Memorandum submitted by the Chemical Industries Association (RCC07)
The
Chemical Industries Association (CIA) Climate Change Agreement (CCA) covers
around 300 sites in a sector which, in total, has 190,000 employees across
every region of the UK. The sector is one of the UK's most important industrial
sectors, accounting for 11% of manufacturing gross value added and is the only
major sector to maintain a significant positive trade balance, typically
registering a surplus of £5bn annually.
The chemical industry faces global competition with UK assets
predominantly owned by companies that are headquartered overseas.
The
industry converts both mineral and plant based raw materials into key
intermediates for use by other manufacturing sectors as well as its own final
products for households, ranging from paints to detergents, fragrances to
pharmaceuticals. We buy our raw materials and sell our bulk products at global
prices with energy representing a high proportion of the conversion cost. As well as being major consumers of both gas
and electricity for heating and power, our members use gas and oil as
feedstocks - for some companies energy represents 30% or more of their total
costs.
As
we are both energy intensive and exposed to international competition, the
impact of the Climate Change Levy (CCL) on our business could have been
significant, had the CCA commitments not provided a means for securing
relief. Under the CCAs we have a good
track record for improving our performance while the use of relative targets
has ensured there is no disadvantage to production growth it is on an energy
efficient basis. Unfortunately,
overlaps and duplication have arisen with other instruments eg: the EU
Emissions Trading Scheme (EU ETS).
After
the current CCAs run their course, we see a continuing role for a CCA-type
instrument suited to energy intensive sites which fall below EU ETS coverage
which, unlike the proposed Carbon Reduction Commitment (CRC), qualifies them
for relief from the energy tax (currently the CCL) as provided for by the
Energy Products Directive. While
effectively targeting continued improvements in performance, it is important
that this instrument:
· Minimizes
competitive impacts;
· Does not
incentivize displacement of activity to countries which are not carbon
constrained;
· Avoids
administrative complexity arising from overlaps or coexistence with other
instruments on the same site;
· Ensures that
operators receive a single and predictable carbon price signal.
Overall
comments on the contribution of
the Climate Change Levy and Agreements to efficiency improvements
There should be greater recognition that the CCAs are a success story.
In the chemical industry the CCAs have further built on our already good
record for energy efficiency improvement.
Over 1990-1998,
the sector's voluntary energy efficiency agreement with DETR produced an 18%
efficiency improvement and, since then the sector's CCA has contributed 20%: in
total this is a 34% improvement from 1990 to the 2006.
We firmly believe that the CCAs that have raised awareness
and generated beyond business as usual improvements both through the
challenging but achievable targets that have been negotiated but also through
instilling a greater ethos of measurement to manage to improve. Top level involvement has been
stimulated through the requirement to implement the qualitative requirements
(an energy policy and plan) and the need, in many companies, for board level
sanction for emissions trading decisions.
We believe that increased awareness is being sustained because:
- Companies
are required to maintain their CCAs and report progress: this includes
continuing to meeting the qualitative requirements and an obligation to review
targets every 4 years - in the 2004 review chemical sector 2010 targets were tightened
by an average of 4%.
- Our
large companies and many of our SMEs include the price UK Emissions Trading
Scheme (UKETS) allowances in their investment and other business
decisions.
There are a number of findings in the National Audit Office
(NAO) report on the CCL and CCAs which we would like to comment on:
- Business
is divided over the effectiveness of the CCAs - this is credible in the
context of many targets being imposed "top-down". Whereas CCA targets in the most intensive sectors, like chemicals,
are developed on a "bottom-up" basis according to what is challenging and
achievable at site level, many of the less intensive sector's targets have been
set on a "top-down" basis in which all sites commit to an average sector
improvement. Clearly, a top-down
approach will be tough on some and easier for others and will therefore appear
less meaningful.
