Memorandum submitted by British Glass
Manufacturers' Confederation (BGMC) and The UK Glass Manufacturing
Industry
The first part of this document provides a response
to issue suggested by the committee and the second part comments
on the NAO reports "issues for further scrutiny". BGMC
representative attended the ETG meeting of 19 September 2007 and
BG generally agrees with the response, however this document refers
to more specific issues within the sector.
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?
a) In the UK glass industry, due to a relatively
stable fuel mix and with no process emissions currently taken
into account, there is a clear correspondence between energy use
and carbon emissions. The benefits of a move to carbon efficiency
targets rather than energy efficient targets could promote a move
to fuels with a lower carbon intensivity, although the capacity
for such moves in the glass industry is very limited.
b) Use of carbon rather than energy would
align more clearly with the European approach. Any potential inclusion
of process emissions should take into consideration sector specific
limitations relating to the manufacturing of process and national
infrastructure eg mineral transformation, recycling.
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)?
a) An absolute cap for a local area is not
desirable in the context of a global market. The manufacture of
glass products is driven by demand, and following significant
improvements in furnace efficiency in recent decades, theoretical
maximum efficiencies are being approached, the result being that
emissions become closely coupled with production output. By capping
energy or emissions of UK glass manufacturers, a limit is effectively
imposed on the amount of goods which can be produced without the
purchase of carbon allowances. If it is not cost effective to
purchase said allowances, any excess demand for these products
would then need to be met by import; decreasing UK caps could
over time act to export UK manufacturing capacity to countries
where costs are less. This is likely to involve manufacture in
countries with less stringent environmental regulations, and import
to the UK would also incur additional carbon emissions associated
with the products' journey to the UK. The net effect is increased
emissions on a global scale.
b) The loss of key manufacturing sectors
in the UK bodes ill for UK recycling capability. Currently manufacturing
of glass places a major role in the UK infrastructure, price stabilisation
and adding value to the diverted waste stream. The economic stability
of the system would be significantly altered were manufacturing
to decrease.
c) In addition to this factor, glass manufacture
is more energy efficient when furnace output is maximised giving
economies of scale. Any cap on emissions which requires a reduction
in output in order to be met, would decrease furnace efficiency
and therefore increase CO2 / tonne glass.
d) It has been suggested that a facilitating
policy to help struggling operators invest in energy efficient
technology be implemented, as well as, or in place of highly bureaucratic
and penalising instruments.
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?
a) The CCAs and the EUETS do not fit well
with each other. This results in significant regulatory burden
and duplication which make poor environmental sense (CCA23 double
counting rules). The reporting years do not match and different
and overlapping emissions sources are included under each scheme.
Targets are often relative in the CCA but only absolute in the
EUETS, differentially encouraging efficiency through maximised
throughput and capped production respectively. There are also
different rules within the schemes for how to deal with small
amounts of fuel (eg de minimus limits) and exactly what activities
are included, as well as other M&R guidelines discrepancies
(eg use of metered versus billed energy consumption).
b) The CCAs could be redesigned for EU ETS
participants, so that only electricity and emission sources outside
the EUETS were used as a measure of performance under the CCAs;
however as things stand there is an issue concerning small amounts
of fossil fuel which would not be caught under the EUETS and which
it would be illogical, difficult and costly to sub-meter. The
80% rebate would need to be maintained for all fuels used at the
facility, be they under CCA or EUETS regimes, in order to protect
UK industry, and promote energy efficiency / saving measures;
this requires a Commission decision. Facilities not covered by
the EUETS would need to be able to continue under the existing
CCA regime, although the issue of mismatched reporting periods
would need to be resolved.
c) In order to ease the administrative burden
for operators, post 2010, it may be advantageous to align CCA
reporting times with EU ETS, thus enabling operators to justify
that all fuels in the given time period are covered by one scheme
or another. This would require review of reporting deadlines to
Government.
d) The criteria for CCA eligibility should
be further expanded. It has now been recognised that the original
definitions of "energy intensive" using the IPPC criteria,
biases inclusion on the most polluting rather than necessarily
most energy intensive operators. The criteria were expanded recently
with additional EI sectors; however the number of facilities which
can be included there under is radically limited when "international
trade competition" rules are applied. This restriction effectively
means that many energy intensive installations remain ineligible,
with limited incentive to reduce emissions. British Glass strongly
agrees with the ETG position that energy intensivity be used as
eligibility criteria.
e) The Government's proposed CRC must be
carefully designed to ensure that it does not overlap with the
CCA or EUETS regime coverages, or facilities already in those
schemes. This is very important to prevent further regulatory
conflicts between schemes for overlapping areas, such as those
already seen between the CCAs and EUETS.
f) Careful consideration must be given now
in order that the CRC, which is explicitly not designed to encompass
energy intensive industries, does not become a catchall if and
when CCAs terminate.
g) It should also be born in mind that electricity
generated from fossil fuel is already covered by EU ETS and the
costs are passed onto consumers in the form of higher electricity
costs. This in its own right creates an increased incentive on
users to reduce usage.
h) Operators would prefer that instruments
are simple and well thought out. It may be considered a better
use of resources to divert the associated costs of implementing
such complicated economic instruments to fiscally supporting development
of energy saving technologies.
