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UNCORRECTED TRANSCRIPT OF ORAL EVIDENCE To be published as HC 1452-i House of COMMONS MINUTES OF EVIDENCE TAKEN BEFORE ENVIRONMENTAL AUDIT COMMITTEE
CLIMATE CHANGE - THE UK PROGRAMME 2006
Wednesday 5 July 2006 MR MICHAEL ROBERTS and MS GILLIAN SIMMONDS DR JACK FROST, MR JOE IRVIN and MS JEAN SPENCER Evidence heard in Public Questions 1 - 91
USE OF THE TRANSCRIPT
Oral Evidence Taken before the Environmental Audit Committee on Wednesday 5 July 2006 Members present Mr Tim Yeo, in the Chair Colin Challen Mr David Chaytor Tim Farron David Howarth Mr Nick Hurd Mr Graham Stuart Emily Thornberry Dr Desmond Turner ________________ Witnesses: Mr Michael Roberts, Director of Business Environment, and Ms Gillian Simmonds, Confederation of British Industry (CBI), gave evidence. Q1 Chairman: Good afternoon and welcome to the meeting. Can I say how delighted I was that in his very first day in the job Richard Lambert chose to come to the House to launch couple of documents, issues which directly relate to this Committee's work. I was pleased to be the host at the reception on Monday evening. I gather you would like to make a short opening statement to kick off? Mr Roberts: Thank you, Chairman. We were delighted to see yourself and one or two of your colleagues there that evening. Thank you for making the time. I thought it would be appropriate to spend two or three minutes, no more than that, saying a few introductory words to set the context for the forthcoming discussion. As I am sure the Committee is aware, the CBI, as one of the main business organisations in the UK, is a broad church in terms of its membership. We have a diversity of members in terms of size and sector and for them the impacts of, and responses to, climate change have very diverse consequences, but what generally unites our members is a recognition that the science on climate change is compelling and that the need for action at home and abroad is strong and, if anything, getting stronger, and that is why we as an organisation have publicly supported the Government in its ambition to move towards a 60 per cent cut in CO2 by 2050 as part of an international effort, and it is also why we have asked for intermediate targets to take us towards that ultimate goal and we recognise that, where there is a case not only for delivering against Kyoto but also beyond our Kyoto obligations, we should take it. Experience to date has shown that it is possible to combine economic growth with reductions in emissions, and business, which has seen its own emissions fall by 15 per cent in the 15 years since 1990, has been a key part of that story. Inevitably, as more and more of our members actively commit to reducing carbon, being the broad church that we are, members move at different speeds but what unites all of those companies is a feeling that Climate Change Programme for the UK needs to reflect five things more strongly than has been the case so far. Very briefly, they are, first of all, the need for a long-term approach given that the lifetime of the investments that are necessary (for example, in power generation) extends beyond the 2010 timescale, second, there is a need to stimulate a range of carbon technological responses, driven particularly by a focus through policy on establishing a single price for carbon, third, there needs to be a streamlining of policy measures (the climate change space is busy with measures), fourth, there need to be more joined up policy between things like energy provision and planning and, sixth and finally, the effort towards the long-term goal needs to be a shared one, whether that is between sectors in the UK or between countries. That is all I wanted to say by way of introduction. I hope it sets a constructive context for the discussion that will follow. Q2 Chairman: Thank you. Certainly I think there is some common ground between us. We particularly welcome the CBI's acceptance of what we think is now the absolutely overwhelming scientific case about climate change and its causes and the need, therefore, for a very broad-based response and a very urgent one. We are specifically looking, as you know, today and for the next couple of weeks at the Climate Change Programme. The document took a long time to emerge from the Government's processes. I wonder whether you would like to say whether you think, given how long it took, it is a comprehensive response to the issues and whether you believe it is an accurate assessment of where we are and where we should be going. Mr Roberts: In some respects we would say that the programme that emerged was challenging for business, and, in particular, in the light of the recent announcement on the Phase 2 allocation of the Emissions Trading Scheme, which will see businesses covered by the ETS and the UK delivering eight million tonnes of carbon saving in that period (which is equivalent to two-thirds of the total effort of the climate change programme), that is, on the face of it, a pretty challenging scenario for business. On the other hand, where I think in some respects the programme was lacking, was not sufficiently adventurous, was, first of all, in not looking to the longer term, as I mentioned in my introductory comments, but, second, not maximising the extent to which other parts of the economy, for example the contribution that can be made to it by individuals in the home or travelling, and there we thought that there was scope to be effecting behavioural change beyond that which is not in the programme currently. Q3 Chairman: The business is already contributing a very substantial proportion of total emissions. Given that is the case, do you think it is reasonable that the Government should expect business to be the largest contributor to the savings that are required? Mr Roberts: One thing that strikes us is that if the Committee has seen one of the accompanying documents to the Climate Change Programme which sought to identify, for example, the cost-effectiveness of measures as they affected different sectors, that analysis indicated that some of the most cost-effective measures would be achieved in addressing the domestic sector; in fact there would be a net benefit over time of pursuing, for example, greater energy efficiency in the domestic sector, and the financial benefit of pursuing those measures is several orders of magnitude greater than the financial benefits of pursuing energy efficiency in business. That is not to say that one should not pursue measures within the business community and it is not to say that one should not put a significant emphasis on the business community, but it underlines our feeling that perhaps not enough was done to try and secure greater emission reductions through other parts of the economy rather than just business. Q4 Chairman: We addressed a bit of that in our report on sustainable homes earlier in the year. Do you think it would be helpful if there were sectoral targets set for reductions of carbon emissions? Mr Roberts: By which you mean what? Q5 Chairman: Breaking it down more by industry groups, industry sectors? Mr Roberts: I think one obvious difficulty that I might have (and my colleague, Gillian Simmonds, might want to comment here) is how that might interact with the existing Emissions Trading Scheme. One of the beneficial principles of that, which does not anticipate sectoral targets within the companies covered, is that there is the ability to find the cheaper sorts of carbon savings across a range of business communities. I think there is a danger that you would lose that opportunity by going for a sectoral based approach to targetry. Ms Simmonds: In the longer term, there is certainly some value in exploring sectoral agreements or targets, I think one has to look at how they are framed, but there is certainly an interest on an international level for the use of some sort of sectoral basis for achieving emissions reductions, and we would favour exploring that. Q6 Chairman: On an international level, you say? Ms Simmonds: On an international level. Q7 Chairman: When we had the Transport Secretary in here in the context of our previous inquiry, which we have not yet published a report on, but on transport, he said that he thought it would be harder to find savings from the transport sector than from some others, and certainly I think the aviation industry is reluctant to acknowledge the extent to which they are becoming a very large, and in due course perhaps a dominant, source of carbon emissions, but without a sectoral target do you think that the pressure, say, on the transport sector to cut it emissions be sufficient? Otherwise, we are going to see that other areas of business may be squeezed in terms of the requirement for emission reductions because of the continued growth from aviation? Mr Roberts: I think there are all sorts of "what ifs" and conditionalities in answering this question. First of all, I do not think it is strictly true to say that the aviation industry, particularly in this country at least, does not take seriously the contribution that that sector makes to the overall challenge to climate change, and, if anything, I think the UK aviation industry's willingness to talk about its inclusion within some form of trading scheme is a sign of how seriously they take the issue. Is their scope for reductions from the transport sector? Yes, that is certainly the case, whether that is in aviation over the course of time or in domestic transport, and, certainly as far as I am aware, the official modelling that is available to the Government shows that, although there are perhaps more cost-effective opportunities in the short to medium term to secure emissions reductions in other parts of the economy, that does not mean that there are not gains to be had in the transport sector simultaneously, and the modelling anticipates that, whilst one should be pursuing energy efficiency in the home and in the work place, there is a lot still to be achieved in a cost-effective manner in the transport community, for example, through greater vehicle fuel-efficiency. Q8 Chairman: You expressed some