and incentive to develop more housing, which is ultimately where we come back to, which was the principal need that Barker identified and to which her recommendations are directed.

Q263 Mr Francois: I think it is very important that I declare my interest as an MP from the South East of England. Nevertheless, this is applicable in many other parts of the country too. If you were to go down the central route, and I think you are saying this afternoon that you realise there are dangers in doing that, if you were tempted, because there is a lot of revenue to be raised from this, I would try to make the point very strongly that we already have resistance in a lot of communities to what would be regarded as excessive house building, and if you were to add insult to injury, and on top of piling on the houses and the infrastructure that goes with that, you then take the revenue gain away to the centre so the localities get the pain but very little of the gain, you will come across quite serious resistance in some areas. I wonder if it is possible to make that point now, while you are still deliberating on this. As you have an official from the Treasury with particular responsibility for spending, I wonder whether, when you have made your comments, Minister, Ms James has anything she wants to add on that.

John Healey: Let me just say, the point is well made. It is the right time to make these points. I understand the fears for those in the South East. I would just say two things. Mr Wright mentioned we would retain that target to have 60 per cent of the development on brownfield rather than greenfield sites, and secondly, the 120,000 extra homes, if we succeed in building them, will not all be built in the South East, quite clearly, and if they were, it would actually take up, according to Barker's case, less than one per cent of the land area available in the region. One understands the fears, but I think in many ways they are misplaced and/or exaggerated.

Q264 Mr Francois: It is not just 120,000 in the four sustainable communities developments. Because of regional housing boards, housing numbers for a whole swathe of counties in the South East have recently been significantly increased. In my own county in Essex we have to take another 20,000 y 2021. So it is not just those four areas by any means. We are looking at very large-scale housing, and you are now starting to get genuine resistance. What I am trying to say to you, in a relatively non-party manner, is if you were to give in to the temptation to draw the money to the centre, that resistance would be even more fierce than it currently is.

John Healey: I understand the point you make. The bigger general point beyond the mechanism for routing the revenue of any potential planning gain supplement is the challenge we all face, which is that without more homes, particularly in those areas where the pressure on existing housing is greatest, in those areas of the country where the economy is performing best, including some of your own areas, if we are not building more homes, housing will not be available for people who either currently live or want to live or those that want to have access at some point to the housing market for themselves. So there is an important economic imperative here, and an equity imperative, I think, to set alongside the concerns that I do understand that Friends of the Earth and others raised about the potential threat they might perceive to development.

Q265 Chairman: These are all issues which this Committee will be looking at in the recently announced inquiry into housing. Does Ms James have anything to add to what Mr Francois has asked?

Ms James: Thank you for the opportunity. I should make clear what I really work on is departmental spending by Defra, and at this stage I do not think there is anything I can add to what the Minister has said.

John Healey: There is no spending commitment there.

Q266 Paul Flynn: For the 2004 Spending Review you have abandoned the requirement of departments to make separate sustainable development reports. Was the 2002 experience a failure?

John Healey: No, it was not a failure, but our judgment this time around is that we can do it in a better way. We can do it in a better way than essentially asking departments to consider the challenge of sustainable development and the relevance to their plans as something separate. The guidance, part of which the Committee has seen, for this Spending Review, and it will be a feature that we examine very closely, emphasises that they need to build into their explanation of the case for the mainstream and plans and programmes that they want supported through the Spending Review.

Q267 Paul Flynn: As you say, we have seen an extract from the main guidance from the department, but it does not encourage us to believe that this will become more important rather than less important. It talks about "As part of the programme departments may be asked to provide one or more of the following in their submission" and one of those, the main one, is an examination of the positive and negative sustainable development impact of the department's proposals. In particular, they should report where there is a significant direct impact, positive or negative, on one of the headline indicators: they may be asked to supply on one of the headline indicators. There are 147 headline indicators. How on earth can this be a strengthening of policy? "For which they may or may not be asked to provide"?

John Healey: The guidance is the general framework. What in practice is happening is that each department is having to agree with the spending team that we have in the Treasury. So in Fiona's case, the EFRA department is having to agree with the Treasury as part of their submission to the Spending review areas on which they may be asked to report specifically on the sustainable development impact of their policies or their programmes. So in a sense the guidance that you are quoting from there is general and it is permissive. What is being followed up is the detailed work between the Treasury spending teams and the departments concerned.

