Examination of Witnesses (Questions 130-139)
MR IAN
RODGERS, MR
STEPHEN RADLEY,
MR PAUL
NOON, MR
ADAM LENT
AND MR
PHILIP PEARSON
28 NOVEMBER 2006
Q130 Chairman: Good morning and welcome
to the Committee. Thank you very much for coming in to talk to
us. As you may have picked up from the previous session, we are
trying to drive through quite a lot of business this morning so
I am hoping that we can get through by about 10 to 12 if we can.
I do not want to inhibit your answers in any way but we have got
a fairly tight timetable. Could I start with the TUC and the arguments
of the Clean Coal Task Group. I understand that you object to
the Government's proposed allocations for Phase 2 because these
favour gas over coal. The Government's argument is that, of course,
since gas emits less carbon dioxide, that is really what the scheme
is supposed to be doing, to incentivise that kind of switch. Do
you have any comment on that?
Mr Pearson: Thank you, Chairman,
and good morning. Obviously the TUC does recognise that the EU
ETS is essentially an instrument to contribute to emissions reductions,
and I think one recognises the crucial importance of that challenge
in the next decade with Stern and so forth. Our concern is that
the EU ETS is not bringing forward investment in clean coal technology.
To be totally realistic on a global scale getting coal cleaned
up is possibly the senior issue in terms of meeting global CO2
reduction challenges. China's CO2 emissions from coal
are massive. The UK's are significant and what we are looking
for is for the UK electricity sector to have that stimulus through
the EU ETS to invest in clean coal technology, allied to carbon
capture and storage. We see the whole suite of technologies working
together. It is not simply about more efficient coal plant because
that will not deliver the CO2 cuts we are looking for,
but together with carbon capture we see this as an absolutely
crucial stage in not just the UK but the European energy mix.
Q131 Chairman: What is your view
about auctioning? If one moves more rapidly to a bigger proportion
of allowances being auctioned, it removes the bureaucratic process
of deciding what allocations should be made. What is your view
about that?
Mr Pearson: There needs to be
a judicious balance between auctioning and free allocations. The
Government's proposal of 7% for Phase 2 seems perhaps a kind of
minimalist position, but one has to recognise that industry is
looking for stability as well as the challenge that auctioning
could bring. Auctioning itself can bring stability because you
could then have choice as to the price of those auctioned allowances,
but to rush into very high percentages of auctioning too early
might not provide that investment stability that companies are
looking for. If the proceeds are recycled towards the Environmental
Transformation Fund that is being considered, then we would greatly
welcome auctioning, and progressively higher auctioning, carefully
managed, could generate significant investment income.
Q132 Chairman: You have referred
to carbon capture and storage, and certainly I share your view
that that is a very important technology situation globally if
we are going to have a global reduction in emissions. I think
your argument is that if you have got CCS you should be allowed
to sell the credits based on the amount of carbon that has been
sequestered into the ETS market. Is that idea now being welcomed
and supported by the Government and by the European Commission?
Mr Pearson: The problem is the
answer is probably yes, and if you look at the Energy Review,
you do see a lot of the right signals in the right documents in
favour of CCS. Our experience through the TUC's Clean Coal Task
Group has been one—and it is a joint industry/government
advisers/trade union body—where we have been trying to get
an overall idea of where the blockages are in the system. You
talk to industrialists and they are talking to us very openly
now about the blockages. Somebody mentioned earlier on references
to the CEGB. Some industrialists now would almost begin to look
back at the certainties of investment direction that used to provide.
What is concerning the industry is the lack of clarity about the
mechanisms that will actually drive forward this suite of investments,
particularly for example the need to implement the recommendation
of the Science and Technology Committee that all new power plant,
whether it is gas or coal, should be licensed as being capture
ready. In broad terms this means at least having the site capacity
to add on the carbon capture suite of technologies, and yet what
we are still waiting for is the suite of regulations that will
actually bring forward this investment, particularly of course
the ETS incentive.
Q133 Dr Turner: I wrote that recommendation
from the Science and Technology Committee and it is very nice
to hear it quoted back at me. Is it fair to summarise your answers
in terms of getting carbon capture and storage in place as meaning
that the ETS as it is currently is providing far too weak a signal
so it is not actually having any effect on CO2 emissions
nor is it giving sufficient investment incentive to invest in
CCS for the future? Is that a reasonable summation; it has got
to be a much sharper, clearer signal?
Mr Pearson: The cap needs to be
progressively tighter. That sends a signal on carbon price inevitably.
Current regulations will bring forward gas investment. The Centrica
proposal just recently on Teesside is a signal that industry wants
to go in the direction of coal for all sorts of reasons we could
discuss. It is only a signal. They are looking for two things
still, I understand. They are looking for the signal on capital
support for the carbon capture and storage element and I understand
they are looking also for a signal through the ETS to support
coal-fired generation. I think the cap issue is important, but
it is really how the regulations then bring forward this mix of
coal and gas. If we are not careful, we are just going to get
more gas-fired power stations and more problems internationally
on security of supply, whereas beneath the UK lies massive coal
resources, (secure because we have control of it), with no internal
distribution problems if the industry is able to invest in new
coal faces, with the price of coal being sorted out, which is
another issue. But essentially, ETS regulations at the moment
are not favouring that coal move that is, as we understand it
from talking to industry, required.
Q134 Joan Walley: I would like to
ask the Employers' Federation first of all and then the TUC just
for your summary of the broad reaction and responses so far there
have been to Phase 1 from different companies from different sectors.