- DEFRA's
latest modelling suggests that CCAs have contributed less emissions reductions
than originally estimated. This is
on the basis that business as usual
improvements have increased over original quantifications, although NAO
recognises that the results of such econometric modelling are subject to a high
degree of uncertainty. While there is
no doubt that the more competitive global environment together with energy
price rises have helped to drive increased efficiency, it would be
counterproductive to vary climate change commitments with every change in
business as usual as this would create administrative burdens and uncertainty.
What matters is that targets are met and that any unexpected sustainable
overachievements are factored into the next CCA target review, planned for
2008. It should be noted that high
energy prices also have a negative impact and, at the 2006 milestone, led to
lower throughput, and reduced contributions from combined heat and power -
symptoms which, together with increased requirements for environmental
abatement, were anticipated to act as a drag on our efficiency in the 2004
review.
- The announcement of CCL resulted
in businesses making energy efficiency improvements - we believe that most
of the improvements have taken place in the CCAs. This is because we do not believe that CCL has been at sufficient
levels to drive improvements outside the CCAs of most non-intensive
organisations whereas energy costs are relatively insignificant to the cost
base. The study by Cambridge
Econometrics NAO cite, which attempts to quantify the CCL announcement effect,
appears to place a heavy caveat on its findings when it records that how far
the observed fall in energy consumption is attributable to an announcement
effect or a rise in temperatures is a matter of "econometric judgement". In relation to the Ineos Chlor case study
cited as evidence of the CCL announcement effect it should be noted that the
intention to negotiate agreements for energy intensive sectors was also part of
this announcement and that Ineos Chlor are CCA participants whose improvements
have also been attributed to the chemical sector CCA. Other anecdotal evidence, including that from the Carbon Trust's
experience, CBI surveys, and the NAO's survey, support the view that most
improvements have taken place in the energy intensive sectors covered by the
CCAs.
Please find below our comments on the issues set out in
the EAC's call for evidence.
1. Is it right for the Levy and Agreements to target energy use, or should
they be reformed to target carbon emissions directly? If so, how should they be
changed?
It
is important that any future CCL changes take care to ensure that there is
continuity in regulatory incentives which have driven long term investments. CCL is the foundation on which several
Government incentivisation programmes are built, eg: exemptions for Combined
Heat and Power Quality Assurance (CHPQA) and renewable source electricity. While
we do not therefore support radical change, we believe that the efficacy of the
CCL would be enhanced if it were developed to reflect carbon emissions rather
than calorific value. This would then be consistent with the need to make a
transition to a low carbon economy.
However, if this change is made, it is imperative that equivalent
incentivisation programmes be put in place to replace those founded upon CCL.
The
continuation of access to CCL relief is
essential to sustaining the international competitiveness of intensive
businesses in the chemicals sector - for some of our most intensive sites,
energy accounts for more than 30% of total costs. We therefore see a continuing role for CCAs. While CCAs already provide incentives to use
low carbon fuels through their link to the UKETS, we agree it would be sensible
to make a full move to carbon based targets.
However, we see a continuing role for relative targets as this approach
directly incentivises reductions in the carbon footprint of products - until
industry elsewhere becomes carbon constrained, absolute targets at site level
risk driving carbon intensive production to potentially less efficient
locations.
We
support the Government's decision to let the current CCAs run their full
course, ie: to the 2010 target, and
that CCL continues until March 2013 as this gives time to plan their successor. However, we are concerned that formal
consultation on the future of the CCAs is being delayed until 2008. Energy intensive sectors like chemicals have
long asset life cycles so it is important to have certainty to inform on long
term planning decisions. We would therefore welcome an early indication from Government
on the future of CCL and CCAs.
2. With the advent of UK-wide carbon budgets from 2008 (proposed
under the draft Climate Change Bill), how valuable is the focus of the CCL and
CCA on the efficiency with which business consumes energy? Would it be better
to have an instrument which enforced absolute caps in energy use (or CO2
emissions)?