Q268 Paul Flynn: The guidance is extremely imprecise and does not seem to place any obligation on the department. It says "they may or may not" and in a very tiny area. Of those 147 indicators, you have 15 headline ones, but again, they may not be called to report even on those.

John Healey: Where those headline indicators are central to the plans of particular departments, they are likely to feature very strongly as an integral part of the submission they are making in the Spending Review, but it clearly will not be relevant to some other department. In a way, that is another way of explaining the "may" that you point to in the guidance, because the guidance is there as general guidance potentially to cover all departments, but the particular relevance of the concern about sustainable development issues is more specific and more relevant to some departments in some of their areas than others.

Q269 Paul Flynn: I can understand how policy can be refined in that way, but you are replacing a mandatory requirement to produce a separate sustainable development plan of all departments by these vague recommendations that may or may not be imposed. Surely that is a weakening of policy.

John Healey: In my judgment it is not. It is making it the focus of these departments as part of their mainstream work rather than being able to set aside the sustainable development issues as an add-on, as they perhaps were able to do in 2002. In the end, I guess, the judgment about whether this process is strengthening the place of sustainable development in the Government's overall target setting and spending programmes will be on the outcome that we publish in the White Paper on the Spending Review rather than in the more general operational guidance that we publish beforehand.

Q270 Paul Flynn: I think perhaps the key words you used in your reply were "set aside". If we can look at how we are doing, the DTI Renewables Innovation study highlighted the level of funding for renewable technology, which they say is far less than both the level of funding and the length of time the funding applies than all of our main competitors. Similarly, the Energy Efficiency plan stated, compared to other countries, the UK has a relatively low level of funding for energy efficiency research and development. Do you agree that the level of funding in these areas is inadequate?

John Healey: I myself am not in a position to judge whether or not those arguments are right, but if they are correct, and backed up by the evidence, I would half expect to see them made by the DTI as part of their bid in the Spending Review process.

Q271 Paul Flynn: Yes, indeed, but they have said these things now, and this Committee were struck by evidence that we had from Professor David King on the urgency of the cataclysm that could well engulf us on this. On these areas there does seem to be a lack of any urgency on the part of the Government or a lack of appreciation of what could happen if we keep polluting the atmosphere and poisoning the planet in the way we have done. Do you not feel there is a lack of attention by the Government to the scale of the problem?

John Healey: No, I do not actually. I think with the Energy White Paper we published in February last year and the follow-up with the implementation plans on energy efficiency at the end of April, the level of commitment we are making to this and indeed, some of the new policy instruments we have been discussing this afternoon all I think underline that we take these extremely seriously. One might argue that the UK is taking the threat of climate change and our responsibilities to contribute to try and solve that more seriously than many other countries. Certainly David King is a really important figure within government as the Chief Scientific Advisor. He is one of the most articulate and powerful advocates for developing government policy further in this area.

Q272 Paul Flynn: Finally, this Committee has previously commented on the dearth of environmentally related targets in the departmental service agreements. Can we expect to see more of the environmental targets in the future?

John Healey: It is hard for me this side of the Spending Review to answer that, because I simply do not know what the outcome will be, but I think, based on the fact that our approach to the Spending Review now makes the question of the environment and sustainable development integral to the Spending Review process, the Committee ought at this stage to be confident that that will be reflected in the PSAs and the investment programmes that we publish in the Spending Review, and will make its judgment based on the outcomes from this process.

Chairman: We will be looking for them.

Q273 Sue Doughty: On the issues Mr Flynn was referring to, I get the feeling sometimes we are dancing in the dark in knowing which bit of policy is actually delivering. Some years ago the DTR told us it could not evaluate separately the impact of each different policy instrument, such as the enhanced capital allowances and the Climate Change Levy on reducing emissions. Just two months ago the Carbon Trust could not tell us what the take of the ECAs was because the Inland Revenue did not think it was worthwhile to collect the data. How do you think you can assess the impact of a policy instrument or choose which ones you are going to use if you cannot monitor the impact?

