140. On our visit to E.ON UK, we heard that it would
be in favour of the Government introducing capital grants which
could be bid for competitively as one means of getting the first
demonstration projects off the ground. BP, by contrast, told us:
"We do not think a capital grant is sufficient because we
need some sort of long-term commitment [
] in place so that
these projects will remain economic over their entire life".
Competitive capital grants may be needed to encourage the first
demonstration projects but they are not a substitute for developing
a long term incentive framework.
141. Prior to the introduction of the Renewables
Obligation, the main instrument used by Government to encourage
the growth of renewable energy technologies was the Non-Fossil
Fuel Obligation (NFFO).
NFFO provided generators with premium payments over a fixed period
for electricity generated using renewables. Originally, NFFO was
introduced to support the nuclear industry. The money needed to
support the industry was raised through imposing a levy on electricity
bills, known as the Fossil Fuel Levy. Green Alliance raised the
possibility that the "fossil fuel levy mechanism, which is
currently dormant, could be revived to provide a long-term funding
stream for zero carbon technologies".
This has the potential to generate a substantial amount of income.
However, a recent report claimed that of the £321M raised
for the NFFO fund, only £60M has been spent on capital grants
for renewable energy, with most of the rest having been diverted
to the Treasury.
It is unacceptable that income from the Non-Fossil Fuel Obligation
is not being used to support the renewable energy industry. We
recommend that revenues generated through levies imposed in the
name of 'green' energy be used in a manner consistent with that
142. Another alternative to the market-based framework
provided by the EU-ETS would be to introduce a carbon tax. This
would form a direct payment to Government, based on the carbon
content of the fuel being consumed. Our predecessor Committee
called in its 2003 Report, Towards a Non-Carbon Fuel Economy:
Research, Development and Demonstration, for the "replacement
of the Climate Change Levy and the Renewables Obligation with
a unified Carbon and Renewable Energy Tax to be levied on the
143. In 2001, the Government introduced a Climate
Change Levy, essentially a tax on energy used in the non-domestic
sector (industry, commerce, and the public sector) aimed at encouraging
these sectors to improve energy efficiency and reduce emissions
of greenhouse gases.
The revenue generated by the Levy is recycled back to businesses
in the form of lower National Insurance contributions. The Levy
rates vary depending on the fuel used and certain sources, such
as renewables, are exempt. Progressive Energy pointed out that
"High quality CHP [Combined Heat and Power] is supported
by being given enhanced capital allowances and eligibility for
Levy Exemption Certificates under the Climate Change Levy".
According to Progressive Energy, "Giving IGCC [with CCS]
the same treatment as CHP has the same rationale" and would
"overcome any barriers associated with perceived technology
risk by investors.
We note that this suggestion has not received widespread backing
and are doubtful that the Climate Change Levy would be able to
deliver the degree of support that other major companies have
argued is necessary to promote investment in CCS.
144. It is also worth noting that some of the evidence
we received argued for specific incentives to promote EOR. Fiscal
incentives have been used to good effect to stimulate EOR in the
US. The costs of offshore EOR are greater than for onshore projects
and we heard that, without such incentives, EOR was unlikely to
be viable in the North Sea. The Institution of Chemical Engineers
suggested that Government should "Encourage the use of CCS
technologies for EOR through financial incentives, such as a reduction
in royalty payments on recovered oil, as is being considered in
Air Products Plc also called on Government to undertake a "review
of the tax treatment for oil produced by tertiary means using
CO2 enhanced oil recovery techniques".
However, BP told the Committee during its visit to Sunbury that
the economic benefits of EOR were nowhere near sufficient to offset
the costs of the DF1 project and, moreover, indicated that EOR-specific
incentives would not significantly influence its investment decisions.
145. A complicated mix of incentives have been used
to stimulate investment in different forms of low carbon energy
generation in the UK. There is now a pressing need for a policy
that will provide the level of financing and long term framework
necessary to persuade industry to start investing significantly
in CCS. Since the Government is currently conducting extensive
reviews of its climate change programme and energy policy, it
is not feasible for us to determine which specific policy instrument
would best meet these needs - the choice would depend on the approaches
being taken to incentivise or support other technologies, such
as renewables and nuclear energy. It is clear to us that urgent
action is required. Doing nothing while waiting for the EU-ETS
to come good, or postponing a decision on the policy beyond summer
2006 when the Energy Review reports, would have disastrous consequences
for the UK's competitiveness in this area. The Government
should also ensure that incentives are in place which will encourage
development and deployment of CCS in industries other than power
generation, such as steel and cement production and oil refining.
146. In the longer term, as well as working towards
an effective EU-ETS, the Government should continue to make the
case for a global framework for trading carbon. Ideally, this
would eventually include China and India (as well as industrialised
countries such as the US and Australia which have not ratified
the Kyoto Protocol). In the meantime, the Government should
also support efforts to enable CCS to qualify for the Joint Implementation
and the Clean Development Mechanism, which were established by
the Kyoto Protocol to allow investment in emissions reduction
projects in developing countries and economies in transition.
Under these mechanisms, the reductions in emissions resulting
from such projects could then be credited to the investor and
used towards meeting their targets.
147. In addition, we believe that there may be an
argument for the Government to consider introducing a mechanism
which would take into account the environmental credentials of
its trading partners. This could, for example, take the form of
preferentially purchasing goods from countries which have taken
demonstrable steps to reduce their greenhouse gas emissions. Any
such measures would obviously need to be designed in a way that
takes into consideration the UK's existing commitments to free