Examination of Witness (Questions 120-138)
MR CLIVE
BATES
8 FEBRUARY 2006
Q120 Mr Vaizey: We have got the Energy
Saving Strategy, should that now cover water as well? Is there
not enough emphasis on people saving water?
Mr Bates: I do not think I would
want to make a specific recommendation about that without thinking
a bit more about it, to be honest. It does make sense by analogy
to have some sort of approach to water efficiency. It may be that
doing it through water suppliers, the water companies, and placing
obligations on them is sufficient and we do not need to establish
a new body to do it. I would have to think about that a bit more,
I am afraid.
Q121 Colin Challen: When Yorkshire Water
had to deal with the drought which got it rather a lot of bad
publicity several years ago they developed their grid. Has any
thought been given nationally to a water grid since many parts
of the country always seem to have plenty of water whereas others
always seem to be short?
Mr Bates: It does come up but
moving water around the country in large quantities is very expensive
from an engineering and energy point of view, so the approach
we have tended to adopt is to favour ahead of that a much more
robust approach to water efficiency and dealing with leaks, getting
the best out of the assets that we already have. We have not taken
a view in favour of that but I guess in the end if it was the
cost-effective way to secure water supplies compared to all other
approaches, including expanding capacity and so on, then we would
look at it. We are a way off the efficiency frontier in the use
of water resources at the moment and it is perhaps not something
we would want to move to straight away.
Q122 Joan Walley: The Environment Agency
is advocating a pretty aggressive approach towards water shortage
but what about water pollution? I think that the Environment Agency
previously to this Committee has said you would really like to
deal with diffuse water pollution and so on and so forth. What
changes have you seen? Is it fair to say that nothing has happened?
Mr Bates: No. Some of the water
companies have been quite imaginative in the area of diffuse pollution.
In a sense, they have obligations to provide high quality drinking
water and clean beaches and so on. They have to make environmental
expenditures to ensure that water is of suitable quality and if
it is full of nutrients, pesticides and so on they have to spend
more at the water purification plants, so they are starting to
think about whether they can address the sources further upstream.
There are also directives around things like nitrates, phosphates,
eutrophification and so on, so there is a regulatory framework
that is already in place and has already delivered quite a lot.
However, if there has been a shift in the challenge for water
it is a shift from point source pollution to diffuse pollution
from many sources who do not have the technical capacity or the
internal capacity because they are a farm, say, to deal with a
heavy duty regulatory regime. We are going to be taking that on
under the auspices of the Water Framework Directive which is an
attempt to reach high ecological standards for river basins and
that does involve intervening in particular farms and dealing
with many diffuse pollution sources. The work around that is now
building up to full tilt and we will start to see the measures
unfolding from 2007-15.
Q123 Joan Walley: There are two aspects
to this, are there not: (1) the taxes and the sorts of instruments
that can be used, and (2) the voluntary agreement that we had
with pesticides, which is now coming to the end of its original
life, and what should carry on from that. What is the Environment
Agency saying, if you are really going to deal aggressively with
the diffuse water pollution that there is and which we have seen
in the aftermath of the oil incident that we had? There are issues
like that which need to be taken into account as well.
Mr Bates: In terms of input taxestaxes
on fertilisers and pesticideswe are, in principle, in favour
of those things. At the moment we are not pressing for a pesticides
tax because the voluntary agreement, driven by the prospect of
a tax, seems to be working quite well.
Q124 Joan Walley: Quite well or as well
as it could be?
Mr Bates: All of these things
are difficult to deal with. Just putting a tax on pesticides would
not necessarily give us a big overnight result either. The fact
is the various participants in the voluntary agreement are working
well. They claim that they have put about £45 million into
the system between them, which is quite a lot of money, and there
is a willingness to address the problem. It may be that we are
gathering low-hanging fruit and that the initial improvements
that we have seen, which is a 19% reduction in pesticide concentrations
in the river network, is a one-off gain arising from greater awareness
and the programme impetuous but, if that persists, that could
be called a success anyway. The question is whether, as we go
forward, we need to bring in stronger measurestaxation,
regulatory interventions. We need to start identifying particular
problem farmsfarms that are compliant with the law but
may just be unfortunately positioned so that the run-off from
them is particularly problematic and expensiveand deal
with them.
Q125 Joan Walley: Exactly what are you
saying should be included in the policy packages that you say
should be included to address the diffuse pollution that there
is?
Mr Bates: For things like fertilisers
there is a good case to put a small levy on the inputs and to
use that to fund a programme that would help farmers convert to
using lower input styles of farming, in essence. You could build
programme around that, which would raise awareness and provide
technical information about how to go about it, but the funds
for doing all that on a "polluter pays" principle should
come from a tax on the inputs. It is the logical approach to that.