John Healey: I started this session by saying I hoped the Committee would see the whole question of the environment and economic instruments as policy work in process. We are in the continuous process of improving our ability to monitor and evaluate what we are doing and develop fresh policy as appropriate. You will see in the Budget documentation we improve the degree of reporting of what our assessed impact of some of the environmental policy measures is. That is based on two things. It is based on what is undoubtedly, compared to two or three years ago, a better data set and evidence base on which to do that, and which we strive to improve all the time. Secondly, it is based on the fact that with some of these measures they are relatively recently introduced. They have only been in place for a couple of years. For instance, with company car tax, we have done an initial evaluation of that, including its apparent environmental impact, but clearly, the full evaluation and the conclusions that we can draw from that are difficult to tell at this stage, but in another two or three years they will be clearer. We will be able to make our estimates or our assessment of the impact with greater confidence and accuracy.

Q274 Sue Doughty: Are you collecting the relevant data then? I come back to the fact that the Inland Revenue did not seem to be collecting the data. How do we know?

Mr O'Sullivan: Perhaps I could pick that up. It has been a difficulty that to cut down the compliance costs we have not required people claiming capital allowances to provide all the detail, but we do have a valuation of the role of enhanced capital allowances that has been undertaken working with the Carbon Trust and is using surveys and other sources of data. That will be undertaken this year and there is work already in hand on that. We are collecting data from other sources than just Inland Revenue to evaluate that. Cambridge Econometrics are doing work evaluating that, which will come to fruition towards the end of this summer, and on the Aggregates Levy. It is a big concern that we collect the data and evaluate these policies and have a clear idea about the cost-effectiveness of them, and we will put a lot of this together in the Climate Change Programme. We will be looking at the major policies and the cost-effectiveness of these policies in thinking about how we are going to take forward that programme.

John Healey: I should say that we actively encourage and are open to suggestions to us from wherever they come about improving our ability to assess, evaluate and improve the evidence base on which we can work. Our experience over the last two to three years is that interest groups, whether they are green lobby groups, industrial concerns or academics have played quite an important part in helping us to improve this.

Q275 Joan Walley: Following on from that last remark, Minister, could I take it that in view of the merger of Inland Revenue and Customs and Excise, now being merged with the Treasury, that that invitation that you just set out could be an opportunity for you to be telling us how you are looking at perhaps dealing with some of the failures in the past to properly monitor what was going on in respect of Inland Revenue and collecting data in order that you can do the very monitoring that you talked about much earlier on, for example, although it was in relation to to CHP? Are you looking at this opportunity that is presenting itself with the merger to re-think your approach towards sustainable development with those merged departments?

John Healey: In all honesty, Ms Walley, we are not yet looking in that degree of detail, but what is very clear is that the integrated revenue department that we propose to set up gives us the opportunity to do precisely that. It gives us the opportunity, whether that is in relation to the design, the monitoring, the evaluation of business taxes across the board or indeed specific measures for charities, which are currently maybe in part the responsibility of Customs and in part Revenue, or indeed in pursuit of environmental objectives, by having a single revenue agency, it certainly gives us the opportunity to do just what you are urging on us. At this point, I have to say to you, having only announced the integration of the two revenue departments in March, the serious work is at a much higher level at present. No doubt that is something that we will come on to.

Q276 Joan Walley: Can I put it to you that the whole thrust of the environmental green concerns are that things should be put in place at the very beginning, at the earliest possible opportunity, so if these discussions are taking place only at the very highest level at the moment, that is precisely the time when the opportunities for sustainable development, particularly in view of the review of the Sustainable Development Strategy, should really be looked at by the most senior people within the Treasury, working, of course, to you on that.

John Healey: Yes, and it will, but just at the moment the sort of issues that we are examining ----

Q277 Joan Walley: ---- are not as important as sustainable development?

John Healey: No. We are not yet at sustainable development. We are looking, for instance, at who should be appointed to lead this agency, and we are looking at the appropriate governance arrangements by which it should report to Parliament and to Ministers. Those are the sort of higher level issues at present that are the focus of detailed attention. I understand your interest in sustainable development, but it gives us the opportunity to come to that. All I am saying to you is we have not yet reached that point.