Part
of the success of the CCAs has been due to their use of relative targets which
ensure that improved energy efficiency is achieved without imposing a growth penalty. We see a continuing role for relative
targets as this approach directly incentivises reductions in the carbon
footprint of products - until industry elsewhere becomes carbon constrained, absolute
targets risk displacing carbon intensive production to potentially less
efficient locations. Indeed, carbon efficiency is becoming more prominent in the
Commission's review of the ETS post-2012. EU ETS review discussions are currently
signalling that benchmarks will be used to maintain free allocations and
minimise competitive impacts - this interest is allied to a recognition that
this approach has the added benefit of giving a performance (energy efficiency)
signal.
3. How well do the Levy and Agreements fit together with other existing and
proposed climate change policies, and what can be done to ensure maximum impact
from complementary policies with minimum administrative burden and overlap?
There
are too many economic instruments and carbon price signals per company.
We estimate that in combination, CCL, the Renewables
Obligation and the EU ETS have added around 20% to the cost of electricity in our sector as this includes the
full CO2 cost pass through of the EU ETS (this estimate is relates
to the period before the fall in the price of Phase 1 EU allowances which will
be shortly be reversed with the start of Phase 2). This means that electricity users are paying for the related
carbon emissions more than once - this is particularly impacting our
competitiveness with non-EU producing regions.
The
introduction of EU ETS has also added to complexities and administrative
burdens as sites now have to participate in two emissions trading schemes and
overlaps in scheme coverage produce the need for a double counting mechanism.
To minimise overlap, Government should consider extending exemption from CCL to
EU ETS participants to reduce the need to participate in both EU ETS and CCAs. Now that EU ETS is in place we
believe that the pass through of full CO2 costs to electricity
prices provides sufficient incentive for sites in energy intensive sectors to
improve their use of this energy source. Government should resist any drive for
a CCA successor to target improvements in the end-use of electricity on
intensive EU ETS sites. Small
emitters should be excluded from the EU ETS because their participation is not
cost effective; they would be better covered by equivalent schemes with lower
administrative burdens like the CCAs.
Coverage of sites by IPPC, CCAs and EU ETS leads to multiple
CO2 emissions reporting requirements and frustrations arise from
each scheme using different CO2 conversion factors. This needs to be rationalised as part of the
review of the EU ETS and CCAs post-2012; change prior to that would bring a
burden as systems are now established for the current CCAs.
4. Businesses are able to use carbon trading to meet their targets under the
Climate Change Agreements. What have been the impacts of trading so far? Should
trading be allowed in this way, or how should it be controlled?
UKETS has provided significant early learning benefits and has
made some contribution to CCA overachievements. We believe trading to meet CCA targets should be allowed because
UKETS is integral to the scheme.
Through the CCAs, UKETS is the first cross manufacturing sector
emissions trading scheme in the world.
CCA participants in UKETS
have benefited from early learning and in coming to the EU ETS many already understood
how to trade, how to use a registry, and had established relations with various
brokers. Due to this early experience,
chemical companies have included the price of UKETS allowances in their
business decisions and this has also lead them to include the price of EU ETS
allowances when the scheme started.
Participation in UKETS has helped to incentivise overachievements against
CCA targets although, owing to the oversupply of allowances, these incentives
have been relatively weak. A third of
chemical sector participants have also traded to meet compliance at each
milestone: despite low allowance prices, trading costs have added to awareness
effects at top level within companies where trading decisions are sanctioned.
Low prices have arisen in the context of UKETS being the original learning by
doing scheme; we note there have been similar problems in Phase 1 of EU ETS -
it is only from experience that these issues can be improved.
By
definition, emissions trading mechanisms work by trading to meet
compliance. Trading provides a flexible
mechanism which allows emissions across businesses to be secured at least cost
while ensuring that overall environmental objectives are met. UKETS is integral to the CCAs and they were
signed on the basis that there was provision for such trading. It is therefore entirely legitimate for a
business to secure continued CCL relief by trading to meet CCA. Indeed, the EU Energy Products Directive
provides for relief from such energy taxes to be provided to intensive
businesses participating in trading schemes.