caution about sectoral targets, but I think you have said that you would favour some targets for overall carbon reductions between 2010 and 2050. It is rather a long gap, though, is it not? Do you want to explain why you think it would be helpful to have some interim targets? Mr Roberts: There are two reasons. One is that I think it sends a clear signal to those businesses that are going to be making longer-term investments to respond to the low carbon agenda about the pace and scale of change between now and 2050 which, in turn, I think, helps them to make rational investment decisions of the sort that are needed. The second reason, which is linked to that, is that I think it is important for the Government perhaps to look at a couple of scenarios, a couple of trajectories, between 2010 and 2050 and to set some indicative targets in each case, mindful of the fact that climate change as a global problem is not going to be solved by the UK alone and that we need to ensure that there is a truly international effort and that the UK's individual effort ought to be positioned within the context of what else is going on in the world, and, for that reason, we think that indicative targets en route which perhaps are set within two scenarios enables the country and businesses to have some confidence that there is flexibility to respond to a changing international circumstance whilst still seeking to achieve the ultimate long-term goal. Q9 Colin Challen: When you came to speak to our predecessor Committee, Sir Digby Jones told us that the UK Government was sacrificing UK jobs on the alter of green credentials. Does that still represent the CBI's overall view? Mr Roberts: I think Sir Digby said that there was a risk of that, but perhaps it would be helpful if I recall what I believe our position was on that occasion, I believe, in January last year. We were explicit, and Digby was explicit in his support for the 60 per cent target. We were explicit in our recognition that some UK companies are leading the way in terms of carbon reduction but that more can be achieved. We were clear about that. We were clear that, whilst it is important to secure international action, that does not mean that the UK or, indeed, the EU should wait until international action happens for us to do something, and, whilst there was a concern about the impact of unilateral action, I think we were quite clear in saying that it was something that was potentially more difficult for certain sectors of the economy rather than the economy as a whole. In short, I think our position (and the Committee clearly is at liberty to go back to the evidence, as I did before this meeting) was actually far more sophisticated than we were given credit for, and Digby was part of that as well as I was. Q10 Colin Challen: That is a problem that we all face, is it not, being more sophisticated than people give us credit for! Nevertheless, that was 18 months ago, when he came to speak to our predecessor committee. I assume that in measuring this risk the CBI has done some research perhaps on where the jobs are facing this risk of disappearing because of climate change measures. Have you done that research to see what the benefits have been in creating new jobs measured against the losses that your members may have experienced? Have you actually done that research? Mr Roberts: Let me reflect on what was available at the time and a little bit about the experience since than. What was available at time? Three years, I think, previous to our coming to the last Committee inquiry we had carried out a survey on the impact of the Climate Change Levy on manufacturing companies, a survey which covered 500 firms, and, although I have not got the precise figures in front of me, a sizeable minority indicated that their competitive position had been affected negatively by the unilateral increase in energy prices that the CCL had brought about. Q11 Colin Challen: That is not a climate change measure, that is a result of market forces. Specific government regulatory approaches towards climate change (and I am not looking at other environmental issues perhaps in the last 18 months), how is that impacting on jobs? Mr Roberts: The Climate Change Levy is a climate change measure introduced by the Government four years ago. It seems to me a good example. Q12 Colin Challen: The big change in energy prices has not arisen as a result of the Climate Change Levy, I would argue. The recent changes, which are serious, are purely the result of market forces. What I am after is the impacts that you have been able to detect on jobs? Mr Roberts: Let me clarify in two ways. First of all, the Climate Change Levy was introduced four years ago. It had an impact on prices prior to the broader impact on prices for global reasons recently and, through our survey, we indicated that it had a negative impact. It did not say it was relocating jobs, it is quite clear that it had a negative impact on the position of manufacturers in certain cases. That is my first point. I think it is a legitimate example of a climate change measure and its impact. The second point I would like to make is with regard to recent changes in energy prices, and I want to use those as an analogue, or, if you like, as a proxy for what might be the impact of any unilateral policy measures taken by the UK Government. As I am sure the Committee is aware, energy prices globally have been rising significantly in the last two years; there is evidence that within the UK energy prices, whether that is gas or electricity, for the largest industrial consumers have risen in excess of the rises that have been experienced on the Continent by similar firms. That has had a negative competitive impact on certain firms, and only yesterday it was reported that Imaris in the south-west was having to scale down operations with a loss of several hundred jobs. I use the example to give a flavour of what can happen if there is a differential impact on a materially important area (energy prices) on UK firms compared with others. It clearly is not a climate change policy in itself that I am referring to, but I am trying to use it as an example of what can happen if the consequence of climate change measures has an impact on things like energy prices. Q13 Colin Challen: Are you saying then, on the basis of that, that you think that we have reached the limit of unilateral action that the Government should take and that we should now behave in a more multilateral fashion to address the problem? Mr Roberts: No, I would not say that. I think it is our belief that there are, for example, significant gains to be had in terms of emission reductions in the commercial sector. Commercial energy use in the last five years in this country has risen at twice the rate of growth in energy in the economy as a whole, there are significant opportunities in offices, in property, more generally within the commercial sector, to become more efficient, and that has a net economic benefit for companies clearly who are more energy-efficient, who are the more resource-efficient, who have the potential for reducing the bottom line in terms of costs. That is an area where there is scope for unilateral action, notwithstanding what is going on elsewhere in the world. Q14 Colin Challen: So it is fair to say that the CBI is calling for more unilateral action. Sir Digby, when he last came here, also said that Britain should lead the world on environmental issues but not to the extent that some other EU members and other competitor countries profit from our good intentions. Is there this great lack of trust? Do we really feel that our competitors do not care about it as much as we do and that we have got all these good intentions and they have no good intentions? Mr Roberts: I do not think we are saying that they do not have any good intentions. I will ask Gillian to come in here in a moment. What strikes us is that when one looks at something like the Emissions Trading Scheme and the approach to the National Allocation Plans taken across EU Member States, it is not immediately obvious to us that all Member States have been quite as rigorous in their approach to setting the targets for their companies as our Government has been or is intending to be in Phase 2. I do not know if you want to reflect on one or two of the headline numbers with regard to Phase 2. Ms Simmonds: In terms of Phase 2, although, obviously, they are all very much in draft stage at the moment, emerging draft National Allocation Plans do appear to suggest that the UK might be, again, more rigorous in its cut than other Member States. I think from our perspective we would like to see a much greater rigor this time round from the Commission in ensuring the tightening up of allocation plans across other Member States, but we would be concerned if other Member States do end up having less more lax or more generous allocation plans than the UK. Q15 Colin Challen: I think we are going to come back to that question. Also looking at a quote from yourself, Mr Roberts, at that famous meeting back in January last year where you said, "We contribute of the order of two to three per cent of the global emission total. Therefore we could commit to unilateral action of a very significant amount and yet have a marginal impact upon the problem, unless, of course, others are coming alongside with us." Is it not a bit of an argument used to moderate action by saying, "We can do it, but nobody else will come with us. Therefore our impact is so small it is not worth doing." That is a recipe for inaction, is it not? Mr Roberts: I think my earlier comments give the lie to that suggestion. I am not suggesting that we should not do anything, and I was not suggesting it then. What I was trying to indicate was that it is critically important that, in trying to show leadership through actions taken in this country, we do actually bring the rest of the world with us because the problem is truly a global one and requires a global reduction in carbon emissions, and if we reduce our emissions by 60 per cent alone in the world, it will not make the slightest bit of difference to