Mr Rodgers: I can speak, I am
afraid, only for the steel sector. Broadly, on Phase 1 our allocation
in the UK has been more or less what we would have expected it
to be. It allows us to produce the volume of steel that we expect
to produce during the three-year period. In other EU Member States
it has to be said that some of our competitors have received very
generous allowances and have had allowances available to trade
disproportionate to what they are intending to produce. I am afraid
I cannot really speak for any other particular sector.
Q135 Joan Walley: And your colleague?
Mr Radley: In terms of the broad
impact on manufacturing in terms of competitiveness and also emissions,
I think in some ways it is hard to make a definitive statement
because we are still at very early days. If you look, for example,
at the Climate Change Levy it was several years down the line
before we had definitive evidence of how well it was working.
What is clear is that it is very difficult to disentangle the
impact of the Emissions Trading Scheme from other factors which
have been increasing the energy price. It differs very much from
company to company, but many manufacturers have seen over the
last couple of years an increase in their energy bill of around
about 80%. Again, it is very hard to pin it down but we would
say that around a fifth of that was probably due to emissions
trading and the majority of the rest of it due to problems in
the gas market. I think one thing you can say is that it has contributed
to the squeeze on profitability in manufacturing. If you look
at the figures of net rates of return on capital employed, it
is at its lowest level for 14 years. We are back to the levels
of the middle of 1992. I think the other factor, which is again
difficult to disentangle, is that we saw issues last winter of
large increases in prices and concerns over supply. We saw a demand-side
response and certainly some companies were limiting output or
transferring temporarily some of their production elsewhere. That
clearly had a knock-on impact on emissions as well. It is quite
hard to disentangle what has been happening on emissions trading
from other factors in the energy market recently.
Q136 Joan Walley: But presumably
if there is going to be a consensus on the way forward to tackle
global emissions, it is going to be really important to disentangle
these different issues, whether or not it is the failure of the
rest of Europe to liberalise energy supplies or whether it is
competition from other sectors within Europe or competition from
other sectors outside of Europe as far as British manufacturing
is concerned. Presumably in the work that you are doing you are
working with different companies and sectors to have a means of
doing this disentangling so that people can actually concentrate
on how we go forward on the route map for carbon emissions reductions.
Mr Radley: Absolutely, and the
one factor I would add to the list—and my colleague has
already mentioned about the fact that many other countries in
the European Union have been over-allocated in the first phase
of emissions trading—is I think we are extremely concerned
at some of the national allocation plans that are being put forward
for Phase 2 at the moment. We share a lot of the Carbon Trust's
analysis that it is only the UK, Italy and Spain that are actually
developing credible plans. That concerns us, one, because we want
emissions trading to be effective and we think that if only a
minority of countries are developing credible plans, that will
ultimately undermine it and, two, we are very concerned about
the competitiveness impact.
Q137 Joan Walley: I want to ask the
TUC the same question about the broad response from different
companies in different sectors.
Mr Pearson: I think we would share
the view of the EEF on the balance between the impact of electricity
prices generally and the particular impact of carbon. There is
a DTI study—and you have probably seen it—which I
found late last week. It is called EU ETS Phase 2 Over-Arching
Partial Regulatory Impact Assessment and that confirms that
energy prices generally have gone up by around 75%, of which maybe
a quarter is attributable to carbon price ETS effects and the
rest is energy market issues.
Mr Noon: It is certainly true
that in terms of the balance of views in the unions part of the
TUC, those who are involved in industries which are high users
of energy and electricity, like steel for instance, would very
much echo the comments made earlier. There has been profound concern
about the implications for their industries. Again it is quite
difficult to disentangle which of that is caused by ETS and which
is caused by other factors in high energy prices, but together
it has caused huge pressure on the competitive position of those
UK industries. In other sectors, other areas like my own where
we are very much involved in the electricity supply industry,
we can very much more strongly see the case for ETS and certainly
unions looking at it on environmental grounds predominantly concede
that case. At the TUC Congress this year there were motions on
energy prices and a very strong feeling coming from a number of
affiliates that in Europe there was not a level playing field
and that British industry was at a competitive disadvantage.
Q138 Joan Walley: Can I ask one final
question in terms of the make-up of the Trade Union Sustainable
Development Advisory Committee. I was interested to see which
unions make up the membership of it. Given the way in which the
Carbon Trust has highlighted the sector of steel, particularly,
as high energy intensive users and also ceramics, I wondered why
it is that Community is not down there as a member of that advisory
committee if you are going to link up all of these different issues,
and there is a particular issue there, is there not, because of
the high energy intensive use of the ceramics industry?
Mr Noon: I think there must be
something wrong with the list, because Community play a big part
in TUSDAC; they are very much involved in it.
Q139 Dr Turner: What do you think
the impacts of the ETS on carbon emissions of UK manufacturing
have been? Do you think it has had a significant effect? I suspect
some profitability maybe and competitiveness, but has it affected
carbon emissions?
Mr Pearson: I think it has made
companies very aware of carbon pricing and carbon emissions management.
I think it is too early to say how much carbon has been driven
out of the system by the Emissions Trading Scheme itself, but
there is plenty of anecdotal evidence. We have been involved in
a project with Corus looking at ways of driving forward energy
efficiency in a number of plants. There have been some very interesting
case studies. We have had a grant from the Carbon Trust, who encourage
joint worker management participation in energy saving initiatives
in companies like Corus. There are very, interesting ways in which
they are now becoming acutely alert to the options of driving
down energy costs, and this is due to the ETS but perhaps slightly
more indirectly in some of the sites.
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