Select Committee on Environmental Audit Minutes of Evidence


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 taxes—taxes on fertilisers and pesticides—we 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 measures—taxation, regulatory interventions. We need to start identifying particular problem farms—farms that are compliant with the law but may just be unfortunately positioned so that the run-off from them is particularly problematic and expensive—and 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 hierarchy—for instance, moving from landfill to incineration has increased the costs of disposal of waste—the 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 obligations—not 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 challenge—a 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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