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?
a) Companies have ensured compliance through
trading (purchasing allowances), as well as benefiting from their
good performance (selling generated allowances). Whilst trading
exists it should continue in this way, because it allows an overall
reduction in emissions across a sector which can be made wherever
is most cost effective to do so; in accordance with market principles.
b) The market should be sufficiently robust
to prevent a situation where the cost of carbon allowances decreases
to the point where it is environmentally unrepresentative of the
cost to stakeholders. A low price (such as that currently seen
in the UKETS) provides little incentive to achieve actual emissions
reductions as it offers a cheap alternative to investing in new,
more efficient technologies.
c) A reduction in the overall number of
different carbon markets would be welcomed.
5. What have been the economic impacts of
the CCL and CCA on the organisations subject to them, and the
wider UK economy?
a) Whilst the CCL package was planned to
be revenue neutral across industry and commerce, the glass industry
felt an additional burden of some £2-3 Mpa. High energy costs
are often cited as a reason for many of the recent closures in
the glass industry and a further tax on energy adds to this strain.
For multinational companies currently rationalising operations,
the UK is seen as an unfavourable location to manufacture for
several reasons, one of which is increasing legislation and severity
of application of said legislation compared to other parts of
the Europe and the wider World. ie there is not a level playing
field.
b) In addition to a tax burden, industry
felt a personnel strain as key members of their staff struggled
to understand the complexities of the CCA system. These are now
well understood, but any new policies should not repeat this mistake.
c) The impact of removal of basic manufacturing
in the UK should not be analysed merely in terms of gross value
added, but also within the framework of the stakeholder, transport,
recycling and waste disposal chain.
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?
a) The glass industry is in favour of splitting
CCA targets as in 3b above. Additionally, regulatory complications
such as the "90/10 rule" which do nothing to improve
the environmental integrity of the scheme should be eliminated
wherever reasonable.
b) The drive to "reduce emissions"
should not be simply translated into a tightening in sector targets
without taking into account the technical possibilities and environmental
benefits of products being manufactured. There is a real need
for joined up thinking across all Government departments to prevent
conflicts in the UK Climate Change Policy eg with building regulations,
production of energy saving products and maintenance of sustainable
practices.
c) The glass sector CCA secures a saving
of over £12 million pa for the glass manufacturing industry.
Without the CCAs there would be further closures (20 of the original
52 facilities in the glass sector have closed since 2001 whereas
only six facilities have joined the CCAs. This includes company
rationalisation and facilities joining under the new Glass Manipulators
EI sector).
d) Without the CCL and CCA, it is likely
that efficiency would continue to improve as high energy prices
are maintained, however there would be no formal recording system
to document the achievements made.
e) The sector could not sustain entrance
into the CRC as currently proposed.
f) The sector would welcome fiscal incentive
schemes to further encourage investment at a faster rate if possible.
7. What are the main barriers to accelerating
energy efficiency in the business sector? How can these be overcome?
a) Glass melting requires a certain amount
of furnace "holding" energy, even under the most efficient
operating conditions. Furnace efficiency decreases with furnace
age as refractories wear; however, these will not be replaced
with the latest technology during the 10-15 year life of a furnace.
This is due to high capital investment and sound environmental
principles (refractory production is itself energy intensive and
so extension of material life is optimised. Sector targets should
reflect a drive towards optimum plant efficiency, but not beyond,
and allowance must be made for furnace aging and rebuild. Energy
saving technologies such as VSDs etc. are already widespread in
the industry, but do little to offset the energy consumption in
the furnace, the major energy centre.
b) There is a serious lack of capital available
to operators to invest in energy saving technology due to high
energy costs and competition from low cost countries. Many operators
would welcome the savings associated with improved equipment,
but are unable to make an investment. Efforts to control energy
prices should continue and increase and fiscal incentives could
be offered to encourage investment in new technology. Preceding
the introduction of any such incentive scheme, there should be
an open dialogue with each sector so that needs are understood
and met.
c) The container glass industry currently
suffers from a shortage of good quality cullet (recycled glass).
