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UNCORRECTED TRANSCRIPT OF ORAL EVIDENCE To be published as HC 88-ix House of COMMONS MINUTES OF EVIDENCE TAKEN BEFORE ENVIRONMENT, FOOD AND RURAL AFFAIRS COMMITTEE
CLIMATE CHANGE: THE "CITIZEN'S AGENDA"
Wednesday 9 May 2007 MR DAVID VINCENT, MR JAMES WILDE, MR DAVID TIMMS and MR ED MATTHEW Evidence heard in Public Questions 858 - 906
USE OF THE TRANSCRIPT
Oral Evidence Taken before the Environment, Food and Rural Affairs Committee on Wednesday 9 May 2007 Members present Mr Michael Jack, in the Chair Mr David Drew Mr James Gray Patrick Hall Lynne Jones Daniel Kawczynski David Lepper David Taylor Mr Roger Williams ________________ Memoranda submitted by the Carbon Trust and Friends of the Earth
Examination of Witnesses
Witnesses: Mr David Vincent, Technology Director, Mr James Wilde, Head of Strategy, the Carbon Trust; Mr David Timms, Economics Campaigner, Mr Ed Matthew, Senior Campaigner, Friends of the Earth, gave evidence. Q858 Chairman: May I apologise for the slightly delayed start? As you will appreciate, the timing of votes is outwith our control. You are very welcome. We decided that we needed a further, focused session on the subject of so-called green taxation and therefore I am most grateful to you for coming and assisting us in that respect. Before us we have Mr David Vincent, the technology director of the Carbon Trust, assisted by Mr James Wilde, their head of strategy; and Friends of the Earth in the shape of Mr David Timms, the economics campaigner, and Mr Ed Matthew, senior campaigner. Thank you very much indeed for your written evidence. The term "green tax" has become almost a term where, if you say it is a green tax, people say, "I suppose I could just about accept it." It is almost a veneer of respectability over something that people do not particularly like, which is paying tax, but when you go into what constitutes green taxes, or at least what the government categorises as green taxes, you get some interesting answers. Before we talk in a little detail about what the government thinks are green taxes, let me ask you if you could tell us what, in your judgment, distinguishes a green tax from any other kind of tax. Mr Timms: Thank you very much for asking us along today. Obviously there is the government's definition which is now in line with the OECD's definition of green taxes which, as I understand it, is a tax levied on any entity the additional consumption of a unit of which has an environmental impact. It is not just those taxes which were designed to have an environmental impact but those taxes which have been levied, in some cases such as fuel duty, for the better part of a century and which also have an environmental impact. The public has a very different perception and what we would add in terms of the green tax debate would also be those tax incentives or fiscal measures which were perhaps taxes that are nothing to do with the environment or environmental entities which can be altered in order to have an environmental impact, so cutting rates of VAT on energy efficiency measures or perhaps looking at council tax rebates or the work that some local authorities have done in cutting, say, parking charges or increasing them for gas guzzlers. All that comes for us within the terms of the environmental taxes debate as well as debates around a tax shift, so which taxes one would make tax cuts in if one were putting up environmental taxes. Mr Vincent: May I preface my remarks by saying that the Carbon Trust looks at markets and the various instruments which are going to help make those markets transform from high carbon to low carbon. In that context, neither my colleague nor myself are tax experts or environmental tax experts. What we would regard as green taxation is a measure which is going to change behaviours as distinct from raising revenue. We would draw a clear distinction between the two objectives. In terms of the statement the Chancellor made in the summer of 1997 on environmental taxation, it is a measure that helps incentivise the reduction of environmental damage. That is what we would regard as a generic description of environmental taxation and green taxation. Q859 Chairman: Do you think the characteristic of a tax that can call itself green is more to act as a catalyst to move policy in a direction and for the government of the day to flag up, through an economic signal, that this is its preferred direction of travel; or should it be a carefully crafted economic instrument taking into account all the arguments about elasticity which is designed, through its sheer economic force, to change a behaviour or characteristic? Mr Wilde: The Carbon Trust focuses on the business sector. If it is useful, we can bring a lot of analysis from the business sector. We have spent quite a bit of time looking at policy that influences the business and public sector and one component of that is the climate change levy. When you look at the barriers and drivers for energy efficiency across the business sector, they vary. We categorise them as four types. First, financial cost benefit, with the additional investment costs versus the energy savings you will make. Second, hidden costs, so transition costs associated with having some down time in your kit or having to spend some time to work out what to put in place. Thirdly, market failures. Things like landlord/tenant divide and metering are specific examples that are very prevalent in the business sector. Fourthly, materiality, awareness and behavioural effects are quite key. As you move across the business sector, the barriers and drivers vary quite significantly. In the energy intensive part of the market where they are covered by the EU Emissions Trading Scheme, the financial cost benefit is a key driver. Energy is five per cent plus of their cost base. There, a tax or putting a price on carbon like the EU ETS can drive behaviour due to elasticity, but when one looks at the less energy intensive parts of the market the elasticity is incredibly low, 0.1, so a ten per cent increase in energy prices through the climate change levy would drive a one per cent reduction in demand. The climate change levy is not necessarily hitting the key barriers and drivers for that part of the market which are far more about materiality, behavioural effects, market failures and also there are key drivers like CSR and the way consumers, investors and employees are looking at this. The tax in itself is not necessarily going to drive the required change in other policy mechanisms that are required. Q860 Chairman: One might argue that the kind of change we have seen in hydrocarbon pricing of itself, the good as opposed to the tax, may have had more effect in concentrating people's minds because of the difference, if you like, in the change in price. One thing has always fascinated me. When green taxation was being discussed, there was quite a debate as to whether you should have a carbon tax or whether you should have something else, another kind of tax that was not related directly to carbon emission, for example. Can you help me to understand why, for example, in the case of the climate change