Examination of Witnesses (Questions 20-39)
MR MICHAEL
ROBERTS AND
MS GILLIAN
SIMMONDS
5 JULY 2006
Q20 David Howarth: That raises a
lot of issues about which I am sure we will come back to over
the next five minutes or so. Can I put the question in a slightly
different way. In fact, this goes back to a question that Mr Challen
asked. Holding all the other factors equal, ceteris paribus,
what effect on business, or what evidence do you have of the effect
on business, would there be of, say, the cap rising or falling
by a million tons of carbon?
Mr Roberts: I suspect you are
not going to be with satisfied with this, but it does depend upon
your assumptions. Let me try and make this real for you and for
the Committee. The DTI commissioned some work on the impact on
energy prices as a result of the Emissions Trading Scheme, and
I believe that the number suggested that the impact on UK energy
prices as a consequence of the ETS allocations was up to a maximum
of a 25% uplift on energy prices. It is quite a difficult thing
to be sure about, but that was the order of magnitude of impact.
If in any way that increase is experienced to a greater degree
in the UK than in other countries, then we would have a concern
about the effect that would have on the competitive position particularly
of energy intensive companies, and there are theories about the
extent to which the UK may be more exposed than other countries,
perhaps those countries which have less liberalised energy markets
and where their power sector has less ability to pass through
cost. There is a feeling that there may be more exposure in this
country to energy price rises than other countries. I am sorry
I cannot give you a straight answer, because there is no definitive
evidence out there, but I am trying to give you a feel for where
some of the friction lies.
Q21 David Howarth: Are there any
other examples of cost outside the rise in electricity prices?
Is that the main concern that you have?
Ms Simmonds: In principle the
first phase of the Emissions Trading scheme allocated to the non-electricity
sectors on a business as usual basis. In practice, not all companies
will have been allocated on a business as usual basis or according
to their need, and, as a consequence, some companies, some installations,
are required to purchase allowances outside of the electricity
generating sector if you put that to one side. I would imagine
in Phase 2 we will see a similar thing because of the nature of
the allocation methodology.
Q22 David Howarth: Can I pick up
a point on competitiveness as well. The Secretary of State said
during the statement on Thursday, "The Government will continue
to insulate international competitive sectors within the ETS from
the burden of carbon reduction." Does that not mean that
you have got your way? There nothing to worry about. The Government
has taken on board your concerns, perhaps, in a way, which imposes
a bigger burden on everybody else.
Mr Roberts: I do not think life
is quite as straightforward as that. There is quite a useful logic
in what the Government has sought to do by allocating broadly
according to need for energy-using companies and putting the burden
of the reduction through the ETS for the UK on the generation
sector. The point at which life is not quite so straightforward
is the point at which power generators have to pass through the
consequence, in terms of cost, in order to meet their own targets.
To the extent that costs are passed through, they will be endured
by all energy users, be they domestic or indeed business, and
within the business community you have got some particular parts
of corporate Britain, particularly the energy-intensive companies
in process industries like glass, steel, cement, who will feel
that increase more sharply than other parts of the economy. That
is where life is not quite as simple as the Government would perhaps
like us to believe.
Q23 David Howarth: The other thing
you mentioned was the importance of certainty about the future
price of carbon. Do you support rules for more certainty about
the future phases of the scheme through until perhaps 2025, and,
if you do, do you support unilateral action by the UK to try to
stabilise expectations, where the UK would say what its draft
allocations would be or, on the other hand, do you think that
everything should go in step with the whole of the EU, that Britain
should not go it alone in announcing even draft allocations?
Ms Simmonds: We certainly support
greater certainty over a longer period and at an EU level. Politically,
I think we would agree that it would be difficult to achieve long-term
certainty on emissions trading at EU level on specific allocations,
but a way of perhaps getting greater certainty at EU level might
be around the criteria on the basis of which those allocations
will be made. So, if one gets an agreement at a European level
around the criteria for allocating, then perhaps we could allocate
at a UK level according to those criteria and have some consistency
on a European level.
Q24 David Howarth: How about having
longer phases?
Ms Simmonds: Absolutely, we are
in support of that.
Q25 David Howarth: Another issue
that will be mentioned, I am going to come back to it briefly,
is about the extension of the scheme to other sectors. Gillian
mentioned . Can I ask you some detail of your views on that? Should
the aviation sector be brought into the scheme on the same basis
as everybody else, so that there is a trading between aviation
and other sectors, or should there be some of kind of special
treatment for aviation and non-aviation business?
