You are here: Parliament home page > Parliamentary business > Publications and Records > Committee Publications > All Select Committee Publications > Commons Select Committees > Environmental Audit > Environmental Audit

UNCORRECTED TRANSCRIPT OF ORAL EVIDENCE To be published as HC 882-iii

House of COMMONS

MINUTES OF EVIDENCE

TAKEN BEFORE

ENVIRONMENTAL AUDIT COMMITTEE

 

 

PRE-BUDGET 2005

 

 

Thursday 9 February 2006

JOHN HEALY MP

Evidence heard in Public Questions 1 - 65

 

 

USE OF THE TRANSCRIPT

1.

This is an uncorrected transcript of evidence taken in public and reported to the House. The transcript has been placed on the internet on the authority of the Committee, and copies have been made available by the Vote Office for the use of Members and others.

 

2.

Any public use of, or reference to, the contents should make clear that neither witnesses nor Members have had the opportunity to correct the record. The transcript is not yet an approved formal record of these proceedings.

 

3.

Members who receive this for the purpose of correcting questions addressed by them to witnesses are asked to send corrections to the Committee Assistant.

 

4.

Prospective witnesses may receive this in preparation for any written or oral evidence they may in due course give to the Committee.

 


Oral Evidence

Taken before the Environmental Audit Committee

on Thursday 9 February 2006

Members present

Ms Celia Barlow

Colin Challen

Mr David Chaytor

David Howarth

Mr Nick Hurd

Mr Graham Stuart

Dr Desmond Turner

Mr Edward Vaizey

Joan Walley

________________

 

In the absence of the Chairman Joan Walley was called to the Chair

 

 

Witness: John Healey, a Member of the House, Financial Secretary, HM Treasury, gave evidence.

Q1 Joan Walley: Welcome. Can I say at the outset, Minister, thank you very much for coming back to this Committee. We understand we have about an hour to an hour and a half with you. We have got a lot of ground to cover, so we would like to go straight into the questions, if that is okay. I would start off by saying that when the Environment Agency gave evidence to us about the Treasury's approach to environmental taxes and incentives, they felt that the Treasury had been unnecessarily tentative and that you could be more ambitious. Do you recognise that criticism or do you feel that it is unfair criticism?

John Healey: No, I do not accept the criticism. To respond to your welcome, I am very pleased to be here again, and it is good to see you in the Chair, Ms Walley.

Q2 Joan Walley: It is only temporary.

John Healey: Even though it is temporary. Would you pass on my congratulations to Mr Ainsworth for his promotion? I have been coming before this Committee for several years and a number of members from both sides have gone on to front bench duties and responsibilities afterwards. It is good to see that the parties are taking the Environmental Audit Committee seriously as well. I do not accept the criticism, briefly, for these reasons. If you look back to 1997, when we first came into government, we set out a principled statement of intent on the environment and the use of economic instruments led by the Treasury but obviously on behalf of Government at that point. At different stages, we have reinforced that principled framework - in the Pre-Budget Report in 2002 and then again in the Pre-Budget Report this inquiry is basing its work on in December. Within that framework we have introduced a number of very serious fiscal and economic instruments, often at points when we have faced considerable opposition not just from opposition parties but from groups outside. If you think back to the introduction of the climate change levy which we started the process for examining and introducing in 1999, at that stage, with the exception of the Scandinavian countries, there were only two other countries in Europe with any sort of carbon or energy-related tax. Now, of course, with the Energy Products Directive, it has become the standard. When you look also at the introduction that we did with the Voluntary UK Emissions Trading Scheme, it was the first economy-wide emissions trading scheme. It was the forerunner and very much the basis on which the EU Emissions Trading Scheme was devised. Again, if you look at the recognition that has always been there in our environmental policy, particularly on the biggest challenges like climate change, this is not a UK problem. It cannot ever be simply a UK problem because our emissions are around two per cent of the world's emissions. Therefore our ability to lead and contribute to the international consensus for action and measures to deal with climate change has been essential. You have seen that not just in the instruments and measures that we have been prepared to introduce, as I have just said, but also, in the recent 12 months, with the priority that we gave to climate change within the period of Presidency that the UK held for the G8 and for the European Union, and you will see this again tomorrow and Saturday when the Chancellor is in Moscow at the G8 meeting - the follow up to Gleneagles - where he will be discussing and leading the arguments for the World Bank to go further with the energy investment framework that was recently announced to try and help the poorest and developing countries develop alternative and cleaner energy sources.

Q3 Joan Walley: Thank you. It is very helpful to have that as a contextual framework for the inquiry that we are taking. I think the issues that you have raised about consensus or communication and understanding by the public are issues that we will come on to later. What we really want to press you a little bit further on is that the 1997 statement from the Treasury really did promise so much in terms of shifting from "goods" to "bads", and the issue is: how do we measure the success of that? We have to have regard, surely, to the fact that the proportion of tax revenue generated through environmental taxes is now, for the fourth year running, lower that it was in 1997. How can you show that you have kept faith with that huge ambition in 1997 and that we are still making progress on the shift from "goods" to "bads"?

John Healey: You can see it, first of all, in some of the specific measures. I mentioned the climate change levy, very specifically an instrument that, apart from its environmental objects, did just that. It shifted the taxation, because it was accompanied, you will remember, by a three per cent cut in employers' national insurance payments, from "goods", if you like, the cost to employers employing people, to "bads", in other words, the profligate or excessive use of energy in business processes. First of all, you see that, and I could make the same argument with the aggregates levy, I could make the same argument with the landfill tax. Secondly, and this is important to understand, if the sole measure of the seriousness with which the Government takes environmental taxes is the total tax take of that group of taxes that happens to be categorised as environmental transport taxes, then I think you are missing two very important points. The first is this. Some of those tax regimes are devised specifically to discourage the activities which are taxed. In other words, if they are working, you see a reduction in the activity that is being taxed because the reduction has a beneficial environmental impact. The evidence of the operation of the aggregates levy is precisely that. The period of economic growth and expansion of the construction industry, the amount of virgin aggregate quarried in this country, has fallen since the introduction of the aggregates levy. The amount of recycled aggregate produced has increased. The second thing to bear in mind on the question of looking at crude figures is this. Within some of these taxes we are able to use the design of them in a way to achieve environmental objectives that just is not shown if you look at the headline numbers. Take fuel duty.

Q4 Joan Walley: We will come on to fuel duty.

John Healey: May I just say, the discount in duty to support the development of bio-fuels, which is 20 pence per litre, is precisely to achieve an environmental end, but if you are just looking at the total take, including the tax take from fuel duty, you will not see that registered.

Q5 Colin Challen: I want to ask a follow up question. I think you are right in terms of the reduction in tax take in terms of its effectiveness domestically, but has the Treasury done any work to see whether or not some of the people who are affected by these taxes might simply be displacing their activities elsewhere in the world? I could mention one example which has recently come to my attention of the potential for people to use Renewable Obligation Certificates for a power model, for example, which could have serious impacts elsewhere, but here, of course, we can say it is a bio-fuel and therefore it is a "good" and reward it, even though it might cause the destruction of ecologically sensitive rain forest and so on?