levy, the government has backed away from having a pure carbon tax to something which was affecting the behaviour of business over its consumption of energy? Mr Vincent: There is not a direct relationship between the carbon content of the energy kilowatt hour delivered and the ratios of the levy on electricity, gas, coal, et cetera. If you take the view that that levy is driving behaviour simply because it is there, it becomes perhaps less important to make that direct arithmetical connection because the initial aim, as we understand it, of that levy is to send a signal in an attempt to change behaviours and focus business and company management on something which, in the past, they have only done not in a systematic way as a controllable cost; it is always something that has eluded management in the impact that energy efficiency can have on their bottom line. It has either not been a credible proposition to them or it has for some reason not been high up on their investment agendas. The aim in introducing the levy in 2001 was to send a directional signal rather than get the carbon arithmetic correct and in a proportionate ratio. Mr Timms: From Friends of the Earth's point of view, we think it is important not to get too buried in setting environmental taxes based on the theory of environmental taxes, looking at aggregate damage curves and marginal cost curves. We are very much of the opinion that environmental taxes are a very useful instrument but you should be led to quite a large degree by looking at the outcome in terms of moving the behaviour in the right direction. We would not want to get too bogged down into whether tax X or tax Y reflects a notional price for carbon or not. On the specific issue of the climate change levy, we think this is a very good environmental tax. The study that Cambridge Econometrics did of it shows that it has been quite successful in terms of the measure that counts, which is the reduction of carbon emissions. As a package, we think it is a very good package and one that government should repeat, the combination of a tax, the creation of the Carbon Trust and the work that that does plus part of the green tax shift so a reduction in national insurance contributions, so it has that package together of the information, the assistance, the green tax switch, which is very good. Whether it accurately reflects the carbon content of those fuels or not is something that can be tweaked. There is an argument as to the extent to which environmental taxes are levied on things which are proxies for something else, so fuel duty is really acting as a proxy for the carbon content of that fuel. I think that is a debate of the detail, to be honest. Q861 David Taylor: I do not know whether I ought to declare an interest as a member of Friends of the Earth but I will do it anyway. I was interested in what David Timms had to say in his definition and I would like to put to him what Mr Wilde said and I will try and paraphrase accurately. It is that environmental taxes that are raised on activities which are relatively inelastic or goods that are relatively inelastic are not going to achieve behavioural change and therefore the tax itself will be seen as a revenue gatherer rather than a behaviour alterer. Would you incorporate what Mr Wilde said in that way? Mr Timms: I do not think it is illegitimate for the government to impose an environmental tax on something which is relatively inelastic. Most of the things we are talking about are relatively inelastic. I am trying to think of something which has very high levels of elasticity which has had a tax imposed on it: something like the Irish experience with plastic bags maybe, where the response was a massive drop off in the use of plastic bags. Mostly we are talking about things that are relatively inelastic. The argument for government is what actions does government take in order to maximise the level of elasticity of the behaviour that will result from the imposition of that tax and whether that is through ---- Q862 David Taylor: You have to ensure the existence of substitute activities. Mr Timms: You could. The environmental tax could just drop off your level of consumption of the thing that you are concerned with, or you could be looking at encouraging people to switch to a more environmental alternative. Unleaded petrol is probably a really good example of this. We had a very small tax differential which led to an enormous switch in behaviour. Why would somebody not put unleaded petrol in their car if they possibly could? You had the presentation of two very close alternatives. When you are looking at something like air travel where an alternative is much less easily available, you are going to have much lower elasticities, especially for business travellers who are able to pay very easily. Q863 David Taylor: You are reasonably positive about the government's track record in terms of environmental taxation in what you have to say. Mr Timms: Only on the climate change levy. Q864 David Taylor: When we look at the revenue that the government is raising from green taxes in the first eight years of our presence in this place, it has risen by about 30 per cent in cash terms but, as a proportion of taxation take, it is down from 9.4 per cent to about 7.7 per cent. I am sure you will be familiar with those figures. Why do you feel that we have an avowedly green taxation government? The statements the Chancellor made in one of his first Budgets referred to that. Why, despite that, are we seeing this fall in the proportion of tax taken by the government's definition of "green taxes"? Mr Timms: I think you are right to characterise the trajectory of the taxes while the government has been in power. They peaked, I believe, in real terms and as a proportion of overall taxes and as a proportion of GDP in about 1999/2000. Quite literally, the only reason for that is the abandonment of the fuel duty escalator in late 1999 and since then the failure to return to it or to significantly upgrade fuel duty above inflation. That literally is the reason why the taxes have dropped. From our point of view, the government came in with a very strong initial statement on environmental taxation in 1997. It was pithy, short and to the point and we liked it very much. There was a flurry of activity and in the 1999 Budget you saw some new taxes, the climate change levy, and the aggregates levy. That was the key for us and we identified it when we did some work recently on Gordon Brown's record as an environmental Chancellor. That was definitely the one Budget that we would identify as being a strong, green Budget. Q865 David Taylor: And yet it did not withstand blockades at refineries, did it? Mr Timms: The interesting thing about the fuel duty escalator is that it was dropped before the fuel protests which is contrary to the folk memory of it. That had a chilling effect on government from then and what we saw until this last Budget was a very high level of timidity from the Treasury in terms of facing up to the need to increase environmental taxes on polluting activities. Q866 Chairman: Therefore, would you recommend the reimposition of the full rate of VAT