Examination of Witnesses (Questions 1
- 19)
TUESDAY 16 OCTOBER 2007
MR GARETH
STACE AND
MR IAN
RODGERS
Q1 Chairman:
Good morning. Welcome, everybody. Thank you very much for coming
in. Could I kick off by asking you just to remind us about the
kind of organisation that EEF and the Manufacturers' Climate Change
Group represents. Perhaps you could also summarise your view of
the Climate Change Levy and the Climate Change Agreements first
of all.
Mr Rodgers: I am the Director
of UK Steel, which is the sectoral trade association for the iron
and steel industry in this country. Amongst other things, we run
the steel industry's Climate Change Agreement which in terms of
energy consumption is probably the largest Climate Change Agreement
in the UK. We are, since a merger about four years ago, a division
of EEF, which is the voice of the manufacturing sector more generally,
which Gareth comes from.
Mr Stace: I am Gareth Stace, Head
of Environmental Affairs at EEF. I manage the Climate Change Agreement
for the steel sector. In a previous role, I have managed another
Climate Change Agreement for a very different sector I am also
the Chairman of the Manufacturers' Climate Change Group, which
has evolved from the ad hoc Energy Tax Steering Group—you
can see why we changed the name—which is a formalised group
of energy intensive sectors that was formed at the beginning of
the Climate Change Agreements to discuss and provide a unified
voice from energy intensive manufacturing companies and sectors.
We look at Climate Change Agreements, the Emissions Trading Scheme
and now the Carbon Reduction Commitment.
Q2 Chairman:
Do you think the levy and the agreements are the right sort of
instruments to tackle the problem?
Mr Rodgers: We certainly think
the agreements are the right sort of instrument to tackle the
problem. The steel industry, back at the beginning of the century,
was urging the adoption of negotiated agreements as the way forward,
negotiated energy commitment agreements but with some sort of
penalty attached for non compliance. The CCA is an extension of
that concept, with the penalty obviously being a return to the
full 100% Climate Change Levy if you fail to meet your targets.
We think the CCA has been a very cost-effective way, in terms
of not damaging our competitiveness while at the same time delivering
environmental improvements.
Mr Stace: If we look back at formation
of CCAs in 2001, negotiated from 1999, they were the first of
their kind in the UK. In addition to the quantitative results
that we have seen of reducing emissions, which are very significant
from all sectors, we really see, in a way, almost the bigger benefit
of a more qualitative measurement, in terms of bringing energy
efficiency very much up the agenda at a time when perhaps it was
not. It was very low down at that time. Things have changed now
and so I think it is quite difficult to look back and see where
we were then and where we have come to now, and I think the Climate
Change Agreements have been a big part of that.
Q3 Chairman:
Focusing on the levy for a moment, the Cambridge Econometrics
study suggested that most of the savings from the levy were the
result of the "announcement effect" and the fact that
people started thinking about it when it was introduced, rather
than the levy itself. Is that your view as well?
Mr Stace: In terms of the levy,
there was an announcement effect. I think that has stayed with
us. However, the sectors that are not subject to or cannot join
the Climate Change Agreements really now see the levy as just
an added cost to energy that is unavoidable. For our sector, in
terms of the steel sector, we probably did not really see an announcement
effect from the levy because energy efficiency was much further
up the agenda at that time anyway. I think we might see it in
perhaps the less energy intensive sectors, or the smaller sectors,
than the steel sector. At the time, the announcement effect might
be confused with an actual cycle of downturn in manufacturing
in the UK. Also, within the steel sector we saw a reduction in
production which led to a reduction in emissions at the time.
I think there are other factors; it is not just the announcement
effect of Climate Change Levy that we are seeing. I was just there
focusing on CCL rather than CCA and the announcement effect of
CCAs.
Q4 Colin Challen:
The National Audit Office have highlighted in their report that
energy prices in general have risen considerably since 2001, whilst
the levy impact on energy costs has declined. They said, "Therefore
companies do not recognise the Levy as a major decision driver."
Do you think the levy is really driving energy efficiency improvements?
Or is it just a bit of additional cost which does not impact on
people's decision making?
Mr Rodgers: For the steel sector,
because we are covered by a Climate Change Agreement and because
we could incur additional levy costs of over 30 million per annum
if we failed to meet our targets, given that there is the rolling
two-year reduction in targets within the Climate Change Agreement,
I think the CCL/CCA system as a whole is continuing to drive whatever
additional energy improvements can be squeezed out of the system.
Mr Stace: I think it is one factor
that companies will take into account when deciding upon investment
in energy efficient plant or systems within their companies. I
think when energy prices went up, the cost of the Climate Change
Levy diluted that to some extent, but that would not have gone
away. In terms of our members, the energy prices, yes, have gone
up, but securing the 80% rebate is the main focus for our members.
As I have said, the benefit is not just securing the 80% rebate;
it goes far beyond that into how companies have changed by being
in Climate Change Agreements.