John Healey: I think you are right to point to that sort of life-cycle perspective in trying to assess the environmental impact and benefit plus the cost of some of these measures. I have mentioned the rather simple and initial policy instrument of the duty discount to support the development of the UK bio-fuels market. The Pre-Budget Report confirmed the Government's intention to introduce what I think you are referring to here, which is a road fuel, road transport fuels obligation, probably from April 2008. Part of the work that the Department for Transport, which obviously leads in this area, is conducting at the moment is, importantly, our ability to assess not just the nature of the fuel that is produced, to make sure it meets the specifications of bio-fuels and we get the mandatory five per cent level by 2010/11, but also the environmental impact: because what we do not want to see is imported bio-fuels derived from other countries and derived from environmental production practices which are hugely damaging - it could be deforestation, it could be a number of other detrimental activities - and we do not want to be producing a policy instrument, albeit one that is likely to deliver about a million tons of carbon savings per year, which has those effects which are perhaps a litter further out of sight.

Q6 Mr Hurd: Minister, I understand your point completely about the initiative taken by the Government at the beginning of the programme. The point is that there is considerable frustration about the amount of activity untaken since 2001/2002 against a background in which the biggest environmental priority of all, which is the Dutch CO2 emissions, is quite clearly being failed. Do you understand that point, the frustration in terms of activity since 2001/2?

John Healey: I am not sure if you are arguing for the introduction of policy instruments of the significance and weight of the climate change levy every year, but I do not accept it entirely. If you look at some of the initiatives that were set out in the Pre-Budget Report, they were designed to reinforce some of the measures we have got in place. They were designed also to try and take us into some of the new areas, like further support for carbon capture and storage. We have just discussed the road fuels obligation, which is potentially a very significant economic measure which has recently been announced by the Secretary of State for Transport, developed by the Chancellor, and, I think, will produce a really important environmental gain for us.

Q7 David Howarth: Can we probe a little further into the points that you made a moment ago about the relationship between behavioural change and revenue and the evidence base that you were using to judge behavioural change. On the first point, Paul Ekins came before us yesterday to re-emphasise the point that the Committee has made in the past that it is a false dichotomy to set up behavioural change against revenue raising, but, if the elasticities are right, you can have both. You have mentioned the aggregates levy, but what about the climate change levy, what about fuel duty? Surely there is no contradiction between raising revenue and changing behaviour, because both can happen at the same time. Have you changed your view on that, or are you still of the view you were last year that behavioural change can only happen if you abandon revenue raising as an aim?

John Healey: No. I do not know if you have misread the transcript of last year's session, but that cannot be the point. You are pointing to two of the factors that inevitably are part of the judgments that the Chancellor takes when making decisions either about new policy instruments or particularly about decisions on rates; and they are balances between perhaps the behavioural change and signals that we want to encourage, because of the environmental gains, with some of the concerns that there may be about distributional impacts or the economic impacts and, indeed, revenue raising, but those are precisely some of the dimensions to any judgment that does not make some of these things straightforward.

Q8 David Howarth: You are saying that the factors that are pushing you against increasing environmental taxes are distributional and to do with competitiveness rather than simply saying, "We have achieved all that we are able to change and want to achieve"?

John Healey: No. Mr Howarth, take fuel duty. You mentioned fuel duty. In the Budget we decided that we would as usual, because that is basically our established policy, look to revalorize the fuel duty and we would do so from 1 September. The volatile oil price caused us to rethink that. By the time it came to the Pre-Budget Report, we decided, in December, that we would extend the freeze that we had announced in July that would not come into effect until September through to the Budget this year. We were set to raise, by revalorizing fuel duty at the Budget, fuel duty for the main pure rate by 1.22 pence per litre. By the time we came to the Pre-Budget Report, the pump price paid for road fuels was ten pence per litre for last year, higher than what we he had projected at the Budget. In those circumstances, first of all, I think you would appreciate (and I would be interested to hear if you disagree) it was the right decision, given the pressure on motorists and business not to proceed with the increase in fuel duty. For those concerned about the environment, clearly the ten pence per litre price rise at the pumps would have a much greater impact on demand and, therefore, emissions from road transport than the planned increase that we had in the duty rates, and, incidentally, will lead to a revenue reduction. If you look at the Pre-Budget Report, you will see that the revenues that we projected at the Budget for road fuel duty are cut, as a result of the combination of factors that is produced by high prices, by about point seven billion. That is an illustration of the interplay of the different factors.

Q9 David Howarth: We will come specifically on to fuel duty later. The only follow up point I would make is this. Are you saying that if the oil price falls the revalorization of tax will come back into play?

John Healey: No. I do not know if you are aware of this. We had a debate in the course of the Finance Bill and subsequently, led by Scottish Nationalist Party, for some sort of automatic arrangement of that nature. That was not a model that we accepted. It was not a model that your Liberal Democrat Party accepted either.

Q10 David Howarth: No, not automatic. I just mean merely as a matter of policy.

John Healey: Clearly, the level of oil price and the volatility of the oil price, which has driven many of the problems of the last couple of years, will be a factor in any decision that we take at the Budget this year, but our standing policy, as with every government in the past, is that we look each year at least to revalorize tax rates in order that they at least maintain their value.

Q11 David Howarth: Can I move on to the second point, which is the evidence base that you use for measuring environmental success. What are the key indicators that you use for the success of environmental taxes?

John Healey: Because environmental taxes have different and specific purposes - you cannot say the aggregates tax is the same as the landfill tax or the climate change levy or the differential in fuel duty to encourage bio-fuels - clearly the mechanism used, albeit related to the fiscal regime, is different, and, therefore, the evaluation that is required is different. If you look back at the Budget report last year, you will see that we reported on the independent Cambridge econometrics study of the climate change levy, and you will be able to see the references to the methodology that was used there. For an aggregates levy, clearly the sort of indices that we are interested in are those that relate directly to the objectives of it: to see what the impact is on the level of virgin aggregate that is taken out of the ground once and for all each year in this country, to look at the levels of recycled aggregate that are being produced and used as a replacement and also to look at perhaps the gains that are made in the aggregates levy case from the environmental fund that was a modest part of the architecture of that tax.

Q12 David Howarth: Car journeys seem to be going up, air passenger numbers go up and car emissions, crucially, are going up. Would you take that as a sign that the policy is not working overall? What you have done is talked about the existing instruments, but one part of the policy is whether we need new instruments to make policy move in the right direction?

John Healey: I would not draw that hard conclusion that you did there. I would suggest, on transport, that a very significant factor, as I think you would agree, is the degree of economic growth and changing patterns and habit. What it would say to me is that with emissions, particularly in the context of affecting climate change, increasing from the transport sector compared, for instance, to the business sector or even the household and domestic sector, clearly in that policy area we have more to do. It was one of the reasons that, in fact, within government I kicked off the study of the fuel obligation and it is one of the reasons that we felt we can do this in a way that balances the range of concerns we have and make a real impact, as I explained earlier, on the emissions that are coming from the transport sector. For the first time, over the last couple of years I think you have been able to see a very firm and clear commitment from the Government that all sectors of the economy have got to contribute to meeting the challenge of climate change, including transport.

