House of Commons portcullis
House of Commons
Session 2005 - 06
Publications on the internet
Standing Committee Debates

Seventh Standing Committee on Delegated Legislation

Column Number: 1

Seventh Standing Committee on Delegated Legislation

The Committee consisted of the following Members:


Mrs. Janet Dean

Baker, Norman (Lewes) (LD)
†Barlow, Ms Celia (Hove) (Lab)
†Burrowes, Mr. David (Enfield, Southgate) (Con)
†Chaytor, Mr. David (Bury, North) (Lab)
†Crabb, Mr. Stephen (Preseli Pembrokeshire) (Con)
†Dobson, Frank (Holborn and St. Pancras) (Lab)
†Ennis, Jeff (Barnsley, East and Mexborough) (Lab)
†Flello, Mr. Robert (Stoke-on-Trent, South) (Lab)
†Francois, Mr. Mark (Rayleigh) (Con)
Greenway, Mr. John (Ryedale) (Con)
†Healey, John (Financial Secretary to the Treasury) (Lab)
†Kilfoyle, Mr. Peter (Liverpool, Walton) (Lab)
Ruffley, Mr. David (Bury St. Edmunds) (Con)
†Stunell, Andrew (Hazel Grove) (LD)
†Tami, Mark (Alyn and Deeside) (Lab)
†Watson, Mr. Tom (Lord Commissioner of Her Majesty’s Treasury) (Lab)
Sarah Hartwell-Naguib, Emily Commander, Committee Clerks
† attended the Committee

Column Number: 3

Wednesday 22 June 2005

[Mrs. Janet Dean in the Chair]

Draft Climate Change Levy (Combined Heat and Power Stations) Regulations 2005

2.30 pm

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

    That the Committee has considered the draft Climate Change Levy (Combined Heat and Power Stations) Regulations 2005.

The Chairman: With this it will be convenient to consider the draft Climate Change Levy (Fuel Use and Recycling Processes) Regulations 2005.

John Healey: Welcome to the Committee, Mrs. Dean, for what I believe is your first time as Chairman. I congratulate you on being appointed to the Chairmen’s Panel—a senior position in the House and one of status. The Chairmen play an important function in our scrutiny of legislation. I look forward to serving under your chairmanship this afternoon and, I hope, on occasions to come.

Both sets of regulations that we are debating this afternoon are technical and tightly drawn in the changes that they introduce. They have been extensively discussed with the industries affected and developed with those industries. The regulations are welcomed and supported by the CHP industry and the manufacturers that they are designed to assist and to which they apply.

The CHP stations regulations form part of a package of legislative amendments that is reflects our commitment to enhance the existing climate change levy relief framework for input fuel—that is, the fuel used by CHP stations. The regulations will help CHP operators to achieve the maximum benefit available and give further encouragement to the environmentally beneficial form of generation that good-quality CHP offers. The regulations will make changes to the current provisions governing the treatment of taxable commodities—coal, gas and oil—that are used in the production of CHP electricity to improve the process of determining the amount of CCL relief that generators can claim.

The Committee might find it helpful and it will underline the benefit that the regulations are designed to deliver if I briefly describe how CHP operators gain the relief on their input fuel and the changes that the regulations will make. CHP plants are eligible for a CCL exemption on the taxable commodities they burn when generating electricity and heat if, and only if, they are certified under the CHP quality assurance scheme, which is a voluntary programme overseen by the Department for Environment, Food and Rural Affairs. The programme assesses the efficiency and the environmental performance of each CHP power
Column Number: 4
station during its previous 12 months of operation. Historical data from such assessments are then certified to the operator as a forecast of performance for the coming year. The certificates, which are issued by the Secretary of State for Environment, Food and Rural Affairs, determine the CCL relief that the CHP operator can claim for the year ahead. In other words, historical data are used for current in-year CCL relief claims.

Where a station’s efficiency percentage equals or exceeds the threshold efficiency, which is derived from the CHP quality assurance programme, all of the taxable commodities used as input fuel can be relieved of climate change levy. The potential benefit to CHP operators is clear and I hope I have made clear to the Committee the support that we aim to put in place around the regulations as part of our general environmental policy. Where a station’s efficiency percentage falls below the threshold, only a proportion of its taxable commodities used as inputs can be claimed and are eligible for CCL relief.

