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Session 2005 - 06
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Standing Committee Debates

Draft Climate Change Agreements (Miscellaneous Amendments) Regulations 2006

The Committee consisted of the following Members:

Chairman: Mr. Jimmy Hood
Afriyie, Adam (Windsor) (Con)
Bacon, Mr. Richard (South Norfolk) (Con)
Battle, John (Leeds, West) (Lab)
Brennan, Kevin (Lord Commissioner of Her Majesty's Treasury)
Brokenshire, James (Hornchurch) (Con)
Challen, Colin (Morley and Rothwell) (Lab)
Goodman, Mr. Paul (Wycombe) (Con)
Grogan, Mr. John (Selby) (Lab)
Healey, John (Financial Secretary to the Treasury)
Huhne, Chris (Eastleigh) (LD)
Keen, Alan (Feltham and Heston) (Lab/Co-op)
McCafferty, Chris (Calder Valley) (Lab)
Marris, Rob (Wolverhampton, South-West) (Lab)
Mullin, Mr. Chris (Sunderland, South) (Lab)
Purchase, Mr. Ken (Wolverhampton, North-East) (Lab/Co-op)
Selous, Andrew (South-West Bedfordshire) (Con)
Williams, Mr. Roger (Brecon and Radnorshire) (LD)
Frank Cranmer, Committee Clerk
† attended the Committee

Sixth Standing Committee on Delegated Legislation

Thursday 6 July 2006

[Mr. Jimmy Hood in the Chair]

