Select Committee on Environmental Audit Second Report


92. As the NAO states: "The Levy and Agreements were designed to promote energy efficiency without harming business competitiveness."[128] In our inquiry, we considered a range of evidence on whether this was actually the case, and whether the Levy package needed reforming in any way as a result. We focused on two main questions:

  • How significant are the direct economic impacts of the Levy and Agreements on business competitiveness?
  • What could or should be done to ease the complications caused by the interaction of different policy instruments (for instance, between CCAs and the EU Emissions Trading Scheme), especially in cases where the same firms are subject to multiple policies?

The CCL package does not impose a damaging burden on UK business overall

93. A number of industrial lobbies and sectoral groups made the case to us that the direct workings of the CCL package imposed appreciable costs; though there was also acknowledgement that this varied considerably among different sectors. The CBI, for instance, cited a survey carried out jointly with EEF which suggested that "manufacturing [was] hardest hit", with "mining and utilities also negatively affected". It also suggested that the "service sector made a net gain from the levy (as a whole), although there are individual cases where companies have faced increases in net costs".[129] EEF highlighted the extra costs borne by the steel sector—in their figures, "the mandatory 20% levy adds £8.2million per year to the industry after NI rebate"—and stressed the resulting dangers to competitiveness, given that "Overseas competitors are not subject to this tax on energy."[130] The Federation of Small Businesses, meanwhile, referred us to a report they published in 2002, The Climate Change Levy—Another Cost for Small Business, whose title speaks for itself.[131]

94. More positive evidence was highlighted by the National Audit Office. On the Climate Change Levy, the NAO stated, "The administrative burden […] is estimated to be small"; in other words, it is straightforward to pay, the amount of Levy a firm is required to pay being calculated by their energy suppliers and simply added as another item to their regular bills.[132] On the Climate Change Agreements, only 8 of the 33 CCA participants surveyed by the NAO considered their administration a "burden", with the remaining 25 regarding it as being "simple". (Furthermore, we heard from businesses ourselves that it is precisely these administrative efforts—the process of complying with an Agreement—that have constituted the value and source of energy savings in the entire CCL package.) The NAO concluded that: "The benefits brought by Agreements tend to outweigh the administrative costs".[133] When we asked a panel of industrial witnesses whether they agreed with the NAO's verdict, Steve Bryan of SABIC Europe replied, "The short answer is yes", and this was not contradicted by fellow panellists from UK ETG, the Chemical Industries Association, or the British Cement Association.[134] The Food and Drink Federation also wrote to us to suggest that its members had saved around £90 million through energy savings; "clearly a large and valuable cost saving that benefits the profitability and competitivity of the UK food and drink manufacturing industry."[135]

95. Finally, the NAO highlighted that while 9 of the 33 firms surveyed said that the CCL package had harmed their international competitiveness, a study led by Paul Ekins had suggested that CCAs had actually improved the international competitiveness of the sectors covered by them.[136] As Professor Ekins explained to us:

    If indeed it is true that all the energy that was saved by those companies was through the implementation of cost-effective measures, and that was the explicit basis on which those Agreements were set up, then what you would have obviously is that companies would reduce their energy consumption in a cost-effective manner, this would reduce their cost base in a cost-effective manner and that would be likely to increase their competitiveness. […] We have then had not one but three target periods now reported; and, indeed, the companies are reporting that they are managing to achieve energy savings in excess of the targets which they were set […] You would be unlikely to do that unless these achievements were being done in a cost-effective way for good business reasons. Therefore, I would conclude that they were good for the competitive position of those companies because it reduced their expenditures on energy.[137]

Defra also referred us to this and similar research, summing it up as follows: "Overall conclusions are that the CCL/CCA package has been beneficial to the economy."[138]

96. Given the relatively limited price impact of the Levy, and the cost-savings that should accompany meeting Agreement targets, we believe that the CCL package has not been a damaging burden for UK business overall. In many cases it may have been good for the economy, given the savings in energy costs available for investment elsewhere, and the stimulus given to providers of energy efficiency products and services.

Businesses face a complex tangle of overlapping climate change policies

97. Beyond the economic impacts of the Levy and Agreements in themselves, some businesses may face costs and inconvenience as a result of the way in which these overlap with other instruments, such as the EU Emissions Trading Scheme (EU ETS) and the forthcoming Carbon Reduction Commitment (CRC). In recognition of these complications, Defra launched a 'Climate Change Simplification Project' (CCSP) in November 2006. Its brief has been to review the main climate change policies aimed at UK business, "with a view to eliminating avoidable overlap, simplifying the existing regulation, and ensuring that the regulatory burden on the economy is kept to a minimum."[139] So far this work has resulted in an initial report, published in October 2007, analysing what the problems are and setting out recommendations for improvements. The Department is inviting consultation on this report until March 2008.