CHP operators told us that the retrospective nature of the scheme was a disadvantage to some of them in some circumstances, where their past performance was poor, because the CHP quality assurance process used past performance to forecast future performance and therefore the relief entitlement. Having consulted the affected industries, we have decided that to enable CHP operators that may be affected in that way to receive the correct CCL relief entitlement, the efficiency percentage that governs the extent of the relief will in future be determined according to the new regulations, rather than fixed by the Secretary of State’s certificate as is required under the existing regulations, which the draft regulations are designed to supplant. The new regulations will allow operators more flexibility by enabling them to notify Her Majesty’s Revenue and Customs at any point about changes in their performance efficiency. They can then immediately account for the correct CCL relief. In addition, the regulations remove the rigid reliance on elements of the certificate process run by the Secretary of State. The new regulations bring the relief for the fuel used in CHP stations in line with other CCL reliefs, where the extent of the benefit reflects the actual event.

I can deal with the second set of regulations slightly more briefly. They do three things. First, they revoke the Climate Change Levy (Use as Fuel Regulations) 2001 and the amending regulations that were made in 2003 to bring together in a full single list all the industrial processes that qualify for exemption from the climate change levy. Secondly, they add secondary recycling processes, which involve the preparation of scrap metal within the aluminium, lead and steel industries, to the list of qualifying processes. Finally, they add to the list of qualifying processes for CCL relief processes in which natural gas is used as feedstock in a gas generator, principally to supply a reducing atmosphere for the treatment or the annealing of metal products.

Column Number: 5

An exemption from CCL for taxable commodities that are used, not as an energy source, but as a raw material is the principle and the main legislative provision from which the regulations are derived. In such processes—I make the point because there are references in the regulations to the terms—eligibility for relief turns on the fact that the energy used is not burnt, or is used to produce a chemical reaction that results in part of the energy being burnt as fuel and part not. In the draft regulations, that is called “mixed use”. In the previous set of regulations, it was referred to as “dual use”.

As Committee members probably expected, the inclusion of these processes has been welcomed by the Aluminium Federation and by the lead industry. Overall, the UK metal industries will benefit by around £900,000 a year. I commend the draft regulations to the Committee.

2.38 pm

Mr. Mark Francois (Rayleigh) (Con): It is a pleasure to serve under your chairmanship, Mrs. Dean. I understand that this is your first time in the Chair of a Committee on a statutory instrument, so I welcome you to your new responsibilities and wish you the best of luck in conducting them, which I am sure you will do admirably. I understand that there are some other people making a debut this afternoon; I wish them the best of luck, too.

It is a pleasure to appear opposite the Financial Secretary to the Treasury. He has been promoted, but I understand that the way in which responsibilities have been allocated in the Treasury means that he has retained the environmental brief. No doubt we will continue to debate these matters for some time to come.

I am confident that I can bring a smile to the faces of all the members of the Committee when I say that I do not intend to detain the Committee long—I see the Government Whip smiling at that prospect. However, this is an important topic—in fact, it was raised at Prime Minister’s questions earlier today and the Prime Minister specifically mentioned the climate change levy—and some important points need to be made.

The two statutory instruments modify the conditions whereby certain power stations and certain processes qualify for partial or complete exemption from the climate change levy. The CHP stations regulations change the way in which the climate change levy exemption proportion is calculated based on fuel supplied to CHP stations; they change the way in which the climate change levy exemption limit is calculated based on electricity supplied from partly exempt CHP stations; and they change the conditions that a CHP station needs to satisfy to be fully exempt from the climate change levy itself.

The second fuel use and recycling regulations make new provision prescribing those recycling processes for which supplies of fuel for the process are exempt from the levy. They also expand the range of activities for which supplies of fuel are to be exempt from the levy because they are used other than as fuel, such as when supplies are used as a catalyst in a chemical
Column Number: 6
process in metallurgy, rather than as a fuel that gives energy to the process. That is an important distinction within the regulation, and I hope that I can convince the Minister that we comprehend it.