Draft Climate Change Agreements (Miscellaneous Amendments) Regulations 2006

8.55 am
The Financial Secretary to the Treasury (John Healey): I beg to move,
That the Committee has considered the draft Climate Change Agreements (Miscellaneous Amendments) Regulations 2006.
I welcome you to the Chair, Mr. Hood. The regulations enable eligible energy-intensive sectors to benefit from a reduction of 80 per cent. in the climate change levy in return for entering into agreements to reduce their energy use and/or emissions. The primary legislation providing for both the climate change levy and climate change agreements is the Finance Act 2000. That provides for any extension to the eligibility criteria for climate change agreements to be made in secondary legislation, as we are doing this morning.
Back in January, we considered in some detail in Committee the initial climate change agreement regulations that set out the first list of sectors that would be eligible to enter into climate change agreements under the revised criteria that the Chancellor announced our intention to introduce back in the Budget 2004. The regulations before us, combined with regulations laid by the Department for Environment, Food and Rural Affairs under the negative procedure, provide for further energy-intensive sectors of industry to become eligible to enter the agreements under the new criteria.
The climate change agreements were introduced as part of the climate change levy package designed for energy-intensive businesses in recognition of the impact that the full rate of levy would have on such businesses, but also recognise the scope that such businesses have to deliver in terms of environmental improvements. That is the combination of factors that we want to build into the design and criteria of climate change agreements. The results have shown some significant improvements in energy and emissions performance in the sectors covered, and independently audited figures show that industry has beaten the climate change agreement targets by about 1 million tonnes of carbon in the first phase and around 1.4 million tonnes in the second phase. There is a good environmental rationale as well as a good economic rationale for the climate change agreements. Many hon. Members will have firms in their constituencies that are energy-intensive users and recognise the pressures of energy costs and, therefore, the economic imperative of the agreements and the ambition to see every part of business and the economy making some effort to help to meet the climate change challenge that we all face.
The European Commission must confirm clearance before we can extend eligibility to climate change agreements to new sectors. It has already scrutinised and approved our general principles under the new criteria, but it must also scrutinise and approve the environmental targets for each sector before agreeing that a specific sector can have the state aid that the climate change agreements constitute. Its aim is to satisfy itself that the targets are environmentally challenging. Its clearance gives the Government and, I hope, the Committee some confidence that they will meet that objective.
We are debating regulations that have been laid alongside DEFRA regulations, and I am pleased that instead of having to do that in future when any new sectors may become eligible, we have found a way of streamlining the process so that only one instrument, laid by DEFRA, will be required to bring new sectors and new firms within those sectors into climate change agreements. That provision is contained in article 3 of the regulations before us.
The sectors undertaking the process now becoming eligible fall into two groups. The first consists of sectors that have agreed targets with DEFRA, and state aid approval for the targets was given on 12 April. Those three sectors are the British Nonwoven Fabric Manufacturers Association, the British Ceramic Confederation and Cleveland Potash. 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 the regulations.
The second group of sectors included in the regulations are those for which the targets have not yet been agreed with DEFRA and the trade association representing them, so state aid approval has not yet been sought. The two sectors are the Cold Storage and Distribution Federation and the British Glass Manufacturers Confederation. Provided that they have submitted the necessary information to DEFR, those sectors can benefit from the tax relief shortly after state aid approval for their targets has been given.
The changes that we are making under the regulations bring to 12 the number of sectors that will have become eligible for the climate change agreements under the new criteria. I should mention the purpose of article 2. It is an amendment to the provisions of the Finance Act 2000 to take account of changes to the Integrated Pollution Prevention and Control Regulations 2000—or the IPPC—following the introduction of the waste incineration directive. Article 2 rectifies some small omissions from the original Climate Change Agreements (Energy-intensive Installations) Regulations 2001, which did not remove all the necessary thresholds from the IPPC processes.
I hope that I have given a helpful explanation of the broader specifics of the regulations and that the Committee will see fit to approve them.
9.2 am
Mr. Paul Goodman (Wycombe) (Con): It is a pleasure to see you in the Chair, Mr. Hood. Here we are, the Financial Secretary, myself and the rest of the Committee, discussing the regulations in the wake of our debates on the Finance Bill. We believe, a view that is shared elsewhere, that a structure that sets out an energy tax—the climate change levy—pays out a series of rebates to businesses and introduces a structure of agreements to enable firms to escape from the structure of taxation of rebates established by the Government that is not particularly transparent.
However, we want to make the levy work as well as possible and, in principle, the agreements are clearly extremely useful. The regulations set out a significant extension of the agreements, so I wish to ask the Financial Secretary a few simple questions about them. The Library note states:
“The Draft SI aim is to extend the range of industries that are able to enter into a Climate Change Agreement, but rather than do it by designating particular sectors it allows all sectors to qualify.”
The extension will be big, so what take-up is the Financial Secretary expecting from the new sectors that he hopes will enter into the agreements? Over what period is he expecting the take-up to emerge? What environmental savings does he expect to come about as a result of the extension and at what cost to the Treasury?
I note that the aim in future is to proceed by negative resolution, which means that the Minister will not have to return to Committee each time with a further list of industries for which he seeks approval. On balance, that sounds reasonable to us although it is obviously not a road down which we encourage Ministers to travel too often. I look forward to hearing answers from the Minister in due course.
9.5 am
Chris Huhne (Eastleigh) (LD): I have much sympathy with what the hon. Member for Wycombe (Mr. Goodman) has just said. We are living in and debating these regulations in a second-best world in which, time and again, an inordinate degree of complexity has come from the Treasury and the Minister’s team. One firm of tax accountants estimates that the sheer weight in kilograms of tax statute since 1997 is up by 50 per cent., so there is a strong element of extra complexity. That fits with the pattern that we have seen since then.
The Liberal Democrats would prefer a much simpler system to be applied, whereby we would have a tax levy upstream which would then go all the way down through the use of carbon-emitting fossil fuels and right through the economy. Such a system could, in most circumstances, get rid of much of the complexity that is introduced here as an offset to the fact that the tax itself—the climate change levy—is a somewhat blunt instrument which Treasury Ministers therefore feel that they have to amend.