98. Some of the main overlaps and areas of conflict include:

  • Overlap between 'upstream' and 'downstream' instruments, or in other words the addition of carbon or energy pricing to the cost of electricity both at the point of generation and at the point of consumption. This overlap arises mainly from the interaction of the EU ETS—which puts a price on the carbon emissions of power stations, in turn passed on in increases to electricity prices[140]—and the Climate Change Levy, which adds a cost to the consumption of electricity. (The same will apply to the Carbon Reduction Commitment when this starts.)
  • Overlap in directly targeted emissions. This relates to CO2 emitted on site, rather than emissions caused indirectly from the purchase of electricity. Where firms are covered by both the EU Emissions Trading Scheme and a Climate Change Agreement, the very same emissions may be regulated twice: under the EU ETS an installation will have to keep its emissions below its allocated allowance or be forced to buy extra carbon allowances from the market, while under a CCA it will have to keep its emissions or energy use within its Agreement target or lose its 80% Levy discount. Major complications arise from the need to avoid double-counting of emissions, and with that the potential for companies to receive double the benefits or penalties in both schemes (Box 4).

Box 4 Complexities in complying with complying with a CCA and the EU ETS

Source: Memorandum from Defra; National Audit Office, The Climate Change Levy and Climate Change Agreements, p 34

  • Different sources of emissions in the same firms being targeted by different instruments. The most common overlap of this type concerns sites in which direct emissions (CO2 produced onsite) are targeted by the EU ETS, and indirect emissions (mainly electricity use) are targeted by a Climate Change Agreement. A related problem occurs where a firm is targeted by one instrument, but this only covers a portion of their emissions, with the rest of their emissions not being targeted by any other regime. The Society of Motor Manufacturers and Traders in particular argued that partial coverage by one instrument was inefficient and could lead to perverse incentives, with site managers focusing on the one area of their site that was covered, while giving less attention to other opportunities for efficiency gains elsewhere: "it might mean there is some low-hanging fruit in other areas but you are targeting on the CCA area".[141]
  • Narrow or inconsistent criteria for inclusion in Climate Change Agreements. A number of business groups have raised concerns about the effects on competition between certain firms and products, where some qualify for an Agreement—and the 80% discount on the Levy that comes with it—and some do not. Currently, industrial sectors are eligible for an Agreement where their energy intensity is above 10% (i.e., energy costs account for more than 10% of production costs) or where energy intensity is between 3% and 10%, and where their products are adjudged to face significant competition from foreign imports within the UK. Complaints from business groups have focused on cases where a sector's processes are relatively energy intensive, but miss out on the other criteria that would guarantee them eligibility.

99. We received a number of detailed comments and suggestions from business groups on how these instruments might be reformed. We did not have sufficient time to examine the merits of each of these suggestions, which would have involved working through the potential implications of each for carbon savings, tax streams, and economic competition. However, we have some overarching comments on the two main themes in these suggestions. A common call from business groups was that the number of different instruments be reduced, with measures such as the Climate Change Agreements and EU Emissions Trading Scheme becoming increasingly consolidated. EDF Energy, for instance, called for the Climate Change Levy to be abolished for electricity, with the EU ETS being relied on alone to perform the original job of the Levy by raising electricity prices.[142] Steve Bryan of SABIC Europe went even further:

    I would very much welcome a simplification and, ultimately, perhaps, one single common scheme that, in one fashion, had one single value of carbon attached to it, such that we would not see this plethora of different instruments and the overlap problems that they generate for companies captured by more than one of them.[143]

We would urge the Government to treat these calls with caution, at least for the time being. The early experience of a number of policy instruments such as the EU ETS—in Phase I the carbon price collapsed, once it became recognised that the majority of Member States had issued their industries with too many carbon allowances—raises doubts about the wisdom of relying on new instruments to deliver carbon savings in a predictable manner. On this point we also note that, in its 2005 review of policies targeting the UK business sector, the Carbon Trust highlighted one of the advantages of Climate Change Agreements as being that they "offer insurance from a policy perspective against EU ETS price uncertainties and under-delivery".[144] And as Professor Grubb argued: "there do need to be different instruments because the failures and obstacles to energy efficiency are different and are much more complex than just price alone."[145] In the future it may be possible to rely on fewer instruments to set a single carbon price to deliver all the Government's climate change policy outcomes. Until carbon markets have matured, however, it is wise to continue to target carbon emissions with multiple policies. Furthermore, one of the lessons that the CCL and CCAs teach is that simply increasing the cost of energy (or emissions) may be a necessary component in any attempt to increase energy efficiency, but not enough in itself; in which case multiple instruments will always be necessary.