The application of the levy is not devoid of controversy. When the levy was introduced several years ago, it was held by the Government to be an important environmental measure and, in particular, to be a contribution to the struggle against climate change and to efforts to reduce potentially harmful emissions into the atmosphere. That was its raison d’être. However, as the Minister knows, there is now considerable scepticism about whether that complicated measure is intended as an environmental benefit or as a convenient way of raising revenue while paying lip service to environmental protection. There is a lively debate about that within the environmental community, as I am sure the Minister, if he is honest, acknowledges.

Whether the climate change levy is having the desired effect is an important question. The regulations do not help much in that respect. The levy raises about £800 million a year for the Chancellor, so it is a fairly important source of revenue—not far short of £1 billion. Part of the levy is supposed to be given back to industry in the form of reduced national insurance contributions. In addition, companies can seek reductions of up to 80 per cent. in the application of the levy by signing up to climate change levy agreements, or CCLAs, which provide reductions in the levy in return for certain commitments to energy efficiency.

There has been some detailed debate about the implementation of the scheme since it came fully into operation in 2001. We have had four years to consider how it operates. The levy tends to benefit larger companies with the resources or skills necessary to understand its complicated nature and to participate in qualifying for the CCLA scheme. It tends also to assist companies with relatively large work forces but low energy usage which benefit from the reductions in NICs because they have a relatively large number of employees. Conversely, the levy tends to hurt smaller companies with relatively high energy usage, such as some small or medium-sized manufacturing businesses that pay on top for their energy but have relatively few workers from whom to recoup the benefit of reductions in national insurance. That point was quickly picked up by business after the levy was introduced. Back at the end of 2002, the Confederation of British Industry and the Engineering Employers Federation conducted a joint study into the practical implementation of the levy. They concluded:

    “The idea of recycling money raised by returning it to employers through reduced NI contributions has been criticised as uneven; it benefits companies with large amounts of staff and low energy expenditure but penalises companies with large amounts of energy and few staff.”

It should also be remembered that the levy, which, in effect, the regulations amend, is effectively a tax on British business, adding to energy costs even for those businesses that qualify for the 80 per cent. exemption. In fact, many businesses do not qualify at all. The CBI has highlighted that fact on several occasions, as the
Column Number: 7
Minister will be aware. In March 2005, in its response to a Government consultation on climate change policy, the Engineering Employers Federation stated the point in fairly clear terms, telling the Government that

    “The majority of businesses see the climate change levy as an additional cost rather than an incentive to become more energy efficient.”

The explanatory notes to both sets of draft regulations state that there is no accompanying full regulatory impact assessment—often the case with statutory instruments of this kind—because they have no impact on the costs of business, charities or regulatory bodies. However, if they have no impact, they are doing relatively little to help to materially reduce the costs for companies, particularly at a time when employment in the manufacturing industry, which is certainly affected by the climate change levy, is falling.

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, thus encouraging them to adopt the type of energy-efficient measures that the Government are seeking to promote in the first place. As the EEF noted in its consultation response:

    “On its own, the climate change levy has not been a successful tool to reduce emissions and has had little influence on business emissions behaviour. However, climate change agreements have encouraged businesses to reduce emissions by offering the incentive of a reduction in the levy tied to clear targets. This review”—

that is, the overall review now in progress—

    “should consider the scope for widening . . . these agreements.”

That seems to me to be a perfectly rational request, and I endorse it. Will the Minister tell the Committee how the draft regulations are designed to facilitate that worthy process? 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?

Whether or not the climate change levy has made any positive difference is the subject of another important debate. Again, the evidence is mixed at best. Remember, the Government claimed at the outset, and have continued to do so since, that their primary rationale for introducing the levy was environmental, not financial. They have also claimed that the levy has been important in helping to achieve their Kyoto commitments. The Government originally signed up to reducing the UK’s emission of six greenhouse gases to 12.5 per cent. below 1990 levels by the period 2008–12. That original Kyoto commitment was supplemented by a specific promise to reduce emissions of carbon dioxide, which some believe is the most harmful gas in climate change, to 20 per cent. below 1990 levels by 2010. That, in a sense, was the second commitment. It would have meant reducing to 132 million tonnes the amount of carbon released into the atmosphere by the UK every year by 2010. Then, in 2003, in the energy White Paper, the Government
Column Number: 8
committed themselves to a much more ambitious longer-term goal of reducing CO2 emissions by 60 per cent. by the year 2050.

