Examination of Witnesses (Questions 300-319)
IAN PEARSON
AND MR
NIALL MACKENZIE
12 DECEMBER 2006
Q300 David Howarth: The confusion
is in the CDM JI field you are doing it in equivalence but you
are not with the domestic targets and I cannot really see how
that is coherent.
Ian Pearson: This is because the
CDM project credits are allowed under the EU Emissions Trading
Scheme. There are good reasons why that was built into the scheme
and I do think it provides a helpful international link that is
enabling some companies that need to buy credits in the market
to invest in those credits in developing countries. It is helping
developing countries as well. I went to China and talked to a
number of companies who have been recipients of CDM projects and
it can make a real difference. Again, there are some interesting
policy questions about how the CDM operates for the future and
how it links to environmental standards that are set in individual
countries as well. That could be something the Committee will
want to look at in the future.
Q301 David Howarth: You have talked
a lot about comparing what is proposed with Business As Usual.
The target for tonnes of carbon is not compared to Business As
Usual at all. It is an absolute target. You start with 1990 where
we were emitting 161.5 million tonnes of carbon. You knock off
20% of that and you get to 129 million tonnes of carbon. That
is an absolute target, not compared to how it might go up otherwise.
In the latest pre-Budget report, it says that Phase I of the EU
ETS will reduce carbon dioxide emissions in the UK by around 4.6
million tonnes of carbon below the projected emissions of the
installations covered by the scheme by 2007. That is against Business
As Usual. Is that not going to mislead ordinary readers? Are not
ordinary readers going to think that that means a reduction of
4.6 million tonnes of carbon towards the eventual target of 129;
whereas that is not what is being said, is it, as far as I can
tell? It is against Business As Usual.
Ian Pearson: We have always been
quite clear on the basis on which we have been setting the Phase
II NAPs and the industry has been very clear with regard to the
basis on which we are doing this. It has been based on Business
As Usual projections. The fact that there is a high degree of
acceptance by industry and a high degree of understanding by industry
of the nature of the targets I think is very welcome. I am not
quite sure what the point is that you are getting at.
Q302 David Howarth: Take the eight
million tonnes in Phase II. Is that towards meeting the 129 million
tonne target or not?
Mr Mackenzie: Yes.
Q303 David Howarth: You are saying
that Business As Usual is a level amount of carbon emitted? I
do not think you are doing that.
Ian Pearson: No.
Q304 David Howarth: That is the point.
Business As Usual is very different from the 20% below 1990 levels
target. That is an absolute target. It is not in terms of how
much carbon would be emitted in 2010 given the rate of growth
that we had in 1990. It is an absolute target about 1990 so the
target is 129 million tonnes.
Ian Pearson: Are you talking about
the 2010 target?
Q305 David Howarth: Yes. The real
question is: if you look at that real target as opposed to all
the Business As Usual stuff, in 2004 we were, what, a quarter
of the way there and not doing very well compared to 2010. How
are we doing now and is the government going to come out with
an official assessment of how likely it is that we will meet that
129 million tonne target in 2010 rather than simply talking all
the time about Business As Usual?
Ian Pearson: I think you are confusing
a couple of things here. Our best official estimate at the moment
is that we are on course to achieve CO2 reductions
of 16.2% below 1990 levels. These figures will vary.
Q306 David Howarth: You are six million
tonnes short?
Ian Pearson: We are short of our
20% target at the moment.
Q307 David Howarth: What is the government
going to do to meet that six million tonne target by which you
are short? It includes the eight million which we have already
talked about, does it not?
Ian Pearson: Yes. Let us be clear.
We are not planning through the EU ETS to address this issue prior
to 2010 because we have consulted on the range and we are setting
the NAPs. We have to look at other policy instruments that might
be appropriate that will enable us to achieve our 2010 target.
As I said very openly, the Climate Change Programme Review and
the Energy Review are not the last words on the subject. Our 2010
target is a very challenging one and the fact that high gas prices
have meant more coal has been burnt in the UK in the last two
or three years has certainly made the targets even more challenging,
but we are still looking at what we can do to do more to achieve
our 2010 target.
Q308 David Howarth: Can you give
us an idea of what that might be? In terms of the EU, you have
already talked about very ambitious targets for 2020 but the mechanisms
that are being used now obviously do not seem to have produced
the desired effect. What would you recommend are the lessons learned
from the failure of the existing mechanism to reach the target
for that future period?
Ian Pearson: I do not accept for
one moment that it has been a failure of either UK policies or
the EU ETS. The EU ETS has got off to a good start. There is a
high level of compliance. There have been lessons learned. The
fact that the Phase II NAPs have been allocated on a 10% below
Business As Usual projections is going to ensure greater scarcity
in the scheme for the future. The fact that we are having a review
of the scheme to see how it will operate beyond 2012 gives us
some opportunities for the scheme to do more for the future. All
that is very good and positive news. Similarly, when you look
at the UK's performance in tackling climate change, we are one
of if not the leading country in the world when it comes to taking
action in this area. We were the world's first government to introduce
a climate change levy and climate change agreements and an emissions
trading scheme with the UK ETS. We were the world's first government
to introduce an energy efficiency commitment. Do we need to do
more? Yes, we do need to do more. Certainly we need to do more
if we are going to hit that 20% target for 2010. It is not that
our policies have failed; it is the fact that there is more to
be done here.
