Memorandum submitted by British Energy
Group plc
(I) BACKGROUND
British Energy welcomes the opportunity to contribute
its views to the Environmental Audit Committee's Inquiry Reducing
carbon emissions from UK business: The role of the Climate Change
Levy and Agreements, both of which have been important economic
instruments for addressing the UK's climate change objectives.
British Energy is the UK's largest electricity
generator. We own and operate the country's eight most modern
nuclear power stations, one coal-fired power station, four small
gas plants and we also hope to develop two large wind generation
projects. Our fleet of nuclear stations make the largest single
contribution to tackling climate change in the UK. Carbon emissions
from our coal plant are subject to the constraints of the EU Emissions
Trading scheme. We provide electricity to the large Industrial
and Commercial electricity market, most of whom will be included
with the CRC, through British Energy Direct.
We have engaged fully in the climate change
and energy policy debate over the years and have responded to
many significant consultations and Inquiries. All our recent Submissions
can be found on our website (www.british-energy.com).
(II) SUMMARY
COMMENTS
— The Climate Change Levy (CCL) and
Agreements (CCAs) provided an important first step in climate
change mitigation in the UK.
— Other instruments have emerged over
the last few years which are perhaps more cost—effective
and provide greater transparency of action.
— Despite much concern about their
ongoing benefits, Government has recently signalled its commitment
to the CCL and CCAs by extending them to 2017. It is not clear
why it has decided on this course.
— If the CCL is to continue, it should
be reformed to become a Carbon Levy which better reflects the
carbon content of the fuel; nuclear which has life-cycle emissions
the same as those for wind should be exempt from the Levy.
— Failing full exemption from the CCL,
the generation from life extension of nuclear plant should be
exempt, incentivising investment in an activity which is important
for the UK's climate change programme.
— The CCL should play no further role
in incentivising renewables production beyond the current arrangements
which exempt these technologies.
(III) RESPONSE
TO SPECIFIC
QUESTIONS
Question 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?
1. The stated main objective of the Climate
Change Levy (CCL) and Climate Change Agreements (CCAs) is to incentivise
the reduction of carbon emissions of one group of stakeholders
in the UK economy. It is fair to say that, as the first major
climate change policies, they have achieved much, not least to
signal the importance of carbon reductions going forward, and
the need to bring the carbon "issue" into boardrooms.
2. The effectiveness or otherwise of the
CCL/CCAs is discussed in some detail by the NAO Review (Climate
Change Levy and Climate Change Agreements, NAO, August 2007).
But in one area at least the CCL has been a poor instrument because
it does not reflect the carbon content of the fuels, deflecting
and diluting efforts to concentrate on this important pollutant;
rather, the consumer is asked to pay the same rate for electricity
derived from coal which has a carbon emission factor of about
900 gCO2/kWh as from nuclear which has life-cycle emissions of
about 5 gCO2/kWh. The latter is about the same level as the life
cycle emissions for wind power, and since renewables are exempt
from the CCL, we believe nuclear power should similarly be exempt.
3. The Government set up the Levy to be
revenue neutral (although according to the NAO Review this is
not the case with the revenues less than the outgoings thus far).
If the CCL is effectively converted to a Carbon Levy to better
reflect the carbon content of fuels, then the rates charged will
have to be increased with coal approximately two times greater
than for gas, and oil somewhere in between.
4. If switching the focus from energy efficiency
to carbon proves difficult to affect, there is still an opportunity
for Government to incentivise important action such as the life
extension of low carbon electricity generation since this helps
the UK meets it climate commitments. In particular, we believe
there should be CCL exemption for electricity produced during
life extension of the UK's nuclear stations (having been approved
by the prevailing regulatory regime). This would encourage the
extension of valuable assets, and since this would form a relatively
small part of the CCL income, would not disturb the smooth running
of the instrument.
5. Energy efficiency and carbon emissions
are interchangeable through well establish emission factors for
the various fuels. As such it would be a relatively straight forward
exercise to change energy efficiency improvement targets to carbon
reduction targets. This will also have the effect of harmonising
most of the policy instruments onto the same metric—carbon
reductions.
6. There is little doubt that an increasing
part of the economy is being covered as new climate change policy
instruments, such as the EU Emission Trading Scheme (ETS) and
the Carbon Reduction Commitment have emerged. But there is also
increasing overlap between, for example, CCL/CCAs and these later
instruments. Further the NAO Report suggests that the CCL, (and
by association the CCAs) is no longer seen by companies as a major
driver for new energy efficiencies, at least in the way it is
currently constituted.
Question 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)?
7. As indicated above, it makes sense to
focus on carbon reductions since this is the metric being adopted
in UK and sector targets, and increasingly with policy instruments
that have emerged since the CCL/CCAs. Improvements in energy efficiency
can make an important contribution to carbon reductions, but it
is not the only one. It is important that all options for carbon
reductions are encouraged, not only to ensure targets are met,
but that they are met at least cost. Of course, carbon reductions
are easier in some sectors than others, and competitiveness issues
must be taken into account. All this suggests harmonisation of
climate change policy instruments towards a single metric in carbon
reductions not only makes sense but is an important ongoing activity
for Government.
