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Session 2005 - 06
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Standing Committee Debates

Draft Climate Change Agreements
(Energy-intensive Installations)
Regulations 2006

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Fourth Standing Committee
on Delegated Legislation

The Committee consisted of the following Members:

Chairman: †

Miss Anne Begg

†Abbott, Ms Diane (Hackney, North and Stoke Newington) (Lab)
†Austin, Mr. Ian (Dudley, North) (Lab)
†Cable, Dr. Vincent (Twickenham) (LD)
Fallon, Mr. Michael (Sevenoaks) (Con)
†Francois, Mr. Mark (Rayleigh) (Con)
Godsiff, Mr. Roger (Birmingham, Sparkbrook and Small Heath) (Lab)
†Healey, John (Financial Secretary to the Treasury)
†Hurd, Mr. Nick (Ruislip-Northwood) (Con)
†Keeble, Ms Sally (Northampton, North) (Lab)
†Khan, Mr. Sadiq (Tooting) (Lab)
†Naysmith, Dr. Doug (Bristol, North-West) (Lab/Co-op)
†Rogerson, Mr. Dan (North Cornwall) (LD)
Selous, Andrew (South-West Bedfordshire) (Con)
†Tami, Mark (Alyn and Deeside) (Lab)
Viggers, Peter (Gosport) (Con)
†Watson, Mr. Tom (Lord Commissioner of Her Majesty’s Treasury)
†Williams, Mrs. Betty (Conwy) (Lab)
Susan Griffiths, Committee Clerk
† attended the Committee

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Wednesday 11 January 2006

[Miss Anne Begg in the Chair]

Draft Climate Change Agreements
(Energy-intensive Installations)
Regulations 2006

2.30 pm

The Financial Secretary to the Treasury (John Healey): I beg to move,

    That the Committee has considered the Draft Climate Change Agreements (Energy-intensive Installations) Regulations 2006.

I welcome you to the Chair, Miss Begg, and look forward to your directing and guiding our proceedings. I welcome the hon. Member for Rayleigh (Mr. Francois), the Conservative Front Bench spokesman. I know, because I appeared before him, that he served for a number of years on the Environmental Audit Committee, and that he brings knowledge and interest to the matter. I also welcome the hon. Member for Twickenham (Dr. Cable) and his Front Bench colleague the hon. Member for North Cornwall (Mr. Rogerson), who speaks on matters relating to the Department of Environment, Food and Rural Affairs. We have the combined forces of the Liberal Democrat Treasury and DEFRA teams with us this afternoon.

The purpose of the regulations is to deliver my right hon. Friend the Chancellor’s 2004 Budget commitment to extend eligibility to climate change agreements, and therefore entitlement to a reduction in climate change levy bills, to energy intensive sectors of industry not covered by the current criteria. The climate change levy provides an important signal to businesses to encourage them to adopt cost-effective ways of reducing energy bills. It was introduced in April 2001 after extensive consultation with business as part of a package of measures, including a 0.3 per cent. cut in employers’ national insurance contributions—incidentally, it was worth £1.2 billion to employers in 2004-05—compared with £0.8 billion raised from the climate change levy; measures to promote business energy efficiency, such as enhanced capital tax allowances to support businesses which want to adopt the best and most energy-efficient equipment, and funding for the Carbon Trust to provide further support and advice to business on energy efficiency; and the climate change agreements, which are the subject of the proposal.

The agreements were introduced as part of the climate change levy for energy- intensive businesses, in recognition of the potential impact that the full rate of levy would have on such businesses, and of the scope of such businesses to deliver environmental improvements. From the outset of the levy, sectors that have entered into binding agreements with DEFRA to cut their energy use and/or emissions have
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been entitled to an 80 per cent. reduction in their climate change levy bill. Progress against targets in the agreements is reviewed every two years.

Since April 2001, results from the current climate change agreements have shown that sectors with agreements made real improvements in their energy use or emissions. Independently audited figures show that industry beat their climate change agreement targets by 1 million tonnes of carbon a year in the first target period up to 2002 and by 1.4 million tonnes of carbon a year in the second target period up to 2004. There is therefore a good environmental case, and a good economic case, for extending the agreements to other energy intensive sectors, as the regulations propose.

