Memorandum submitted by The Mineral Wool
Insulation Sector (Minesco)
We are pleased to submit the following comments
from Minesco in response to the above call for evidence. Minesco
is a trade body that represents all four UK Mineral Wool Insulation
producers for Climate Change and EU Emissions Trading Scheme purposes.
By way of background Insulation is central to
delivery of many Government Climate Change Programmes, with for
example an estimated 82% of the savings that will be delivered
by the Energy Efficiency Commitment 2005-08 being attributable
to retrofit insulation measures.
Manufacture of Mineral Wool insulation involves
significant investment and long lead times. However, as a result
of signals provided by Government CCP initiatives the sector has
made or announced significant capacity investments amounting to
an estimated £200 million, and output is now anticipated
to be roughly double 2002 levels by 2010.
Production is however captured under a number
of different Environmental initiatives, including IPPC, CCA's
and the EUETS, although saves many times more carbon in use than
it takes to manufacture.
The sector is therefore perhaps uniquely placed
to be able to comment on the role of Business in reducing carbon
emissions, being both regulated as a major energy user and strategically
important in terms of delivery of Government Climate Change Policy.
We can therefore submit the following comments:
1. CLIMATE CHANGE
AGREEMENTS
1.1 We believe that the Climate Change Agreements
have been demonstrably successful in focusing senior management
attention and in reducing energy demand so have delivered significant,
real, savings.
1.2 However, because the UK ETS was the
first scheme of its type, from the outset there was considerable
uncertainty over the evolution of carbon prices. As a consequence,
many companies chose to meet target by investing in abatement
rather than leaving themselves exposed to uncertain carbon prices.
In the case of our own sector significant energy saving investments
have been made, and, whilst partly driven by Corporate Social
Responsibility considerations, compliance could have been achieved
at far lower cost through trading.
1.3 As the awareness and sophistication
of participants increases, and internal abatement options and
costs are better understood, we believe that compliance based
on the classic abatement cost curve model will become the default
under any successor scheme to the CCA's. This may mean that the
CCA structure will become less effective at driving actual investment
in for the energy intensive sector.
1.4 Manufacture of Mineral Wool insulation
is a capital intensive process, with investment costs of the order
of £1,000 per tonne of annual output. Historically returns
on capital have been poor, and continued access to CCL rebate
is essential to ensure a level playing field against both international
and non energy intensive products and ensure continued access
to investment.
1.5 However, as has been mentioned, industries
such as Mineral Wool manufacture not only participate in the CCA's
but are captured by the EUETS as well as being regulated under
IPPC. Therefore recognising the burden that the CCL represents
on energy intensive businesses and noting that the CCL rebate
is likely to contribute less to emissions reductions in future
that other programmes, we believe that there is a clear case for
not only continuing to provide CCL relief for energy intensive
industries but to reduce the burden.
1.6 We believe that as the CCL is the UK
transposition of the Energy Products Directive it will endure,
and note that the EPD includes specific provisions for a rebate
to be applied in the case of energy intensive industries where
these are covered by undertakings to reduce emissions. The size
of the rebate allowed is up to 100%, which compares with the 80%
currently applied under the CCA's, and we would hope that Government
would try and ensure that UK industry remains competitive by adopting
the higher rate.
1.7 The question is therefore one of what
eligibility criteria could be applied, and what compliance mechanisms
will exist. Broadly we suspect that the options include:
1.7.1 A replacement CCA structure broadly
as current but with compliance using EU ETS or proposed EPC allowances.
1.7.2 Eligibility via participation in the
EU ETS. The main problem with this option is that indirect emissions,
ie electricity, are not constrained other than via cost pass through
in electricity prices and it is not clear whether this would meet
the EPD requirements.
1.7.3 A combination of EUETS coverage of
Direct emissions coupled with CCA or EPC structures to cover indirect
emissions and emissions from associated activities currently captured
under the "90/10" rule.
1.8 Due to the complex interactions between
the EUETS and CCA's, and the associated mechanism to avoid "double
trading", there is an urgent need for early certainty on
future access to CCL rebates.