Q13 David Howarth: Finally, I mention one particular levy which seems not to be working at all and seems to require some change of direction, the air passenger duty, where the yield seems to be falling but the number of passengers seems to be rising. Are we taxing the wrong thing?

John Healey: The air passenger duty in many ways is not an entirely satisfactory tax. It was introduced, you may remember, in the early 1990s. It has never been an environmental tax. It has certain sorts of perverse aspects built into the design. In other words, a more fuel-efficient plane filled with the same number of passengers pays the same rate of air passenger duty as an airline using a much less fuel-efficient plane, and actually a half-empty plane is rather less than a full plane, even though it is more efficient in terms of passengers per air miles travelled. First of all, it is not an environmental tax. Second, it does, however, contribute to the recognition that we have been very clear about, that the aviation industry has to pay the costs, the externalities if you like, that it imposes on society and on the environment. It is a significant contribution to that, but it is not an instrument that is well designed to achieving environmental ends.

Joan Walley: I think we will come on to more of the detail of aviation tax later on.

Q14 Mr Chaytor: Minister, in the last few weeks since the Pre-Budget Report, the Treasury has conducted two major U-turns. It antagonised the nation's bite on that lobby by the changes to self-invested personal pension scheme arrangements and it has antagonised the environmental lobby by pulling back on the Operating and Financial Review. I ask myself: is this good politics and what does the Treasury intend to do now that the OFR has been scrapped?

John Healey: You will make judgments, like anyone, Mr Chaytor, on whether it is good politics. These are the right decisions in policy terms in both cases. In terms of the Operating and Financial Review, you will be aware that there are already requirements to prepare business reviews. You will be aware, I think, that we are consulting as a government, led by the Department of Trade and Industry, on the development of those and that we want to do so in a way that allows us to make any decisions about whether that system should be developed further in order that we can make the legislative changes, if they are required, within the Company Reform Bill that has already been introduced into Parliament.

Q15 Mr Chaytor: What is going to be in the Business Review that was not in the Operating and Financial Review? Are we just playing with words here or are there points of substance?

John Healey: No, in general terms, the reporting requirements are quite similar.

Q16 Mr Chaytor: So we are playing with words?

John Healey: Let me finish. No, I am not playing with words. I am going to draw some observations about how they are consistent and then I am going to draw some observations about how they are different, if that is what you are asking me. They both have broad disclosure requirements for requiring provision of information that is necessary for shareholders to make judgments about the development and the performance of the company, in broad terms. Specifically what the Operating and Financial Review would have required is much more prescriptive auditing arrangements, and that was the bulk of the additional cost that was set out in the Regulatory Impact Assessment, originally around £33 million. It was principally that auditing requirement that was the big difference between the two.

Q17 Mr Chaytor: But last week the DTI also announced that it is going to consult on companies' environmental reporting. How does this fit in with the Treasury's concept of a business review?

John Healey: I think it is entirely consistent. As I said earlier on, led by the DTI, the Government is consulting on the nature of the current requirements for reporting in the Business Review framework and the degree to which there is a case for developing those further. Clearly, and you have a strong interest in this, the environmental element of that is a feature that the DTI is particularly keen to get views on.

Q18 Mr Chaytor: Can you give the assurance that there will be no watering down of the specific environmental requirements that finally emerge from the new concept of a business review, as against what would have been the case in the OFR?

John Healey: The OFR has been repealed.

Q19 Mr Chaytor: I understand that?

John Healey: What we have is a business review. The Business Review does not have any specific reporting requirements on the environment, and so what we are building on potentially, depending on the judgments we take after this consultation, will be the framework that exists at the moment, which is the Business Review. To the extent that this Committee or others want to make the case for stronger environmental reporting, this is a very opportune time to be doing that, during this period of the consultation, before we make any decisions about appropriate amendments to the Bill going through Parliament.

Q20 Joan Walley: Given what in effect is a U-turn that the Government has had to do because of the challenge by Friends of the Earth, can I check, in terms of the new Business Review that you are now talking about, that you will be consulting with people like Friends of the Earth to make sure that there is that attention to the environmental aspect of the new Business Review that Mr Chaytor has just referred to?

John Healey: First of all, it is not a U-turn. In the sense that the Chancellor announced the Government's decision to set aside the Operating and Financial Review, then that stands. In terms of how we develop the Business Review, we are particularly keen to hear from Friends of the Earth their ideas about how we can build on what is in existence now.

Q21 Colin Challen: The Government published last week the outcomes of the Exeter conference, Avoiding Dangerous Climate Change, which, if anything, shows that the situation is far worse than perhaps we thought even two or three years ago. How does the Treasury respond to the warnings that the Exeter conference report contains?

John Healey: I think it is an important publication. As you say, it is the report of the conference that took place earlier last year. What it does show is that incontrovertibly climate change is happening; it shows that incontrovertibly it is global in cause. In many ways, I think we are getting a better scientific understanding of this now. It is clear that greenhouse gas emissions have a very similar impact wherever in the world they happen to be emitted. We understand better that, once they are emitted, they can stay in the atmosphere and do the damage that they bring for well over a century. If we understand more clearly, and this publication helps us, that the climate change challenge is global in course, it is global in consequences, then what it drives us to do is to work very much harder to say that we have to find and build international solutions to try and deal with these problems.

Q22 Colin Challen: Will it have any impact on the Treasury's top five priorities? Could you say what those top five priorities are and then explain how tackling climate change may move up the agenda or stay where it is? The Treasury has a lot of thresholds to cross.

John Healey: Since we have come into government, let me be very clear, the heart of the Treasury's economic role is a desire to see the British economy grow but grow sustainably. Therefore, right in the heart of the Treasury's mission are some of our formalised public service agreement targets, the concept that we have to make decisions about economic prosperity, also with some of the social consequences in mind and the environmental consequences as well.

Q23 Colin Challen: Economic prosperity, in the old-fashioned way of describing it, is going to be perhaps more injurious to us in many ways. How can we respond to the argument that we have to really make a radical shift and very quickly? Tony Blair was saying only last week (a few days ago) that we have got to get the new post Kyoto framework in place. That time-set, of course, is set by the existing Kyoto Protocol, but where is the Treasury taking us now? We cannot wait for agreements all the time or for further reviews. Where does this extra document land in the Treasury and make people really start assessing things now and moving things up their order of priorities?