The levy is intended to contribute in stages to all three objectives. However, despite the fact that it has been in force for four years, the numbers on UK carbon emissions are going the wrong way. UK carbon emissions have risen in four out of the last five years. The Government’s own provisional estimate for 2004, which I am sure the Minster will be happy to confirm, is 158.5 million tonnes of carbon released, compared to a 1997 figure of 152.6 million tonnes of carbon. In short, despite the operation of the climate change levy in the United Kingdom over the last few years, UK emissions of CO2 are going up, not down—even though British business is paying £800 million to the Chancellor.

The Environment Agency, an agency of the Government, which circulated its recent report “State of the Environment 2005” directly to most hon. Members, admitted that the 2010 commitment is not being met. As the report said:

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

British business is being charged nearly £1 billion per year, but the desired effect is not being produced. The issue was looked into by the House of Commons Environmental Audit Committee, on which I served in the previous Parliament and of which I can see some other members here—I have a feeling that we will be hearing from them later. The Committee said in its pre-election report on environmental taxation measures in the 2005 budget:

    “In March 2005, the Government released updated figures for the Climate Change headline indicator. These showed that carbon emissions in 2003 were significantly higher than the provisional forecasts—and indeed higher than they were in 1997. Later that month, the DTI published provision data for 2004 which revealed that carbon emissions had risen by a further 2.5 million tonnes.”

The Government have acknowledged that they are in trouble. In December 2004 the Secretary of State for DEFRA acknowledged that the 2010 target would not be met and announced a review of the whole UK climate change programme, including how the levy is designed to operate.

The Chairman: Mr. Francois, I ask you to draw your remarks back to the motion before us.

Mr. Francois: Certainly, Mrs. Dean. What I am trying to ascertain from the Minister, as I will say in a moment, is whether or not the levy is included in the review.

Let me ask the Minister directly. Can he confirm that the operation of the climate change levy will be included in the review? Last week’s ministerial statement told us that the timetable for that review had been put back. Originally, we were supposed to have the answers by the middle of this year—about now. Then a written statement, which appeared in Hansard last Thursday, told us that the review would not now be completed until the end of the year. In the spirit of cross-cutting government and of co-operation, and as the Minister is responsible for environmental taxation, can he please tell us whether the climate change levy
Column Number: 9
will be included in the review? Does he think that there might be any implications for the operation of the levy that might have us all back here, in a few months or early in 2006, to go through this whole process again?

As one who served on the Environmental Audit Committee in the previous Parliament, I would like to stress to the Minister that there is genuine scepticism about the Government’s commitment to environmental taxation for any reasons other than raising revenue. The levy itself is a complicated measure, which is difficult to administer. The detail of the draft regulations only serves to underline that. I am afraid that they do not demonstrate a tremendous amount of Government imagination in terms of solving the wider problem, not least because they do not seem to do much to encourage more companies to enter into climate change levy agreements. Most people agree that those would be beneficial, because they would encourage companies to adopt more energy efficiency measures and, thus, hopefully, reduce their carbon output.

The Government are not being nearly imaginative enough. Their review has been delayed. Their whole climate change policy is now in a bit of a mess, to put it mildly. Even the Government’s chief scientist claims that climate change is the greatest overall problem facing the planet. The Government’s response is far too late and far too weak. Memo to the Financial Secretary to the Treasury: “This is important. You must do better.”

2.54 pm

Andrew Stunell (Hazel Grove) (LD): Welcome to the Chair, Mrs. Dean. I hope—in fact, I am sure—that you will have a long and successful run as a member of the Chairmen’s Panel. It is also a pleasure to be responding to this statutory instrument with the Minister. I know that he takes the issue seriously, as part of his wider role.

I listened carefully to the hon. Member for Rayleigh (Mr. Francois), not least because I cannot usually get his constituency right and once mistook him for someone completely different. He made some useful points, which I hope to draw on.