Question 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?
8. It is natural that as new carbon reduction
policy initiatives emerge to address different parts of the economy,
as has happened in the UK over the past decade or so, that overlaps,
double counting, and other interactions will occur. This is made
even more likely when the energy system contains the consumption
of primary and secondary fuels, products and services, all having
carbon footprints. This suggests Government needs to take action
to minimise the impacts of these interactions, whether by modifying
the relevant economic instruments or even abandoning them when
they become redundant. It is open for discussion whether the CCL/CCAs
are already largely redundant or will become so in the not too
distant future, at which point it makes sense to remove them altogether.
Question 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?
9. It is widely recognised that trading
offers the most cost effective approach to delivering carbon reductions,
and it makes sense then to offer this opportunity for those with
CCAs to meet their obligations. However, a focus on carbon reductions
rather than energy efficiency would be a better approach, providing
greater transparency of action and harmonisation with trading.
Question 5—What have been the economic impacts
of the CCL and CCA on the organisations subject to them, and the
wider UK economy?
10. It is clear that the CCL has been internalised
by organisations in the same way as VAT and other taxes; the rebates
associated with CCAs have minimised these costs for many organisations.
The crucial issue is whether they have led to energy efficiency
improvements, and thus carbon reductions, in the most cost-effective
manner. Estimates presented by the NAO Review suggest there have
been carbon reductions, although these have been largely caused
by an "announcement effect" rather than a "price
effect". Unless Government opts to increase the CCL significantly
which could harm competitiveness for some sectors, then the CCL
and CCAs should be removed in favour of more effective instruments
such as the EU ETS.
Question 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?
11. The rebate afforded by the CCAs provide
some organisations an opportunity to reduce their CCL burden and
as such advantages these organisations over others—although
it is also true that some of the carbon reductions made by those
organisations advantaged in this way may not have been forthcoming.
Going forward, if the benefits associated with the CCL/CCAs as
they are currently constituted have largely been had, it may be
appropriate to either remove the CCAs entirely, or make the sectoral
targets more stringent for incumbents and open them up to new
entrants that can make further reductions, but possibly lack the
financial incentives to do so.
Question 7—What are the main barriers to
accelerating energy efficiency in the business sector? How can
these be overcome?
12. There are a number of barriers to accelerating
energy efficiency in the business sector including inertia in
the system, costs and payback times associated with potential
solutions, and the capacity and culture of organisations. The
natural time constant associated with many physical systems mitigates
against energy efficiency improvements on a quick timescale, particularly
if the incentive is not sufficiently large. In particular, organisations
are reluctant to affect costly change if the payback period is
too long.
13. Another important barrier is the lack
of the requisite capacity in the organisations involved, or those
providing new products and services. The culture of an organisation
can be an important barrier, although there is much evidence to
suggest that organisations are increasingly taking responsibility
for their carbon emissions. Nonetheless, affecting culture change
in an organisation is a long-term activity, often beyond the attention
span associated with a particular policy initiative.
14. Also, the fact that the same policy
instrument is being applied to a large number of organisations,
in many different sectors, with differing starting positions means
any benefits from a policy initiative can take a long time to
become apparent.
Question 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?
15. The scale of the issue will clearly
depend on the nature of the product but the NAO Review indicates
that in the case of electricity, probably the most ubiquitous
of the "fuels" for organisations affected by the CCL,
the additional cost involved has fallen to about 7% of fuel prices,
and has not thus far been greater than about 12%. Of course some
organisations use more than one fuel source so that the total
cost would be higher in these cases.
16. In a world in which fossil fuel prices
are set to remain high, the contribution of the CCL to the fuel
prices may well remain at these relatively low levels, even with
a CCL that is indexed linked. However, what is perhaps more important
is not whether this is a small or large fraction of fuel costs
but whether it is the most cost-effective way of delivering carbon
reductions by participating organisations.
Questions 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?
17. The Enhanced Capital Allowances (ECA)
scheme is complementary to the other climate change measures,
and can potentially provide an important incentive for companies
to improve the carbon intensity of their operations, particularly
as it addresses two key barriers to the adoption of energy efficiency
equipment: up-front cost and payback time. The Government should
broaden eligibility for the ECA as far as possible.
Question 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?
18. We do no believe the CCL should play
a greater role in incentivising renewables growth. The Renewables
Obligation (RO) is the instrument that is being used to incentivise
the development of this sector. The subsidy awarded by the RO
is significant, making this abatement option already costly in
relation to other low carbon options. Moreover, the Government
has only recently consulted on changing the RO to provide greater
incentives for those renewables not in the mainstream.
19. The average ROC price in the auctions
since 2001 is £45.5/MWh, which is an order of magnitude higher
than the Levy exemption benefit and shows why the latter has had
little impact on renewables growth. It would be necessary to increase
the Levy to much higher levels (with all the competitive issues
for other sectors) for there to be a discernable difference. Alternatively,
it could also be argued that removing the Levy exemption from
renewables would have little impact and consequently it may be
more logical to switch this benefit elsewhere, where it can make
a difference.
15 October 2007
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