John Healey: First of all, I do not accept the premise that was at the heart of your question, Mr Challen. Essentially, you suggest that if we want to be greener we have to be poorer. First of all, I do not think the experience that we have been able to demonstrate over the last eight, ten years actually supports that. I will not go into the detail for this Committee, but the UK has been one of the most successful, certainly the most stable economy out of all the developed countries since 1997. At the same time, we are one of only two (Sweden being the other) EU countries on track to meet our Kyoto targets. I do not want to go over the other ground about aspects of the way that we have been able to lead some of the practice and the debate on climate change policy, but in the end we are politicians and our purpose is to try and balance some of the competing pressures that there are within our society between the demand that people rightly want to be able to work and support their families and their concern for the environment with the some of the concerns that are there about the poorest. We have to make decisions that balance those. That is the heart of what we need to do. In terms of the Treasury, as a government we have to shift up a gear in our attention and our advocacy of international solutions. I think you really pointed to that with your concern about the post 2012 Kyoto arrangements. You will see, tomorrow and Saturday, the Chancellor of the Exchequer leading the arguments in Moscow for a follow up to one of the important elements of the Gleneagles agreement (the G8 agreement) that the World Bank should develop a well-funded alternative energy investment framework that helps the poorer countries and those developing countries to meet their energy needs from alternative sources or in more efficient ways. The reason we have to do this, as I talked about earlier on, is the recognition that the consequences of climate change are global, the impact is hardest on the poorest, which gives us a special responsibility to help them, and, although we in the developed world are responsible for the emissions that are causing the damage at the moment, over the next ten, 20, 30 years the significant proportion of emissions that is going to continue to do the damage or escalate the damage is going to come from those developing economies.

Q24 Colin Challen: I accept much of what you say about the UK's position on climate change, but domestically the Office of National Statistics has shown that only four per cent of government expenditure is spent on what is classed as ambient air and climate. That is £250 million out of something like six billion. There is something in which we perhaps could take a more interventionist role in terms of direct expenditure to tackle this problem, but it does seem to be the lowest amount spent in the various classifications compared to waste water management and so on. Perhaps we ought to reconfigure that approach and say that the Government should become far more involved with direct expenditure, helping us to reduce our carbon footprint, if you like?

John Healey: I think you are probably pointing to the limitations of the classification of expenditure that the Office of National Statistics uses if you want to get a measure of the range of investments that the Government is making in various either programmes or policy areas that will help deal with climate change.

Q25 Joan Walley: I think Mr Challen is referring to the "environmental protection expenditure by public sector" graph that was used by the Office of National Statistics, if that is helpful to you in terms of the reference he has just made.

John Healey: It is and it is not, in the sense that there are whole and very significant government spending and investment programmes in other measures, such as developing technologies, for instance, such as supporting the renewables obligation, that will have a direct impact on our attempts to deal with climate change. The expenditure by public authorities on what may fall within the classification of environmental protection may be useful, but it is only a partial part of the picture.

Colin Challen: It may be partial, and I guess it is always difficult to pin these things down precisely, but if you look at initiatives, the recent announcement in terms of the funding of the low carbon building initiative, which brings together Clear Skies and various other programmes that the Government funds with direct grant in aid, has been cut. There is an effective cut in the low carbon building initiative. It is now 30 million over three years. In previous programmes it used to be around about £12 million a year. That is what I mean by our "direct expenditure". Perhaps the ONS does not count all of that under environmental protection. Nevertheless, it shows that there is an unmet demand, and that is what I mean in this question.

Q26 Mr Hurd: No-one would argue with your premise that climate change requires a global solution, but would you accept the argument that that global conversation would be greatly facilitated if a G8 country was able to prove that emissions could be reduced at no cost to prosperity and that Britain has a fantastic opportunity to do that, but as emissions rise that opportunity may be slipping away? It is in that context that this Committee and others are questioning the degree of priority that the Treasury are giving to clamping down on domestic emissions.

John Healey: You are right in principle that our ability to convincingly and credibly lead arguments with other countries about (a) the importance of measures to tackle climate change but (b) the ways that it can be done without heavy social or economic penalty do, to some extent, depend on our own ability to demonstrate that we can do this in our own UK economy. I come back to the fact that if you compare our growth and our employment creation record since 1997, if you compare the environmental performance of the UK - and, as I said earlier, alongside Sweden, we are the only two countries on track to meet our Kyoto commitments - then I think we are well placed, as we have demonstrated, to be able to influence that international debate. What is also clear (and this is the reason for the very thorough Climate Change Programme Review that is going on in government), is that we believe we need to do more to reduce the emissions beyond the Kyoto commitments, and we are examining both the impact of what we have done already and potential policies for the future in order to do that.

Q27 Colin Challen: In relation to the Climate Change Programme Review, we have seen that Defra want UK firms to cut down emissions by eight million tons by 2010 and the DTI are suggesting three million tons. Does the Treasury take a view on that?

John Healey: What you are probably referring to is speculation in the media recently. What I think you are referring to is the discussion and therefore the decision that will have to take place within government on what we publish for consultation as part of the preparations for the second phase of the European Union Emissions Trading Scheme. That process, as you may know, Mr Challen, requires, by June, the UK to submit to the European Commission our emissions cap for the next phase (2008 onwards). What it is necessary to do - it is an important part of the process and the UK Government has given a very strong commitment that this is what we will do - is to produce a draft allocations plan that indicates the sort of options for the cap and the consequences that will be there for the different industrial sectors that come within the EUETS. That will give the range of interests concerned to see the EUETS, like the Government does, be effective in this second phase and then we will make the decisions that we need to on the appropriate UK cap by June, and we will do it also in the light of what the other European Union states are doing in their plans.

Q28 Colin Challen: If the Stern Review comes out with some serious proposals for increased environmental taxation, perhaps recognising the very serious nature of this challenge, would we be prepared to take that on even if it were unpopular with the public or the CBI?

John Healey: It is not Stern's remit to start prescribing a set of policies that are appropriate for the UK. The importance of the review that we have commissioned from Nick Stern and his team that report to the Chancellor and the Prime Minister by the autumn of this year, is essentially to examine the economics of global climate change, to look in particular at the analysis and the dynamic of precisely what we discussed a moment ago together in the Committee here between growth and emissions, growth and the impact of climate change, including the costs and benefits of potential measures that might be there and the costs and benefits of not taking some of the steps that may be required. Stern, when he published an interim update, at the end of last month, of the work of the review, laid very heavy stress, quite rightly, on the fact that, as we discussed a moment ago in the Committee, this is global in nature and must be, in the end, global in terms of the solutions and agreements that we are able to forge to meet it.

Q29 Colin Challen: We can wait forever for global agreements, can we not. It is 1948 since the last aviation international agreement was signed, and we are struggling, I think, to convince some to stay on track in terms of Kyoto or even to get involved in that international level of negotiations. We have to ask ourselves what Stern actually provides are some indicators of how seriously we domestically have to reshape our approach to it. We are slipping on our 20 per cent target for 2010 in carbon reductions. Surely that may mean having to take bold, radical and possibly unpopular action. Is that something the Treasury is willing to do?