the fate of the planet. Q16 Colin Challen: Other people are waiting for us to take the lead because they think we have a responsibility. Surely our carbon footprint is greater than two per cent. If we look at the number of British companies that are operating around the world, world-leading companies like BP clearly have taken very strong unilateral action and have not said, "We will not do it because Exon is not going to do it." That would be disastrous, would it not? Mr Roberts: To use a quote from the last meeting, I think from Digby, "We are a violent agreement." I have not said we should be taking action on our own; I just think that it is important that action is within an international context. Q17 Colin Challen: Lastly, I think it was me that actually asked the question about whether any companies had relocated abroad as result of regulatory action on climate change, and at the time I think you said that you could not think of any directly as a result of that, although a French company had closed a factory here. It had a programme of closing one or two factories and we just happened to be the one that closed. Could you update us on this. Is there any evidence now that some companies may be relocating or not making the investment decisions because they find our regime too rigorous? Mr Roberts: I am in the interesting position of helping to remind you of what you said, which is, I believe, "Was there any evidence of relocation purely as a consequence of environmental pressures?", and Sir Digby at the time, quite rightly, said there was no such evidence of companies relocating purely as a consequence, and I think that remains our position at the moment. What we sought to indicate was that badly designed environmental policy measures run the risk of imposing costs for companies operating in this country that might not be incurred by their rivals overseas, and that can be a factor in making the UK a less attractive place to do business than other countries, and that remains our position. Q18 Mr Hurd: Can you help me understand a bit better how the CBI see the balance between risk and opportunity in relation to the climate change agenda? In the press release of Richard Lambert's speech he seems to be facing both ways. On the one hand he says UK business cannot be heroic on this, the Government has to recognise it is taking a risk with competitiveness, but in the same question he talks about the need for government to provide a favourable policy environment which can help UK businesses win a greater share of the growing global market for environmental goods and services. Are these two statements reconcilable over time, and which is gaining greater council within the CBI and your membership? Mr Roberts: I believe the statements are reconcilable. To put a bit of flesh on the bones of what Richard Lambert said, the global market for environmental goods and services in the round, not just related to climate change, is worth of the order of $500 billion annually and growing, and growing quite significantly. We as a country have a share of that market somewhere in the order of five per cent. It is a lower share than that secured by companies in that sector in France and Germany (for example Japan), and our view is that this is a missed opportunity and one that we should be doing something about. Our view is that if we had, in some respects, a clearer policy framework, particularly in the UK but also in the EU, with regard to climate change - for example, if we were able to find a simple way by which the price of carbon could be established and one in which people had confidence - that would send a very clear signal to businesses about the value of investing in products which address that particular issue, which in turn gives them a strong home market on which to then capture other opportunities. That issue around certainty and simplicity is something which, frankly, is shared also by those companies who perhaps see climate change more as a challenge, the ones who are, if you like, energy users and have to maybe change behaviour in one form or another, to rise to the climate agenda; but I think there is a common cause between those who see it as an opportunity and those who see it as a challenge in having a policy framework which is simple, sends some clear signals about the direction of travel on which they can make very rational investment decisions as appropriate. Q19 David Howarth: Can we come back to the question of the second phase of the European Union's Emissions Trading Scheme, the Government's plans announced last week, which you obviously were not ecstatic about. Could I ask you a simple question? What level of cap would you be happy with? Mr Roberts: To be clear, in our submission to the consultation on the NAP, we did not specify a number. So, to be clear, we did not specify the lower end of the range, for the record, and, mindful of the next evidence session that you have, we would absolutely sign up to the words of the climate leaders, who incidentally involve many CBI members, when they said in their supplementary statement to the letter which went to the Prime Minister that the UK Government should aspire to the higher end of the range. We would agree with that principle. The nuance we would add is that in aspiring to the higher end of the range the Government needs to take into account a number of factors, one of which is what is going on in the rest of Europe. Are we taking all of the burden, or a significant share of the burden of the EU move towards climate change reduction, or are other countries shouldering the burden alongside us? The Government needs to be mindful of the accuracy of its projections, which is not merely a technical issue, it was quite a material issue with regard to the efficiency by which they set the Phase 1 allocation, and they need to be mindful of the potential impact on energy prices of the allocation that is applied to the generators. I am sorry that is not a number which I know you were looking for, but the reason I have not given you a number is because it is complicated, and I am not just being fatuous, it is complicated and those factors which I have mentioned need to be taken into account. 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 per cent 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. Ann mentioned aviation. 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 that 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 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 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 gaining 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 gaining, 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 p.m. to 4.44 p.m. 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 to 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 a need to look at the interface between who pays the Climate 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 220 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. Q40 Mr Chaytor: Is this something that the CBI is actively promoting to its members or is it just the unilateral action of individual companies? Mr Roberts: To be fair, our focus in life is much more on the public policy agenda, and that is what our members pay us to do and expect us to do, to have this sort of conversation that we are having this afternoon, and we certainly try to help promote awareness of what businesses are doing in the way I have just done in answering your question, but I would not say, to be fair that---- Q41 Mr Chaytor: Disseminating best practice. Mr Roberts: We do that up to a point, but I would not want to over egg the pudding. Chairman: Thank you very much indeed. It was a very useful discussion. We are grateful to you for coming in. Memoranda submitted by Johnson Matthey and Anglian Water Examination of Witnesses
Witnesses: Dr Jack Frost, Director, Johnson Matthey Fuel Cells, Mr Joe Irvin, Director of Public Affairs, BAA, and Ms Jean Spencer, Director of Regulation, Anglian Water, Corporate Leaders' Group on Climate Change, gave evidence. Q42 Chairman: Good afternoon and welcome. You may have heard some of the previous exchanges. You said in your letter to the Prime Minister that you "welcome the recent advances in climate change policy that have been made in the UK as a result of the announcements made in the 2006 Budget and the Climate Change Programme". Can you tell us which particular advances you welcome most? Dr Frost: Yes, I think we need to see this in the context. We were happy with any measures which advanced the cause and our support of them, but I think the letter is in the context of saying that is okay but we need to go rather further than that if we are going to address the problem. So it is not that we disagreed with any of the particular measures, we thought they would all help in varying degrees, some more, some less, so it was not really a particular comment on any of the individual policies per se but merely a more general comment that perhaps as a package and overall the scope would go rather further than those had gone. Q43 Chairman: What would you say differentiates your position from that of business more generally or perhaps of the CBI, for example? Dr Frost: I am not sure that "differentiates" is exactly the right word. What we are looking to do is to deal with what seems to be an inhibitor at the moment, which is what we describe as a "Catch 22" position for what is by any scientific measure apparently quite a serious problem but the policy initiatives that are being considered to deal with that are to some extent being inhibited, in our view, from the fact that the difficulties of implementing those are stopping people doing bold enough measures to tackle those problems. What we are saying is that that is not necessarily the case. If bold policy measures are put forward you could expect a bold response from industry. Of course, different companies are in different positions and their ability to respond will vary from company to company. So, there is a spectrum of available responses from industry, but we thought it was useful to take more of a leadership role in