Q126 Joan Walley: Would you say the same
should apply to oil, solvents and other chemicals?
Mr Bates: There is a good argument
for that as well. There is a regulatory approach to be had there
as well. I think you want a judicious mix of instruments that
reflects the reality of the organisations and the individuals
that you are trying to intervene in, recognising that a small
tax will probably raise some money and have an income effect but
it probably will not effect a huge behavioural change unless it
is backed up by a package of measures that is designed to increase
the response to the price signal. Those measures need to be tailored
to the types of organisation and the diffuse sources that you
are trying to tackle.
Q127 Mr Vaizey: How do the Treasury,
for example, use economic instruments to try and reduce the creation
of waste products and recycle them? A plastic bag tax?
Mr Bates: Yes. There is quite
a good experience with the plastic bag tax in Ireland, I think.
Q128 Mr Vaizey: Have you got any statistics?
Mr Bates: Yes, but not to hand.
At the moment the landfill tax encourages movement of waste up
the hierarchy. There is a danger it will move up the hierarchy
and stop at waste incineration, and we would like to see more
change going on at the top, or, if you are following the money,
more of the money, more of the resources, being dealt with in
the top parts of the waste hierarchy. You could have a waste tax
with different rates for land-filling and different rates for
incineration, for instance, a bit like the structure of a potential
carbon tax. You could have something that is essentially tax waste
per se but providing a greater tax.
Q129 Mr Vaizey: How do we stop people
creating the products that become waste?
Mr Bates: The interesting thing
is that the more you increase the costs at the bottom of the hierarchyfor
instance, moving from landfill to incineration has increased the
costs of disposal of wastethe more that sends a price signal
up into the recycling tier that says that what was once not cost-effective
to recycle now may be. If you think about how price signals are
reflected up that waste hierarchy, even those measures can be
quite effective, but there might be other things that you could
do, for instance. There are some types of energy recovery from
waste that qualify for renewables obligationsnot all but
some. Maybe it is possible to start to reflect embodied energy
in products that are recycled and for them to get some sort of
credit for that. Rather than the energy being taken out, sent
through the power grid and then put back into melting glass, and
so on, if you got the glass already melted you could get a credit
for that. Conceptually that is something that could be done. I
do not think we have developed a package of instruments that would
do that sort of thing, but those are the areas to look at. The
aggregates levy, for instance, has had quite a positive effect
in changing behaviour up the waste hierarchy and causes more builders
to recycle building rubble rather than to dump it because it is
more expensive. There are some good things going on, but, again,
it is one of those things where you could do more if you really
wanted to press the case.
Q130 Chairman: Just to finish up on transport
briefly, now we have got a renewable transport fuel obligation
do you have concerns about the increased use of biofuels and,
if so, what should be done about it?
Mr Bates: Not all biofuels are
alike. They differ greatly in the value they offer from a carbon
reduction point of view. The public policy purpose for having
the renewable transport fuels obligation is part of the climate
change programme, but the amount of carbon reduction that you
get from a given litre of biofuels can vary quite considerably.
We need to make sure that we are being realistic about valuing
biofuels in terms of their environmental value. Then we need to
be clear about the negative environmental effects that arise from
biofuels to do with intensive agriculture, crop impacts, deforestation
in Brazil, or whatever. We need to go into that subject with eyes
wide open. The Environment Agency has developed a tool to try
to give an assessment of the various environmental dimensions
of different sources of bio-energy, called the "BEAT tool",
and that is something that we would like to see taken forward
and used in thinking about how to design the economic instruments
that are supporting the development of bio-energy.
Q131 Colin Challen: Would you favour
the introduction of a certification scheme for biofuels in the
same way that we have the FSC scheme for timber?
Mr Bates: In terms of principle,
you have to know, with confidence, what these fuels are, what
value they offer and what impacts they bring, and that does lead
you inevitably to having some sort of accreditation or certification
scheme. Otherwise, if you want to adjust the economic instruments
to reflect those environmental characteristics, you have got no
currency to go on. That sort of certification scheme would give
you some insight into what should qualify for what kind of support
under, say, a renewable transport fuels obligation. Without that
you cannot differentiate between them.
Q132 Mr Chaytor: Do you think it is more
difficult to deal with the issue of the cost of the use of private
vehicles since the recent rise in oil prices, or has it concentrated
people's minds more on the urgency of the situation?