Q278 Joan Walley: No, but what I am saying to you is that you did invite us to comment, and given that the review of the Sustainable Development Strategy is taking place now, I would say that this is precisely the time, because in the very person who you appoint you will presumably be looking at some kind of criteria. It may well be that if you do not pinpoint the importance of somebody with an overview of this subject, you would end up with somebody who would be unable to relate to this whole agenda. It is precisely weaving this in at the very earliest opportunity that gives you that wonderful opportunity in the merger of these departments to really go down a new, green route in terms of sustainable development, and that should be linked as well to the review that is taking place at the wider level across government. In respect of the new arrangements that you will be having, will there be a duty to promote sustainable development? We have seen with the setting up of the regional development agencies from within the DTI that that duty was not there from the very beginning. Is there going to be a duty in respect of this new agency now?

John Healey: You have seen the way that the sustainable development and the environment has been incorporated into the PSAs that the Treasury has accepted and set for themselves as part of the Spending Review process. I mention that as hard confirmation of the interest that we take in this, and our readiness to commit ourselves to it. I think at this stage I cannot go any further in anticipating precisely how the remit and future PSAs for this integrated revenue department will be set.

Q279 Joan Walley: Can I turn briefly to the review of the Sustainable Development Strategy and just ask by who, how and when that is being done within the Treasury?

Ms James: The review of the Sustainable Development Strategy was launched on 22 April, and we were involved in a lot of discussions with Defra but also other Whitehall departments in the run-up to that in the introduction of the consultation document. We will also continue to be involved as that goes forward in the coming months and in the second stage as that part of the consultation closes.

Q280 Joan Walley: Given the importance that the Prime Minister is placing on the G8 presidency next year in relation to climate change, and the importance that the Government attaches to the role of climate change, would you like to see and are you taking steps to see a greater focus on this within the Sustainable Development Strategy? Has that been part of those talks you have been having with Defra on that subject?

Ms James: This is one of the questions which is raised in the consultation, as to whether the UK's Sustainable Development Strategy should focus on some priority areas, and climate change is one of those where already the Government's strong commitment is very demonstrable. We will wait and see what the consultation results come up with.

Q281 Joan Walley: Does that mean the Government does not have any views on it; they are just waiting to see the response to the consultation? Are you not going to say, for example, that if we have a 60 per cent 2050 target, that departments should be required to set that in as part of the Sustainable Development Strategy? Surely the Treasury has a view on that, rather than waiting to see what comes in from the focus groups.

Ms James: The Government's views on climate change generally are well set out, and it has a clear strategy there to deal with them. What the review of the Sustainable Development Strategy is looking at is not just government activity but how the whole community and society, from businesses to socially or whatever, respond to the sustainable development agenda.

Q282 Joan Walley: So in terms of the climate change, how are you going to be driving that forward in terms of the Sustainable Development review?

Ms James: I am not quite sure I understand the question.

Chairman: What systems have you put in place? What lines of reporting or what initiatives?

Q283 Joan Walley: It goes back to the point made earlier on, in a slightly different context, in relation to CHP. What you said, Minister, in response to that was that if there was going to be a need to do more, if it was falling short of the target, obviously measures would be put in place. What we are really wanting to see is how we are going to get from here to where we need to be in respect of different targets. That route map, whatever it is, in relation to all of these different targets comes into focus in respect of the Sustainable Development Strategy. So without having those opportunities to see where the targets are, where the information is, where the monitoring is, where the audit is of that, we cannot see how far along the route we are actually getting. It is how that is woven into the discussions which are going on now in relation to this timely and very welcome review of the Sustainable Development Strategy.

John Healey: The review of sustainable development is important, but perhaps, if I may say, you may be looking for it to carry too great a load. If one takes the interest that we have discussing that as part of the Energy White Paper, or climate change programme, we review the Energy White Paper and the progress against the targets every year. As Mr O'Sullivan has just mentioned, we have a formal review of the climate change programme coming up, which is going to be very thorough and focused on the extent to which those measures are meeting the scale of the challenge and the targets we have set. Those are separate, and probably really important to carry out rather than looking for the sustainable development review itself to be a vehicle that we can use for all such monitoring right across the policy range.

Q284 Joan Walley: Perhaps it would be helpful if you could let the Committee have a note on the way in which the Treasury is planning to contribute to that review.

John Healey: I will certainly do that if the Committee would find it helpful.

Chairman: Thank you very much indeed. Thank you for being so generous with your time. We are very grateful to you. There are a number of points to follow up. We look forward to continuing the dialogue with you on Barker and on the sustainable development review, and indeed the Spending Review. Minister, thank you very much for this afternoon.