Examination of Witnesses (Questions 40-57)
MR JIM
GRAY, DR
MARTIN BIGG
AND MS
LESLEY ORMEROD
21 NOVEMBER 2006
Q40 Chairman: Well, one sanction
might be to cut their National Allocation Plan.
Mr Gray: Yes, it could be exactly
and it would be interesting to see what Phase II does.
Q41 Chairman: I understand your caution
about not wanting to get into policy-making, but there is something
inherently irrational about a country which has a Kyoto target
of X% reduction and who sets their National Allocation Plan for
a half of X. It seems to me to be that the sort of minimum target
set under the National Allocation Plan should be one that achieves
the Kyoto target for that particular nation. Given that it covers
almost half of all emissions, if they have a less-demanding target,
they are making incredibly optimistic assumptions about the least-regulated
part of the whole emission process.
Mr Gray: I do not think we can
add, but we can only agree with that, I guess.
Q42 Chairman: Good! We are coming
on to a very important part of the discussion, but the truth is
that there would not need to be any national allocation plans
if we had a system of 100% auction permits and an EU-wide target.
All those problems would disappear.
Mr Gray: Yes, agreed.
Q43 David Howarth: Could I ask you
to comment more on the idea of 100% auctioning because, in your
memo, you say that should be a long-term aim of the scheme, to
have 100% auctioning, but you also say that you could have a 50
to 70% reduction of permits without affecting profitability. I
am a bit puzzled by what that means because, on the one side,
if the scheme is not threatening the profitability of firms, how
is it going to have any behavioural effect either at the level
of the firms themselves or at the level of the barters where it
encourages investment in the form of economic activities which
do not use so many permits? Are you saying that we can have 50
to 70% of auctioning without any effect because that would be
slightly pointless, would it not?
Dr Bigg: Can I turn it round the
other way in terms of why auctioning in the first place? We have
assessed the overall impact and are advocates of auctioning in
comparison to grandfathering or benchmarking on the basis that,
in principle, it actually internalises the cost of the pollution,
in this case the carbon dioxide. So you start with everyone actually
having to take account of the costs, but then using the funds
raised from auctioning to support particular areas of new technology,
cleaner technology which then will deliver additional benefits
over and above the market. That is the most straightforward way
of doing it and, in that way, you are actually returning the costs
back to the emitters in one way or another. When it comes to any
figure less than 100% there is a debate as to whom you advantage
and disadvantage and the costs. Our concern is, as I say, that
the environmental costs are taken into account and that there
should not be additional distortions over and above those which
bring environmental benefit. For international traders we would
like to see the same approach applied to the same type of activity
in each individual country so that, say, a steelworks is subjected
to the same costs of carbon in whichever country it operates.
Whether we go for a lower proportion of auctioning is, I think,
a matter of debate and detail, but our principal concern is that
the costs of carbon are actually built in to the costs of operating
the particular installation.
Q44 David Howarth: Could I just press
you on this 50 to 70% figure and how it was arrived at?
Ms Ormerod: The 50 to 70% figure
came from some work that we commissioned which focused specifically
on options around auctions in Phase II up to 10% and it is fair
to say that the modelling that that was based on made some assumptions
around things like the industry sectors, it is not across all
industry sectors, but it was focused on specific industry sectors
and a carbon price and things like that, so it was a very specific
bit of work.
Q45 David Howarth: Do those assumptions
include an assumption that firms are not able to adapt beyond
a certain level of carbon price?
Ms Ormerod: Possibly.
Q46 David Howarth: The other thing
which was interesting about your proposal is what to do with the
non-auctioned bit, how to set benchmarks. I think you have put
forward the principle that you should operate on the basis of
the most efficient and the best in Europe, the kind of BATNEEC
sort of technique. Just as a sort of matter of interest, how would
the UK fare if that principle was put into operation? How near
to the best-available technology, not entailing excessive costs,
are we?
Dr Bigg: In terms of controlling
emissions of CO2 particularly?
Q47 David Howarth: Yes.
Dr Bigg: Well, if I can focus
on the biggest emitters and the example there, our power stations,
are relatively old, the technology is relatively old and we are
in a process of retrofitting gas clean-up for sulphur dioxide
to meet the requirements of the Large Combustion Plant Directive
which further increases their carbon emissions. Therefore, to
answer your question directly, relative to much of Europe, we
do not perform perhaps at BAT or BATNEEC standards for carbon
emissions.
Q48 David Howarth: I suppose it would
be BAT or BATNEEC, would it not?