Mr Roberts: A very good set of
questions which are very much at the edge of our own understanding
of what needs to be. I think, ultimately, in an ideal world you
would want to see the aviation sector part of a trading arrangement
which involves other sectors as well, and, of course, we have
an incumbent trading arrangement and so those would be a natural
set of businesses to link to an aviation trading scheme. Having
said that, I think there are some important practical issues to
resolve about the transition through which you get from where
we are now to a situation where aviation is part of a broader
trading arrangement. There is certainly a debate about the extent
to which the inclusion of aviation or the linkage of aviation
to existing trading arrangements might put pressure on the existing
market for carbon credits. That very much, of course, depends
upon what constraints are put upon aviation sector players, and
no-one has yet reached a view about what exactly those might be.
The other issue, of course, is about how the allocations for aviation
are actually made. That issue about allocation methodology is
likely to be made within the existing ETS as well as what might
be an ETS with or without aviation, but that might have a material
impact. Ultimately, the economic logic would be that aviation
has got be playing its part inside a wider Emissions Trading Scheme
with lots of others, because that is how you get the economically
most efficient reduction in carbon. How you get there is going
to be extremely difficult. We should sort that out sooner rather
than later. To be clear, it is not a recipe for inaction.
Q26 David Howarth: How about road
transport consumers? Does there need to be a transition?
Mr Roberts: We would be willing
to consider, alongside others, the idea that in some way road
transport might be part of a future set of emissions trading arrangements.
Again, there are several complexities, two of which are immediately
obvious. One is you have a number of individual sources of emissions,
i.e. in this country 26 million vehicles on the roads, rather
than a rather more manageable number of point source emissions,
as you would have with the Emissions Trading Scheme, which numbers
thousands rather than millions. The second is if, for example,
one decided to base a road transport emissions scheme on some
sort of commitment by vehicle manufacturers, the difficulty is
that while the manufacturers have responsibility for the carbon
emissions associated with the production of the vehicles, they
have far less control over the emissions associated with the use
of the vehicles, which clearly is down to individual drivers like
you or I.
Q27 David Howarth: You mentioned,
I think, in passing, your concerns about the accuracy of the data
on which all these policy decisions are being made, especially
about the accuracy of the data being used in other countries.
What do you think should be done about the accuracy of the data
being used here and elsewhere to set limits? Obviously the whole
scheme depends on the data being accurate and trustworthy.
Ms Simmonds: We are hopeful that
the second phase might lead to more consistent presentation of
data, which, I think, is the first step that you require at EU
level. If the National Allocation Plans are presented in a more
consistent manner, then there may be an ability to assess and
compare Member State allocations. For example, in the first phase
some Member States did not present their projections, so it was
very difficult to understand what the cut was against any projections.
I think that is the first phase. Again, in some Member States,
I would imagine, one needs a much more significant data-gathering
exercise. The UK has probably better data than many other Member
States, and there may be a need to level this up across the European
Union.
Q28 David Howarth: One final point.
You returned to this point which I have heard Digby Jones talk
about several times, the difference between how we deal with EU
regulations compared to other people. Is it your view that what
is going on really is some kind cynical manipulation by people
abroad, or is there really across Europe countries, areas with
different needs, different problems, and therefore there does
need to be some variation of approach in different countries?
Mr Roberts: Certainly different
countries are at different stages of development along the low
carbon path, if I can use that rather jargon-laden phrase, and
therefore it is reasonable, if you are going to have a burden
sharing approach to the EU reduction in carbon, as indeed we do
under the Kyoto arrangements, it is reasonable to assume that
different countries will have different stretch targets in terms
of controlling carbon. I think that is taken as read. The trick
in the game is to try and make sure that you deliver differential
allocations on the basis of the best possible information and
data. Within that, however, as in other walks of life, and not
just in the business world or the political world, inevitably
gaming goes on and people, businesses, countries, will seek to
maximise their competitive position, and, as we have said before
in this session, looking at the way in which some of the targets
were set in Phase 1 and as they appear to be being set for Phase
2, there is reason to believe, we may be contradicted, but there
is reason to believe that some may be gaming, some may be trying
to maximise the beneficial position by having a laxer rather than
a stricter target, and, for that reason, as in Phase 1, instead
of Phase 2, we have said the Commission has got a critically important
role in acting as policeman to make sure that there is some commensurate
degree of effort across the 25 Member States.