Of the two statutory instruments, there will be least controversy about the Climate Change Levy (Fuel Use and Recycling Processes) Regulations 2005 which, as the Minister properly said, are not only technical but helpful to the industries concerned and do not have a negative impact in terms of carbon dioxide emissions. They are to be welcomed. I shall therefore focus my remarks on the Climate Change Levy (Combined Heat and Power Stations) Regulations 2005.

Bearing in mind that the regulations are designed to aid the CHP industry, I hoped to hear more analysis from the Minister of the general context of combined heat and power, but it was not given. Had the hon. Gentleman engaged in analysis, he would have had to say that the situation facing CHPs plants in this country is dire. The one plant with which I am familiar is the ConocoPhillips plant at Immingham in Humberside. I was present when it was opened by the Secretary of State for Environment, Food and Rural
Column Number: 10
Affairs. I do not have an interest to declare, but perhaps I should say that a senior executive of ConocoPhillips was attached to me as a member of the Industry and Parliament Trust, which gave me a considerable insight into the company’s approach to the scheme. It is rightly regarded as a flagship project. The fact that it was opened by the Secretary of State shows its significance.

The input fuel of the project is largely gas. The plant provides electric power for the national grid and heat for processing in the adjacent refinery and industrial complex. It is clearly a scheme that exceeds the qualifying threshold of DEFRA’s quality assurance scheme. The Minister is right to say that schemes should be judged on their current performance when that threshold is calculated, rather than on their historical performance, which might relate to an initial period of operation, for example, when efficiency levels were not achieved, and other variables.

However, the largest combined heat and power plant in Britain, run by one of the major oil companies, is not fulfilling its potential and ConocoPhillips has made it clear that it would never repeat the project under the present regime. Existing CHP plants around the country are being mothballed, investment in new plant is frozen, and schemes have been abandoned. The Government’s targets for the amount of energy that is produced by CHP and the amount of carbon dioxide saved as a result are in disarray. As the hon. Member for Rayleigh said, carbon dioxide emissions are rising, not least because those CHP targets have been so woefully missed.

As the Minister explained, the regulations are a marginal recalibration of the baseline performance for the calculation of climate change levy exemptions. Another way of expressing it is to say that the regulations will ensure that the deckchairs are in a particularly straight line on the sundeck of the Titanic, because they do not actually do anything to rescue the combined heat and power industry from the problems it faces. I hoped that the Minister would present an outline of the action that the Government are planning to take. In the recent election, my party advocated carbon tax to replace the climate change levy. If the climate change levy is still a key part of the Government’s plans, they must set out much more firmly and clearly how the changes that they are making—whether marginal, as in the regulations we are considering, or more fundamental in future—will achieve their targets. It is fine to have a global target, a long-range target or a UK-wide target, but policy aims are achieved through changes in particular industries in particular increments. From that point of view, the regulations are bitterly disappointing.

As the hon. Member for Rayleigh said, the Government’s chief scientific adviser has said that climate change is the biggest threat to the planet. Combined heat and power provides a simple cost-effective way to reduce CO2 emissions. It uses existing technology and does not require us to overcome any of the difficulties associated with alternative sources of power, such as nuclear or renewables. CHP is fully established and entirely benign.

Column Number: 11

The Government could have achieved some simple quick hits by introducing different regulations today—quick hits that would have improved investment instead of allowing it to continue to be cancelled, and that would have enabled CHP to expand instead of allowing operators to continue to mothball and sell off plants. That could have been achieved, but has not been, so please, will the Financial Secretary take back from the Committee to the Secretary of State for Environment, Food and Rural Affairs and the Chancellor of the Exchequer the message that we want some action? We want them to draw up a plan to revive CHP in this country and to cut CO2 emissions as a result. Please will the Financial Secretary come back soon with a recovery plan to get CHP back on track? I do not mean some time next year, or even some time in the autumn: next month would be good.

Contents Continue
House of Commons 
home page Parliament home page House of 
Lords home page search page enquiries ordering index

©Parliamentary copyright 2005
Prepared 23 June 2005