Dr Bigg: BAT under the IPPC Directive
and BATNEEC under the previous legislation, so yes, particularly
from the major power generators, we do have an issue there. In
other industries, where perhaps one can say the costs are not
so readily passed on to the consumer, there has been a bigger
incentive to improve efficiency and we do see new technologies,
new approaches and more efficient processes which do mean that
the emissions are relatively smaller.
Mr Gray: Your question has made
me think and listening to Lesley's and Martin's answers has just
made me think that there is almost a hierarchy, is there not?
It is a bit like the waste hierarchy which you will have come
across many times. I guess you have got a hierarchy of grandfathering,
benchmarking and auctioning and the further you can push the allocations
up that hierarchy, I would think the better the market is going
to work out like a true market, so there is almost a hierarchy
there. The reason we are quoting figures like that is that there
is practical element to all of this. We do not think we will get
those kinds of figures, but there is something that says that
if you do take a position as an Environment Agency, you want to
see things moving up that hierarchy and the further that happens,
then the better the market you get and then the better the environmental
outcomes, and that is probably the way we are looking at this.
Maybe that is obvious to you, but it came to mind as you were
asking the question.
David Howarth: That is helpful, thank
you.
Q49 Chairman: Is it not the case
at the moment that the longer we delay introducing a higher proportion
of auctions, the more there is a kind of hidden incentive on installations
not to take dramatic steps because, if they introduce low-carbon
technology into their processes, they will actually be reducing
their expected future allocations?
Dr Bigg: Yes.
Ms Ormerod: In Phase II, the baseline
that was used to calculate those grandfather figures was not updated,
so it did not take into account first year's emissions data, so
there is not an incentive in that respect, but clearly if you
are not going to update your baselines, then the information you
are using to base your allocations on is becoming less and less
realistic the further away you move from that, so there is an
argument there that grandfathering is not the way to allocate
in the future.
Q50 Chairman: It possibly disincentives
people?
Ms Ormerod: Yes.
Q51 Colin Challen: Just moving on
from the earlier questions about the disproportionate costs on
smaller emitters, the proposed Energy Performance Commitment might
be a place for some of these small emitters. Would that not also
have a similar cost base for them and it is going to be equally
expensive whichever scheme it is surely?
Mr Gray: We have seen some figures
around for this because we think it would be a lighter touch.
A big bit of the cost is the verification cost and we would probably
see again on a proportionate basis a lighter-touch verification
exercise. If the EPC came into a company that only had one site,
then I think it would be cheaper to administer than the EU ETS,
but not hugely so, but a bit cheaper, but if a company had 100
sites or 100 shops and it could spread some costs, then the cost
per unit drops really quite dramatically, so I think for the bigger
companies that may have small installations and would not come
into the EU ETS, but they have a lot of them, a lot of supermarkets
or whatever, probably the cost across them all per unit would
be a lot, lot less than the compliance costs of the EU ETS.
Dr Bigg: The point I would emphasise
though is that the EPC is out for consultation at the moment,
so clearly there are a lot of things which are not known about
the final scheme and what we have got in the consultation document
are draft indications of the proposed costs, so until, realistically,
the final proposal is put together, we do not know what the precise
details would be, except that logically if you reduce the amount
of work required and the standard of work required, then the costs
will go down.
Q52 Colin Challen: It would not be
less robust then?
Dr Bigg: Logic says that if you
have more of a self-assessment process rather than third-party
verification, then the level of robustness will be less.
Mr Gray: I think the level of
robustness will clearly be less, but, because you are dealing
with much smaller emitters that aggregate to a smaller amount,
you can afford some proportionality in all of this, which is really
the way I would look at this, so a small emitter, if there is
a 10% error and you do not spot it, that 10% is minuscule compared
to a coal power station and a 10% error, so it is just where you
focus attention. Those figures that I had in mind before come
from the consultation and they kind of show there should be costs
going down very markedly if there are a lot of installations or
shops or whatever that company has.
Dr Bigg: The figures we have from
the consultation, just for information, are, we understand, for
single sites about £7,000 and for multiple sites you are
in the region of up to £30,000, whereas under the EU ETS
for the smallest installation, it is, as I touched on earlier,
about £11-12,000 plus the fees for your contractor, so there
is a pretty significant step-up, but that reflects again the scale
of activity and the environmental impact.
Mr Gray: And the 30,000 might
be split across 100 sites or so, and so it could be quite cheap.
Q53 Joan Walley: The review that
you were looking at in respect of the ETS Update Project, do you
see, arising out of that, other sectors being included, like,
for example, coal or aluminium?
Ms Ormerod: The LETS Project looked
at specific industry sectors and did a feasibility study as to
how realistic it was to include them and it made recommendations.