Mr Bates: Whether we get a high
cost of fuel through shortages and cartel behaviour or we get
it through tax, you could say that from an environmental point
of view it does not make much difference. I think there is an
argument that goes a little beyond that though, which is that
when you have a policy instrument like the fuel tax escalator
or, like regular increases in fuel duty, it sends a much longer-term
signal about the intent that feeds back up into the cars that
manufacturers design about R&D programmes, the cars that people
buy and it sends a signal from government about what they think
about the future evolution of the vehicle and transport market.
There is a danger that if we just say, "Oil prices are doing
the heavy lifting for us", we will lose that kind of signal.
Therefore, whilst I think the Chancellor has a point in saying
that there have been very steep rises in oil prices and we do
not want to clobber the motorist relentlessly, we also need to
ensure that there is a strong signal about the direction of travel
and how we see transport fitting into a concerted national effort
around meeting the climate change targets, which at the moment
it most certainly is not. I think that is the key challengea
sense of direction about where we are going.
Q133 Mr Chaytor: The Agency's focus has
been on the revenue costs of private car use. You do not seem
to have said much about the capital cost?
Mr Bates: Sorry; no. There are
lots of things to unpack there. Stop me if I am not getting to
your question, but we want to look at the environmental impacts
of vehicles in the round. For instance, the recyclability of the
material, the consumption of materials, of embodied energy, and
so on, we want the environmental costs of those reflected in the
prices that were charged. We support the use of a vehicle excise
duty as a policy instrument, as a way of affecting the choices
that motorists make, and we think that you could have steeper
gradients in vehicle excise duty. You could even go to much steeper
gradients if you are prepared to move to a "feebate"
system in which you would have gas guzzlers paying those that
were purchasing small cars and a transfer between different types
of motorists. There is a lot of potential for those sorts of policy
instruments that we will exploit perhaps in the future.
Q134 Mr Chaytor: But as long as the impact
of globalisation is bringing down the purchase price of motor
cars dramatically and the impact of the single market is doing
that, all of these things are just drops in the ocean, are they
not? As long as it is cheap to buy a car, whether or not the VED
goes up a little bit or not is really neither here nor there.
Mr Bates: If a vehicle excise
duty is high enough, in a sense it could compensate for falls
in the purchase price of vehicles. We can also apply tougher regulatory
standards to vehicles so that they have strong fuel efficiency
standards or other environmental criteria applied to them, such
as recyclability and the type of materials that they use. Those
things would tend to internalise external costs and bid up the
price of motoring, but behind your point is an observation that
the cost of motoring is steadily falling despite all these interventions.
Overall the cost per mile is falling, and that is a source of
concern. At the same time, incomes are rising, there is a high
propensity to travel given the economic framework that we have
for charging out for road use, which is not to charge for it for
the most part. I think, and the Agency thinks, that there is a
lot of scope for pushing much harder and getting something that
puts transport on to a more sustainable footing, and those types
of economic instruments are the tools that are available to do
it, including a proper pricing infrastructure.
Q135 Chairman: On VED specifically, given
that people are prepared to spend £40,000 or more for a car,
you have to have quite a hefty increase in VED to make any impact
at all. Would you envisage VED at £5,000 for cars of that
sort, perhaps £10,000?
Mr Bates: I do not think we have
a position that would go that far, to be honest. I do not know.
I think with instruments like this there is an argument for saying
that you should consider quite large increases rather than a sort
of stealthy, small salami-slicing increase partly to get the big
introduction effect and for it to really send a sharp signal.
I think tackling gas guzzlers with VED would be a sensible approach.
Whether £5,000 a year is overkill or sufficient, I just do
not know.
Q136 Dr Turner: Assuming biofuels to
be produced in an environmentally acceptable manner, how would
you envisage treating vehicles running on a high %age of biofuels
both in terms of the fuel tax and the vehicle excise duty?
Mr Bates: We have seen that differential
rates in fuel tax can be an effective policy lever, and there
will be every reason to use that lever, as was done with unleaded
fuel, so that would be an option. If it was about a change in
engine design to allow a vehicle to run on a much higher proportion
of biofuels, the question is, would the concession that you got
through the lower rate of fuel tax be sufficient to incentivise
people to buy cars that could use that? You may then say you could
have a different tariff for vehicle excise duty that reflected
the different capability of the car, in the same way that you
reflect the fuel-efficiency of the car. In other words, maybe
you could calculate fuel-efficiency on the basis of its fossil-fuel
efficiency; exclude maybe renewables components as tax exempt
in some way.
Q137 Dr Turner: Would you favour that?
Mr Bates: No, I think it is too
soon for me to commit to an instrument design. I will express
the thought processes rather than offer you a conclusion, if you
do not mind.
Q138 Chairman: Thank you very much. We
have a covered a little bit of ground and we are grateful for
you coming in. I think that draws our question to a close.
Mr Bates: Thank you.
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