Current eligibility to enter into climate change agreements, which covers 42 sectors of our economy, is conditional on an activity being listed under the Pollution Prevention and Control (England and Wales) Regulations 2000. However, not all energy intensive sectors are covered by these regulations and some sectors were affected by competitive pressures as a result. For that reason, we announced in the Budget 2004 that eligibility to enter climate change agreements would be extended.

That decision followed a lengthy period of discussion and consultation with business on the case for the extension and on sound criteria for doing so. Those detailed discussions continued after the Budget in 2004 as we prepared the necessary application to the European Commission for state aids clearance. The hon. Member for Rayleigh will remember, as he was following these matters at the time, that our decision was widely welcomed. It was welcomed not only, and not surprisingly, by those industries that stood to benefit, but more generally and particularly by the Confederation of British Industry, which led much of the pressure and consistently pressed us to provide such an extension.

Regrettably, however, obtaining clearance from the Commission, which was necessary before the new arrangements could be put into place, took rather longer than we or industry had hoped. It took some 15 months from the point at which we submitted our state aids application—until 5 October last year—before we finally secured the clearance that we sought. During that period, we had to satisfy the Commission on a number of detailed points.

Since October, we have concentrated on producing the secondary legislation that the Finance Act 2000 allows us to introduce to extend the eligibility criteria for climate change agreements. We have also needed to undertake further consultation of eligible sectors to ensure that their processes are precisely described and that the legislation does not open the way for other processes for which we do not have state aid approval or which have not demonstrated eligibility.

The legislative package to introduce the new agreements comprises two separate statutory instruments. The hon. Member for North Cornwall may be particularly interested in this. The first is the draft regulations that we are considering this afternoon, which outline the new processes carried out
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at installations that are suitable to be identified in agreements. The second is the draft Climate Change Agreements (Eligible Facilities) Regulations 2006, which specify the criteria that must be satisfied for sectors to be eligible for an agreement. Those will be introduced by my right hon. Friend the Secretary of State for Environment, Food and Rural Affairs. They will be subject to the negative resolution procedure and will be timed to come into force at the same time as the measure that we are now considering.

The sectors that we are concerned about and debating fall into two groups. Members of the Committee may be interested in the details of those sectors, because there may be companies in their constituencies that stand to benefit from the measure. The first group is where targets have been agreed by DEFRA and state aid approval for the targets has been given as part of the Commission’s decision to grant us the state aid clearance for which we applied. The relevant bodies are the British Calcium Carbonate Federation, covering the processing of calcium carbonate-based minerals for use as filler or whitener; the British Compressed Gases Association, covering installations where nitrogen, oxygen or argon is separated from air and subsequently compressed or liquefied; the Kaolin and Ball Clay Association, covering the extraction and processing of kaolinitic clay in combination with accessory minerals; and the Contract Heat Treatment Association, covering the heat treatment of metals. Provided that they have submitted the necessary information to DEFRA, those sectors’ agreements will come into force within a few days of the House of Commons approving these regulations.

The second group of sectors included in these regulations is those where targets have been agreed between the trade association and DEFRA, but where state aid approval for the targets has yet to be received. There are three such sectors. We are talking about the National Farmers Union, covering the horticulture sector; the British Apparel and Textiles Confederation, covering the manufacture of textiles; and the Packaging and Industrial Films Association, covering the production of plastic film. Provided that they have submitted the necessary information to DEFRA, those sectors will be able to benefit from the tax relief shortly after state aid approval for their targets has been given.

Mr. Mark Francois (Rayleigh) (Con): The Minister mentioned that the Government waited some 15 months for state aid clearance from the Commission for the four types of process that he outlined in the first category. Based on that experience, can he give the Committee some estimate of how long it will take to obtain state aid approval from the Commission for the other three in the second category? Does he at least have a rough estimate of the period?

John Healey: The hon. Gentleman will appreciate that trying to anticipate how long it will take the Commission to process any of these state aid approvals is difficult. The process is not always entirely
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predictable. I am confident that the approvals will come through before the end of the year—I hope within a few months. The Commission has accepted as part of the state aids approval for what we are considering this afternoon the approach that we have taken and the criteria that we are setting.