that spectrum and to say that this group of companies, for example, would be ones that would be prepared to invest if the Government was in a position to take a bolder policy. Q44 Chairman: In the context of what you have said in both those answers and the fact that many of us were rather disappointed by what was in the Budget and in the Climate Change Programme, and the very fact you chose to write in the way you did publicly a month ago might be interpreted, and it was interpreted, as an implication that you did not really think the Government had gone as far as it could have done. It would be helpful if they were more radical and not necessarily unhelpful to you in business. Dr Frost: Yes. What we are trying to put on the table and into the public domain is that businesses will respond positively to bold policy initiatives. Obviously any change causes problems of different types but it is not just problems; there are also opportunities. In a situation where there is a major clear and pressing need for bold policy, it would be strange if there were not business opportunities in it as well and we can see and support those. We wanted to break that Catch 22 situation where no one can move forward because they think that somebody else will not respond. We are saying that that is not quite true. People will respond in different ways. Q45 Chairman: Some people will still nevertheless interpret the fact that you are a self-selected group, chosen to speak out separately. It does rather suggest that business generally perhaps is not quite as supportive of the government and of the people who are campaigning for more urgent responses to climate change. There is a kind of implication there that perhaps you rather share that view. Dr Frost: Which view? Q46 Chairman: That business generally could be a little more supportive of the government's efforts in tackling climate change and meeting some of the demands of people who have identified this as a very serious threat for some time and would like to see both business and government giving a more urgent response to the problem. Dr Frost: I would phrase it slightly differently. If government does make the long term policy decisions which are credible and believable, that creates an investment case. People should not underestimate the power of that investment case because investment allows change to be done much better and cheaper than people would otherwise think. If we try to do change without the right amount of investment in the technologies and other things to make it more practicable, it is going to be more painful. We were trying to emphasise there is a positive dimension to this. Different companies are in different positions and are affected by energy prices and other things in different ways. They are all costs to everybody but there is also opportunity. I would not try to polarise the response unduly in that respect. We are a group that can see a positive side to it. Q47 Mr Hurd: The government has a 2010 target and a large gap out to 2050. Do you share the view that the government needs to focus on breaking down that 2050 target into more regular milestones in terms of targets between 2010 and 2050? Dr Frost: Government targets by themselves are not a great motivator for many things so the targets in themselves are not the point here. It is the policy packages that go to make those targets credible and achievable. We attach more importance to the policy framework than the targets. Targets are always helpful if they inform people of what is coming up. That long range view in things like the ETS and others is helpful; it establishes a framework, but the critical point is the credibility of those targets and that is given by the policy implementation. Q48 Mr Hurd: What credibility would you attach to the 2050 target today? Dr Frost: In terms of can it be achieved, yes, of course things can be achieved. It will become more pressing to achieve it presumably if the scientific analysis of climate change is correct. 2050 is quite a long way away. If we start doing things now, by 2050 an awful lot of change can be achieved. We have seen that in the past. Q49 Mr Hurd: You seem to be pretty indifferent in terms of the idea of milestone targets between 2010 and 2050. Do you not think this whole climate change programme and this review of policy was entirely driven by the fact that the government recognised it was not going to make the 2010 target? There might be some value in having checks along the way that might focus politicians' minds on the task in hand. Dr Frost: I cannot speak for the government on this. I can only speak on the effect on my company. The targets are helpful indicators. There is absolutely no harm in a target but what is really more useful is the policies that support that target. We are saying those create the investment case to act on. The targets by themselves are less helpful if they are not done with the appropriate policy measures. Q50 Mr Hurd: Is that a view shared by Ms Spencer and Mr Irvin? Ms Spencer: Yes. I think we said in the letter we would support a target of 2025. We did not say what that target would be. That will need some more work. Yes, we would support an interim target but it is getting the policies that deliver that. Mr Irvin: As we said in the letter, we think it would be helpful to set targets for 2025 and that would give a much longer term view for investment at the right level. Q51 Mr Hurd: Do you have any concern about the figures that the government use in terms of estimating carbon savings and projecting emissions? Is there some concern in industry about the reliability of the data that they are using? Dr Frost: I am not sure that this group has a particularly strong view on that. Obviously, we hope any figures are reliably based and given as much thought as they deserve. Q52 Dr Turner: The European Trading system is not universally applied or necessarily universally admired. You say in your letter that you want the ETS to maintain its basic structure in order to ensure business confidence stays with the carbon market. Does this exclude the possibility of including other sectors, notably aviation and road transport within the ETS, or is it to do with the way that it covers what it does cover? Mr Irvin: Perhaps I can explain what we said in the letter and the agenda which was attached to the letter to the Prime Minister as the Corporate Leaders' Group. We felt as a group that the Emissions Trading Scheme was a very important element in action to tackle climate change. There are three things that the group asked for. One was to set an interim target for 2025 which we just referred to in order to provide companies and investors with longer term value for their investments, to estimate that. Secondly, the potential for a competitive threat from imports originating from non-participating countries should be addressed by trying to ensure that non-ETS countries enjoy stronger incentives to participate in the scheme, for example, by use of the clean development mechanism. Thirdly, the ETS needs to be broadened to include sectors - we specifically referred to aviation - that are expected to generate an increased share of overall emissions, yet at this stage cannot reduce their own emissions levels at a reasonable cost. Those were regarded by the whole group as strengthening the scheme. You were talking about keeping the basic structure of the scheme in place. I think it is worth remembering that this is a complicated and quite ambitious scheme. This was the first phase of its operation. I sometimes refer people back to think about when income tax was introduced as a kind of emergency measure in the Napoleonic wars. Was it the perfect system? Was it important what level it was set at? Probably not but the fact that there was a progressive taxation system in place to be built on was quite an important step. Q53 Dr Turner: Phase two is in negotiation right now. Do you have confidence in the ability and indeed the willingness not just of our government but of governments in other Member States of the EU to be as tough but allegedly fair on their industries as the UK government says it is being on UK industry, because clearly you need a level playing field. Do you have that confidence? Mr Irvin: We were strong supporters, as we said in the letter and at the meeting with the Prime Minister, for the government aspiring to the higher end of the range it is consulted on which indeed the Secretary of State did announce subsequently in a national allocation plan for phase two. It is very hard for us to make judgments about what all the other EU governments are going to do. It is probably widely felt that in the first phase some governments were more stringent than others with industries. The UK government was reasonably stringent compared with other governments. We would like to support the effort to try and encourage other EU countries to be as stringent as the UK government because that will be the best result for the environment. It is not only fairer and will tackle any competitive problems but it is going to produce a better result for the environment overall. Q54 Dr Turner: Is not this potential lack of consistency in rigour amongst different members of the EU potentially the biggest weakness of the system because, if they do not honestly and robustly apply the caps, it is not a level, competitive playing field, is it? Mr Irvin: At the moment, the emissions captured within the ETS are something like 45 per cent of all the EU's CO2 emissions so they are a significant part of the whole EU scene. The first phase was designed to produce a reduction in overall emissions by 2.5 per cent and that is a step forward in that period. We would prefer a more evenly stringent application of the scheme across all of the countries. We hope that will be more to be seen in this second phase than in the first phase but we are better off with the scheme than without it. The more open the scheme, the more inclusive the scheme is so that the trading exists and the market signals exist to encourage reductions in CO2 the better. It does not mean you should not have the scheme