John Healey: If I may say so, I think you are missing the essential point and importance of Stern. It is not about the UK policy framework, it is not about the short-term through to 2010 and whether we meet our domestic target on 2010. It is about the international challenge, it is about the medium and long-term and, as I said earlier to the Committee, the UK emissions are around two per cent of world emissions. There is no benefit to the UK in aggressively being able to reduce our own emissions in the UK (a) if we suffer serious economic disadvantage or social problems as a result and (b) if the rest of the world, producing the 98 per cent of the emissions, does not take similar steps. Because these are global problems with a global impact, we get none of the environmental gain that we need to see. I am less pessimistic. I do not underestimate how complex and sometimes painstaking progress on this sort of international stage can be. I am less pessimistic for two reasons. First of all, if you look at the significant shift that there has been in the commitments and the consensus of view on the importance of debt and development, particularly in Africa, over the last seven or eight years, and, I am proud to say, led not entirely but very much led by our Government, then it does demonstrate that you can change minds. There has been strong support from church, voluntary groups and others as well, but you can change minds, you can change government policies and you can get in place the sort of co-ordinated action that is required to deal with such problems. The second reason I am less pessimistic than you, Mr Challen, is that I really do see some of the outcome of what we have been able to achieve over the last year, in leading with the Presidency the G8 and then the EU, as significant steps. At Gleneagles in July we had, for the first time, a real shift in the acceptance of the United States that the climate change problem exists and steps need to be taken to deal with it. We had around that Gleneagles Summit the beginning of detailed discussions with 20 of the most serious emitting countries round the world. In the UK we are leading the joint venture on behalf of the European Union with China in exploring and trying to develop carbon capture and storage, and in Montreal, just before Christmas, I think, again, a really important development where you saw the realignment of countries like China and India, accepting, for the first time, that they needed to be part of some international arrangements. You saw at Montreal also an international acceptance that there must be arrangements beyond the Kyoto period. I think the climate of concern is getting stronger, the climate of opinion is beginning to change and really the challenge for us as a government and as politicians of all parties concerned about this is how can we help force the pace of that on the one hand and, on the other, how can we do what we need to do in the UK to make sure that our performance and commitment to climate change measures up with the best.

Q30 Ms Barlow: The Pre-Budget Report made quite a lot of the Gleneagles' decision to have a communiqué and an action plan. Can you tell me if there is going to be any extra money or new taxes as a result of this action plan?

John Healey: I think we are some way off getting to the point of being able to, first of all, firm up how the action plan will be put into practice, and the Bill, if you like, will be there for governments across the board to support it. The nature of the discussions in Moscow, in part, will be about how this energy investment framework that the World Bank will develop will work, how substantial should be the financial support that is behind it. It will be decisions for governments like ours, as a result of that, to decide what sort of commitment we make to get it off the ground and make sure that it works as well as it can. In many ways, I think the parallels are quite similar to the process by which international pressure, then international understanding and then individual country commitment went with the right offer of third world debt, the increase in aid to developing countries and also some of the specific the programmes that would be necessary to try and tackle HIV and AIDS, particularly in Africa. In each of those cases, it was, first of all, international argument and agreement, backed up by decisions from our Government and others, about the sort of financial commitment that we were prepared to make. I think the development of the Gleneagles agreement and the Montreal work will follow a similar pattern. We are not clear enough yet to be certain about the financial commitments that we will need and we will want to make, but that will come.

Q31 Ms Barlow: It also talks about getting together with the Norwegian Government, particularly on carbon capture and storage and also, I think, an additional ten million demonstration projects. How useful how do you think this will be and how much do you expect these measures to achieve?

John Healey: They are small but they are a start. An important part of the Energy Review that the Government is conducting now will be to assess the long-term potential and, therefore, the long-term commitment that as a government we need to make to carbon capture and storage as part of the ability to deal effectively with the challenge of climate change. What you saw in the Chancellor's announcements at the Pre-Budget Report was very much the start of that process. What you see, as I suggested earlier, in terms of our work leading the EU's joint project with China on this new technology, again, is very much in the early stages but it is promising and potentially it could be very significant for the long-term.

Q32 Ms Barlow: What particular areas of change would you like to see from the Norwegian project, for example?

John Healey: The Norwegian project potentially creates the conditions where we may look to foster perhaps the trial of, and investment in, these sorts of technologies within the North Sea. Clearly it is the UK and Norway that have the principal shared interest in the off-shore Continental Shelf and the oil and the gas reserves and the wells that are there already. In the private sector, also some of our leading companies, like BP, also potentially have a very important role to play here.

Q33 Dr Turner: There is a lot of speculation about when we reach peak oil production in the world, and, of course, we have done already in the North Sea. What analysis have the Treasury done about the situation and the implications, both in terms of revenue and the costs of energy? Does the Treasury have a view on the timescale?

John Healey: Yes. I think if you study the Pre-Budget Report and the succession of Budget documents, what you will see is that our economic forecasts all incorporate the forecast for production on the UK Continental Shelf, and the forecasts take out of what are the DTI's figures about declining production. In many ways this is a territory where we have very good information, good analysis and some quite long-term forward projections. It means, I think, that we can make sure that we plan for and set up a framework to see the sorts of adjustment in energy supply that we are going to need as a country as that trend over the next 20, 30 years take place.

Q34 Dr Turner: Would you agree that we have actually got to start weaning the UK economy off its addiction to oil in advance of the time when available reserves start to deplete and the market price gets so high that it is unaffordable? Do you think we need to start taking action now, in advance?

John Healey: You are right, and we are. If you look at the encouragement that we have given to the development of renewables - tide, wind, solar, but particularly wind because obviously our hydro sources are fairly limited in the UK - if you look at the support we have given, not just in regulatory terms with the renewables obligation but in funding terms and in research and development to the support of renewables, that is precisely the principle or the ambition that underpins that part of the policy, and this will be taken further as part of the Energy Review that is currently underway.

Q35 Dr Turner: Do you have any intentions to respond to the changing situation in terms of oil and gas supplies in terms of the fiscal measures?

John Healey: I would need to be convinced that that was necessary. Let us not lose sight of the fact that the majority of the developed countries (the G7) have been net importers of oil and gas for ages. We will move into that position. In many ways the UK is one of the most liberalised energy markets, certainly in Europe, and we would expect, at first, to see a response from the private sector in terms of investment in, and development of, new technologies and also in terms of resources, and that is happening. There is ten billion pounds of investment going into gas facilities and storage in the UK between now and 2010, and the majority of it will be in place by 2007. That is private investment based on the fact that they see the projections about UK oil and gas production, and it is investment there that is built to precisely manage that sort of transition in the economy that we know is coming, and have known for some time is coming, but is reasonably a response from private investment in the private sector and not simply a requirement or a responsibility of the Government.

Q36 Dr Turner: The climate change levy is one of the key planks of Treasury fiscal instruments.

John Healey: The climate change levy is not just one of the key planks of the Treasury's fiscal instruments. the climate change levy for this country is one of the principal ways in which we are cutting our own carbon emissions, putting ourselves on track to achieve the Kyoto target and the other targets that we have got, and, without the climate change levy, which by 2010 is going to bring three and a half million tons of carbon saving, we really knock a big hole in our ability to deal with the challenges of climate change.