The melting of good quality, colour sorted cullet decreases the
energy consumed in glass manufacture. This also reduces carbon
emissions as carbon locked inside the raw material has already
been removed in its initial manufacture. Whilst the weight of
container glass collected for reuse has increased in recent years,
proportionally less cullet has been sorted by colour and contamination
has increased with a move to less costly collection methods by
local authorities. It is therefore of little use to the container
industry. This was a result of local authority waste targets which
measure weight removed from landfill only and do not consider
the requirements of the optimum recycler. Whilst other products,
such as aggregates, have partially absorbed this waste stream
and are thriving, it has taken away a valuable source of emissions
reductions capability from the sector. This is an example of conflicting
policies and highlights the unintended consequences of legislation
and market forces.
d) The manufacture of "green"
products such as low emissivity architectural glass requires the
additional coating of glass panes, which in itself requires additional
energy consumption during manufacture. DEFRA are resistant to
accommodating this additional energy in eased CCA targets, even
though the life cycle carbon savings of the product far outweigh
the additional energy involved in manufacture. That is, the addition
of this technology by facilities has not been allowed for in the
CCA efficiency targets. This is an example of non—joined
up thinking in government policy where subtleties within specific
areas can be lost under a "one rule fits all" approach.
e) When considering "efficiency"
in the glass industry we consider energy used per tonne of glass
made. Many manufacturers of container glass are moving towards
light weighting bottles in order to reduce raw materials wastage
and energy consumption. The same number of bottles could then
appear as less weight and a worse "efficiency". In actuality,
CO2 per bottle is reduced. Consideration should be given to taking
into account relative carbon savings that do not fit comfortably
under the CCA banner. These matters are of great concern to NGOs
such as WRAP.
f) A further complicating matter in the
container industry is that marketing professionals are often uncompromising
regarding the appearance of their product. Valuable work being
carried out within the industry such as light weighting of bottles
and investigation into increased recycled glass content (which
can effect colour purity) often meets strong opposition from brand
owners who are adamant that a specific and consistent colour and
a certain shape are necessary. Government product policy and incentives
may be required to overcome such marketing inertia.
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?
a) As mentioned in 7c, the additional energy
associated with making green products is an issue for the production
efficiency of the flat glass sector. Fibre glass is another example,
as it can be used both in building and vehicle insulation as well
as in manufacture of wind turbines, lighter car bodies etc. Extra
energy is often used at the manufacturing stage but consideration
has not been made in CCA targets. A proper investigation into
this issue should be conducted and government policy in all areas
should address the findings in an integrated fashion. An easement
of targets should be allowed in some instances, to recognise carbon
benefits of certain products across their life cycles. Hypothecation
of carbon benefits should be investigated.
b) An alternative might be to offer a further
reduced rate of VAT on these products to encourage their use,
although this would not counteract a move towards increased import.
A further reduction in CCL rates for these products could also
be considered.
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?
a) Currently this is of little use to the
glass industry. This is because the list of eligible technology
is very prescriptive and the majority of manufacturers had already
implemented the appropriate equipment from the list prior to the
introduction of the scheme. The current list may be more use to
CRC participants who have historically been less likely to invest
for cost reasons.
b) If an operator is already paying little
in tax due to poor profit margins, it would be difficult to take
advantage of such a scheme.
c) There should be more support for research
and development and the feasibility testing of new technologies.
d) It should also be recognised that if
competition becomes more severe experience shows that the opportunity
for joint action within a sector becomes less likely and more
difficult for a trade association to achieve.
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?
a) It is believed that there has been little
impact so far because of limited renewable electricity supply
in the UK. That generated is currently principally to meet the
requirements of the generator's ROC, and under current rules cannot
also be discounted from energy consumption under the CCAs. In
this context, there ought to be additional incentives for using
renewable electricity, but more importantly for producing it,
and this should be aimed directly at the power generators.
b) Reducing the levy on energy to make products
used in equipment for renewable projects would add incentive to
growth in renewables from eg wind farms.
28 September 2007
THE FOLLOWING SECTION ADDRESSES THE NAO REPORT
ON ASSESSMENT OF CCA EFFECTIVENESS PAGE 7: ISSUES FOR COMMITTEE
SCRUTINY
i. Both the Levy and Agreements were designed
to promote energy efficiency rather than absolute reductions in
carbon emissions; this reflected government priorities following
the 1998 Marshall report. In light of the Stern Review and draft
Climate Change Bill, where do policies which focus on energy efficiency
fit with those that target absolute carbon reductions directly?
See 2. above.
ii. The Levy has been a greater driver of
change in energy-intensive industries than in those which are
less energy-intensive. What role is there for a climate change
tax in less energy-intensive sectors and how will it work alongside
the Carbon Reduction Commitment?