Q5 Colin Challen:
Setting aside the levy for the moment, has the rise in energy
prices themselves been by far the greatest driver for change in
the industry towards energy efficiency?
Mr Rodgers: Again, I think it
is going to depend on the energy intensity of the company involved.
From the steel sector, there have always been substantial drivers
towards improving energy efficiency because energy is such a huge
part of our costs. In the years prior to the introduction of the
Climate Change Levy and Climate Change Agreements, we reduced
our specific energy consumption, the amount of energy consumed
per tonne of steel, by 40% over a 30-year period, so that has
always been high on boardroom agendas. The fact that energy prices
have been fluctuating quite a bit at quite high levels—certainly
two years ago very high levels—has not been a further driver
because the driver was there already.
Q6 Colin Challen:
If the Government were to look at reforming the levy—it
is currently a flat-rate charge—perhaps if it were put more
along the lines of VAT as a percentage figure, how do you think
that would affect policy? Do you think that would deliver the
Government's intentions better or would it be a charge that is
bound to increase it that you would rather resist?
Mr Stace: Yes, we accept that
the levy has stayed the same since 2001 and is only now increasing.
If it was higher, then it would clearly focus the minds of those
companies which are paying the levy, but, in terms of sectors
that are in Climate Change Agreements, they are only paying 20%
of that, and so the big focus is getting the 80% rebate. If the
levy charge was higher, then that would be all the more reason
to make sure those energy saving targets within your agreements
are met, to avoid paying the full rate of the levy that would
expose your sectors. In the steel sector, we are very exposed
to international competition, and paying the levy would increase
the costs of our materials and we would become uncompetitive on
a global market, so it is very, very important for us to keep
those additional unilateral costs down compared to our competitors.
Q7 Colin Challen:
Does that suggest that we are talking here about an impact that
the levy might make, affecting very marginal decisions whether
to invest or not invest, if it is going to affect competitiveness?
Mr Rodgers: Again, if you draw
a distinction between energy intensive sectors, covered by Climate
Change Agreements, and non energy intensive companies, the NAO
report shows that non energy intensive companies, because energy
tends not to be a significant cost for them, have not really focused
on improving energy efficiency and suggests that energy prices
or energy taxes would have to go to a very high level indeed before
that started making a difference. I am not sure that companies
in those sorts of sectors would relish the impact on their competitiveness
vis-a"-vis their European competitors, let alone elsewhere,
of such additional tax levels. But, again, for sectors such as
the steel industry, we currently pay 20% of the Climate Change
Levy, that is basically wasted tax. That of itself is not driving
any further environmental improvement from us because that is
driven, that is controlled, by the target setting in the agreements,
so already we have a 20% residual tax which is not environmentally
effective. To increase the level of that by increasing the level
of CCL generally I think will simply impose another unnecessary
cost burden.
Q8 Colin Challen:
You perhaps would not agree with the proposition that it should
keep pace with inflation on a regular basis and that would be
a simpler way of addressing the question of where it should be
set. Bearing in mind that the Government is often criticised by
environmentalists of allowing the level of green taxation to fall
as a proportion of taxation overall, perhaps we should have an
automatic increase each year, but you seem to think that would
not be welcomed.
Mr Rodgers: I think it depends
what you link it to. If you link it to inflation—if you
link it to RPI, for example.
Q9 Colin Challen:
Chief executive's bonuses!
Mr Rodgers: That would be understandable.
Mr Stace: But it has changed.
In the last budget, the levels of Climate Change Levy have increased
for the first time since 2001, so our members within the EEF that
are not subject to Climate Change Agreements are seeing an increase
in their energy costs as a result of the CCL.
Mr Rodgers: I think the problem
with linking it to energy prices, by making it a percentage rather
than a flat rate is that, is that with energy prices fluctuating
incredibly widely in this country, certainly for intensive sectors,
if you suddenly have whatever it is on top of that which is the
levy that is going to increase that fluctuation effect and be
quite destabilising for business.
Q10 Joan Walley:
You are saying that the money that is spent on the levy by your
companies would be better spent on making carbon reductions and
investing in energy efficiency and low carbon technology. It would
be better to have no levy at all and the levy is no longer a kind
of way of producing that.
Mr Rodgers: The residual 20% levy
that Climate Change Agreements companies pay has no environmental
benefit, it is just simply a tax. If that were recycled back to
industry, in a very clear way to stimulate further investment
in energy efficient equipment, then that would be an improvement.
Q11 Joan Walley:
What about the Climate Change Levy, as opposed to the Climate
Change Agreement?
Mr Rodgers: Companies in Climate
Change Agreements have to pay 20% of the levy anyway. The only
benefit we get is not paying 80% of the levy. It is that residual
20% levy that I feel is good for the Exchequer but is not delivering
environmental improvements.