on electricity and gas? Mr Timms: For domestic users? No, we would not. Q867 Chairman: Why not? Mr Timms: Because we consider that the implications for fuel poverty are untenable at this point in time. Maybe Ed can come in if you want to go on and talk about our green homes agenda and the integration with tax. What you can do is have a massive impact, both on tackling fuel poverty and on tackling carbon emissions by a very positive agenda on home energy efficiency and the use of things like council tax rebates which, from reading the uncorrected proofs of evidence to this Committee, have been raised a number of times. Why would a government that wanted to persuade the public that climate change is an agenda they want to run with - it will have a positive impact on people's living standards - go to use that when there is an alternative mechanism which can be used? Q868 David Taylor: You referred to the OECD definition of green taxes in your earlier comments. Do all the taxes which this government classify as green comply with that definition, as far as you are aware? Mr Timms: I have not been through every example in the ONS report and tested it. I think they do. Q869 David Taylor: If you need to clarify that at a later date, I am sure you can write to us. Can we move to aviation? The point was made very vigorously in debate within the last two or three days in the chamber that there is no particular link between air passenger duty and carbon emissions from any particular flight. Do you think therefore that invalidates any claim for air passenger duty to be a green tax and reclassifies it as merely £1 billion extra a year or whatever it is that the Chancellor then has access to? Mr Timms: Friends of the Earth thinks that air passenger duty is a perfectly legitimate tool to use to tackle the rising emissions from aviation. Whether it is the perfect design to do that is another matter. Both the Liberal Democrats and the Conservatives have come up with proposals for changing the nature of aviation taxation, both of which have considerable merits to them. Is APD a good example of a green tax used well? No, it is a very poor example of a green tax being used. The increase in the prebudget report on short haul flights which are after all 75 per cent of tickets, I believe, only took it back up to the level it was in 2000. It was a very poor piece of planning and was very poorly solved as well in a prebudget report which did not have anything else in terms of measures to help the public go green. This was a measure which did not show the Treasury being prepared to take the level of courage and action commensurate with the rhetoric which came out of Stern. Q870 David Taylor: APD is a distant cousin of the family of green taxes, is it? It comes to the family dos but it is not really a fully fledged green tax by your definition? Mr Timms: I am not sure I would want to pick up on the metaphor but I think it can be used effectively. The most important thing we have to do is raise the cost of aviation to slow the growth in flights. Air passenger duty can be used very effectively to do that. We would like to see an APD escalator but, yes, there are some very good ideas out there for how more effectively to design the instrument. Q871 David Taylor: If revenue raising taxes are camouflaged under a green cover, do you feel that when the population comes to that conclusion it devalues the whole concept of attempting to change behaviour via genuinely green taxes? Mr Vincent: Because we have been focusing very heavily on a tax measure which is imposed on individuals in order to change behaviours, there would be another way of looking at how one might achieve the outcome of low emissions from air travel. I would like to invite my colleague, with your permission, to say a few words about emissions trading as a potential mechanism for putting an obligation on the airlines. Chairman: Can I restrain you from doing that until we come to it? We will come to it and we would love to hear from you about it. We would be very interested to hear about double counting. Q872 Lynne Jones: Can I ask Mr Timms to enlighten us on the means by which the instruments could be used to make air tax more acceptable or more effective? Also, going back to the fuel escalator, in the Budget the Chancellor announced small increases in fuel duty and was at pains to point out that even with those increases the price of fuel would be 11 per cent less than it was in 1999. That was actually put in the Red Book. Also, there were other changes in vehicle excise duty to encourage more efficient vehicles. Has the government got it right now in terms of taxation of travel by car or should more be done and what? Mr Timms: I certainly think that more needs to be done. On air passenger duty, we have not pinned ourselves to any of the particular reforms because there is a debate going on between the two Opposition parties. We think it is worth looking at the idea of a graduated tax whereby somebody would get their first flight tax free and subsequent flights would be much more heavily taxed. Air passenger duty is not a regressive tax but there is certainly a political issue which has to be addressed around the perception that the impact to price working class people off flights. Q873 Lynne Jones: One idea is that everybody should have a voucher to allow them the equivalent of one trip to Spain or whatever and then they could be tradable in the same way so that poor people who never travel would sell their vouchers. What do you think of that? (The Committee suspended from 6.01pm to 6.12pm for a division in the House) Mr Matthew: We need to take a step back here in terms of transport and taxation and how to deal with that because we know that in the last ten years or so carbon emissions in the UK have gone up by two per cent. The fastest growing area of those emissions is transport. Clearly the government has its package of policies wrong on this. This would include taxation as well. The taxation package clearly needs to change. The taxes in terms of air passenger duty and so forth are peanuts compared with what they need to be to incentivise people not to fly. When it comes to aviation, we have to reduce the amount of flights that are being taken. In terms of surface transport, it is worth reflecting on the fact that the cost of motoring has gone down by eight per cent since 1997. For buses it has gone up by 14 per cent. For rail travel it has gone up by five per cent. In terms of substitution, encouraging people to use alternatives, it is all moving in the wrong direction. Something substantial needs to change here both within the taxation system and also within the regulations and subsidies that we need to put in place to provide real alternatives for people not to use the kinds of transport which are going to lead to high rises in emissions. Patrick Hall: I am stunned by that last comment. What are the alternative modes of transport for travelling abroad, practically? Q874 David Lepper: I noticed Tony Juniper in an interview this week bemoaned the fact that he feels he flies too much on Friends of the Earth business and did not seem to be able to come up with