Coal-mine methane was one recommendation that the LETS work came
up with, so methane emissions from coalmines. I am not sure; I
will have to double check.
Dr Bigg: There are other parts
of the chemical industry.
Mr Gray: There is ceramics and
there is aluminium as well. There are a few other high energy
sectors.
Ms Ormerod: Nitrous oxide was
one from nitric acid and adipic acid manufacture—it is fairly
detailed—CO2 and fluorocarbons from aluminium
production and methane from coal mines.
Q54 Joan Walley: Wearing my constituency
hat, I would be interested in the conclusions on that in respect
of ceramics. In terms of coalmining and aluminium, how would it
affect the price of coal?
Ms Ormerod: We did not look at
that.
Mr Gray: It is a pretty incomplete
picture. In terms of ceramics, we will privately talk to you about
that. The big one is coal-mine methane, and may be somebody else
does but I do not actually know how you would mitigate methane
emissions from coal mines, and there seem to be a lot less coalmines
around than there used to be. This is a study that has made some
recommendations and we feed this in, but personally, at the end
of the day, whether this stuff makes a huge difference I am not
sure.
Dr Bigg: The key point to emphasise
is that if we are looking at greenhouse gases, with methane having
20 times the greenhouse gas potential compared to CO2,
then clearly significant sources of methane need to be considered,
and mining is a significant source, alongside other activities
including land-filling and agricultural sources.
Q55 Joan Walley: What would you say
are the main recommendations that you have been making from this
review and how well received have they been by the Commission?
Dr Bigg: The key recommendation
is that the Commission looks broader than just CO2.
Other greenhouse gases and improvements can be achieved. It particularly
mentions methane, any sources of methane (it does not matter where
it comes from when it gets into the atmosphere), similarly N2O,
and even to look at where changing technologies may be resulting
in increasing N2O. For example, putting in gas clean-up on combustion
processes actually can increase the emissions of N2O rather than
reducing other emissions. What we are keen to ensure is that there
is a broad review of all potential greenhouse gas sources.
Ms Ormerod: I think the LETS Update
Project seems to be have been fairly well received by the Commission,
and they actually refer to it as a good source of information
in the recent communication on the directive review, so I think
they are taking those recommendations seriously.
Q56 Joan Walley: Finally, you commented
earlier on that you were doing the monitoring, and the enforcement
and the policy issues were a matter for government and Defra.
Arising out of this review that you have done, it is not that
you are detached from the policy-making arena, are you? What mechanism,
do you feel, needs to be put in place whereby the work that you
were doing on the implementation side could be more closely aligned
with the policy agenda that is determining, through Defra and
government, what comes out of the EU Commission?
Dr Bigg: The straight answer is
that we are actually working very closely with Defra and DTI,
both in the early stages on the implementation of the EU ETS but
particularly now on its operation and, being the front-line regulators,
our experiences that we are gaining through the operation of the
scheme. So, through our regular dialogues with government departments
and our formal representations back to them, our position is very
clear, and they in turn, we can see, are reflecting that back
to the Commission. But also, as we touched upon earlier, we are
working with our European counterparts as European regulators
similarly feeding through other Member States back to the Commission
as well. We believe we have got to an effective working relationship
influencing them on the workings of the scheme.
Mr Gray: Can I add a couple of
things to that. The LETS Study that Lesley was talking about,
we were essentially, I guess, a contractor, or partly a contractor.
We know it was partially European funded and it was with some
European partners and it was Commission funded, so we are almost
doing it as, I guess, a contractor to some extent, and that is
the domain of that. Of course the Commission has been positive
about the kinds of things we have been saying. I agree with Martin
entirely about the way we are working with government, but I go
a step beyond that. I think for us the whole EU ETS experience
over the last few years has for me been a role model in how the
Environment Agency works with DEFRA. It has been one of the good
kind of best practice examples, and two things, I think, are part
of that. One is being clear about the roles—what is Defra's
role and what is our role—but also Defra devolving as much
as they can to delivery bodies. They still kept, I guess, the
political things like the NAP and the European negotiations, all
that kind of stuff, but devolving the delivery aspects to us.
I am only saying what Martin said, but I am kind of strengthening
it. I think this has been an area where we have worked immensely
well with Defra and have been clear about what our respective
role in all of this is.
Dr Bigg: Particularly, may I say,
bearing in mind the timescale that we had to set up the scheme
and operate it, the fact that, as far as we are concerned, it
has actually worked well and delivered on a UK basis what the
scheme was intended to, using the market to deliver environmental
gains. We see it as a major success.
Q57 Chairman: We have covered all
the ground that we hoped to, so thank you very much for coming
in.
Dr Bigg: Thank you very much.
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