Q37 Dr Turner: Perhaps I expressed it rather badly. That is not what I meant at all.

John Healey: I apologise, Mr Turner.

Q38 Dr Turner: The point is that it needs to bite to be effective, as, indeed, do all environmental taxes, and the need to have some pain for bad behaviours and reward for good behaviours. Do you think that we need to increase the level of the climate change levy, increase the pain level, to accelerate the changes?

John Healey: That will be one of the arguments in the representations that we get from some interest groups on the climate change levy that the Chancellor will be taking into account as he makes his annual decision about rates at the Budget.

Joan Walley: I think the concern is whether or not there is a sense that it is business as usual and that the extent of the climate change levy is perhaps not hurting enough.

Q39 Dr Turner: The climate change levy does add to the energy costs that businesses face. It was designed to do that. It adds much less of a cost than the increase in world oil and gas prices in the last year or two, which have been a very significant driver of increased business energy cost, electricity and gas, but with the climate change levy - I mentioned what it will yield in terms of the reduction in carbon: 3.5 million tons a year by 2010 - when we first set out to introduce it we had a projected gain of only two million tons of carbon. Therefore, the way we have introduced it and the decisions that we have taken still combine to have a policy measure at present which, if we look forward to 2010, will deliver that scale of savings. The climate change agreements that I know this Committee is familiar with as an important part of the design of the regime again have led to much greater carbon savings than originally assessed and expected at the time of its introduction. It is working, but the arguments that people want to put to us about the potential impact of either freezing, revalorizing or increasing in real terms the rate of the levy will all be questions that we will consider in the context of the budget for this year, and then we will do so again for the future.

Q40 Dr Turner: The climate change levy is not the only fiscal instrument involved. One of the messages which I constantly hear from industry is that they would make investment decisions, whether it was increased investment in renewable energy generation or in energy conservation, if they had sufficiently clear long-term signals to give them the confidence to do that. This applies to both the business community and domestically. Do you have any plans to review this - and presumably Stern will to an extent do this - or do you have thoughts about raising the profile of environmental taxation to achieve changes in investment patterns?

John Healey: The basic contention, that the greater the clarity and certainty for the long-term the greater the reduction in the risk of investment from the private sector, is broadly right, and the framework of long-term Government policy and commitment is a part of those sort of risk investments in any sort of business assessment. I have heard that same argument made by those interested in investing in increasing nuclear capacity, and I am not sure if that is what you are arguing for.

Q41 Dr Turner: No!

John Healey: Clearly as part of the Energy Review, there will be recognition that Government priorities, commitments, for the long-term - which is exactly what the Energy Review is designed to try and assess - will form part of the investment climate in all sorts of potential energy-generating and climate change-saving technologies. So to the degree that Government can, it is important we do give that sort of commitment. It is one of the reasons we accepted the argument for extending the renewables obligation, for instance, through to 2014-15. It is one of the reasons with bio-fuels that we introduced a couple of years ago a three-year framework where we make decisions on the duty discount for bio-fuels and there was a guarantee for at least three years. It helps, sometimes around the margins, but it certainly helps with the ability of business to make those sort of long-term investment decisions.

Q42 Dr Turner: So we can look forward to some changes as a result of this year's review?

John Healey: I think you can look forward to certainly the Energy Review and some of the other work going on in Government as having quite an important part in setting the future direction, and then we will see how the private investors respond to that.

Q43 Dr Turner: Does it worry you that there will be possibly a lack of connectivity with the three reviews going on at once, with the Stern Review, which could possibly have the most co-ordinated effect through whatever pattern of fiscal instruments arise, not emerging until the end of the process?

John Healey: No, it does not worry me at all. The three reviews you are probably referring to are very different in their purpose and focus. The Climate Change Programme Review is there to assess the measures in the UK that as a government we have taken to date and to look at our performance in relation to the domestic 20 per cent cut in carbon dioxide emissions by 2010, so it is UK-focused, relatively short-term. The Stern Review, as I explained earlier, is an academic exercise, it is potentially analysing the economics of climate change. The Energy Review is a systematic look at the long-term future of UK energy policy and a look, in doing so, at the progress we have made against the four goals we set out in February 2003 in the Energy White Paper. So they have different purposes and different, if you like, time perspectives. I think all will contribute in different ways to the decisions we need to take.

Q44 Joan Walley: Just to cut in there, presumably there has to be some degree of synchronisation and some continuity and constancy about the environmental input into all three of those, otherwise there will be clashes or tensions between them, will there not?

John Healey: Do you mean by that that the economic analysis, some of the methods of producing the social costs of carbon, for instance - that sort of methodology - is consistent?

Q45 Joan Walley: Yes, but the economic analysis must take account of the environmental analysis on which it is based.

John Healey: Quite. It does and it will.

Q46 Joan Walley: That is the same for the Stern Review?

John Healey: We are developing our ability to improve our methods of doing so as we go along. I would expect the Stern Review to make a significant contribution to our ability to do that well in the future.

Joan Walley: Okay. I think we have to move on to aviation.

Q47 Mr Hurd: Aviation emissions grew by 12 per cent in 2004. Do you still think it is possible to include aviation within the European trading system at the start of Phase 2?

John Healey: Yes, it is possible. I think it is more likely we will be able to get it into the second phase of the EU ETS, and if we cannot get it in by 2008 then we want to see it included as soon as possible after that date. The work we did under the UK Presidency in the last six months of last year formed an important part of moving that on. So the fact we have seen from the Commission the confirmation they will put forward a draft legislative proposal on this by the end of this year is an important step forward. The working party which is set up under the auspices of the Commission to pursue this is again an important sign that other countries are taking it seriously and that we have got a good chance of getting it included during the second phase.

Q48 Mr Hurd: How long would it normally take to reach agreement on a proposal, assuming it is out at the end of 2006? Is three years reasonable?

John Healey: Having dealt with Europe as a Treasury Minister for about three years now I have never been able to predict the length of time that European-related processes take. As I say, I hope and believe we have a good chance of getting aviation included, that we have a good chance of getting it included during the second phase of the EU ETS. If we cannot get it included for the start of 2008, what we will be pressing for is that it is included as soon as possible after that.

Q49 Mr Hurd: Defra released a consultancy report, which you may have seen, which suggested including aviation in Phase 2 would have no impact at all on the price of carbon. Does this not strike you as surprising, given the growth in aviation, and does it not send a rather worrying signal about the kind of rigour that governments will be taking to the negotiation of the cap on aviation?

John Healey: I have not seen that study but clearly I will now that you have raised it with me. If the European Union countries were to accept aviation as part of the EU ETS, (a) it would be a very strong signal that they, like us, see aviation as a significant and growing source of emissions for the future and (b) they are willing to see some action taken to try and deal with it. We would be doing so in an area where, once again, emissions from aviation are international in nature and unilateral action from one country really does not hit the mark, but we are heavily constrained by the web of international conventions that, as was said earlier, date back to 1944.