any answer to how to get about without doing that. Mr Matthew: For aviation there are fewer alternatives than there are for domestic surface travel. The reality is that aviation is the fastest growing area of emission rises for transport and we do need to fly less. There are some alternatives for short haul destinations - for instance, via train - but it is a difficult area to find alternatives in. We need the taxation system in place which is going to lead to a reduction in demand for air travel; it is as simple as that. Q875 Patrick Hall: That was not going to be the focus of my question but that is a very British view about alternatives because we are a small island. On the continental scale other countries do not have that alternative. Can I turn to the question I wanted to put which was to do with air passenger duty being acceptable as a general revenue raising measure because I think that is what has been put forward, that it is acceptable as a normal revenue raising measure because it may incidentally and temporarily deter air travel. It is temporary because once people get used to a level of tax they do not recognise it any more, just like the congestion zone charge in London. Why not though clearly try to link air passenger duty - you can call it something else - with something that we have not yet succeeded in doing which is to seriously research possible non-carbon fuel for air travel. A non-carbon kerosene does not exist. It does not look at the moment as if it is a practical possibility but if we research it strongly enough, not just driven by Rolls Royce and the carriers but with some public subsidy and investment as well, paid for by a duty perhaps people would then understand the purpose of it and it would have greater support. It would lead to what we would all want to see which is the possibility of a carbon free fuel. Mr Matthew: There is a principle here which is important, which is that if you are increasing a tax in a certain area, if you are saying that you are going to be using some of that revenue to try and provide alternatives, clearly you are going to be selling that tax much more productively than you otherwise would do. It is being used in a positive way to provide that alternative so that can certainly be a good thing. There is research going on now and I know that Virgin are involved very much in this in terms of looking for alternative fuels for aircraft. It is important to say that it is very early days. It is in principle a support of sustainable biofuels but we also are very much aware from work we have done around the world that this whole area is fraught with risk both in terms of fuel sources which need a very small amount of emissions through to the problem of some fuel sources like palm oil. If you get it from a place which has been deforested and where there have been forest fires, the emission levels can be ten times higher than they could be from a conventional litre of fossil fuel. It is an area for development which needs to be looked at but with an extremely cautious approach to ensure that it really is done in a truly sustainable way which also guarantees that it leads to substantial emissions reductions. Q876 Patrick Hall: Unless we believe that we will never achieve this, surely there is a case for pushing it hard now. Is that not more likely to yield beneficial results than making humanity feel guilty at the thought of using air travel which I see as, frankly, politically naïve and unlikely to be delivered? Mr Timms: We have to be clear that we are not talking about banning air travel. We are talking about levelling off the growth in flights. Q877 Patrick Hall: Especially for middle and lower income groups. Mr Timms: The massive growth in flying has not come from poorer people flying for the first time abroad. It has come from the relatively well off flying multiple times for weekends here, there and all over the place. I see in today's Guardian that flights have grown seven per cent in the last year so we are talking about levelling off the growth. Q878 Chairman: Is that why Easyjet issued a profit warning? Mr Timms: I have not seen that. I think it is something to do with competition. There are going to be some journeys that will not be transferable but 75 per cent of tickets are for short haul flights. Many of those are to neighbouring countries. There is no reason, as far as I can see, why people need to fly from London to Manchester in any kind of numbers and similarly to Brussels or further afield within Europe. We have to be clear about what we mean. To come back to Lynne Jones's point, there is a political problem here about how to sell environmental taxes. The aviation one is a useful one but when we look at some of the polling the public are remarkably in favour of this. Looking at populus and MORI polls, you are constantly finding well over 50 per cent of the population are happy to see environmental taxes which increase the cost of flying and stop them having cheap flights. If you add on to that questions which say, "Would you be prepared to see this if you saw the money spent on other environmental projects?" the figures jump up to well over 70 per cent. It is not politically impossible. I do think there are other mechanisms that have been mentioned which help with the fact that there is a political issue for politicians with this but I do not think it is unable to be sold. Q879 Patrick Hall: Is Friends of the Earth likely to advocate hypothecation or earmarking for scientific research as I have suggested? Mr Timms: We are not generally in favour of hypothecation. Q880 Patrick Hall: Why not? Mr Timms: Because when you are talking about an environmental tax, the objective of an environmental tax is to change behaviour. It is very difficult to tell what level of tax you are going to end up with. Price elasticity is notoriously difficult to predict. There is no guarantee that you can say, for example, "We want to spend a certain amount of money on providing bus services in a certain area and we are going to raise that through a hypothecated environmental tax." There is no guarantee that the level of tax you are going to raise from the environmental tax is the right amount of money to pay for ---- Q881 Chairman: Why does the question of hypothecation or compulsory offset have to be the province of the government to decide? Your analysis says that it is government that decides what to do with the hypothecated money. If you were looking at a model that involved a citizen, you might move to a mechanism similar to the lottery where, with a compulsory offset scheme for the carbon that was incurred for your particular air journey that went into a pot which people could bid against for carbon saving projects. The citizen would see immediately that they were funding a flexible approach to reducing carbon emissions by a variety of perhaps domestic based schemes, but there would be, if you like, a one for one arrangement that would remove the danger of hypothecation about the sustainability of funding because, when the pot ran out, it ran out. Mr Timms: I have not heard that proposal before so you will forgive me if I do not feel empowered to