Therefore, the Commission principally has to consider the targets that have been proposed in the agreements for those three sectors. That is a different process from the state aid application process that gave the go-ahead to the original climate change agreements. Nevertheless, we have had close contact with the Commission on a range of such issues, so I am confident that we should not encounter any significant hitches in future in getting them through.

An eighth sector, which is represented by the British Ceramic Confederation, involves the extraction, crushing and processing of sand and clay for glass making. It recently reached agreement with DEFRA, but only after we had laid these regulations.

Ms Sally Keeble (Northampton, North) (Lab): I have a particular interest in the paper industry, as there are paper-making companies in my constituency. My hon. Friend mentioned calcium carbonate-based materials, which are whiteners, and I believe that he mentioned the association that represents the chemical trade. Presumably, the agreements also include the paper manufacturers’ trade group, so that the paper industry can take advantage of the discounts. If there is not time to reply now, a response in writing would be fine. I would like to ensure that my local companies are covered.

John Healey: Just to be clear, paper-making companies are not included in these regulations. I am wracking my memory of the past three years as to whether the paper industry is one of the 42 sectors covered by existing climate change agreements. If I recall that during this afternoon’s proceedings, I shall let my hon. Friend know. If not, I shall write to her with confirmation of the details.

Ms Keeble: So that where the schedule states:

    “An installation where calcium carbonate based minerals are processed for use as filler . . . for”

and then lists paper and other products, it refers to the chemical side rather than the paper-manufacturing side. Perhaps my hon. Friend would clarify that in writing so that I can make it clear to the paper companies in my constituency exactly what the position is, as they have asked me about some of these things.

John Healey: I do not need to write to my hon. Friend on the first point, as I can confirm that these regulations do not cover the general paper-making and milling industry. What I cannot tell her at this moment—I am trying to remember—is whether the industry is already covered by a climate change agreement through its trade federation and therefore eligible for the 80 per cent. discount on the levy. The number of companies in the sector that she refers to is small, but the potential savings to them are likely to be significant.

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Members may be interested to know that DEFRA is in negotiation with four further sectors, and it is possible that a small number of other sectors may therefore become eligible under the new criteria that we are considering this afternoon. However, the overall cost to the Exchequer of the extended relief once all the agreements made under the new provisions are in force should not exceed the forecast amount of £25 million that was set out in the Budget announcement in 2004. In total, as a result of these changes, DEFRA has already reached agreement with eight additional sectors, on top of the 42 sectors covered by existing climate change agreements, on delivering further environmental improvements as well as energy cost relief.

In summary, the extension of eligibility for climate change agreements provided by these regulations will reduce the tax burden on energy-intensive businesses that are subject to international competition by some £25 million a year while delivering environmental benefits to the UK as a whole. I commend the regulations to the Committee.

2.45 pm

Mr. Francois: It is a pleasure to serve under your chairmanship, Miss Begg? I take the opportunity humbly to wish you and the Committee a happy new year.

It is a pleasure to be sitting opposite the Financial Secretary to the Treasury. We last debated aspects of the climate change levy back in June 2005 when we discussed a statutory instrument that touched on a number of related matters. I was reading that debate again just yesterday, so I have a sense of déjà vu and look forward to debating the matter again with the Financial Secretary.

It is a pleasure to see the hon. Member for Twickenham in his place, accompanied by his hon. Friend the Member for North Cornwall. It is always good to see him here, not least when he clearly has some weighty matters on his mind.

Partly because we touched on these matters not so long ago, I can bring joy to the faces of all Committee members by saying that I do not intend to delay it overly long this afternoon. That is a new year present. However, the topic is important and several points deserve to be made so I hope that you will forgive me, Miss Begg, if I attempt to focus on those.

The climate change levy raises about £800 million a year in revenue for the Exchequer in a full year and part of that is supposed to be given back to industry in the form of reduced national insurance contributions. In addition, companies can seek reductions in their levy payments of up to 80 per cent. by signing up to climate change levy agreements. Those reduce the amount that they pay in return for commitments on energy efficiency. The regulations will broaden the categories of industrial and horticultural processes that can benefit from climate change levy agreements.
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They are listed in the explanatory notes and the Minister clearly delineated them into two categories. I want to press him on that a little.

