The stringency and value for
money of the CCA system should be increased
45. Certain questions were raised during our inquiry
on the extent to which the Climate Change Agreements were sufficiently
stringent. A key criticism is that CCA targets were too generous
when initially set, have so far been tightened only once since
the system beganin 2004, but before the performance data
on the first milestone period, from 2002-2004, were knownand
that they were still too generous even after this revision. The
Environmental Industries Commission, for instance, wrote to us:
"EIC's Members, who have great experience advising business
on energy efficiency, have regularly informed Ministers since
the introduction of the Agreements that the potential for savings
in the sectors covered is much greater than reflected in the Agreements."
Certainly the NAO is clear that there is room for targets to be
made more stretching: current CCA targets "are forecast to
maintain a steady annual level of additional carbon savings, but
will not drive energy efficiency to the next level."
46. As the NAO describes, a lack of information,
both before the initial targets were set, and during the process
of setting revised targets in 2004, hampered the Government's
ability to take a tougher position in negotiating sectoral Agreements.
The result was that after setting revised targets in 2004, intended
to be tougher and to drive further efficiencies, the Government
discovered that many sectors were making more rapid progress than
expectedto the extent that 10 sectors had already
improved performance enough to pass their newly revised targets
for the next three milestone periods, all the way to 2010.
At the 2006 milestone period the number of sectors that had already
met their 2010 targets had increased to 25, very nearly half of
all sectors. On this progress at the 2006 milestone Defra has
written to us: "This suggests that targets can be further
tightened in the 2008 target review".
However, while we are reassured by this, we are surprised and
disappointed that 2008 represents only the second opportunity
for targets to be reviewed since the beginning of the Agreements.
47. We are highly surprised that the Government
has not tightened the Agreement targets since data from the first
milestone period revealed that both the initial set of targets,
and those revised in 2004, were too lax. We recommend that CCA
targets should be reviewed at every milestone period.
48. A further concern was raised about the value
for money offered by the Agreements. According to Cambridge Econometrics,
the 80% discount on the Levy given to CCA participants represented
a cost to the Exchequer, in terms of CCL revenue forgone, of approximately
£350 million in 2003-04.
Andrew Warren asked whether the current CCA regime was sufficiently
rigorous in terms of driving emissions reductions to justify tax
rebate of this size.
This was particularly appropriate to ask, he felt, given that
the Marshall Report had suggested:
[...] that we would get just as much of an incentive
there to companies to look at this if the discount was 50% rather
than 80%. [
] By dint of having a reduction of 80% rather
than 50%, there is certainly about £120 million extra that
has been forgone [
] If you were to ask me whether or not
that £120 million which the Treasury have not taken in could
perhaps have been better spent in terms of delivery of the end
objective, which is improved energy efficiency and improved carbon
savings, I have to say the answer would almost certainly be yes.
I am dubious as to whether it was strictly necessary to be as
generous as the Government turned out to be in the end.
We might add to this point by drawing attention once
again to the fact that CCA targets are meant to have been set
at 'cost-effective' levels, thus that meeting them ought in itself
save companies money.
49. The questions this raises are how far CCA targets
should be toughened, as well as whether the size of tax discount
provided under the Agreements should be reduced. This in turn
partly hinges on the question of how much can be asked of firms
under the Agreements without seriously damaging competitiveness.
That is to say, how much further potential is there within energy
intensive industries to make ongoing energy and emissions savings,
and when and to what extent will 'cost effective savings' start
to dry upi.e., when might new levels of energy savings
begin to cost more money to achieve than they save in fuel bills?
50. AEA Energy & Environment argued that there
was still considerable room for efficiency savings, even from
energy intensive industries:
We do not necessarily hear exactly what companies
do in order to meet their targets, they are not required to tell
us, but my feeling is that at the start of the agreements, in
2001/2002, once companies knew that the game was on and it was
going up to board level people found more savings, probably much
more low-hanging fruit than they actually anticipated [
C]urrent activities have mainly been directed more at the utility
side of energy use and there is scope in many sectors for more
energy-saving capability on the process linesheat recovery,
] installing more efficient motors, but generally looking
at "how am I making it, and indeed why am I making it?",
rather than just looking at a new steam system or a new compressed
air system. There is still a lot of that basic stuff to be had
but there is also another level of thinking which is yet in some
areas to be had, saying "are we doing this processing in
the most efficient way or can we schedule it differently?"
or whatever. That is why I think there are more savings to be
This opinion was echoed by Paul Ekins, who declared
that "technology develops; long-hanging fruit once picked
is inclined to grow, especially if there are price incentives
to do that."