That said, as we are living in this second-best world, and we have set out on this path, these are uncontroversial changes within that framework, which we are happy to support. However, I have a few questions for the Minister. What effect does he expect the regulations to have on the costs of the businesses and sectors involved? Will there be any effects on international competitiveness for any of the significant businesses or sectors in this area? Otherwise, I am happy to join the hon. Member for Wycombe in asking about the impact on the environment of the regulations combined with the climate change levy.
9.8 am
John Healey: I welcome, in principle, that both Opposition parties have offered to agree to this extension.
Without straying too widely, I must say that any proposals to introduce a carbon tax would have to deal with the impact that it would inevitably have on householders, because the design of the climate change levy clearly protects householders from any consequential increase in energy prices.
It is not very clear whether the hon. Member for Wycombe advocates the abolition of climate change agreements as part of his overhaul. Perhaps, we will have to wait and see. The independent evaluation shows that by 2010, such agreements will contribute 2.8 million tonnes of carbon savings each year, which will be a significant contribution towards our climate change and Kyoto targets. The total value to business is about £325 million a year. If the hon. Gentleman proposes to take that away from some of the most energy-intensive users and businesses in this country, I think that those businesses would be very interested in his proposals.
For the benefit of the Committee, I would like to clarify something. The hon. Gentleman mentions a Library note that I have not seen, which seems to suggest, as he did in his remarks, that there will be a wide extension of the ability and eligibility to apply for climate change agreements. That is not the case. For new sectors, eligibility for CCAs depends on the new criteria that we have already set. What is changed by the regulations is the process for designating and agreeing the CCA. It is a procedural device for approval, not a change to or extension of the new criteria which define eligibility.
The hon. Gentleman asked about the total cost of the extension of eligibility under the new criteria. We expect still to be within the £25 million figure that we published and estimated at the time of the 2004 Budget. We have already extended it to seven new sectors and these regulations extend it to five more. We expect only a small handful of relatively small sectors to beat the new eligibility criteria. That is the limit of the extension of eligibility that we expect.
I am glad that the hon. Gentleman regards the move to change this procedural way of handling things as reasonable. Generally, the House of Commons tends to deal with relieving provisions under the negative rather than the positive procedure. He will be aware of that, particularly given the work that he has done on the Finance Bill, as will the hon. Member for Eastleigh (Chris Huhne). Climate change agreements are relieving provisions and because of that they are welcomed by business.
I must tell the hon. Member for Eastleigh that when we first proposed in the 2004 Budget that we would find new criteria and extend eligibility, that was widely and warmly welcomed by business and by business organisations. The complexity of the world is to some degree inevitable, because in this area we are dealing with a powerful interaction with European frameworks, which the hon. Gentleman will know better than many others will. We have to be able to design a scheme that not only meets the state aid criteria and gets clearance from the Commission. It also needs to be administratively simple, and our experience of climate change agreements demonstrates that that can be the case, and valuable to business, as well as having a robustness in legal terms and an intellectually clear rationale. That is what we have been trying to put together in the design of the climate change agreements and the new criteria.
Rob Marris (Wolverhampton, South-West) (Lab): I ask the Minister to ignore completely the comments made by the hon. Member for Eastleigh about the simplicity of tax structure, since two days ago in the Chamber he was actively supporting amendments put forward by his party that would have doubled the complexity both of vehicle excise duty and of the fuel levy on petroleum and diesel. Again, he is having it both ways.
John Healey: My hon. Friend follows these matters probably more assiduously than any other Back Bench Member. [Hon. Members: “To his credit”.] To his credit indeed. Perhaps I shall leave it at that, aside from to say that he puts the point perhaps more sharply than I would have, given the context of a generally consensual statutory instrument Committee. I am happy for him to do so, and I have put such points much more powerfully in other places.
Finally, I was asked by the hon. Member for Eastleigh about the competitive effects. The individual businesses and their plants that will now become eligible for an 80 per cent. cut in their climate change levy rate will clearly be assisted by that, particularly in the context of dealing with high energy costs. To that extent, there will be a marginal and useful gain for those businesses in terms of their competitive position and costs.
Adam Afriyie (Windsor) (Con): The Minister said earlier that the climate change levy should not impact on consumers or domestic consumers of energy. Surely all levies end up with either the taxpayer or the consumer.
John Healey: I am not sure how closely the hon. Gentleman has studied the climate change levy design or the way that it operates. It is levied in a way and at a point in the process that means that it is not levied on the costs of power supply to domestic consumers. It was designed specifically to act in that way, because we came into Government soon after 1997 and one of the first things that we had to do was to reduce the tax burden on fuel for domestic users that the Conservative Government had previously introduced.
Adam Afriyie rose—
John Healey: I am going to stop, because I am winding up, but I just want to finish the point that I was in the middle of making on competitive effects. There is clearly a benefit for businesses that are newly eligible for the climate change agreements, but importantly—and this is why the clearance of the European Commission is significant—the Commission has judged that this is not competitively distorting in European terms. Therefore, it does not constitute an illegal state aid and has been given clearance. I hope that the Committee will give its clearance as well.
Chris Huhne: I presume that the Treasury, in its negotiations with the Commission, had to quantify the impact that these changes are likely to have on the businesses concerned. Will the Minister share with us the figures that he presumably had to share with the Commission?
John Healey: I had wound up, but I will answer the hon. Gentleman’s point.
The five sectors under consideration in the regulations would deliver total carbon savings of 27,000 tonnes a year by 2010 under the agreements that they are looking to put in place with DEFRA. I hope that that helps the hon. Gentleman.
Chris Huhne: May I just come back on that?
The Chairman: Order. I think that the Minister has resumed his place.
Question put and agreed to.
That the Committee has considered the draft Climate Change Agreements (Miscellaneous Amendments) Regulations 2006.
Committee rose at fifteen minutes past Nine o’clock.

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