Q50 Mr Hurd: The Defra report was released on 1 February and it is a consultancy report by ICF Consultancy. Are you satisfied that the Government and the Treasury are doing enough to send signals to passengers about the link between climate change and their travel? I am thinking of a Department for Transport survey in 2002 which showed only 1:8 travellers made any connection between flying and climate change. In that context, do you think the air passenger duty tax is punching its full weight in terms of sending signals to the consumer?

John Healey: No, because, as I explained earlier, the air passenger duty is not an environmental tax; it is not related to a concern about emissions, it is not related to more efficient aircraft, it is not related at all to more efficient use of the aircraft which are flying. I think there is more that the industry could do, it is not just a question of what government does. The climate of debate around climate change and the potential problems it poses is much fiercer now than it was even 12 or 24 months ago and I welcome that. It does help to draw people's attention generally to what contributes to it and what the risks are. There is more than the industry itself can do and there has been, over the last 12 months or so, some quite encouraging signs that major players, including British Airways, are coming together to not just alert their passengers more to the environmental impact of flying but taking some steps on a voluntary basis to try and offset some of those impacts as well.

Q51 Mr Hurd: Is the Treasury looking at increasing the level of air passenger duty or considering levying VAT on ticket sales? I believe we are the only country which does not do that.

John Healey: We will look at all these options, as we do with all taxes which are in place. Any options on these are part of the Budget-making process. Where people are making representations to us as part of that Budget process, we would consider them carefully and in the end we will make a judgment in the context of the Budget.

Q52 Mr Hurd: Are they under active consideration now?

John Healey: To the extent that the Chancellor has to make decisions each year on the rate of air passenger duty, he will do so again in the Budget in a couple of months' time.

Q53 Joan Walley: I think it is inevitable, because it is such a far ranging inquiry in terms of the Pre-Budget Report, we are going to flit over different issues. Just before we move on, I want to go back to your response to Dr Turner's question about the peak oil situation, where we are going to peak in terms of oil and where the tipping point is and what we do to prevent it. Given what you have just said, going along with the fact that the UK economy should be weaned off its dependence on oil, I just wonder what your comments are on the decision I believe by the Swedish Government this week that they are now setting a target of making Sweden oil free by 2020? I wonder if you can tell the Committee what the UK's consumption of oil will be by 2020 and whether or not you have any long-term plans about how you expect to see the consumption of oil start to decline?

John Healey: I do not have those figures but if we have them within the Treasury I can certainly let the Committee know. In some senses what Sweden does is a matter for Sweden, our situation is entirely different. We do have reserves of oil and gas that Sweden does not have. They are broadly on a declining production trend but, in fact, partly as a result of some of the fiscal changes we made in the last Parliament, companies in the North Sea are opening up new fields and will edge back into being a net exporter of oil in 2006-07 as we open up more capacity. We are very fortunate as a country to have these natural reserves. They clearly mean that our approach to future energy policy will be different from Sweden's but it does not remove the long-term challenge and concern that we have, as I explained, that we are already trying to develop, which is that in the long-term these resources are finite. In the long-term we must move to an ability to meet our energy needs from non-fossil sources. In the end we have to do so as well in order to reduce the emissions which are damaging the climate so badly.

Joan Walley: On that basis, it would be quite helpful if you have got any information inside the Treasury that you could let us have on that because I think the issue relates very much to the point that Dr Turner was making about the need to have long-term signals about the route of travel, the direction of travel that we are taking. Obviously the point of peak oil supply and where that stands, it is useful to have that as a long-term indicator as to where we are with it. If you could let the Committee have that it would be very helpful.

Q54 Mr Chaytor: Could I just comment quickly on that. Accepting the difference between Britain and Sweden in terms of oil reserves, do you not think, Minister, that it does make sense, in terms of national policy, to have a goal of energy self-sufficiency? Now Sweden may be able to get there before the United Kingdom could possibly do but as an objective, energy self-sufficiency, is it not something we should be aiming at?

John Healey: I do not accept that it should be the over-riding objective. Clearly, as we set out in the Energy White Paper nearly three years ago, security of supply and our ability to produce for ourselves as an important element of security supply is an important goal of energy policy but it sits alongside a concern for those who are fuel poor, it sits alongside our concern for climate change emissions and it also sits alongside our concern to see energy, where we can, delivered and part of a competitive market.

Joan Walley: Mr Chaytor's point is very much about the leadership that the UK Government is giving on that.

Mr Chaytor: We will pursue that another time.

Q55 Joan Walley: Very briefly on road transport, because we have covered some of the points already that we did want to make. I suppose we are wondering, given the graph which I think you are familiar with, of the index of household disposable income and cost of motoring - there seems to be such a big gap, the disposable income has increased and the real cost of motoring has declined - is there not a contradiction there in terms of the Government's stated intentions in terms of tax policy back in 1997 on the environmental front?

John Healey: There is not a contradiction, there is a challenge there. I do not think you are arguing that we should not be seeing household incomes increasing or that we should not be seeing the economy growing. The challenge there lies in general terms, like we have discussed before, how can you encourage greater efficiency in the technology of engines that power road transport, how can you encourage the development of cleaner fuels, and how can you ensure, as we have done, seeing the average emissions from new cars, for instance, falling every year for the last ten years, stepped up so that the increased activity that comes often with increased economic activity does not do such damage to the climate at the same time?

Q56 Joan Walley: Should we not be raising fuel duty in line with inflation?

John Healey: It is our general stance with all taxes that we at least look to raise taxes by the level of inflation to revalorize so they maintain their real value. I think we dealt at some length with the decisions on fuel duty taken during the course of 2005. The general point to make on that is that when the Chancellor makes these decisions he rightly weighs up a range of factors which come into play. In the end that is the purpose of us as politicians and the judgments we have to make as a Government.

Q57 Joan Walley: At the heart of it, is it not about the Government's communication strategy in terms of the public buying into the need to address climate change through the cost of fuel? Is it not about a communications strategy, how we get the message across? Should that not be at the heart of it?

John Healey: The communications challenge is at the heart of it and it is an essential part of it. I am not sure that fuel duty is the right focus for that. If you look at the reforms we have made to Vehicle Excise Duty or to company car tax, those are tax reforms to restructure tax regimes in a way that (a) gives signals to domestic and company purchasers of cars that encourages them to buy more efficient vehicles and (b) rewards them for doing so. Now that is part of the communication of the essential messages that you are talking about. I am not sure the fuel duty is perhaps the right focus for that.

Joan Walley: I will bring in Dr Turner on that point.

Q58 Dr Turner: It is an appropriate point because I want to ask about the company car tax regime and the Vehicle Excise Duty regime. The Energy Saving Trust have told us in their evidence that there was a leakage between the relatively stringent company car tax regime to the less stringent Vehicle Excise Duty regime, which is less punishing for very high emission vehicles. Executives are taking the cash and buying their gas-guzzlers rather than having the company car. Have you been aware of this leakage? Do you have any proposals to plug it by, for instance, making the Vehicle Excise Duty steeper at the top end?