because it is not quite as good as we would like to see. Q55 Dr Turner: What is your view on the view expressed by the CBI earlier that they would like to see a single carbon price regime? In practice it has to be a carbon tax. Mr Irvin: The more open an Emissions Trading Scheme is the better and the more real it is the better. The most efficient scheme - that is, the one that will produce the biggest reduction in carbon at the least cost - is one which would have the common price. It does not mean it is going to be common from week to week or month to month, but it does mean that at any one point you have a spot price which everybody is paying and therefore you will find that the investment will be driven towards the places where you can make the biggest reductions fastest. Q56 Dr Turner: Would you not want some level of stability for the sake of long term investment? After all, all of our current carbon pricing mechanisms are inherently unstable at the moment from the ROC to the ETS. I cannot think of one which is particularly stable. Dr Frost: You have to distinguish between different types of risk and the difference between risk and uncertainty. The certainty that we are looking for is that there will be a market in carbon. It does not mean that anyone is in a position therefore to pick the price in a particular market but the fact that there is a market in carbon is something you can plan on. Companies can then take their own view on supply and demand factors that will affect that market. Companies are quite used to handling market risk in that context. After all, the price of materials and the price you can sell things at change pretty much as well. It is really the fact that the ETS will continue to exist, that there will be a price of carbon and that it will be a tradable commodity, which is the important thing for the long term view. The price of it of course should be set by a variety of things, not least how important we think it is to discourage carbon emissions and that is a different thing. We are all capable of taking a view on what the decisions will be that affect that price in 20 years' time. It is more important that there is a market in carbon for long term investment decisions. Q57 Dr Turner: How do you react to the government's announcement on phase two of last Thursday? Dr Frost: We were very positive about it. We had suggested that it would be appropriate to work towards the higher end of the suggested range. That is what they have done. The detailed consequences of that will be worked out and that is a slightly different question but it is one element of taking a leadership position on this issue, which we think it is very good that the UK does and we support that. Q58 Dr Turner: What is your view on something else that the Secretary of State said last week, that the government will continue to insulate internationally competitive sectors within the ETS from the burden of carbon reduction? Can this be sustainable? It must mean that other sectors are going to have to pick up the burden. Mr Irvin: The system has worked in phase one - and this is how it is proposed it works in phase two - such that the government have said emissions allocations should go to those sectors which are open to international trade in particular on a business as usual basis and therefore the burden has been passed to the insulated but very important power generation sector. That is not the end of the story. The cost of power generation gets increased and that gets passed on to everybody else. It does come home to haunt everybody else in a fairly even handed way in the sense of its relationship to carbon dioxide emissions. Secondly, the whole trading system provides a penalty for those who exceed their allocations and, very importantly, an incentive which most other schemes do not have to try and beat your target because then you have allocations to trade and to sell. You have an economic incentive to find better ways to run your business. Q59 Dr Turner: Would you like to see some more clarity about the long term prospects of the ETS? Some of your members and the companies they are associated with would be working out their investment plans up to 2025, maybe, and it is clearly helpful if you have some idea of the carbon pricing background against which you are working over that timescale. What would you like to see the government doing to try and promote that long term predictability? Dr Frost: It is important that the government does, as it has been attempting to, take a leadership position in terms of setting carbon caps at a particular level and then progressively lowering those. That is what creates the market in carbon of course and determines the price. Creating a market of course requires the agreement of all the participants so there is an element of diplomacy there that needs to be taken between governments to encourage everyone to support the same thing. Q60 Dr Turner: If the government were to set an interim carbon dioxide reduction target for 2025, would not that send the very strong signal that, because this is the sort of mechanism by which it would be implemented, there would be carbon driven pressures on investment in place for at least that timescale? Dr Frost: Yes. There are many other measures that need to be taken if we are going to reduce carbon emissions significantly, other than the ETS scheme. The ETS scheme is very helpful in that it allows us to deploy finance and resources in an efficient way, like any market, but it is probably not going to be sufficient to introduce some of the step changes in technologies, processes and operations that are needed in order to make substantial reductions in our long term carbon emissions. We have to recognise that, useful as the ETS may be, it is not the only factor that will affect companies' investment decisions. Indeed, it is more likely to affect short term decisions to move to invest in carbon emissions. It is all very positive stuff but none of it is amounting to some of the step changes that we think are really necessary to address the underlying seriousness of the problem. The ETS or setting the price for carbon is a good feature but price mechanisms like that can only achieve so much. Q61 Dr Turner: Do you think the government was a bit timid in its proposal of the three to eight megaton range, given that you and the CBI, as representatives of industry, have all immediately opted to support something at the higher end? If the figure was as low as three, that would allow for emissions higher even than business as usual. Three was never a realistic proposition for cutting emissions, was it? Dr Frost: We said it was very important that there was a market established and that there were caps. The higher the range the better. There are many factors that go into that range. We are not parties to all the considerations of different companies. It will affect different companies differently. I do not think this group is in a particularly good position to say whether three would have been too timid. We encourage a higher cap and we would encourage progressively higher caps in future if those were feasible. Q62 Dr Turner: The implication would seem to be, given the initially timid range and the ease with which the high end of the range has been sold to industry, that the government could have been bolder and gone for a higher target. Mr Irvin: Our letter to the Prime Minister preceded the decision on where the cap was going to be. The Corporate Leaders' Group collectively asked the government to go for the higher end of the range. We did that in advance of it. It is not as though it was announced and sold to us. A lot of people were quite surprised that the decision was at the top of the range, which was eight million tonnes of carbon or about 29 million tonnes of carbon dioxide reduction. That is what we asked the government for in advance. The government produced it. It would be foolish of us to do anything other than welcome it. We would have thought three million tonnes would have been too low but eight million tonnes of carbon was, we thought, a stretching enough target to make a difference. Q63 Dr Turner: It seems a little bit too easy. How would you have reacted to a proposition for 11 or 11.5 megatons? Dr Frost: The most important thing in anything like this is to see in which direction prices are going. That influences investment decisions as much as anything. The interesting question will be where will it go in the future. If you set a cap now, what is the next cap going to be? You can start slowly and accelerate change and that produces a very good response in all regulation in terms of affecting investment decisions. It signals where things are going into the future in a very good way. It allows us to say that this is the level today; "I could take some decisions as to how to meet that level but, if I think it is going to get more difficult in the future, I can take some slightly different investment decisions which will allow me to be where I think it is going in the future." The absolute level is probably not the main issue for investment decisions; it is which direction things are going in that is more important. If we start gently and move forward, that will produce similar investment results. Q64 Dr Turner: It is the absolute level that determines CO2 emissions. Dr Frost: It does at any given point but reducing CO2 emissions by a few per cent is not sufficient. You have to go a fair bit further than that. You have to look at the long game if you want to talk about affecting investment decisions. That is quite a different point from using this as a measure to limit CO2 emissions now. This is not the only mechanism that could be used to do that and it is probably not the only one that should be used. Q65 Dr Turner: You will be happy to see a much more demanding target in phase three? Dr Frost: As long as these things are well signalled and people can respond to them, that will create its own investment logic and people will invest to meet that cost effectively. Q66 Tim Farron: You cite some other mechanisms to give the commercial sector in particular the