Examination of Witnesses (Questions 40
- 56)
TUESDAY 16 OCTOBER 2007
MR GARETH
STACE AND
MR IAN
RODGERS
Q40 Jo Swinson:
Do you have anything you want to add to that?
Mr Rodgers: Not particularly,
no.
Q41 Jo Swinson:
Would you be able to say something briefly on what happens in
other EU Member States and the impact energy taxes there have
on their competitiveness and what your awareness is from your
competitor companies in the rest of the EU about the regimes in
different countries.
Mr Rodgers: A number of Member
States do not have systems. The one we are aware of, that is not
identical to the Climate Change Agreements but has been in place
for some time, is in the Netherlands. Obviously my largest member
happens to have a very large plant in the Netherlands and there
is a tax exemption given there for the large energy intensive
companies like Corus meeting energy commitments. There are similar
systems, we are told, in a number of Northern European countries
but the framework that other countries are working under is of
course the Energy Products Directive, which sets out minimum levels
of energy taxation that countries have to apply, and those minimum
levels are considerably lower than the Climate Change Levy in
the UK. The only one with which it is possible to make a direct
comparison without some very complicated arithmetic is on electricity,
where the minimum level that need to be imposed across Europe
is about 8% of the level of the Climate Change Levy.
Q42 Mr Caton:
Can we move on to look at Enhanced Capital Allowances scheme that
was brought in at the same time as the Climate Change Levy. Its
impact does not seem to have been anything like as great as the
Government hoped and expected. Why do you think that is and what
can be done about it?
Mr Stace: I think that is very
important. Our industry had great hopes for the Enhanced Capital
Allowances scheme. I think the problem is that the real benefit
from a member company purchasing its equipment kit from that list,
the Enhanced Capital Allowances list, is not as great as we envisaged
back in 2001. What happens is that a member will realise that
the discount they will get from 100% Enhanced Capital Allowances
to be able to offset that in the first tax year after they have
purchased the piece of kit, might be between 5 and 10%, or something
in that region, and they find that the kit that is on the list
actually is more than a 10% cost increase than items that are
not on the list and, therefore, I think we find our members not
going for things that are on the list. I think it is not as well
publicised as it could be as well. I think a lot of our members
are very unaware of the Enhanced Capital Allowance scheme. Of
course, you only benefit from it if your company is in profit.
We would like to see something to help companies that are not
in profit, and therefore perhaps have more need than companies
that are in profit, to be able to gain some benefit from purchasing
energy efficiency equipment. We would like to see the benefit
increase somehow and one thought might be—and this is not
firm policy here; we would be open to a number of different ideas—to
increase the 100% to something like 200% Enhanced Capital Allowance,
just to provide that extra benefit to member companies to encourage
them to go to the list to find suitable plant which is on that
list, purchase those and increase their efficiency as a result.
We might be finding our members buying energy efficiency equipment
that is not on the list, which does not have the certificate—because
you have to apply to get on the list—because it is a bit
cheaper but it might be just as energy efficient.
Q43 Mr Caton:
Have your members told you that if the carrot was increased in
the way you are describing that they would be more likely to get
into the scheme?
Mr Stace: Yes, but, more strongly,
when I am asking them if there is any routine maintenance or big
extensions to their operations, I am always saying, "Have
you looked at the Enhanced Capital Allowances list?" they
say, "Yes, yes, but we don't see it being a real driver,
a real benefit" and they discount it, which, as you say,
is very unfortunate.
Q44 Joan Walley:
Could I press you a bit more because I do not really understand
about the list. I do not understand how the list is drawn up,
what influence industry has in determining what would qualify
to be on the list and what incentives there are to get other technologies
on to the list that presumably would be of benefit. I just would
like to have a bit of an idea about how that list is accessed
by the different things on it.
Mr Stace: If I was manufacturing
variable speed drives and they were very efficient and I wanted
them to get on to that list, I would have to apply and prove that
my variable speed drive is very efficient and therefore should
be on that list.
Q45 Joan Walley:
Who determines what goes on to that list?
Mr Stace: As far as I am aware,
that is Defra.
Q46 Joan Walley:
Do you have no discussions or talks with Defra officials as to
how that list is comprised, what goes on to it?
Mr Stace: Historically we have
not. We might encourage our members who are manufacturing kit
that could go on the list to do that.
Q47 Joan Walley:
Do you do that? Do you proactively go out and do that? Would engineering
firms in my constituency, for example, have heard from you about
what they would need to do to get their products on to that list?