make up Friends of the Earth's response on the hoof. Q882 Chairman: You are not intuitively opposed to a mechanism that might involve a citizen in some degree of circularity, where it would be entirely clear that the money that the were offsetting their carbon for the journey was actually going to do something to assist, for example, domestically in achieving your objective of improved energy saving techniques at the domestic level. Mr Timms: We need to see a very high degree of political linkage in order to win the argument with the public. Whether that is a degree of formal hypothecation or the kind of model you have talked about I could not say now. We need to see the public won over by knowing that government is doing something other than taxing them as a strategy for tackling climate change. The narrative that we wanted to put to Gordon Brown was yes, environmental taxes on polluting activities have to rise in order to reduce the demand for these but government will also be doing these things to help make it cheaper and easier for you to go green. Q883 Lynne Jones: Is that not hypothecation? Why have you just said you are opposed to hypothecation? That is what people want. "If I am paying more for air travel, I want to see it invested in rail travel so I can go to Manchester by train cheaper than I can fly" or, "I can travel to London cheaper than by taking my car." Mr Timms: I think the problem is there is legal hypothecation where the money has to be spent for that thing and nothing else, and that money clearly has to be spent. I am not arguing that we do not need to spend an enormous amount. Q884 Lynne Jones: I can understand you saying that that might excuse the Treasury from spending other money, it should not exclude other expenditure to achieve that objective, but I still do not understand your logic in saying that you are not in favour of some kind of hypothecation. Mr Timms: I think there is a big difference here between saying we want to see a massive investment in these things - buses, rail travel, energy efficiency, grants for microgeneration, et cetera et cetera - and we also want to see a raising of the level of environmental taxes on these things, but I think Friends of the Earth is not in favour of saying that there is a legal hypothecation for the money from one to go to the other. There are other places that we can find money to fund energy efficiency schemes - the road-building programme, for example, or Trident - but there are barriers; so the idea that one tax feeds something else in a legalistic sense, I think, is something that we would not go for. Do we have to link in the public's mind and do we have to do these things regardless of whether we are raising environmental taxes? Were it that the resistance for one of the environmental taxes was so high that the Government could not proceed with it any further, therefore that should feed through to limiting the spending on the positive measures that you outlined, I would say probably it should not. Q885 Chairman: We are going to move on. Mr Wilde, you wanted to come in a little earlier and then Mr Drew. Mr Wilde: I was just going to say on the offsetting point that you mentioned, in a sense a number of providers are already allowing people to offset their carbon emission with flights and with other products that they buy; and businesses have been thinking about becoming carbon neutral increasingly and they often come to us to advise them on that topic and the advice we give them is quite clear. First, they should focus on reducing their own direct emissions, because they can save money by doing that and become environmentally responsible, then they should look at their indirect emissions, but if they are going to offset they need to do it robustly, and there is a series of tests one needs to go through to check that those offsets that someone can buy are robust. There need to be verified, additional reductions over and above business as usual, avoid leakage outside the project that they are investing in, they need to create permanent reductions and they need to avoid double counting; and I guess the issue with what you were talking about there is the double counting one. Strictly speaking, to have a gold standard voluntary emissions reduction, you cannot do it within a Kyoto country. Chairman: I accept that point. The point of double counting I was raising was that if you have aviation in the European Emissions Trading Scheme, that, effectively, is a tax by another name and then to impose upon the user of the service a further tax is an element of double counting, but we will part from that at the moment. Mr Drew. Q886 Mr Drew: Can we look at the issue of personal carbon allowances and emissions trading. How would you as an organisation rank them as against green taxation? I accept that these are not alternatives, but if you had a one-lever policy to pull is green taxation or emissions trading the most appropriate way forward? Mr Wilde: I do not feel educated to talk about the domestic market, but I could talk about the business market, if that is useful. If one is looking across the big business sector, about 20 per cent of the business market is large non-energy intensive organisations, the ones I talked about before where energy is not a material component of their cost base (well under one percent), and there the elasticity is very low and so the tax alone will not prompt change. Buildings use is quite a high proportion of their energy use, so building regulations are quite keen for the new stock, one to two per cent turnover per annum, a key driver. Providing information for businesses - so buildings labelling, asset and operational ratings - is key, but you also find in that part of the market that CSR is a big driver - what investors are thinking about, what employees are driving companies to do and also what consumers are driving companies to do. Q887 Lynne Jones: You mean corporate social responsibility? Mr Wilde: Exactly. There is very little transparency of performance across the market place, so the cap and trade scheme there that levers that CSR driver to increase the transparency of performance and overcome the market failure of poor metering within the market can really help to drive change, and that is something that the Government should--- Q888 Mr Drew: Are you saying that should be done at a voluntary level or has this got to be imposed? Mr Wilde: On a mandatory level. Q889 Mr Drew: Mandatory, and you think businesses are aware of that? Mr Wilde: Yes. Q890 Mr Drew: What about personal? Let us get on to personal carbon allowances. Mr Timms: This is not an area where we have done an enormous amount of work, I have to confess. For us this is a solution that will be, at best, maybe a decade in the future. Our concern over the last few years has been the immediate steps that government can make to start to reduce our carbon emissions, and, obviously, that was the message we took from Stern, that carbon emissions need to start to come down very quickly. I am not going to be able to enlighten you enormously about what we think is the right relationship between the policy instruments. Q891 David Lepper: I think