John Healey: If I may say so, Dr Turner, there are a number of questions there and one misunderstanding at the heart of it. In terms of the Vehicle Excise Duty, you will have seen how we reformed the structure of Vehicle Excise Duty to make it reflect the environmental performance of different vehicles. You will have seen in the Budget last year, the fact that we raised the top two bands and froze the others in a way to stretch the incentives and signals that are there within the Vehicle Excise Duty regime. As part of the decisions again that the Chancellor would take at the Budget, we would consider whether there is a case for going further. On the question of the company car tax, it is not a question that those that opt-out of the system to which the company car tax applies somehow then haemorrhage into the Vehicle Excise Duty. The Vehicle Excise Duty is payable on all vehicles on our roads. If an individual company car driver is not subject to company car tax then it will be because their employers are offering them another form of support to their business motoring and they will fall not within the VED but some other form of income tax. The fact that numbers under the company car tax scheme do appear to have been falling to some extent is a reflection of a number of things we believe, and we are doing some further work to try and analyse these, including different incentives that employers happen to be offering their employees in relation to company motoring and probably a misapprehension, as we introduce the company car tax, of quite how stringent as a fiscal change that might be.

Q59 Dr Turner: You must appreciate that someone who has got a big enough cash bonus - a City trader and so on - to go out and buy a £50,000 car is not going to be deterred by a £10 or £20 hike in the Vehicle Excise Duty. It needs to be much more significant before it bites, do you not agree?

John Healey: The Vehicle Excise Duty is not designed to take a slice of the bonus a City trader might get, the income tax system does that. That is the distinction I am trying to make. The company car tax is about taxing a benefit that comes to an employee by virtue of the arrangement that the employer puts in place for their motoring.

Q60 Dr Turner: You are incentivising the purchase of fuel efficient vehicles by lowering the Vehicle Excise Duty for them, all I am suggesting is that it would make logical sense to increase the Vehicle Excise Duty at the high end because once they have reached the level of owning a Ford Mondeo it peaks.

John Healey: There are people arguing strongly, including yourself, for us to make that decision. To be clear that is a decision about the rates within the Vehicle Excise Duty regime, unless I am missing something serious, it is not linked to the operation of the company car tax.

Joan Walley: Differentials are obviously a key part of this as well.

Q61 Dr Turner: Finally from me, the renewables transport fuel obligation, which I greatly welcome - that was announced in PBR - was great but I just wonder whether the fuel duty bonus that you have given, the 20 pence per litre, is going to work as effectively with that as it might, especially given the fact that (a) industry tells me that 20 pence a litre is not quite enough to kick the market in bio-fuels off and (b) that the technical specifications associated with it are in fact somewhat counter-intuitive to environmental considerations because, for instance, bio-ethanol produced by fermentation, as I understand it would not qualify whereas if it is produced by other chemical processes which are themselves CO2 emitting then it would. Do you have any plans to revisit the fuel duty rebates?

John Healey: I think there are a couple of things tangled up in that. First of all, the definition of a bio-fuel which attracts the 20 pence per litre discount is set out in the 1979 legislation, the Hydrocarbon Oils Duties Act. That is a specification that is about the nature and the quality of the product, the oil, not about the processes at all producing it. That is the first point. The question marks over what does and does not fall within that definition are essentially determined by HM Revenue and Customs. They do so by analysing the samples of the fuels in question. The guidance and specifications about what counts are very clearly set out. What I have said to some small producers is that in the light of (a) the legislation and (b) the guidance that has been produced I will, and we are, looking at the way that this is working. Just to be clear, it is not related to the process, it is related to the oil product at the end of it. On the question of the duty discount, the scale of it, I have had producers and potential producers making the same arguments to me for some time. I thought the report a couple of years ago of the Select Committee responsible for shadowing Defra was quite significant in this. It took the view that I do that simply increasing the duty discounts on bio-fuels would be unlikely to develop a UK bio-fuels industry. Indeed about a third of the bio-fuels on sale at the moment are imported. My view is that you need a range of measures to help support the development of the market in bio-fuels production in the UK. That is why we had the duty discount, that is why we are putting the obligation in place. We have announced, also, the entitlement to enhance capital allowances once we get state aid approval of good new bio-fuel plant investments. I think if you look at the increase in the bio-diesel and bio-ethanol market since we introduced the discount, we are at a very low base, I accept, but you are seeing very significant increases.

Joan Walley: Minister, I am aware that we are time constrained in terms of the session, we want, very quickly, to touch on sustainable housing. I suspect that what we want to ask you on sustainable procurement probably we will not reach. We may have to ask you, if necessary, to write to us on that.

Q62 Mr Hurd: Carbon emissions are on the rise in this country, 30 per cent of them seep out of our own homes. All the evidence to us points to consumer apathy being the major roadblock to transforming attitudes to energy efficiency. The evidence suggests that EEC is working reasonably well within its limitations but that to achieve a real breakthrough requires fiscal incentives to encourage good behaviour. Does the Treasury accept this analysis and, if so, why has it done nothing in this area for two years?

John Healey: In fact 25 per cent of the UK's emissions are coming from households. Households consume 30 per cent of energy. The emissions from households are gradually declining, we need them to decline further. What I do not accept is that we have not put any measures in place, including fiscal instruments. If you look at the range of reduced rate VAT measures that we put in place, for instance, particularly on micro-generation technologies, those are fiscal instruments designed in anticipation of a growing market. You mentioned the energy efficiency commitment, that is costing £300 million a year. We have introduced, also, the Landlords' Energy Saving Allowance and confirmed in the Pre-Budget Report the work that we are doing to turn that into a green landlords' allowance, a fiscal measure designed to try and have some impact on the housing sector that is most difficult in energy efficiency terms which is the private rented sector. Clearly it is difficult because there is market failure, the landlords have to invest, the tenants get the benefit from lower monthly or weekly bills. I do not accept that we have not been acting in this area. I am ready to consider representations or arguments that we should go further but I do not want you to feel misinformed or too pessimistic.

Q63 Mr Hurd: Have you looked at what is happening in Braintree where the Council in partnership with British Gas is offering rebates on council tax of £100?

John Healey: I have indeed.

Q64 Mr Hurd: Have you studied that case?

John Healey: Yes, and I have studied the Energy Savings Trust report that they have done, making a more general case for some use of the council tax system in a similar way to the way Braintree Council have.

Q65 Joan Walley: On that point, because our time has run out, I know you have to be away by 1.30, I simply wish to put on record that we had we had more time now we would have wished to pursue water efficiency and pollution and sustainable procurement as well. Obviously these are all ongoing issues but certainly if there are further thoughts you wish to share with us about how we can make progress, more procurement issues, we will be very pleased to receive them. On that point, I think you want to be away by 1.30, can I thank you very much indeed for your evidence today.

John Healey: Thank you. If you would like me to set out the challenges on water and what Government is doing on that, I am happy to do that and also on sustainable procurement.

Joan Walley: Thank you. It would assist us in our inquiry. Thank you very much, Minister.