Mr Stace: We do but, discussing
this now, we probably do not do that enough because it is one
of those things where it has been there since 2001 and, as time
goes on, we almost discount it more and more. Could this be an
opportunity where we talk it up to members again and try to invigorate
our members to get their equipment on that list and then our other
members to purchase plant from that list? As it stands, there
may not be the incentive to do so.
Q48 Joan Walley:
Or there may not be the awareness.
Mr Stace: No.
Q49 Mark Lazarowicz:
As I think you mentioned in passing a few questions ago, a number
of firms will be subject both to the Climate Change Levy and Climate
Change Agreements and also the EU ETS as well. In practical terms,
what implications does this have for your members companies in
how they cope with having to comply with a number of different
schemes?
Mr Stace: I think it is very confusing,
even for large companies, that are subject to both Climate Change
Agreements and EU ETS, and then possibly, in the future Carbon
Reduction Commitment and then obligations under IPPC as well.
I think they are kind of forced at the moment to live with that.
But we see there is a different coverage within their operations
of what is covered within EU ETS and what is covered by CCAs,
different gases, different measurements in terms of Climate Change
Agreements. If you have a carbon target, that is based on carbon
and not on carbon dioxide, but your compliance with CCAs is carbon
dioxide. It is quite a confusing message that comes out from Government
for our members in terms of where the focus really is.
Q50 Mark Lazarowicz:
Can you give us some idea of what effect that has in practical
terms, as to how companies behave in response to these. What are
the results of that? It probably costs more in administration—I
understand you are going to say that—but in terms of how
it affects their behaviour, what effect does it have?
Mr Stace: It does cost more in
terms of administration—you know, in terms of different
reporting periods and that sort of thing. They are very different.
In who they are reporting to, the verification requirements are
very different. The allowances used for compliance are different
and when the Carbon Reduction Commitment comes in they will again
be different. So they will have three different allowances, almost
non transferable, that can be used for compliance for those three
schemes. But I think our members, particularly the larger ones,
are struggling along with being in both EU ETS and CCA and reporting
separately for them but double-counting certain emissions within
that. I said in our response that I think Defra has worked quite
well with us to try to overcome the problems that our members
face with being in both schemes and I think we have come up with
a solution that works reasonably well—I will not say well,
actually, at all—now, for milestone 4. Possibly we would
need to think about something different for milestone 5. Definitely
we need to think about something different beyond milestone 5,
with the announcement last week that CCAs will extend to 2017.
Defra, I hope, are very keen to work with us to come up with a
better solution to the issue of double-counting than we have at
the moment but it is a very difficult nut to crack really.
Q51 Mark Lazarowicz:
Would the introduction of a Carbon Reduction Commitment be an
opportunity to bring about some of the simplification, clarification
which you clearly would like to see or will it inevitably bring
in its tread more confusion?
Mr Stace: I think it would make
it more confusing. I think our members understand Climate Change
Agreements well now. That took a number of years for them to bed
in. I do not know if you are suggesting it, but to try to move
that then over to Carbon Reduction Commitment would really add
complexity and change the shift and focus of where our members
are. I think we are always calling for longer-term certainty.
Our members need to think about investing. Lifecycles in our industry
are 20/30 years, so if we do not have that long-term certainty
of where we are and what is expected of us in the future then
it is going to be very difficult to make those investment decisions.
Q52 Chairman:
Finally, your memorandum suggests that businesses are turning
against emissions trading in favour of taxation and regulation
as a way to achieve the goals. Would you like to say a bit more
about why that is?
Mr Rodgers: That came from a survey
that EEF conducted of their members, so Gareth can talk to that.
But, coming over here, we were speculating as to what the reasons
might be and one of the reasons is undoubtedly predictability
and certainty. In the steel industry, if you wind the clock back
a few years, we were already regulated through IPPC and its UK
predecessor. Then the Climate Change Levy came along, which could
have been ruinous had we not had Climate Change Agreements. So
we get used to Climate Change Agreements, which were an extension
of what we had been asking for anyway, and this then becomes overlaid
by Emissions Trading Scheme. At the moment that is having little
real impact, because during phase 1 it is learning by doing and
there is plenty of carbon in the system; that is not going to
be the same in future. It is partly that companies like what they
know already—and we know Climate Change Agreements and we
know they work and they of course are a necessary counterpart
of the tax, of the levy. EU ETS will or does create that extra
degree of uncertainty. It is a cap in trade scheme. It looks like
it is going to remain a cap, a trade scheme, applied just within
the European Union, whereas we have competitors outside of the
European Union from non carbon constrained economies. Our main
non-European competitors these days are China, Brazil and India,
all non carbon constrained economies. We can see that if we get
the situation where we are carbon constrained ourselves, in the
sense that we have to buy allowances, that is going to be very
costly. That is why, instinctively, we feel that EU ETS as currently
constructed, as a cap and trade scheme, is not something that
we relish.