5. What have been the economic impacts of the CCL and CCA on the
organisations subject to them, and the wider UK economy?
The cost impacts of CCL on our
members have generally been muted as most pay after CCA relief at
80%. However, depending on the fuel and
its current price, unrelieved CCL represents 10% to 20% of energy costs. Because our most intensive companies' energy
costs can exceed 30% of their total costs, the loss of relief therefore
represents a significant sanction.
Because of set-up costs and ongoing administrative
requirements, CCA companies tend not to find CCA participation worth management
time if annual CCL savings are below £10,000 p.a. The administrative requirements are therefore not insignificant
and can be complex as they comprise:
- CCA
performance monitoring and reporting;
- annual
checks on PP4 eligibility form including the 90/10 rule;
- maintaining
claims for CCL on each account from each energy supplier with reviews at
minimum on an annual frequency;
- participating
in UKETS including the registry, dealing with trader/brokers and trading
agreements, and any third party verification of overachievements.
To
understand resource requirements we undertook a case study of a chemical sector
SME. The CCA facility in question is a
speciality chemicals company engaged in manufacture by batch process. The company estimates that it spends 16
man-days p.a. on administrative requirements for CCAs at a cost of £7,000 p.a
These
figures demonstrate that CCA costs are not insignificant. However, they are below the burdens imposed
by the EU ETS which the SME is also subject to although its annual emissions
are below 25kCO2 p.a. The
company estimates that, of the 16 man-day spent on its CCA, 13 man-days are on
monitoring and reporting that is also used for EU ETS. But there are an additional 9.5 man-days
(cost £3,500) which are EU ETS only and
relate to permitting. In addition, the
fees for the permit, permit variations and verification total £1,800 p.a. It is clear that coverage by EU ETS adds
significantly to administrative burdens and that, in this respect, the lighter
touch of CCAs is a more appropriate instrument for small emitters in intensive
sectors.
6. Should the Climate Change Agreements be reformed in any way? For
instance, should the Agreements be simplified, or the sectoral targets made
more stringent?
It
would be sensible to make a full move to carbon based targets, reduce overlaps
with other instruments and make CCAs and other instruments in the policy mix
more consistent (see also answers to questions 1, 2 and 3).
Simplifications
should include the removal of requirements for third party verification to
generate emissions allowances from CCA overachievements. This requirement makes individual
verification of small overachievements, eg: by SMEs, uneconomic. Instead, allocations should be made based
on self-certified data, though this should be backed by an increased number of
sample audits. This would be consistent
with the self-certification principle included in the Government's CRC
proposals. We would also favour some
relaxation in the 90/10 rule as this bars a number of our sites from including
all their activities under a CCA and thereby taking a holistic approach to
targeting efficiency improvements.
The
current CCAs already include provision to review targets every four years to
take account of changes in circumstances, eg: new technological
developments. The review conducted in
2004 strengthened the chemical sector relative energy target for 2010 by 4% and
this greatly reduced the overachievement at the 2006 milestone. The Government has confirmed that next
review set in the agreements, for 2008, will go ahead as planned. With reference to the final bullet in paragraph 3.32 of the NAO report, it is clearly
correct that emissions allowances built up from overachievements in previous
milestones should not be factored into the review. This is because, under the principles of emissions trading, these
form part of the payback for the improvement measures in question. It is also entirely correct, of course, that
any unexpected, but sustainable
overachievements are factored into the next CCA target review.
We
would support the new, independent Climate Change Committee advising Government
on the review to ensure the right balance is struck between contributions from
early starters in CCA sectors and other sectors of the
UK economy, where there may be more cost effective potential.
7. What are the main barriers to accelerating energy efficiency in the
business sector? How can these be overcome?