ability to tackle climate change such as renewables obligation, expanding the energy efficiency commitment scheme and strengthening building regulations. Which mechanisms do you believe will deliver the greatest level of carbon savings? Dr Frost: All of the above and probably some others as well. Q67 Tim Farron: And at least cost? Ms Spencer: In terms of renewable obligations, they only apply to electricity generation. Particularly in the water sector through combined heat and power we produced quite significant heat generation. While we are already making investment decisions, those could be enhanced and generate further investment if obligations also applied to heat generation. That is one example. Another example is on small hydro schemes, again within the water sector, a sector that I know. We have significant opportunities to put micro hydro generation on our sewage outflows but, because they have been pumped as part of the process of collection and treatment, they are specifically disallowed under the obligation certificate. That is another example where we can see opportunities to incentivise further investment. In terms of building regulations as another example, that is both mitigation and adaptation to climate change. In the south and east of the country there is a proposal for a million new houses over the next 15/20 years. It seems sensible to us as part of that to require delivery of the proposed savings of 25 per cent on water efficiency. We are only going to get that if we seek the requirement to building regulations. Dr Frost: On the question of cost, this is clearly an important consideration. If you put very heavy responsibilities on people in a very short time frame, it is at best disruptive and probably quite expensive. Those same requirements placed in an orderly fashion, visible into the future, in a credible way, do not cost anything like what people expect because people develop innovative solutions and invest in those to make the cost of implementation much lower. This is a very well established principle and it is particularly important in the environment sector that governments and other bodies take the lead in that respect to provide that sort of long range requirement to produce better, cheaper solutions. The business of government is to take care of the common good in that way. The markets will not of themselves make those sorts of investments in environmental, low carbon technologies. They are there because society requires them. Those rules and regulations allow us to make those investment decisions because society is signalling its need ahead of time. The cost question really comes down to the timescale you are trying to operate over. Q68 Tim Farron: I do not know whether you have discussed any of these additional mechanisms with government? Dr Frost: Yes, individually and collectively. Q69 Tim Farron: I am not asking you to crystal ball gaze necessarily but from the basis of the discussions you have had can you give us an idea which schemes you think the government might employ? Dr Frost: The group has said that there is not a particular silver bullet here. There is not one answer to a question like this. Reducing carbon emissions substantially requires action on a whole range of fronts. It requires price mechanisms like the ETS; it requires an extension of something like the renewables obligation to low carbon technologies as well as just renewable, because there is a whole range of carbon reductions that can be achieved which are not supported by the renewables obligation; and, for example, extending the renewables obligation to allow different bands of support so that the currently higher priced technologies can be brought into the market with more support and then work down their cost curve as they increase in volume down to lower levels of support. Much of the regulation needs to be made more innovation and investment friendly if it is going to achieve its targets but that is right across the board for all of our regulations. Something as dull as ditchwater in terms of building regulations has an immense impact. Planning and planning consents have an immense impact. Are we going to require certain things of our planning system that could help immensely in terms of allowing wind farms or, better yet, encouraging particular types of developments in particular ways. Pretty much everywhere we can see something we should be trying to do something would be our feeling. Q70 Chairman: On the question of building, I think you have expressed the view that a voluntary code for sustainable homes is not going to work. That was certainly the conclusion we came to when we did our report on this earlier in the year. If it is made compulsory, what is going to happen to the costs? Are they going to be absorbed by the builders and therefore they will have a squeeze on their margins, or will they be able to pass them on if it is a compulsory code? Ms Spencer: The potential for additional costs is overstated because manufacturers will respond in terms of manufacturing of sanitary ware, white goods and so on. I do not think the costs should be that excessive but it is overstated because developers prefer not to have to change their position from what it is currently. Q71 Chairman: Given that that says that you are willing to see tougher regulation as a driver of innovation in that way, its effects are going to be from time to time somewhat arbitrary. Some sectors will find it harder to produce those innovations than others, will they not? Dr Frost: I am not sure why in particular. There are laws of physics and chemistry which probably will not be broken. Q72 Chairman: Would it be somewhat arbitrary? Will there be some areas where businesses, faced with greater regulation, have much more difficulty in adapting to it by an innovative response than others? You are the experts on this rather than us. Dr Frost: It will vary company to company and sector to sector. The implementation of the various measures needs to be given quite a lot of thought in terms of the impact it is likely to have. We have looked at road transport recently. Introducing measures on fuel has perhaps a different effect from introducing them on the car manufacturer, which will have a different effect from introducing them on the consumer. The consequences of any regulatory process need to be thought through pretty carefully but they are usually in the details of the regulation. The overriding principle is if it asks for things which are currently either not available or too expensive. You can ask for those and they will be delivered by a combination of innovation and investment provided they are properly signalled in a reasonable way in advance. There are many examples of that being shown to be so. Usually, the problem is not being bold enough in what we ask for, rather than failing to deliver if the requirement is credible. When they fail, it is usually because the request was not considered credible by people to invest their own money and time in. Q73 Chairman: You mentioned transport. It is noticeable that in the statements you have made you have referred to road transport emissions but not aviation emissions. I also notice that you have BAA as one of your members but you do not have any motor manufacturers. Why is aviation left out? Mr Irvin: I am from BAA and it is not left out. If you look at the letter, I quoted the section earlier which for example suggested that the ETS needs to be broadened to include a sector such as aviation specifically mentioned in future. It is not omitted. Q74 Chairman: That is the agreed stance of the group on aviation, that it should be within the ETS? Mr Irvin: It is the agreed stance of the Corporate Leaders' Group. Q75 Chairman: Do you think realistically, looking at the transport sector, that that is anything like as tough a demand, given that it is going to be at the very best several years before it has any effect at all, on the aviation industry as the other demands that are already being made on the road transport industry? Mr Irvin: The hope and desire of BAA certainly is that we get aviation into the Emissions Trading Scheme in 2008 or as soon as possible thereafter. We are working towards 2008. We have established with the Commission that if there was any slippage in that time we do not have to wait until 2013 to take any action. It could commence at any point thereafter. We are working very hard towards that. It is quite a big thing to get the whole of aviation in the EU into that scheme by 2008. I do not think it is an easy thing to do. Q76 Chairman: That is an understatement. As someone who has tried to follow these issues for some time fairly closely, I have not met anyone other than people working in the aviation industry who thinks there is the remotest chance of getting agreement on a scheme by 2008, not even a one per cent chance. You have not convinced anyone outside your own industry that that is remotely likely. Mr Irvin: The European Commission are working to that and they are due to bring draft regulation forward at the end of this year which would be in time to do that. Certainly, if we all give up on it, it will not happen by 2008. Q77 Chairman: We also need to be realistic about it. We had that argument put repeatedly by the Secretary of State a few weeks ago. It would not be the first time the European Commission has had a timetable for introducing measures that has not been met. Going back to road transport, one of your earlier statements I think acknowledged that the more miles travelled on the road the higher the emissions. If you have more roads you tend to get more miles travelled. Does that mean that you are going to be arguing against the road building programme? Dr Frost: There are lots of statistics in these areas and it is possible to roll off some correlations in lots of things: GDP, the amount of petrol bought and all sorts of things. That is not quite the same as saying there is a cause and effect relationship between these different factors. It is quite true that the amount of miles driven in a country tends to depend on how many miles of road that country has. If you