we have already covered, in some respects, some of the things I was going to ask about. You have talked about selling proposals to the public. In the submission from Friends of the Earth, you use a phrase that is often used by politicians "new deal", "a new deal for households", and that links in very nicely with our theme of the Citizens Agenda. You have mentioned in the course of the afternoon a number of schemes both involving taxation and other measures. Could you sum that up for us a bit, give us some idea of what Friends of the Earth's new deal for the citizen in terms of greening the citizen would consist of? Mr Matthew: The principle idea behind the new deal that we are proposing is that clearly there are costs in society for the citizen in order to bring down their emissions, for instance in transportation, but it is quite clear for us that in the area of households, which is responsible for 27 per cent of all emissions, there are significant costs associated with bringing down those emissions; less so for energy efficiency, but even for energy efficiency there is a barrier there of cost. We believe that the Government has a responsibility to make it much cheaper and much easier for citizens to be able to reduce their emissions. We know that there is growing concern out there, there is real willingness, I think, for a lot of people to take action, but cost is one of the principal barriers. We wanted to see from government a quantum leap, if you like, in incentives coming from them to really help bring down the cost of taking action to reduce domestic emissions. We have only just started this work, so we are having to develop it a lot more over the next year, but some of the key opportunities that we see to do this revolve around the following. We saw that in terms of energy efficiency it would be extremely valuable if a fund was set up round about the amount of 1.4 billion through council tax rebates to help drive forward energy efficiency through insulation - loft insulation, cavity wall insulation and so forth. We know through schemes that have been set up in the country, for instance through Braintree Council, have been very successful in this regard by offering £100 back in terms of a council tax rebate to help incentivise the installation of insulation. Given that that is one of the easiest and most effective ways of cutting down emissions, why is not the Government pumping in a large proportion of money to achieve that? We came to the £1.4 billion figure because we calculated that would be the cost of putting cavity wall and loft insulation into the remaining households that do not currently have it. One other area was stamp duty rebates. Q892 Lynne Jones: Would you confine it just to cavity wall, because now British Gas has extended the rebate, I think, up to £400 for solar thermal? Mr Matthew: We certainly would not confine it to cavity wall - that was just an example - and we definitely see a lot of benefits in extending that out further to microgen and other things. Q893 Lynne Jones: A lot of people do not pay council tax because they get a 100 per cent rebate. Mr Matthew: That is absolutely true; so it clearly would not cover everybody. There is a number of different packages that you are going to need to put in place to help bring down domestic emissions; so council tax rebates are going to be one tool in your tool box to help achieve that; stamp duty rebates might well be another. We know from research which has been done at Sheffield University that the six-month period after people move home is one of the most important opportunities for tackling energy efficiency and putting in microgeneration, and so forth. If there was some kind of rebate on stamp duty if you put those measures in place quickly, we think that would be a significant opportunity to help bring down emissions. There are other significant areas as well I think we need to look at: one is about boosting microgeneration as well. We are extremely critical of the Low Carbon Buildings Programme in not being ambitious enough. I think you said in March the grants available for microgeneration in the domestic sector sold out in 75 minutes, and there has been a huge difference in the level of demand out there and the amount of grants available for people to take up and actually install microgeneration, which has been a huge problem. We want to see the Government providing a much bigger incentive, a quantum leap in the amount of money they are making available to boost microgeneration in the domestic sector. We are thinking about billions rather than millions at the moment. In the Budget this year the Chancellor, I think, raised the amount available for the domestic sector by six million pounds. From our point of view we think that is feeble; it needs to be much higher than that. Mr Timms: Can I add something to Lynne Jones' question about the rebates. I think our initial thinking on this was that the £100 would be best applied to cavity wall and loft insulation. I think there are eight million homes that do not have cavity wall insulation and just over six that do not have loft insulation, and that is the model that has already been used in Braintree and we were very keen to take that model - we are certainly not the only people who are calling for this, I know - and get the Chancellor to pay for it, to roll it out nationwide after it being so successful; and those measures have the quickest pay-back times as well. Obviously you are talking about less than two and a half years for the two measures. I think what was crucial about that was the rapidity with which they paid back and I think, interestingly, the Mayor of London's Climate Change Strategy identifies those two particular measures as being the closest things we have to silver bullets in terms of tackling carbon emissions from the home. Q894 Chairman: Can I analyse a little bit the line of argument: because you have moved away from taxes to carrots; and carrots have to be brought from somewhere. Give me a ball park billions worth of expenditure to achieve the objectives you have just outlined - four, five, six, ten? Mr Timms: Let us say you offer £100 for cavity wall insulation, £100 rebate for loft insulation for those homes that do not already have it. If there was no overlap between the two, which I am sure there is going to be an overlap, that is £1.4 billion. Then, I think, if you are looking at a roll-out of something like a stamp duty rebate, and I did have a figure and I cannot remember where it is now, an example that has already been worked out for that, I think you are talking about 500--- Q895 Chairman: Half a million. Mr Timms: Half million. How do you know? There is Owen Lee's study, is there not, which was, I think, just one example that we picked up. You would also be looking at a measure like a cut in the rate of VAT of high environmental level refurbishment as well, and these levels work at different points, so something like the stamp duty rebates would work very well with energy performance certificates when people are selling their houses so that they would see what measures they needed and then the stamp duty rebate would feed in as an