All UK businesses do pay the levy; obviously
the greater the relative cost (and ability to pass on costs) the
greater the impact. Eligibility in the existing and proposed schemes
whether voluntary or mandatory, does not align with absolute carbon
burden. There are inconsistencies, eg CCL rebates of 0%, 50%,
80%. Government has introduced complexity of initiatives which
indirectly address the key issue but lack commonality. The usefulness
of the CCL as a "stick" has been estimated time and
again. Specific and relativistic targets linked to trading schemes,
and the safety valve that they provide, have however proved their
worth. Therefore the role of the levy for CRC organisations is
highly questionable unless some form of discount is available.
Thematic approaches in the EU also work towards
this end.
It is important that overlap between the CRCs
and CCA be avoided.
iii. Businesses have reported difficulties
in reconciling the Levy and Agreements with the EU Emissions Trading
Scheme. Can the policy mix impacting on businesses be simplified
whilst still providing the required incentives?
See Qs 3 & 6 above.
iv. From the perspective of the taxpayer and
competitive rivals, is it right that some businesses can be given
a tax discount despite failing to achieve their Agreement targets?
CCA are first and foremost sectoral agreements,
to achieve overall targets set at sector level. As such if these
targets are met, then the performance of individual target units
is irrelevant. That is, the agreements are still achieving the
planned efficiency improvements.
However, where the sector fails its targets
and an individual target unit which fails its target outright
meets its obligations via risk management options (which reflect
operating conditions on the ground) or through carbon trading,
this represents a legitimate using of trading markets and other
mechanisms which adjust targets to reflect the realities which
companies deal with on the ground. It would be self contradictory
to exclude the use of the market when it depends on demand.
v. The Government has the opportunity to revise
Agreements targets in 2008. What, if anything, should be done
to tighten the targets for participating companies and industry
sectors? How can government overcome the limitations in the way
targets have been negotiated so far?
See Q6.
Essentially, targets should remain feasible.
They should be split to accommodate interaction with the EUETS
for relevant companies. Above all, Government should take into
account the greater requirement for UK sustainability.
vi. Should the Government conduct more analysis
to assess the scale of any potential error in the total carbon
savings figure generated from the results of the Agreements?
The CCAs are a self verifying scheme. However,
in an energy intensive industry such as glass a high degree of
faith can be placed in the figures from the industry, as energy
represents a very significant operating cost and as such this
matter attracts significant scrutiny.
Recognising climate change as a global issue,
it may be useful to compare the CO2 costs and benefits of various
imports (manufacturing and transporting from abroad) against manufacturing
in this country. Also, the energy consumed in the manufacture
of energy saving products should be balanced against the life
cycle emissions savings of these products.
The outcome of both areas of study could give
better context for the setting of targets under any climate change
initiative and the penetration these products in the UK.
vii. Carbon trading is becoming a more important
way for businesses to meet their targets under the Agreements.
What will be the impact if businesses purchase carbon credits
(if they continue to be traded at low prices) rather than push
for greater energy efficiencies? Is the large surplus of carbon
credits, which could be used in future target periods, a problem?
See Q4 above.
viii. Businesses see long term uncertainty
in government policy as a barrier to improving energy efficiency.
Does carbon budgeting, as proposed in the draft Climate Change
Bill, represent an opportunity to reduce uncertainty regarding
the long term future of particular policy packages? What will
be the long-term future of the Levy and Agreements?
Long term uncertainty in government policy represents
a barrier to improving energy efficiency as it does not support
investment decisions, which play a key part in achieving emissions
reductions.
Carbon budgeting may help reduce uncertainty,
but must take into account the global nature of climate change,
and in this context, seek to maintain a well regulated but not
penalised UK manufacturing industry base.
ix. Products which when in use promote energy
efficiency (such as insulating glass for windows) can be energy
intensive to manufacture. Policies such as the Levy, Agreements
and Emissions Trading Schemes can penalise manufacturers for making
these products. Does the Government need to give greater consideration
to this apparent conflict?
See Qs 7 & 8 above.
Government climate change policy needs to be
integrated through the supply chain when making such targeting
decisions, and not consider elements of that chain in isolation.
Hypothecation of carbon savings back to would do much to ensure
the continued production of these goods at highly efficient installations
close to the consumer base. Both relatively new blue sky and existing
technologies and their manufacture must be supported by the government.
x. Does it matter that econometric estimates
of policy impact can vary widely due to changes in business as
usual projections, even if policies are working as expected? In
the case of the Agreements, what are the implications of the fact
that taxpayers are receiving less value for the tax foregone?
It must be recognised that estimates are exactly
that. However, Government must seriously listen to and be advised
by industry and commerce when making such estimates. Also, recognising
the inherent uncertainty in such estimates, Government should
take a realistic view when using these estimates to set carbon
budgets and should not assume that the most extreme budget is
necessarily achievable.
In the context of the glass agreement, the tax
payer receives excellent value against tax foregone, as all sector
targets to date have been met. This is little consolation to the
hundreds of people who have lost their jobs in the glass sector
in the last few years.
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