The regulations are important for the companies concerned and their employees, not least given the rising energy costs that many of them now face and the raw cost of the energy that they use even before the levy is added at whatever rate it will be applied. The Minister knows that there has been considerable debate about the detailed implementation of the scheme since it came into operation in 2001. To return his compliment, he appeared before the Environmental Audit Committee on a number of occasions when I served on it during the previous Parliament and it is fair to say that he knows his onions. He will know that historically the levy has tended to benefit larger companies that have the resources or skills necessary to participate in the climate change levy agreement scheme and to negotiate the agreement successfully. In relative terms, it has tended to assist companies with relatively large work forces but low energy usage because they have benefited from the reduction in national insurance or at least from the fact that their contributions have not increased further because of the money that the Government claim to allocate in return for receiving it from the levy. Conversely, it has tended to hurt smaller companies with relatively high energy usage, such as small or medium-sized manufacturing businesses who pay a top-up on their energy costs but have relatively few workers from whom to recoup the otherwise slightly lower cost of employer’s national insurance contributions.

When we debated the operation of the climate change levy back in June 2005, I called on the Financial Secretary to consider widening the scope for the operation of climate change agreements so that more companies could benefit from them. To be fair, a number of industrial organisations were making the same plea, so it was not just us, but he may recall that I supported in principle an extension of the qualifying list and argued that

    “One way to improve the impact of the climate change levy would be to make it easier for companies to qualify for CCLAs and the 80 per cent. reduction”.

I then asked him:

    “Are the Government committed in principle to allowing a wider range of companies to qualify for CCLAs and, if so, how do they intend to do that?”—[Official Report, Fourth Standing Committee on Delegated Legislation, 22 June 2005; c. 7.]

The Minister was non-committal at the time, as Ministers must sometimes be, but now that the expanded list of qualifying industries and processes has been produced it would be churlish not to welcome it as we called for that from the Opposition Benches. However, I want to press the Minister on a few points about how the expanded list may operate in practice. First, the explanatory notes state:

    “A Regulatory Impact Assessment has not been prepared for this instrument as it has no impact on business, charities or voluntary bodies.”

However, there might be an impact because the proposal could theoretically reduce business costs, which, to be fair, were increased by the imposition of
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the levy in the first place. I therefore ask the Minister to say a little more about the process of consultation that went into the composition of the new list, and why these processes were included. No doubt the industries concerned made an effective case and the Minister partly answered my question in his opening remarks. To be specific, he said—if I heard him correctly—that the ceramics industry was a little late in sending its information. Will the Minister therefore clarify its status?

The Minister also said that four further sectors were in the process of trying to negotiate another list, or extension. Unless he believes that those negotiations are commercially confidential, in which case I would respect that confidentially, will the hon. Gentleman give the Committee some idea what are the four additional industries or processes and the likelihood of progress in their individual cases?

Secondly, will the Minister confirm, for the record, that the estimated revenue cost to the Exchequer of extending the list, and therefore giving greater relief from the levy, would be about £25 million? I take that to be an estimate in respect of a full financial year, but I should like the Minister to put that beyond peradventure.

Thirdly, I ask the hon. Gentleman to say what effect he thinks the proposal will have on the Government’s attempt to meet their targets for climate change. The Minister will recall that there has been scepticism about whether this relatively complex measure is intended as an environmental benefit or if it has simply become a convenient way of raising revenue, while some pay lip service to protecting the environment. We discussed the matter in detail last June, and I do not propose to reprise that debate. I hope that that approach is popular. Suffice it to say that despite the operation of the levy since 2001, UK emissions of CO2 do not appear to have fallen materially as the Government would have wished.

In addition to their original Kyoto commitment which the Government seem set to meet, they also promised to reduce emissions of CO2 to 20 per cent. below their 1990 level by 2010. However, the Environment Agency, in its 2005 report on the state of the environment, admitted that the 2010 commitment will not be met. The report stated:

    “We are not on track to meet our target to cut carbon dioxide emissions by 20 per cent. by 2010.”