Q309 David Howarth: The point is
not that those are bad policies; it is that emissions are rising.
I cannot see how a situation when emissions are rising can be
said to be a success.
Ian Pearson: Our best available
estimates are that we are 16.2% below. We are heading in the direction
of achieving those levels of CO2 reductions. If you
are saying to me, "Have CO2 emissions risen since
1997?", yes, they have slightly. The latest figure is 2.3%.
Overall when you look at greenhouse gas emissions they are significantly
down and they look as if they will be 23 to 25% below 1990 levels
over the Kyoto commitment period. We should bear in mind that,
at the same time, if you go back to 1990, the UK economy has grown
by over 40%. If you go back to 1997, it has grown by about 26%.
We have substantially broken the link between growth and CO2
emissions. Yes, we have more to do in the area but the situation
would be significantly worse if it was not for the range of measures
that we have introduced since 1997.
Q310 Chairman: So that I can be clear
about the contribution that the first phase of the ETS has made,
are you saying that has cut emissions by 4.6 million tonnes?
Ian Pearson: Yes, we are.
Q311 Joan Walley: Taking up the point
about more to do and relating it to the whole issue of competitiveness,
I really want to try and explore that a little bit and also, if
I may, to say how heartened I was to hear you say it matters what
we do in Birmingham, Beijing and Bangalore. Can I add Birstall
to that list as well because I very much hope we will have the
opportunity to discuss that with you in more detail in the not
too distant future. On the competitiveness issue, the manufacturers'
group, the EEF, have said to us that the savings that have been
made so far have been very much the lower hanging cherries, the
easy savings to make. They have really made it clear that if we
are going to make substantial progress on top of what has already
been done we do need to have a step change in the technologies.
Their argument is that the ETS as it stands at the moment would
not necessarily drive any carbon reductions from their processes.
I am wondering what your answer is to that.
Ian Pearson: There is evidence
that the ETS is already at the moment achieving CO2
reductions and I have no doubt that it will continue to do so.
Under Phase II we will see even greater CO2 reductions
as a result of it. When you look at it at an individual company
level, the individual company has a choice. There is a clear incentive
there for them to look at reducing their own emissions and then,
depending on the allocation that they have, being in a position
where they can sell some of their allowances if they have managed
to achieve CO2 reductions and maybe they do not need
all the allowances that they have been allocated; or, if they
are in a situation where they need to buy in allowances, they
can either look to do that through purchasing EU allowances or
through project credits under the Clean Development Mechanism.
There is a range of alternatives. The way the system works at
an individual company level is to give them an incentive. If we
tighten the caps on emissions so that everybody has to do something,
we put companies in a situation where there is a real pressing
need to either do something domestically within their own business
or businesses or to buy credits in the market place. That is where
I think the issue of competitiveness comes in as well, which is
important because the more you tighten the caps on companies and
require them to take action the more potentially all that is going
to not just involve requiring them to achieve CO2 reductions
but it is going to potentially cost them money, either taking
action themselves or by buying allowances. You do need to bear
in mind the economic consequences of taking those sorts of actions
because frankly it does not really do any good if you make life
so difficult for a business in Birstall that it does locate to
Bangalore and emits just as much, if not more, CO2
there. You have just driven it out of the UK. That is why I am
very clear that, when we are looking at the ETS, we do need to
be aware of the competitive position of the European business
and that is one of the factors that will need to be considered
as part of the review as well.
Q312 Joan Walley: I am very pleased
to hear that. If we are going to have to bring about a step change
in the technology, that is going to cost money. I just wonder
if there are any examples of where you are working with companies
specifically to look at how that could be achieved. Have you any
examples of that?
Ian Pearson: There are a number
of good examples where companies have had a look at their carbon
footprint and just become far more efficient as businesses and
produced substantial bottom line savings. As you know, we fund
the Carbon Trust which works with a lot of UK businesses, providing
them with advice on how they can become more energy efficient.
If you look at their website, they have a range of stories about
how they have helped companies not only reduce their carbon footprint
but improve their business performance. There is a lot that can
be done I think in terms of resource efficiency.
Q313 Joan Walley: We have interviewed
and had the Carbon Trust here as witnesses. From my point of view,
I would like to see a lot more being done a lot more quickly,
in a much more focused way with the government working with companies
to see how we can move on to this new cutting edge technology
that is going to be required if we are going to be keeping competitiveness
here. You cannot provide us with any examples where there has
been a close working relationship between government and companies?
Ian Pearson: I can provide you
with a list of case studies of companies that have introduced
new technologies and it has helped reduce their energy bills and
their CO2 emissions if it would be helpful to the Committee.
Q314 Joan Walley: I think it would
be helpful to know how the government is working with firms that
are covered by the EU ETS in order that we can see how ever more
progress is being made.