1.9 Our understanding is that the issue
of a replacement CCL rebate structure may be considered later
this year. Our feeling is that eligibility via EU ETS participation
@ 100% for direct and indirect emissions (excluding 90/10) would
represent an equitable and extremely welcome regulatory simplification.
1.10 However, such an approach would involve
a shift from the current relative (ie energy use per tonne of
production) CCA targets to the absolute caps applied under the
EUETS. In the context of a rapidly expanding sector such as Mineral
Wool insulation, this does raise important questions regarding
how the necessary emissions headroom to cover growth can be accommodated.
2. INTERNALISING
THE COST
OF CARBON
2.1 This leads us to perhaps the most challenging
point raised by the enquiry, how the contribution of energy saving
products can be reflected in the regulatory framework. As is noted
in the Committees call for evidence, the operation of existing
and introduction of new initiatives can have unwanted implications
for the manufacture of energy saving products.
2.2 It is entirely appropriate that all
manufacturing processes, regardless of the end use of the output,
should be subject to rigorous environmental constraints, and be
encouraged to operate to best practice levels.
2.3 However, whereas the current regulations
effectively internalize the cost of carbon emissions, in, for
example, electricity or manufactured goods, no analogous framework
exists to internalize the value of carbon savings arising from
these products in use.
2.4 The UKETS, EUETS and EEC frameworks
have created valuable new property rights through commoditising
Carbon. Historically the value of an energy saving product could
be said to be underwritten by the value of energy saved over its
lifetime. The introduction of new frameworks based on carbon effectively
means that a new value vector has been created, and the worth
of an energy saving product in use should logically now reflect
the sum of energy cost savings and avoided carbon emissions.
2.5 Currently, the very considerable value
of the carbon savings generated from the installation of energy
saving products accrues to the Government via, for example, the
energy supplier Carbon Emission Reduction Targets (CERT) framework,
but is not internalized into the value of the product.
2.6 We believe that if the value of carbon
is truly to be used to drive behavior it must be fully reflected
in product cost and there needs to be a symmetry; whereby both
manufacturing emissions and savings in use are both considered.
The EUETS could potentially be a part of such a framework through
project mechanisms, although Tradable White Certificates or Personal
Carbon Allowances might also represent alternatives.
3. CLIMATE CHANGE
LEVY
3.1 In contrast to the success of the CCA's,
we are far less convinced that the Climate Change Levy itself
has been successful in delivering efficiencies in other business
sectors. A range of reasons have been suggested for the apparent
lack of impact from the CCL, including cost pass through where
this represents just a small proportion of costs, and issues such
as the efficiency with which energy efficiency is priced into
commercial property rents.
3.2 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.
3.3 Whilst recognising that it is reducing
carbon in the atmosphere that is key, and therefore it is appropriate
for major programmes to focus on Carbon, there are unnecessary
complications associated with establishing emissions from small
sites, such as fuel carbon intensities and the inability to switch.
We therefore suspect that a continued focus on a simple energy
"tax" approach is simpler to understand and monitor
and will provide greater certainty.
3.4 This also avoids introducing yet a further
"flavour" of carbon over and above the UK, EU Kyoto
project and CRC allowances already in existence, and can only
aid the emergence of a clear, single price signal for carbon.
4. REVENUE HYPOTHECATION
4.1 Currently our understanding is that
CCL revenues are hypothecated through NI rebates and Enhanced
Capital Allowances for energy savings investments.
4.2 We are not aware of any evidence to
suggest that the latter has made any significant contribution
to reducing emissions, and uptake is constrained by issues of
differentiating capital investments from renewals and refurbishment
that can anyway be written off in the year of expenditure.
4.3 Consequently we believe that there is
a strong case for reviewing the use to which CCL revenues are
put. Taking into account our earlier comments regarding shifting
the focus of the CCL towards the SME policy gap, we feel that
in addition to "sticks" there is a need to educate,
inform and signpost smaller users to the type of energy saving
technologies that are available—many of which are existing
measures with proven savings.
4.4 There are a variety of ways that this
might be achieved, but the Carbon trust, and/or Energy Saving
Trust have the proven ability to manage this type of educational
program.
September 2007
| 