wanted fewer miles driven, you might infer that you should build fewer roads. That would imply that there was a cause and effect relationship between the two. It is probably more to do with GDP activity and such like. We need to be careful in drawing simple conclusions from correlations. If you want to reduce carbon emissions from transport, you need to look at a range of measures that might achieve that. If you want to reduce carbon emissions from the economy, transport may not be the easiest or the most cost effective place to reduce them from. There is no simple answer that says build fewer roads or have fewer carbon emissions. That is not available to us. Q78 Chairman: We accept that the correlation may be hard to understand as to whether it is cause or effect, but you did say - I think this would be irrefutable - that economic growth means there is greater demand for transport as the economy grows. Do you think it is possible to decouple a growth in emissions from transport from continued economic growth? Dr Frost: Yes. Historically this has been the case. Higher GDP means more of everything available to be purchased in the market effectively, transport being one of those things. The question is: is that what society wants and are its rules and regulations going to allow that. Those are political choices that we need to make. If we have unfettered use of something, we allow people to use it and the GDP grows, then people will probably use more of it. That has been our experience. Then we restrict and manage that in various ways. The question is: is transport necessarily linked to emissions? No, not necessarily. It is possible to have emission free transport. My own company is now responsible for fuel cells. These could be constructed to be an emissions free transport system, something that the car companies would welcome very much because emissions are a real nuisance to them. It costs them a lot to manage emissions from vehicles at the moment. An emissions free transport system is possible. What is equally clear is it will not happen very quickly because it is a big system and we would need to change it progressively. If we want an emissions free transport system, we should say that is what we want and put in place measures that achieve it in a credible timescale. Q79 Chairman: Pulling together several things you have said in the last half an hour, aviation is going to happen in due course when it gets to be part of the ETS so nothing immediately from that. Therefore, economic growth means more demand for transport. That would suggest to me that what we need is very much more rapid action on road transport where technology, as you have just said, exists but we are not introducing anything like as fast as we need to if we are going to make a real impact on the emissions. Do you share my view that it is absolutely extraordinary that the incentives from the government to accelerate introduction of lower emission road vehicles are so feeble? Dr Frost: Of course we would welcome more incentives to use lower emission vehicles. There is a limit to what we can expect to achieve though with incentives and simple price mechanisms as well. We already have a very, very high effective carbon tax on road transport, something like £700 a tonne. It does not encourage people to drive less so we need to take other measures to achieve that sort of change. Incentives are one measure but investment decisions are based not on grants and subsidies but upon markets being in existence. If there is a market for low emission transport, that will encourage its implementation much more readily. That market can only be created because society says, "We do not want emissions from vehicles." Q80 Chairman: The logic of what you said is it is going to be a while before we can cut aviation emissions so we have to do something a bit faster on road transport. To create that market you have two possibilities. One is to introduce some regulations about the kind of engines people have, whether it is in trucks or cars. The other is to have much greater fiscal incentives than there are at the moment. There are significant fiscal incentives but they are not really achieving much by way of behavioural change at this stage. You may not wish to draw this conclusion quite so explicitly but we would have to draw it from what you said. Either we need much tougher regulations or we need a dramatic step change in the fiscal instruments that are currently being used to encourage people to move to slightly greener vehicles. Dr Frost: This is more my own view. It is an area I have looked at quite a lot in working, for example, with the Stern Review on this sort of question. Price mechanisms are not very effective in a lot of these areas. The prices you have to achieve would be so high that they would have unwelcome effects and all sorts of other society effects. What people value is mobility and therefore you need to deal with that. Far more effective would be zero emission zones or, as California has, a percentage of zero emission vehicles required in the fleet, these sorts of measures rather than the fiscal measures. We have tried pretty hard with fiscal measures to affect driving behaviour and the use of vehicles and carbon emissions from vehicles. The evidence over the past 25 years is that they have not had that much effect. We need to take that into account in the range of measures we are looking at. Q81 Chairman: That is because they have not really been tried. The unwelcome effects would only be felt by those people who refused to move to the low emission vehicles. Dr Frost: Provided those vehicles are available. That is the key thing, to get those sorts of vehicles into the market place. At the moment you cannot buy a fuel cell powered car so there is no possibility of the market demanding one. We need to look at the measures that will produce the introduction of those vehicles into the market place. The government has measures available to it. One is regulation; the other is procurement measures. The difference between building a one off prototype and building a few thousand of something is very big in terms of what needs to be achieved. The investment decision to produce a few thousand of something is a big investment decision and, in my experience, people will do an awful lot for a purchase order including invest money. There are many tools that the government has to achieve this and fiscal measures are only one. I think we perhaps resort to them a bit too easily and think we have solved that when a more comprehensive suite of measures is what is required to achieve the changes that we are talking about. Ms Spencer: The only thing I would add to the debate on the need to encourage vehicle manufacturers is that, what we have found as a user and procurer of transport, where we have looked to increase the use of biofuels we are limited to using a five per cent mix on biofuels because the manufacturers limited their warranties. Their warranties become void if we use a higher level of mix; whereas on the continent exactly the same manufacturers and vehicles will accept a much higher biofuel mix and the warranties are still in force. It would be some fairly simple things, it seems to us, for vehicle manufacturers to move. Whether that is through regulation or encouragement can be questioned. Q82 Mr Chaytor: If you invited one or two vehicle manufacturers to join the Corporate Leaders' Group, you could have the discussions to resolve it, surely? Dr Frost: On questions like that, yes. Q83 Mr Chaytor: Is there a reason why big vehicle manufacturers are not part of your group? Dr Frost: I do not think there is any particular reason, no. Many of them are not UK based. We did set ourselves an ambition to enter into a bit of a debate in the UK because we value particularly the idea of the UK taking a leadership role in these areas. There is a tremendous scope, as places like California have shown in different areas, for relatively small states and markets to have a disproportionate global impact by taking a leadership position. I am a member the Low Carbon Vehicle Partnership Programme, which does have the vehicle manufacturers in there, and the SMMT so there are quite a lot of fora for vehicle discussions in this area. No doubt you will be familiar with them. Mr Irvin: I think Jack put his finger on the difficulty because we are a UK based organisation, largely, although we have become Spanish now as well. Part of our programme for the coming year is to try and extend links into the European Union and get some European cooperation where we could much more readily invite such companies to take part. Q84 Mr Chaytor: The reality is that UK emissions are less than two per cent of global emissions. If growth continues in China, India and Brazil, that is fine. Why are you putting all this effort into persuading our government to be more interventionist when the impact on total global emissions could be quite marginal? The former director general of the CBI was fond of saying that there is a danger of showing significant global leadership but could it be a reality? Dr Frost: If you look at the simple arithmetic, that is obviously correct. If we achieved an ideal state in Britain of zero carbon emissions or something, that would have relatively little effect on global warming. However, it discounts and devalues the leadership argument that we are quite attached to. We know the importance of leadership in our businesses. Being a leader is completely different from being in the pack in terms of your position and being able to influence events. We have seen the disproportionate impact that states such as California have had on the world, global market. California does not have a car industry but has had more impact on the car industry globally than almost everybody else put together, I would think, in terms of emissions from cars. I think I can pretty safely say that, if it was not for the zero emission mandate in California, the whole fuel cell industry would not exist because they would not have any interest in making the investments to take this laboratory technology to something like