100. Another common theme from business groups has been to argue that the criteria for inclusion in each carbon reduction scheme should be widened, so that, for instance, it was easier for businesses to qualify for a Climate Change Agreement, and easier for an Agreement to apply to the whole of a site. EEF, for instance, argued that "the government should improve incentives for energy efficiency in other business sectors by extending the right to participate in CCAs to any sector that can demonstrate a credible plan to deliver efficiency gains."[146] This was backed up by AEA Energy & Environment, who said that easing the entry criteria "would allow more people, more sectors, into agreements and that would be a good thing to widen the scope."[147] EEF also argued that the current rules governing whether the whole of a site was covered by an Agreement ought to be relaxed, so that if 70% of a site's emissions were eligible for a CCA target, the whole of the site was covered. UK ETG told us of the benefits this would bring: "What we would love to see is, obviously, the whole process just to cover the whole factory. It would make life simpler and it would deliver more environmental benefit".[148] Given the extra progress on energy efficiency which the process of complying with Climate Change Agreements appears to have driven, we recommend that the Government look favourably on such proposals.

101. Overall, we have sympathy for businesses, dealing with a multiplicity of policy instruments; the climate change policy landscape in the UK is messy, and is only going to become more so with the introduction of the Carbon Reduction Commitment. However, we are also aware that much of this complication has arisen from the evolving recognition that one size of instrument does not fit all, and we welcome the constructive efforts of Government to tailor its policies to the needs and drivers of different types of business. We note, for instance, the long consultation on the design of the Climate Change Levy package before its implementation (in which time Government increased the proposed Levy discount for Agreement participants from 50% to 80%), and the extensive consultation still ongoing on the design of the forthcoming Carbon Reduction Commitment. Equally, we note its proposal to exempt all emissions targeted by either the Climate Change Agreements or the EU ETS from the Carbon Reduction Commitment.

102. One aspect of this concentration of the scope of the Carbon Reduction Commitment may perhaps have gone too far, however, or at least left a number of businesses outside any equivalent climate change regime. In its original proposal for the CRC, the Carbon Trust suggested a lower threshold for inclusion; Defra raised this threshold "to further reduce the risk of including participants for whom the administrative cost of participating in the scheme might outweigh the benefits".[149] Without making a detailed study of the preparations for the CRC, we are unable to judge whether this was overcautious or a justifiable case of tailoring climate change policy to the needs of different types of businesses. In any case, it still means that smaller businesses are left outside any regime. As Minesco observed to us:

    Whilst complementary regulations have been developed aimed at specific sectors, such as the proposed Carbon Reduction Commitment, we believe that there is a clear policy gap in respect of approximately 4-5 million Small and Medium Enterprises. This sector is notoriously difficult to reach effectively, and as a consequence there is an argument for specifically focusing the CCL to encourage action in this sector.[150]

The reason given by the Government for introducing the CRC—the inadequacy of the simple price signal of the Climate Change Levy to focus non-energy intensive organisations on reducing their energy use—applies equally to all the SMEs too small for inclusion. The Government must set out what it is going to do instead to help drive down emissions from SMEs while addressing the particular obstacles they face.

128   NAO, The Climate Change and Climate Change Agreements, p 36 Back

129   Ev 127 Back

130   Ev 3 Back

131   Ev 132 Back

132   NAO, The Climate Change and Climate Change Agreements, p 36 Back

133   NAO, The Climate Change and Climate Change Agreements, p 36 Back

134   Q72 Back

135   Ev 103 Back

136   NAO, The Climate Change and Climate Change Agreements, pp 36-7 Back

137   Q193 Back

138   Ev 136 Back

139   "Consultation on the recommendations of the Climate Change Simplification Project", Defra,, 18 December 2007 Back

140   Defra's Climate Change Simplification Project report states that: "Empirical and other evidence to-date indicates a substantial pass-through of EU ETS prices to electricity prices (wholesale and retail)". Back

141   Q74 Mr Croucher Back

142   Ev 6 Back

143   Q83 Mr Bryan Back

144   Carbon Trust, The UK Climate Change Programme: Potential evolution for business and the public sector, November 2005, p 4 Back

145   Q151 Back

146   Ev 1 Back

147   Q118 Back

148   Q74 Mr Gluckman Back

149   "Action in the UK - Carbon Reduction Commitment", Defra, 26 June 2007, Back

150   Ev 126 Back

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