That is important, because if the levy is meant to persuade companies to be more energy efficient in return for a reduction in the amount of tax that they have to pay over a period of time—a tax imposed by the Government having sought clearance from the Commission to do so—we would expect it to start to have some material effect, not least because there are already more than 40 different sectors and industries to which the levy applies. Unfortunately, in practice the numbers appear to be going the wrong way.

The Minister said that the Treasury works closely with DEFRA on the issue. DEFRA formally acknowledged in December 2004 that it was unlikely to hit the 2010 target, so the Government admitted it. They then announced a review of the UK climate
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change programme, which was due to report in the first half of 2005. As the Financial Secretary confirmed in June 2005, the review was intended to encompass the operation of the climate change levy, so the Treasury has been liaising with DEFRA about how the climate change levy will be affected by a policy shift by Her Majesty’s Government.

There was a written ministerial statement on climate change on 16 June 2005, in which the Government told us that the review was being put back. It stated:

    “The programme will now be published before the end of the year.” [Official Report, House of Commons, 16 June 2005; Vol. 435, c. 22WS.]

The year is now over, but we still do not know the outcome. Given that the Financial Secretary retained responsibility for environmental taxation in the Treasury when he was promoted, can he now say when he expects that delayed review to be completed? I hope that he will not fall back on the old chestnut that that is a matter for DEFRA, as we are always being told about the importance of cross-cutting Government.

Mr. Nick Hurd (Ruislip-Northwood) (Con): In the context of this long-awaited climate change review, and the role of the climate change levy in that review, I am sure that my hon. Friend is aware that sources of comment as diverse as the House of Lords Select Committee on Economic Affairs and the Institute for Public Policy Research have made constructive criticisms of the levy. The second report of the Economic Affairs Committee, Session 2005-06, stated in paragraph 140 that

    “it is anything but a carbon tax. It is an energy tax and the tax rate does not vary directly with the carbon content of fuels.”

Will my hon. Friend join me in hoping that the long-awaited climate change review will address some of these constructive criticisms of the levy?

Mr. Francois: I thank my hon. Friend for his balanced contribution and his helpful suggestion. I congratulate him on introducing the deliberations of those in another place into our debate. I shall be interested in what the Minister has to say about that point, which I hope he will address in his response. The Minister looks as if he is about to intervene. I return the compliment and give way to him.

John Healey: Can we assume from the hon. Gentleman’s warm welcome to the point made by the hon. Member for Ruislip-Northwood (Mr. Hurd) that a carbon tax is the official policy of the new Conservative party?

Mr. Francois: I genuinely thank the Minister for his intervention. He is being mischievous, and he knows it. He is well aware that we have just begun a review—[Hon. Members: “Oh!”] We have just begun a review of exactly these matters and I cannot pre-empt the result. The difference between us is that we have just begun a review, and we would not expect to have the answer the following day. The Government have had a review running for well over a year. It was supposed to last six months, then 12 months, now it has been going for 14 months and we still have not had an
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answer. I am in a slightly stronger position to ask the Minister for the outcome of his review than he and his hon. Friends are to ask me for the outcome of ours.

John Healey rose—

Mr. Francois: I will gladly give the Minister another bite of the cherry.

John Healey: May I ask the hon. Gentleman a simpler question? Does he accept that the climate change levy and the associated agreements have a role in tackling the challenge of climate change, something that the hon. Gentleman’s new leader is very concerned about?

Mr. Francois: The Minister will recall from our debate in June that I never said on the record that we were opposed in an outright manner to the levy—the hon. Gentleman will remember that if he reads the Official Report—as I did last night just in case he wanted to ask me about it. He will recall that I expressed scepticism, and mirrored that of a number of industry organisations about the way that the levy has operated in practice.

To be serious for a moment, everyone is keen to know the outcome of the review and as the Minister confirmed on the record that the operation of the levy will be part of the review, people are genuinely interested to know whether the levy will be retained or abandoned or how it may be modified in the light of the review. Hence my determination now to press the Minister on what I hope he will accept is an important matter. I hope that in his reply he will give some indication of when he expects the Government’s review of climate change policy to be complete.

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