51. By contrast, representatives of several business
groups argued that the pursuit of energy efficiencies was either
naturally subject to diminishing returns; or if it were to be
continued, would require major technological innovations, in turn
requiring significant amounts of time and money to develop. Ray
Gluckman of UK ETG argued that while "there is enormous low-hanging
fruit still available" in smaller and non-energy intensive
organisations outside the Agreements, and "some low-hanging
fruit available" in some industries within CCAs, in "that
top band of highly energy-intensive industriessteel, cement,
glass, and so onthe low-hanging fruit is long gone."
Steve Bryan of SABIC Europe, an international plastics and chemicals
company, argued that for much heavy industry further increases
in carbon savings, along the lines recommended by the Stern Review,
will require step-changes in technology; "they are not, if
you like, a natural continuum of the process we have been discussing
under the existing agreements."
EEF and UK Steel also argued that for energy intensive industries
such as "the steel sector, there have always been substantial
drivers towards improving energy efficiency because energy is
such a huge part of our costs", implying there was little
scope for further incremental improvement. (We would observe,
however, that this argument seems to rather contradict EEF's point
about the value of the Agreements, and the way in which CCAs raised
energy management from "oily book" to boardroom.)
52. We also received evidence on this issue from
Dr Ian Bailey, lecturer in economic geography at the University
of Plymouth, and the author of a number of papers on industry's
responses to carbon reduction instruments. He told us:
I have spoken to an awful lot of business leaders
over the course of the last ten years. [
] The issue of the
actual existence of technology seems to be a lesser issue for
most of the energy intensive sectors that I have spoken to. The
greater issue is the affordability of that technology and the
various either internal company financing requirements or the
need to go out on to open capital markets and persuade other investment
organisations to invest in things which have got a very long pay
The conclusion he drew was that more public funding
should be made available for industries to make such investments.
53. Given both that targets have been readily
overachieved so far and that meeting them should have saved participating
firms money, and given the overall imperative to accelerate carbon
reductions, we recommend that targets are considerably toughened
at the next milestone period. To help preserve a constructive
relationship with industry, protect competitiveness, and accelerate
emissions reductions, the Government should increase public investment
in low carbon technology, as well as grants or loans to aid its
54. A further theme in our inquiry on the subject
of the value for money of the CCA system concerned the extent
of auditing of and compliance with targets. At the time of our
inquiry only 9% of target units had been audited to ensure they
had achieved the performance against targets they had claimedand
that in nearly one in five of these audits serious errors had
been found. Andrew Warren commented on this: "To have only
done less than 10% of these is really not sufficient to give one
complete confidence that these tax breaks are justifiable."
AEA Energy & Environment, the consultancy which carries out
the audits, was more relaxed, arguing that audit coverage will
increase with time, and that most of the errors found so far are
related to poor quality base year data, and thus not of ongoing
55. Perhaps more worryingly, the NAO report highlighted
that some 6% of target units were treated as having passed their
2004 milestone, and as a result had their 80% discount on the
Levy renewed, despite failing to meet their efficiency targets.
This is because if a sector overall is judged to have met its
umbrella Agreement, then all units within it are treated as having
passed, even if some of them may have failed individually; Defra/AEA
initially look at sector performance, and only drill down to the
level of individual target units if the sector as a whole has
failed to meet its target. This claim was contested by UK ETG,
who said: "We have some rather strong views here. We think
that the NAO have misunderstood the way that most of the Climate
Change Agreements work. [
V]irtually all businesses with
Climate Change Agreements either meet the target by saving the
energy as required or they meet the target by purchasing CO2
allowances in the emissions trading mechanism."
56. We would respond to this criticism by stating
that the NAO is not referring to target units which did not reach
their own Agreement targets, but which bought carbon credits to
make up the difference; this, after all, happened in 27% of cases
in 2004, not 6%.
Rather, the NAO has drawn attention to a significant number
of businesses which have both failed to meet their CCA targets
through their own actions, and failed to make up the difference
to these targets through other mechanisms such as carbon tradingand
yet which continue to enjoy their CCL discount. Regulations should
be tightened to ensure that this cannot continue. The trading
mechanism established within the CCA system should make this straightforward:
any firm that does not meet its target through its own actions
should be required to purchase credits to make up the difference,
or lose its Levy discount.