Q12 Joan Walley:
But you are not saying that about the Climate Change Levy itself.
Mr Rodgers: The Climate Change
Levy for companies not in CCAs has undoubtedly, as the NAO report
says, delivered some environmental improvement.
Q13 Joan Walley:
Do you think it would automatically follow that if companies were
not paying the levy they would automatically invest it in new
technology with that incentive?
Mr Rodgers: Companies not paying
the levy are only not paying it because they have a Climate Change
Agreement. The Climate Change Agreement itself sets targets that
are negotiated every two years with Defra, which are meant to
be—and in our case are—tough but deliverable targets.
It is the agreement itself that is driving the environmental improvement
for companies that do not pay the levy.
Q14 Joan Walley:
I suppose what I am getting at is would companies of their own
volition be making the investment if there were no scheme at all
for them to be part of?
Mr Stace: In terms of our members
who have Climate Change Agreements and members who have not, we
have seen a huge shift from 1999, when we started to negotiate
the agreements, where we would go and ask companies for data in
order to form a base year and they would find it very difficult
to get that data—you might talk to an engineer and he might
have the data in an oily book but he does not see the bills, the
finance departments have those. We have seen a huge shift in those
companies, where almost every one within that company is aware
of the current efficiency of their facility, how that is improving,
what they can do to improve it, with new schemes within their
company to drive efficiency improvements to meet their Climate
Change Agreement targets. Then we meet companies within the EEF
membership who do not have agreements, who cannot get Climate
Change Agreements, and the story is very different, and, in my
mind, we are almost still back to that place in 1999 where you
ask about energy efficiency and it is not really there. I think
that is why we are really strong believers in Climate Change Agreements,
both for the actual emissions reductions that are taking place,
have taken place and will take place but also, as I keep saying,
for driving this up the agenda and helping those companies to
explore other areas where they could go beyond what they might
do in terms of perhaps energy price increase, going beyond their
targets and realising that they can do more. Because the targets
are renegotiated—in 2004 for the last three milestones and
2008 for the final milestone—we are really delivering—and
I am quoting Defra here—"all cost-effective saving
measures". That is what the targets are based on.
Q15 Dr Turner:
The arguments you are making on behalf of energy intensive industries
would carry a great deal more conviction if it was apparent that
such industries, such as steel in particular, were undertaking
clearly defined R&D programmes to reduce energy consumption
and CO2 emissions associated with production plants. What is the
industry doing to demonstrate it? I think this is a case where
the industry should put its money where its mouth is if it is
going to make an argument for relief from the Climate Change Levy.
Mr Rodgers: I would agree entirely.
The most carbon intensive process within an integrated steel works
is in fact the blast furnace. This is a technology that has evolved
over centuries almost. In the blast furnace, I should explain,
the coal, the coke, is used as a chemical reductant and not as
an energy product as such, and therefore there is a theoretical
minimum amount of carbon that has to be consumed for that chemical
reaction to take place. The technology has advanced to the state
where we have virtually reached that theoretical minimum, there
is little more that we can do, and therefore the European steel
industry, collaboratively, is investing many millions of euros
at the moment in looking at what the next generation of technology
might be. They are currently in a position of evaluating winners
and losers, if you like, they are evaluating possible runners,
which they will then go and research. They will, in a year or
two, select one or two technologies to take forward for far more
intensive research. It is a long-term project but the industry
is aware that it has to do something to develop new technologies
to meet the climate change challenge.
Q16 Dr Turner:
Would carbon capture be a feasible proposition in a blast furnace?
Mr Rodgers: That is one of the
technologies that is being looked at.
Mr Stace: Quoting from the National
Audit Office report, between 2002-04 output in the steel sector
rose by 18%, however the energy use rose only by 9%, demonstrating
an improvement in energy efficiency. Just looking at the UK as
a whole, CO2 emissions between 1997 and 2004 increased by 1.5%,
whereas the steel sector reduced emissions by 23% over that same
period, resulting in a saving of 7.3 million tonnes of CO2 emissions.
So the steel sector is doing quite a lot, and has done historically,
and will endeavour to do as much as we can to reduce costs.
Q17 Joan Walley:
It was not accounted for by closed factories, was it?
Mr Stace: If the aim is to reduce
emissions, that is what the sector has done by closing, perhaps,
inefficient factories and moving the production into other factories
to make those other factories more efficient. An excellent way
of reducing emissions and improving efficiency.
Q18 Colin Challen:
Can I clarify that point. It is based on the same level of production
but you have reduced carbon emissions within the UK.
Mr Stace: Just to explain, our
output between 2002 and 2004 rose by 18% but there was an increase
in energy use of 9%.
Q19 Chairman:
In the other statistic you quoted you were claiming a reduction
of 23% at a time when UK emissions rose.
Mr Stace: Yes.
Chairman: The clarification we need is
whether that is based on a level output or whether there was a
fall in output as well.
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