Chairman: If you would not mind, we would
like you to remain. There are some more points we would like to
put to you. We will have to break now to go and vote. Can I ask
colleagues to be ready to resume in 15 minutes maximum.
The Committee suspended from 3.30 pm to
4.44 pm for a division in the House.
Q29 Dr Turner: If I heard you right,
Mr Roberts, in your opening remarks you said that the CBI would
prefer to see a single price for carbon. Presumably you would
like to see a real cost for carbon across all sectors which would
guide investment policies and reactions, et cetera. At the moment,
of course, we have just been talking about the Emissions Trading
Scheme. We have got anything but that. Does that mean that the
CBI would be receptive to an outright carbon tax policy?
Mr Roberts: I think a carbon tax
in many respects would be preferable to, for example, the Climate
Change Levy, which is a bit of a misnomer in that it tackles energy
rather than carbon as the externality. Whether a carbon tax would
be the right way forward depends on a few things, not least what
would other countries be doing with regard to their taxation policy,
which brings us back to some of the earlier conversation, and
I think also it would be important to understand what its overlap
might be with things like emissions trading, which in some respects
we regard as being more efficient as a policy tool, subject to
ensuring that it is reasonably simple and administratively light.
Q30 Dr Turner: What about a carbon
tax to be allied with a concomitant carbon tax credit regime which
rewarded low-carbon or non-carbon emitting behaviour? Would the
CBI see any mileage in that?
Mr Roberts: I think I would rather
like to know a little bit more about how it worked before offering
a comment on that.
Q31 Dr Turner: The Science and Technology
Report 2003 sets out how it would apply certainly in electricity
generation.
Mr Roberts: Do you have a view,
Gillian?
Ms Simmonds: I do not have a view,
and I do not know enough about it.
Q32 Mr Chaytor: Could I come back
to the earlier question about vehicle manufacturers and road transport
being within the trading scheme. Your argument is that it is more
difficult in the vehicle sector because there are X million vehicles
and separate point sources, but, in respect of manufacturers,
although they are not directly responsible, although they cannot
accurately calculate the exact emissions of all the vehicles they
produce, yet each of their vehicles days is designed and built
to cover a certain broad mileage over its lifecycle; so the information
on average vehicle mileages for particular categories of vehicles
is pretty accurate, is not it? Would that not be the basis whereby
manufacturers could be brought into the trading scheme?
Mr Roberts: I suppose that is
a way of trying to get a handle on the lifetime carbon emissions
associated with a vehicle, but I think it is still a pretty inaccurate
one. Although we have not talked in depth to vehicle manufacturers
about this particular issue, my instinct would be that they would
probably want a bit more clarity on how that part of the carbon
envelope of a vehicle is accounted for. The motor industry has
indicated you could cut carbon emissions from the use of a vehicle
by something of the order of a third through the adoption of so-called
eco-driving practices; so there is quite a significant element
there of the carbon envelope which is down to the behaviour of
the driver, and that is the bit that is difficult to capture accurately
in the way that you were suggesting, I think.
Q33 Mr Chaytor: Yes. We could pursue
this in a detailed discussion, but all I am saying is it is not
just a question of the lifecycle mileage, it is the average annual
mileage for particular categories of vehicles. The behaviour of
the driver is almost a bonus. It is indisputable that the manufacturers
have an understanding about what is the typical mileage for each
kind of vehicle they produce, and that could be the basis for
a discussion?
Mr Roberts: It might be the basis
for a discussion, and I am certainly aware that within this country
at least the motor manufacturing industry, which does take its
responsibilities seriously, is starting to think about where one
goes next with regard to their contribution to the climate agenda
post the current voluntary agreement, for example. Maybe the sort
of proposition you mentioned would form the basis of a conversation;
I think there would still be some residual concern about the degree
of control, if you like, that the vehicle manufacturers would
have over an element of that total carbon footprint.
Q34 Mr Chaytor: On the previous issue
that you have responded to, the carbon tax as against the Climate
Change Levy, it is not necessarily either/or, is it, because the
Government, if it were minded to, could simply rename the Climate
Change Levy to the Climate Change Carbon Levy and make the necessary
adjustments and you would have your carbon tax?
Mr Roberts: It could do.