Ian Pearson: A lot of the companies
that are governed by the EU ETS, by the very nature of things,
are extremely big, sophisticated companies and do not require
government to teach them anything. In fact, there are things that
they can teach us about energy efficiency. There are some relatively
small companies in the EU ETS as well where advice and support
may well be appropriate. The key challenge for us is not with
regard to EU ETS companies; it is the whole range of companies
that are not currently in the EU ETS but could do more to reduce
their CO2 emissions. It is working with those companies
that I see as being probably a bigger priority than working with
those that are currently in the EU ETS.
Q315 Joan Walley: A brief note would
certainly be very helpful. A second response I want to make to
your reply is that that fits in very much with what the TUC have
said to us in evidence. They really believe it is important that
the government should be working with businesses and with trade
unions to help the economy respond to the challenges that we face
with carbon emissions. One of the things that was raised and flagged
up with us was the need to do this through investment in skills
training and in workforce development. I wonder how and when that
is taking place and what input you have into that.
Ian Pearson: I have had a number
of meetings with the trade unions about what more they can do
to help green our work places. Defra provides a limited amount
of project funding at the moment to help this through the trade
unions. I think there is quite a powerful agenda there that could
be developed. I have had meetings with TUSDAC—I cannot remember
what the acronym stands for—a group of interested trade
unions about how we can work together more and utilise the skills
and expertise of their members to encourage companies to do more.
In some cases, companies are extremely willing and up for this
agenda. In other cases, maybe they need some persuasion. Getting
some people in the work place to talk to management about this
can be of assistance and that is one of the things we have been
exploring.
Q316 Joan Walley: Using a constituency
interest, it might well be useful for you to explore the ceramics
industry when you visit. One of the issues that the Carbon Trust
raised in their evidence to us was that some companies might be
more exposed in the UK because they face competition from outside
the EU and perhaps more exposed as well because they have not
made as many cutbacks or as many carbon reductions as we have
in the UK. I wonder how you react to that.
Ian Pearson: We need to be very
well aware of the position of companies that are in the full force
of international competition. The aluminium industry, the steel
industry and ceramics are the areas where competition is intense.
Anything that impacts on the bottom line is a serious consideration
with regard to their competitive position. When it comes to the
design of Phase II, the ETS, we have had discussions with the
ceramic industry about their NAP and we have been able to satisfy
them over some of the concerns they had about it originally. The
key thing for me here is that overall we should not be seeing
the EU ETS as being something that damages Europe's competitive
position. Far from it. The fact that it is helping to deliver
carbon savings and helping to get largely European industries
to a position where they are decarbonising their businesses is
very much to be welcomed. I do here want to stress again though
that the competitive position of UK industry and indeed European
businesses has to be something that is taken into account as part
of the overall review. I do not believe that necessarily doing
the right thing by the environment means that you are doing the
wrong thing for a business. One of the key lessons here is that
doing the right thing by the environment can be very good for
your business in the long term and we are keen to encourage businesses
to see that.
Q317 Joan Walley: Looking to phase
II of the EU ETS, I think you are probably familiar with the three
options that the Carbon Trust have put forward in terms of competition
looking at international, sectoral agreements, the use of border
tax adjustments or a third option which would be to make allocations
proportional to production levels. I just wondered if you had
any views on those three options?
Ian Pearson: The Carbon Trust
has come up with some thoughtful ideas that are part of the debate
that we need to have on the review. I would not want to comment
in detail about the individual options or express a preference
at this stage. It is helpful to have people thinking about different
options for the future. That is what the review needs to look
at.
Q318 Joan Walley: Would you want
to comment on the proposal that has come from the employers which
would remove certain sectors from the EU ETS and then make them
subject to a separate energy efficiency reward and penalty scheme?
Do you think that would have merit?
Ian Pearson: As part of the review
process we will want to contribute fully. As you know, it involves
all EU Member States and I am very encouraged by the Commission's
approach of tackling the review at the moment. We have an open
minded view as a government about the best way forward. The only
thing that we really want to stress is that the review has to
be done in a timely fashion. It has to clearly demonstrate that
the Emissions Trading Scheme is here to stay for the long term
and to give the long term market signals to business that are
required if they are going to take some major investment decisions
in the future. It has to be clearly focused on reducing CO2
emissions. All those are key goals. You have seen our vision for
emissions trading as a document and I think that fairly sets out
our position. Within that there will be a range of Member States
and a range of different organisations that have different views.
We will want to consider all of those but in terms of the vision
and where we are going in the UK I believe we have a very clear
vision of what we want the EU ETS to deliver for the future and
we want to ensure that that can be achieved.
Q319 Chairman: You have mentioned
aviation two or three times. I wanted to be clear as to the basis
on which you think it would best come into the ETS. You said it
was covering all the flights that took off or landed, or was it
both?
Ian Pearson: I personally think
an all flights departing and landing model would be most likely
to achieve the biggest level of CO2 emission reductions.
For that reason I think it is the natural starting point in terms
of a preferred policy position.
| 
