Memorandum submitted by the Manufacturers'
Climate Change Group
INTRODUCTION
The formalised Manufacturers' Climate Change
Group (MCCG) evolved from the Ad-Hoc Energy Tax Steering Group
(AHETSG) which has been successfully operating since the early
days of Climate Change legislation in the UK, when it was established
make a coordinated input to Climate Change Agreement (CCA) discussions.
It represents a group of key UK manufacturing sectors affected
by the EU Emissions Trading Scheme and other Climate Change instruments,
comprising aluminium, cement, ceramics, chemicals, glass, lime,
paper, gypsum, metal forming, food and drink, mineral wool, quarry
products, motor manufacturers and steel. Membership is open to
any manufacturing organisation. Given the timescales and the issues;
a list of members currently supporting this position is annexed.
Firstly, MCCG members believe that there should
be greater recognition that the Climate Change Agreements (CCAs)
are a success story.
CCAs have raised awareness and generated beyond
business as usual improvements, both through the challenging but
achievable targets that have been negotiated, but also through
instilling a greater understanding of monitoring and reporting
and workforce "buy in".
It should be acknowledged that the success of
the agreements has not only come from the quantitative targets
and the resulting reduction in energy usage, but also the qualitative
requirements, that required business to develop energy management
systems.
CCAs have managed to push energy management
near the top of the Boardroom agenda, at a time when energy prices
were significantly lower than they are now.
MCCG strongly believe that UK industry is over
burdened with an excess of instruments relating to climate change.
MCCG members are subject to the Climate Change Levy, (and the
associated Agreements), the EU emissions trading scheme (EU ETS)
and potentially the Carbon Reduction Commitment (CRC).
MCCG wish to see a continuing role for relative
targets as this approach directly incentivises reductions in the
carbon footprint of products—until industry elsewhere becomes
carbon constrained, absolute targets risk displacing carbon intensive
production to potentially less efficient locations.
MCCG would support the new, independent Climate
Change Committee advising government on the review to ensure the
right balance is struck between contributions from early starters
in CCA sectors and other sectors of the UK economy, where there
may be more cost effective potential.
1. Is it right for the Levy and Agreements
to target energy use, or should they be reformed to target carbon
emissions directly? If so, how should they be changed?
It is important that any future CCL changes
take care to ensure that there is continuity in regulatory incentives
which have driven long term investments. While we do not therefore
support radical change, we believe that the efficacy of the CCL
would be enhanced if it were developed to reflect carbon emissions
rather than calorific value. This would then be consistent with
the need to make a transition to a low carbon economy. However,
CCL is the UK response to the Taxation of Energy Products Directive.
Therefore changing the focus from energy use to carbon may prove
difficult, as the Directive doesn't have any direct relationship
with carbon.
Furthermore, if a change to a carbon basis is
made, it is imperative that equivalent incentivisation programmes
be put in place to replace those founded upon CCL, eg: exemptions
for Combined Heat and Power Quality Assurance (CHPQA) and renewable
source electricity.
UK industry is over burdened with an excess
of instruments relating to climate change. MCCG members are subject
to the Climate Change Levy, (and the associated Agreements), the
EU emissions trading scheme (EU ETS) and potentially the Carbon
Reduction Commitment (CRC).
The continuation of access to CCL relief is
essential to sustaining the international competitiveness of intensive
sectors within MCCG membership. We therefore see a continuing
role for CCAs.
MCCG has serious concerns that the CCAs are
not being given due credit for the environmental benefits they
have achieved. The NAO report suggests that the targets were too
easy. However, all CCA targets are agreed on the basis that they
reflect "all cost effective saving measures".
We support the government's decision to let
the current CCAs run their full course to 2013 as this gives time
to plan their successor. However, we are concerned that formal
consultation on the future of the CCAs is being delayed until
2008. UK Manufactures have long asset life cycles so it is important
to have certainty to inform on long term planning decisions. MCCG
would welcome an early indication from Government on the future
of CCL and CCAs.
2. With the advent of UK-wide carbon budgets
from 2008 (proposed under the draft Climate Change Bill), how
valuable is the focus of the CCL and CCA on the efficiency with
which business consumes energy? Would it be better to have an
instrument which enforced absolute caps in energy use (or CO2
emissions)?
Part of the success of the CCAs has been due
to their use of relative targets which ensure that energy efficiencies
are achieved without imposing a growth penalty. A growing healthy
manufacturing sector is vital sustaining jobs and the economy.
Relative targets also helps ensure that all
sites, irrespective of size, have an incentive to improve. If
the targets were in absolute terms then smaller sites would not
appear to be making a significant improvement. The relative targets
can also make it easier for workers in the sites to relate to
the improvements.
MCCG wish to see a continuing role for relative
targets as this approach directly incentivises reductions in the
carbon footprint of products—until industry elsewhere becomes
carbon constrained, absolute targets risk displacing carbon intensive
production to potentially less efficient locations.
Indeed, carbon efficiency is becoming more prominent
in the Commission's review of the EU Emissions Trading Scheme
(EU ETS) post-2012. EU ETS review discussions are currently signalling
that benchmarks will be used to maintain free allocations and
minimise competitive impacts—this interest is allied to
a recognition that this approach has the added benefit of giving
a performance (energy efficiency) signal.
3. How well do the Levy and Agreements fit
together with other existing and proposed climate change policies,
and what can be done to ensure maximum impact from complementary
policies with minimum administrative burden and overlap?
There are too many economic instruments and
carbon price signals per company. It is counter-productive to
impose more than one instrument in order to achieve the same or
very similar objectives. This is currently the case for many of
the energy intensive industries, which are subject to the UK CCL
and EU ETS. The matter will be further exacerbated should they
additionally fall within the ambit of the proposed Carbon Reduction
Commitment. It is important that organisations which are in a
CCA or the EU ETS are not covered by CRC as well.