In the
chemical sector, an acceleration in energy efficiency will require significant
process change / plant replacement or the development and innovation of step
change technologies. This is because
the sector is an early starter in improving the energy efficiency of its
existing assets and much of the "low hanging fruit" has been addressed. Over 1990-1998, the sector's voluntary energy efficiency agreement
with DETR produced an 18% efficiency improvement and, since then the sector's
CCA has contributed 20%: in total this is a 34% improvement from 1990 to 2006.
Economic barriers
therefore include availability of cost effective energy efficiency projects,
capital to fund them, and asset life cycles.
Plant supporting our most energy intensive activities tends to
have long life cycles (eg: ethylene crackers, where equipment can be
continuously upgraded and refurbished within a framework laid down 20 or more
years ago). While market based instruments like emissions trading can help to
improve the payback on complete replacement, it would need an unsustainably
high carbon price to provide sufficient incentive to replace plant mid-way
through its life. What's more, a multilateral approach to emissions trading is a
pre-requisite for a high carbon price as, until industry elsewhere
becomes carbon constrained, this would risk displacing carbon intensive
production to potentially less efficient locations.
There are
also barriers to innovation. In the
above context, as Nick Stern recognizes, additional sources of
coordination and support are needed to work alongside carbon markets to ensure
the development and innovation of the step-change technologies that will be
needed to move us towards our ambitious long term climate change goals. In this respect we feel more needs to be done
to support commercialisation and demonstration of step change technologies.
Finally, uncertainty about the future climate change policy mix
also represents a barrier to improving energy efficiency. In
the longer term it is difficult to anticipate additional changes as a result of
climate change policy. There is
considerable uncertainty about the future shape of EU ETS and CCAs post-2012
and whether these systems will be part of a multilateral or unilateral
framework for addressing climate change.
This uncertainty is inhibiting investment decisions
8. Products which can increase energy efficiency (such as insulating glass
for windows) can be energy-intensive to manufacture. Policies such as the CCL
and CCA can penalise manufacturers for making such products. How big an issue
is this, and what, if anything, should be done about it?
Chemical sector products also provide some of the solutions to
climate change, eg: materials for wind turbine blades, silicon for photovoltaic
cells, fuel cells, insulation materials for housing, low weight materials for
cars and other applications, synthetic rubber for low rolling resistance tyres
and low temperature detergents.
It would be very complex to recognise the contributions of these
innovations in schemes aimed at improving plant efficiency. A key thing that can be done is to avoid penalising
these technologies by providing for their coverage by relative targets which are consistent
with their realistic carbon intensity - until industry elsewhere becomes carbon
constrained, absolute targets risk displacing such production to potentially
less efficient locations.
9. Alongside the CCL, the Government introduced the Enhanced
Capital Allowances, to further encourage firms to make energy saving
investments. How well is this scheme working? How well does it fit with other
existing or proposed climate change instruments?
The ECA scheme provides information benefits because it helpfully
identifies energy efficient equipment.
Whether the 100% depreciation allowance in the first year is significant
to an energy project depends on the extent to which it comprises eligible
technologies. The Budget 2007 decision
to extend equivalent financial benefits to companies that have not generated a
profit will help to increase the take-up of the scheme and is very much
welcomed.
10. The Levy exempts electricity from renewables, though so far this appears
to have had little impact. Should it play a greater role in incentivising the
growth of renewable electricity, and, if so, how?
Renewable
electricity enjoys sufficient incentives from the combination of Renewables
Obligation Certificates (ROCs) and Levy Exemption Certificates awarded to
relevant schemes. Indeed, the banding
proposal in the Energy White paper will increase the ROCs allocated to
technologies which need higher levels of support to be economic. There is also an incentive from the full
pass-through of EU ETS CO2 costs to electricity prices. There is therefore no need to increase the
incentive from CCL.
2 October 2007