Q35 Mr Chaytor: Are you actively
lobbying for changes or a replacement to the Climate Change Levy
in favour of a carbon tax or adjustment to the climate change
levy to become a form of carbon tax?
Mr Roberts: We have certainly
said that there are ways in which what is currently the CCL could
be improved, one of which would be to make sure that it does not
penalise the use of nuclear on its carbon credentials, and the
second would be that there is að ñneed to
look at the interface between who pays theð ñClimate
Change Levy within the business community at the moment and who
is covered by the Emissions Trading Scheme, because from the point
of view of companies who are covered by both, they feel that they
are paying, in fact, not just twice, but three times over for
the externality which is carbon. If you are a manufacturer, for
example, you are paying through action to meet your own allocation
on the ETS, the impact on your energy prices cost as a consequence
of the generators' need to meet their commitments under ETS and
through the CCL, even if in some cases it is a residual levy rather
than a full levy, and so we think there is an argument for trying
to streamline rather than applying several different policy measures.
Q36 Mr Chaytor: Your objection is
not to the levy on energy as such, your objection is to the complexity
of the system that currently applies?
Mr Roberts: To be absolutely clear,
you would be hard-pressed to find many businesses or, indeed,
many individuals who are in the game of asking for more taxes,
and, to be clear, we are not in the game of asking for more taxes
but we recognise that in certain circumstances there is an economic
case for applying taxation, for example to address externalities.
We think that there are improvements that can be made to CCL,
and one that we have not mentioned is the extent to which the
domestic energy user is exposed to the carbon externalities of
energy use, which, of course, under the CCL they are not.
Q37 Mr Chaytor: In respect of the
achievement of government targets, at the moment the Government
is not going to achieve its 2020 target. What specific measures
would you argue for to bring the carbon emissions back on track?
Are there policies you think the Government should adopt that
they have not yet adopted to bring these carbon emissions down?
Ms Simmonds: The targets are 2010
targets, or 2020 targets and the UK Climate Change Programme's
focus over the next four years, so it is a very short space of
time, but in our response to the Climate Change Programme Review
we certainly did identify a number of additional measures that
we thought could be implemented on the SME and commercial sectors
as well as the domestic sectors, as Michael was mentioning before.
I think on the industrial sector, as we have already been alluding
to, we feel there is more an issue for streamlining the measures
that are currently in place for the industrial sector. There are
a number of very well thought through measures already targeted
at the industrial sector. The SME sector, things such as enhancing
the free loans that the Carbon Trust provides to the SME sector,
which we think have worked well to date, perhaps providing more
grant capital through that; VAT reductions on energy efficient
products is another way of encouraging investment in energy efficiency.
They are small measures but together they build up into a significant
carbon reduction.
Q38 Mr Chaytor: In terms of the domestic
sector, essentially you want to revisit VAT on fuel?
Ms Simmonds: Did we address VAT
on fuel in our response?
Mr Roberts: No. To be clear, I
was pointing out a short-coming in the existing CCL, but we have
not actively been suggesting that that is something to a government
policy. What we have tended to focus on more is trying to secure
greater emission reductions through the enforcement of energy
efficiency standards in house building, where we think there is
significant scope for additional benefit, and the use of things
like reduced or zero Stamp Duty on energy-efficient homes.
Q39 Mr Chaytor: Finally, can I just
ask about the question of public awareness and individual behaviour.
Do you think that business has a role or responsibility to contribute
to the raising of the levels of public understanding about the
seriousness of climate change and the necessary actions that need
to be taken to mitigate it?
Mr Roberts: It certainly does
have a role, and I think leaders within this community already
exercise that role, and I am sure there is scope for widening
that. For example, through measures encouraged by employers in
the workplace, simple things like switching computers in offices
off at night-time or at weekends clearly benefits the employer
in terms of reduced energy cost but helps to embed an approach
within individuals which, hopefully, they will take home with
them. In fact, as I understand it, Boots have actively and explicitly
provided information for employees precisely because they feel
this is an issue which transcends the division between the workplace
and the home. Equally, businesses have a role in terms of their
interface with consumers, with their customers; so what Tesco
has recently announced in terms of investment in high energy-efficient
supermarkets has an educational benefit, I think, for their customers,
and finally, I think businesses in terms of their relationship
with their shareholders who increasingly are expecting information
on their environmental and carbon performance is another way,
albeit by proxy, through which the business community can help
stimulate a different way of thinking through society at large.
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