Coverage of sites by IPPC, CCAs and EU ETS leads
to multiple CO2 emissions reporting requirements and frustrations
arise from each scheme using different CO2 conversion factors.
This needs to be rationalised when the EU ETS and CCA schemes
are renewed; change prior to that would bring a burden as systems
are now established for the current CCAs.
4. Businesses are able to use carbon trading
to meet their targets under the Climate Change Agreements. What
have been the impacts of trading so far? Should trading be allowed
in this way, or how should it be controlled?
Trading has been a very useful element on the
CCAs. However, MCCG has concerns relating to the steady fall in
the value of allowances, due to oversupply from the voluntary
UK ETS, which has meant that it now provides little incentive
to go beyond emissions targets. Without trading many facilities
would find it impossible to meet targets, so it is imperative
that the trading element remains.
By definition, emissions trading mechanisms
work by trading to meet compliance. Trading provides a flexible
mechanism which allows emissions across businesses to be secured
at least cost while ensuring that overall environmental objectives
are met. Indeed, the EU Energy Products Directive provides for
relief from such energy taxes to be provided to intensive businesses
participating in trading schemes.
5. What have been the economic impacts of
the CCL and CCA on the organisations subject to them, and the
wider UK economy?
Our members will comment in their individual
responses.
6. Should the Climate Change Agreements be
reformed in any way? For instance, should the Agreements be simplified,
or the sectoral targets made more stringent?
It would be sensible to make a full move to
carbon based targets, reduce overlaps with other instruments and
make CCAs and other instruments in the policy mix more consistent
(see also answers to questions 1, 2 and 3).
The current CCAs already include provision to
review targets every four years to take account of changes in
circumstances, eg: new technological developments. The review
conducted across all MCCG sector in 2004 strengthened the robustness
and accuracy of the targets. The 2008 review will give both industry
and government a further chance to improve the last target to
reflect changes within those sectors and understanding of achievements
to date.
MCCG would like to see CCAs widened to whole
site coverage and for there to be easier entry for sites into
CCAs in the first instance. The former could be achieved by adjusting
the 90/10 rule to become a 70/30 rule, for example.
MCCG would support the new, independent Climate
Change Committee advising government on the review to ensure the
right balance is struck between contributions from early starters
in CCA sectors and other sectors of the UK economy, where there
may be more cost effective potential.
7. What are the main barriers to accelerating
energy efficiency in the business sector? How can these be overcome?
There are a number of barriers that impede the
take-up of measures to improve energy efficiency. In many cases,
attempts to forecast the potential of energy efficiency to deliver
reductions in carbon emissions have failed to take sufficient
account of these barriers. It is therefore vital that policies
to encourage greater energy efficiency are based on a full understanding
of these barriers and how to overcome them.
Uncertainty about the future climate change
policy mix also represents a barrier to improving energy efficiency.
In the longer term it is difficult to anticipate additional changes
as a result of climate change policy. There is considerable uncertainty
about the future shape of EU ETS and CCAs post-2012 and whether
these systems will be part of a multilateral or unilateral framework
for addressing climate change. This uncertainty is inhibiting
investment decisions.
8. Products which can increase energy efficiency
(such as insulating glass for windows) can be energy-intensive
to manufacture. Policies such as the CCL and CCA can penalise
manufacturers for making such products. How big an issue is this,
and what, if anything, should be done about it?
MCCG sector members produce products that provide
some of the solutions to climate change, eg: materials for wind
turbine blades, silicon for photovoltaic cells, insulation materials
for housing, low weight materials for cars and other applications.
These products are produced within almost all MCCG sectors, such
as glass, steel, chemicals, ceramics, cement etc.
It would be very complex to recognise the contributions
of these innovations in schemes aimed at improving plant efficiency.
If there is a switch to absolute emission targets then thought
should be given to how manufacturers of low carbon products are
treated, as those products maybe more energy intensive to make.
9. Alongside the CCL, the Government introduced
the Enhanced Capital Allowances, to further encourage firms to
make energy saving investments. How well is this scheme working?
How well does it fit with other existing or proposed climate change
instruments?
The take up of Enhanced Capital Allowances (ECA)
has not been as comprehensive as envisaged. The scheme is seen
as complex and restrictive, with not all energy efficient products
qualifying for inclusion to the list. Many MCCG sector members
do not see the financial benefit to be significant enough to cancel
out the increased cost of purchasing plant from the list, as these
products increase in price once they qualify for inclusion.
ECA is only of value to businesses that are
in profit. Loss makers cannot benefit. This is a major drawback
and therefore take up is limited. The Budget 2007 decision to
extend equivalent financial benefits to companies that have not
generated a profit is therefore welcome and we look forward to
its implementation.
MCCG would like to see the percentage of ECA
increase 100% to something like 200%. We hope that this would
then provide a significant driver, both for manufactures to produce
plant capable for inclusion to the ECA list and then companies
the incentive to purchase those products.
10. The Levy exempts electricity from renewables,
though so far this appears to have had little impact. Should it
play a greater role in incentivising the growth of renewable electricity,
and, if so, how?
Renewable electricity enjoys sufficient incentives
from the combination of ROCs and LECs awarded to relevant schemes.
Indeed, the banding proposal in the Energy White paper will increase
the ROCs allocated to technologies which need higher levels of
support to be economic. There is therefore no need to increase
the incentive from CCL.
MCCG (via electricity prices) already pays for
the renewable obligation and the investments in renewable technology
and as such further taxation is not necessary.
September 2007
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