incentive on that; whereas the council tax rebate can operate at any time while people are in the property; so they do different jobs. So, adding this stuff up, we are getting near to a kind of two billion level. Why do you ask? Q896 Chairman: Like everything else with tax, it is easy to spend the money, it is more difficult to decide where you are going to raise it and how you are going to do it. It costs, roughly speaking, four billion pounds to take one penny off the basic rate of tax. Unfortunately, we have abolished halfpennies, but the Chancellor could have halved his reduction in the basic rate of tax and achieved your objective. Mr Timms: I think the Institute of Fiscal Studies calculated that had the fuel duty escalator been maintained at, I think, 1999 levels, then the Treasury would be something like four billion pounds better off. Q897 Chairman: I suppose what we are getting at, and I do not want to dwell on it, it comes back to this question of, if you were being bold, you would be the Chancellor from your standpoint who would stand up and say, "I am putting X on because I want to achieve these objectives, and that is where the money is coming from, end of story." Carbon Trust, you want to come in. Mr Vincent: I am wondering whether it might be helpful, Chairman, to put this discussion in a wider perspective and draw in, if you like, the other half of this equation in the market place called the "service providers", the people who are actually going to insulate lofts and fill cavities. One of the drivers, I think, relates to an earlier point that you made, Mr Hall, regarding relating the measure to the purpose. When you look at the fungibility of carbon dioxide savings, wherever you save these savings in the economy they still count towards the environmental benefit. So you might argue from an inefficient use of resources point of view that you would look around for the cheapest tonne of CO2 to save, and that could quite easily be in parts of the domestic sector where cavity wall insulation is a well-known measure, so would be loft insulation, and then you would actually start looking at the mapping of the opportunity in relation to cost. Then you might look at a driver that would be required to stimulate market activity, and that driver might be a tax or a grant or some kind of measure. The first thing the business community is going to want to ask, before they tool up and resource up to meet this demand, is for how long is this measure going to be in existence? One of the risks and uncertainties which the business community faces when it is endeavouring to change or increase production - more cavity filled material, more condensing boilers, or whatever - is if this market stimulation is dependent on a Government incentive or policy measure: is it not just too small, is it going to be only for two or three or four years; whereas what might really be required is to tackle the 24 millions homes that already exist, and the BRE domestic energy fact file will explain to us whereabouts the level of loft insulation is, whereabouts the five billion infill cavities sit. The business community is going to see that as the prize, but it is dependent upon having a government instrument at play to stimulate the activity. They are going to want assuredness that they are not going to be caught halfway through their expansion programme and find they cannot do it because the grant has been stopped. That is quite a serious consideration for businesses who want to contribute towards that green transformation. Q898 Lynne Jones: Picking up on that point. There has been an announcement today that under the Low Carbon Building Programme the maximum grant has been reduced to two and a half thousand, which means that at a stroke the photovoltaics industry is going to be affected. Could you comment on that but, also, why should we be putting taxpayer's money into those kinds of schemes? I would also cite, for example, micro wind generators, which, quite frankly, are a waste of space and it is appalling that the Government is giving any money at all for those kinds of schemes? Do they not need to be very careful about how they target these incentives, and what should be the combination of an upfront grant and other incentives, for example the feed-in tariff that they have in Germany, which is a 20-year programme? What do we need to do in this country to stimulate energy efficiency and the most effective carbon saving and microgeneration measures? Mr Wilde: Energy efficiency is the first point of call and the lowest cost of the carbon reduction opportunities. There is still a case for investing in innovation. Q899 Lynne Jones: There are some things that people will do anyway; so you should not be giving them money to do things that they are going to do? Mr Wilde: Sure, additionality is key, but in terms of the innovation argument and funding the development of new technologies, a lot of those new technologies need to come down a learning curve. To get to a low carbon economy is going to require a series of options of low carbon technologies, and the UK has a choice of which options it should invest in. I think it is clear; there are two important axes the UK needs to look at when making the choice of which ones to support. The first is the carbon prize for the UK domestically and also the cost-effectiveness of the carbon reductions. Does this technology have an opportunity to get down the learning curve? The second is: what is the economic value for the UK? What is the inherent value of this technology across the supply chain and what is our market share of that value across the supply chain? You can do that mapping for every single technology. So, it is clear, when you look at large-scale technologies, where we have done a lot of work, there are technologies where the UK could have a significant economic benefit by them driving down the innovation curve and have a significant carbon prize in the UK and an export market. Off-shore wind is an example where we have got a lot of expertise around the installation side of the market; wave-tidal, where we have got a lot of IP and the leading technology developers in the market place. I think the first key question is: which technology should we support as the UK versus import once they have got down the learning curve. There are other countries that have taken a very significant lead in technology development and the components in the value chain where there is significant inherent value. Q900 Chairman: One of the things that comes out of this line of questioning is coming back to the central point of this bit of the inquiry about behavioural change, in terms also of the point, I think, that witnesses were making, which is almost going for the low-hanging fruit. In other words, where you are going to get the biggest hit for whatever amount of resource you use. What should be the pecking order? We have been talking about resistance, because not every home is insulated perhaps as well as it could be, and yet you have advocated as your number one priority good energy efficiency. What are the barriers to progress and what is the best device to remove the barrier? Mr Wilde: In the business sector, I spoke earlier about the sets of barriers and drivers and how you need an integrated set of policy measures, including building regulations, which force change and product standards, which take poor performing bits of equipment out of the market place. The Energy Performance Commitment that the Government are looking at is a good way of incentivising change as well for the business sector. I think there is a series of policy measures that are required beyond just taxation to really look to overcome the barriers and drivers. One piece of work we are doing that relates to the consumer is really looking at the influence businesses can have. We did an exercise to map UK emissions by consumption in service, and you find that the UK is a net importer of emissions; and so now we are working with companies, not just to look at their own direct emissions, but to look at the carbon embodied in the products that they produce and, therefore, supply chain emissions. We find that two-thirds of consumers want to know what the carbon footprint of the products is that they are buying and two-thirds would also want to buy lower carbon products. We have had a lot of businesses coming to us to say, "We want to look at our supply chain emissions, look for opportunities to reduce them and also inform customers as to what those emissions are." Q901 Chairman: Mr Timms, your body language and demeanour suggested more enthusiasm for carrots than it did for sticks in terms of moving barriers and getting agendas moving forward. How do we hit the low-hanging fruit then? Mr Timms: I am not sure if my body was misleading you. I would say I am more of a carrot man that a stick man. The low-hanging fruit is definitely home energy efficiency, and everybody has recognised this. It is the lowest cost carbon emission reductions that we are really going to get anywhere, apart from voluntary behaviour changes. However, I think there is a danger with a strategy that says: what we do is look at the cost-effectiveness as measures and we do all of the most cost-effective, then we move on as a society to looking at the next least cost-effective and then we move down, because what you will do is you will find yourself getting to 2020 and there are still maybe 500,000 homes that are holding out against a particular energy efficiency measure and you have not got round to developing a renewable energy sector and you do not have homes starting to put in micro-renewables. So, I think there is a risk of having a strategy which just says you move from A to B to C to D and that delivers you 80 per cent cuts in your carbon emissions by 2030. I do not think it will work like that. What that means is that while you do have to have massive investment for a range of mechanisms, and it is not just the incentives for the able-to-pay, it will be the state, in various forms, actually doing this for those that are unable to pay as well, but you do have to start to have mechanisms to roll out, using taxpayers' money, micro-renewables. We see this as being an industry which can play a significant role in the UK. True, some of the sectors and technologies have been monopolised by different countries, but there are others where the UK could have a leading role. Q902 Lynne Jones: Such as? Mr Timms: Tidal, for a start. Q903 Lynne Jones: That is not microgeneration. Mr Timms: No, that is true; you are right there. Certain areas of wind as well, but I think as regards photovoltaics, British industry is really struggling with a local buildings programme. Q904 Lynne Jones: Are we giving too much emphasis to domestic installations of microgeneration and not enough on community generation, which would be much more effective? What we saw in Germany is people are willing to bung a bit of money to have the school or the local community building full of photovoltaics, or a community, a village wind-turbine rather than people having little things all over the place. How could we stimulate investment? The Chancellor has asked Ofgem to look at this and to look at ROCs for individuals, but if people invest in microgeneration, they could have it tax exempt so that, instead of putting money into ISAs, people will be putting it into microgeneration. Mr Timms: I know the Committee has been over to Germany to have a look there, and we have certainly got a colleague in Germany who bought a home which had solar panels on it and sends us emails every now and again saying, "I woke up this morning and my house is making me money", because he is getting 35 pence a kilowatt hour for it, and people here are getting between four and ten pence a kilowatt hour. We certainly think the Government needs to take the measures necessary. Lynne Jones is absolutely right that we have to do something other than just look at people's individual homes and off-shore wind arrays like the London Array - there are levels in between - and things liked the Merton Rule on new developments will start to address that. I have to say, it is not my area of expertise how you are going to roll it out at different levels, but we certainly agree with you that there is a need for it and we can send you some evidence on how we think that might happen, if that might be useful. Q905 Chairman: I do not want to this to get to be a re-run of evidence that we have already taken on a multiplicity of other things. I think the message I have got from you all is that there is no one, single policy instrument in any of the things that we have talked about; it is a question of blending all of the policy instruments, some carrots, a bit of stick, some technology, some behavioural change, some corporate social responsibility - all of those mixed together as appropriate to achieve the task - rather than simply saying: silver bullet, green taxation, everything fixed. I think that is the main message that you have put across and, as you are all nodding, I am going to thank you very much indeed for coming before the Committee this afternoon and thank you for your written submissions. It is all down on the record, but, obviously, if there are further thoughts you have that you wanted to give to us, we are at the stage where this is the last piece of the jigsaw puzzle to go into the report before we draw our final conclusions and produce a draft, so time is short, but, nonetheless, thank you very much indeed for your contribution. We really appreciate it. Mr Vincent: May I come back on that last set of points. Q906 Chairman: Is it a postscript comment? Mr Vincent: It is a very brief one. It is to suggest there should be consistency and complementarity and longevity of that package of measures. Otherwise there will not be the confidence, certainly in the business community, to make that transition. Chairman: If I could respond to that, we have taken evidence on, if you like, the lessons learnt from EEC1, where we are with EEC2 and what is EEC3 going to look like, to coin a phrase about the Energy Efficiency Commitment, and, you are quite right, this question of investment and resources, the training and the skills are points that certainly the Committee have been made aware of. Thank you for emphasising it again. |