Mr Stace: I think the results
come from two surveys that we did, one on energy and energy prices
and another on tax in general. Unfortunately, we did not ask for
reasons, so it was tick the box, and what came out at the top
was that energy taxation is more preferable to emissions trading.
This is also seen in the PWC report that we have seen.[8]
I am wondering if it is more, as Ian said, that these companies
understand tax. They have always paid tax, so another tax is something
they feel more comfortable with; whereas, if they have not been
subject to an Emissions Trading Scheme before, it is a whole new
ball game that they really do not understand at the moment, and
they worry that it is going to increase their costs and be more
of an administrative burden than a tax would be. I am saying that
if the survey went to FD's companies, that is what they might
be saying. I think we should understand that Emissions Trading
Schemes are not simple. That is why we are probably here today,
because the Climate Change Agreements and Climate Change Levy
is not a simple issue. Okay, it seems quite simple now in 2007,
but introducing this to our members from 1999 until when it came
in 2001 was really an uphill struggle and an awful lot of work
educating our members as to what it is going to mean for them.
That is the reason why I would say our members are not advocating
the Emissions Trading Schemes.
Q53 Dr Turner:
Do you think that in part, though, your members' attitude towards
EU ETS might be improved were it more demonstrably effective than
it has been and were it demonstrably fairer across different European
countries than it has been up to now? Would that attitude be even
further improved were the ETS to be transmogrified into some sort
of European carbon tax which is much more readily understood and
much more predictable?
Mr Rodgers: That is a complex
series of questions. Certainly the lack of consistency across
Europe has been a concern in phase one. It looks like it will
be less of a concern in phase two because the Commission has cut
back the National Allocation Plans for every Member State other
than the UK. Transmogrifying it into a carbon tax? The problem
is that we exist in an international market. If by transmogrifying
it into a carbon tax it means that you can then start imposing
that same tax on all products, regardless of where they are manufactured,
that is a way of eliminating the competitiveness impact of it—and
we certainly have no policy position on this (it is not something
we have debated)—you could see that that might be a preferable
solution to what we have and what we are likely to have post-2012,
which is a cap and trade scheme where the greatest incentive will
probably, for compliance, be reducing output rather than improving
energy efficiency.
Mr Stace: Then, if we reduce output
in the steel sector in the European Union, somebody else is going
to produce that steel and they might produce it less efficiently
and, therefore, global emissions will increase. So, environmentally,
it is actually making the situation worse.
Q54 Chairman:
All those objections would apply to a tax anyway. A tax is not
going to be paid by Chinese steel producers if it is a British
or EU tax.
Mr Rodgers: With a tax it does
become easier to impose something at the border which is WTO-compliant.
It is virtually impossible, I think, to impose a border measure
within EU ETS and keep it WTO-compliant. With a tax it does become
easier.
Q55 Joan Walley:
Can I just press you a bit more on that? It is this area of competitiveness
and production that is taking place in countries which do not
have the same targets, agreements and levies to meet. I just wonder
what work you are actually doing at the international level which
would, if you like, start to look at how this lack of a level
playing field, in terms of manufacturing processes, should be
incorporated into the kind of international agreements, and where
that fits with the European Emissions Trading Scheme, and where
it fits with the levy and agreements in this country.
Mr Rodgers: We certainly think
that the globalisation of whatever scheme we have is the way forward.
The International Iron and Steel Institute only last week met
and agreed that all the major players, all the major steel companies
around the world will start exchanging data. This is an interesting
first step towards something that could lead to an international
agreement. We would certainly support international sectoral agreements
as the way forward, as a way of constraining carbon but, at the
same time, not hitting competitiveness.
Q56 Joan Walley:
Can I ask how that started, that discussion, and interfaces with
the international negotiations and the international framework
that is going on currently looking at international agreements?
Mr Rodgers: Probably, at the moment,
it is not interfacing a huge amount because the steel industry
only took this international decision last week. However, clearly,
the next stage has to be some sort of interface with the international
negotiations for the post-2012 global system.
Chairman: Thank you very much indeed.
That has been very helpful to us.
8 A Review by the NAO on The Climate Change Levy and
Climate Change Agreements, August 2007, p.41. Back
| 