approaching commercialisation. California's impact globally, by taking a leadership position, has been enormous. From the point of view of companies based in the UK, if we are doing things first here, that is an advantage to us going forward. It may be a bit more or less painful at the time but it is an advantage going forward because we are required to come up with solutions that will work. Q85 Mr Hurd: That comes to the heart of the issue of future competitiveness of the British economy. I read with great interest the summary of the workshop that you did in April on the potential economic opportunities for the UK that could be created by leadership on climate change policy. Part of that premises that the UK economy is shifting away from competing on price issues to competing in added value niche service orientated, non-price driven markets. In that context do you think the CBI have been misguided in terms of emphasising so much the need to protect British industry from higher prices that result in unilateral action on climate change? Dr Frost: If there is a difference in nuance here, I think it is that, if changes in the short term give no one a chance to do anything other than pay the cost, that is a bit unhelpful. If it is necessary, it is necessary. That is a different question. If you want to encourage investment and change, it is best to signal those changes into the future. Our view is that the more far reaching and adventurous those changes are the more far reaching will be the response from industry to meet those challenges because they can see more clearly that there is a market in place. I am sure that most companies would agree the thing they look for most is a degree of visibility from policy. Short term flips and flops of policy are not very helpful to anybody. You just have to pay the cost. You cannot create a better answer in a short period of time. If you are looking to encourage innovation and competitiveness, this is not an overnight thing. It is a plan that takes years to work through. Q86 Mr Hurd: It does require leadership. The message out of the CBI for some time now - the gospel according to Digby - is that there is no need to be heroic on these things because in striving for heroism you risk undermining competitiveness. I am trying to get a flavour from you. What is your break out? Your distinctive voice now partly reflects a desire to see the conversation around competitiveness focus much more on the opportunity than the risk. Dr Frost: Yes, certainly. I think that is an important thing to do and most companies will want to do that. They are obviously concerned about the short term impacts of different changes. Many members of the Corporate Leaders' Group are members of the CBI and would be worried about next year's bills. They are equally interested in the opportunities in years two, three, four, five, six, seven, eight, nine and ten. Q87 Mr Hurd: Can I ask for your perspective on where you think the UK stands at the moment in terms of the development of the low carbon economy, because we have a reputation for being a leader in terms of the climate change agenda and yet other countries seem to be moving faster, further than us, in terms of growing market share of what used to be called environmental industries. Dr Frost: Yes, I think that is true. In another context I am chairman of a group called the Environmental Innovation Advisory Group which is a Defra/DTI body. It is true that we have looked at the environmental sector in general, beyond just climate change. Although that sector is growing in the UK, it is not growing as fast as it is in other countries. We have looked at some of the reasons for that. It is not a lack of ideas or indeed even inventiveness. It is a lack of getting those into the market place. Historically, the UK has had very pragmatic regulations in the environmental sector which are based on things which are known to work, which are relatively low risk - i.e., it has not encouraged innovative solutions to its problems using its regulatory modes. Therefore, the case for innovation in the UK and investment in the environment sector has been not a very good one. It has been better to take those ideas and put them into operation in Germany or somewhere else where there is a more forward looking regulatory environment. There are also other barriers involved. This is where I would emphasise the way in which we use things like public procurement, because those initial orders for something are disproportionately important in terms of getting something into the market place. The market cannot act on things until something is in the market. Getting it into the market there is very important. In both cases, the UK does not do a particularly good job of managing into the market place innovative and potentially high growth activities. Q88 Mr Hurd: Can you give us a flavour for how the German regulatory environment around innovation feels and looks very different from the UK? Dr Frost: There is a whole range. One I am familiar with is quite well established and that is the way that the German car industry operates, for example, in terms of setting future EU emission regulations. It is a very important player in that. The German government offers tax incentives to implement those regulations sooner in Germany than the law requires. German car manufacturers are putting them in place two or three years before the law requires. Curiously enough, that gives them a bit of an advantage. It is that integration of policies and practices that is not so evident in the UK. There are signs that that is changing. The initiatives we are taking could well change the outlook for the UK to be a place to invest in for environmental industries, environmental innovation and of course climate change. There are some encouraging signs but we need to get better at doing that. The way I like to describe it is that the government should consider itself like any private company. It wants some outcomes at reasonable cost. The current solutions are a bit expensive so it should tell its supply chain what it wants and say, "If you produce them, I will buy them from you." That is what General Motors does to us. Curiously enough, we invest to meet that need because we can see there is a market in it. That virtuous loop is not really present in the way we set things up. It is not helped by the fact that a lot of the regulations are based on old technologies and old solutions that are achievable. Q89 Mr Hurd: Do you think the government or the Stern Review are alive to this? Dr Frost: Increasingly it is becoming well understood on the Sustainable Procurement Task Force. You can do two things. You can increase the general level of things. What you can buy is currently not good enough; it costs too much. It is not attractive and does not work well enough. You need something new and better so you have to factor into your thinking the innovation process. I believe the Stern Review - at least I hope it has, certainly not through any lack of any effort on our part - has that firmly in its sights as an important component of something you need to take into account as well as improving today. You have to think how you are going to make things a lot better in the future. Q90 Mr Hurd: When are you going to take this initiative forward? Where does it go from here? Dr Frost: We mentioned that there is a view that we can do some things in Europe. The Corporate Leaders' Group sees itself very much as an enabling organisation in that these actions in many cases, in the first instance, have to be taken by government. If government does things, industry will respond because it is in industry's interest to do that. That simple message is very powerful. It enables bolder policy decisions to be taken. We have said that we would work in detail with various initiatives to see how we can make each of those work better, along with others. There is a whole range. That central message is the key thing for the Corporate Leaders' Group idea that we would help to enable people to take the bold decisions that seem to be required. Q91 Mr Hurd: You mention that ambitions might stretch into Europe but part of the fundamental challenge here is the attitude of industrialists and consumers in India, China and Brazil. Looking longer term, are you hoping to stretch your tentacles out? Dr Frost: Groups like this have been emulated elsewhere - for example, in Canada and Australia. A group of people have got together in a similar mode to affect things locally and that is encouraging. That is the sort of result you would expect from leadership. That has been echoed around the world. It remains true that the business of business is business, not government. At the end of the day, we will be responding to the various opportunities that are created in this by government action. We have identified six or seven areas that we are keen to pursue discussions on. We are certainly very interested to be involved in things like the Stern Review to inform the experience that we have. We do not intend to become a trade association of some description. Mr Irvin: The Corporate Leaders' Group emerged from the Prince of Wales Business and Environment Programme. It was chief executives of a group of companies that came together to do it and to try to push the thing forward. I do not think we will dominate the world in the sense of going out to India and China and becoming part of that but we have a nine point programme going forward and one of those points is to look at development links with India and China. Dr Frost: We should emphasise the credit due to the Prince of Wales Environment Programme for bringing this group together. Nearly all of the corporate leaders are graduates of that programme and many of us are so there are some like minded people. Chairman: I personally very much welcome the emergence and the existence of the group. It is an encouraging initiative for those of us who are concerned about the subject. Thank you very much for your time this afternoon. We are grateful to you for coming. It has been very helpful and interesting and I am sure we will keep in touch. |