Select Committee on Environmental Audit Minutes of Evidence


Submission from The Society Of Motor Manufacturers and Traders Limited

  SMMT is the leading trade association for the UK automotive industry, providing expert advice and information to its members as well as to external organisations. It represents more than 500 member companies ranging from vehicle manufacturers, component and material suppliers to power train providers and design engineers. The motor industry is a crucial sector of the UK economy, generating a manufacturing turnover of £47 billion, contributing well over 10% of the UK's total exports and supporting around 850,000 jobs.

  SMMT has had a climate change agreement since 2001. Currently we have 25 sites in the CCA. They have made significant improvements against their CCA targets through hard work, investment and increasing output.

Below we answer the 10 questions laid out by the Committee.

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?

  The CCL and CCAs have worked well and delivered significant emissions reductions. However, SMMT has questioned the need for CCL to continue under the significant rise in energy costs. In addition, when CCL was introduced NIC were cut in lieu, but quickly raised after the introduction of the scheme. However, if the CCL is to continue then it must do so with CCAs also in place. The CCAs were designed to offer some protection to energy intensive sectors. If the CCAs were to be removed and the CCL remains (or sites fall into the proposed CRC), then the competitiveness implications for the sector would be significant.

  When the CCA was first introduced there was much concern over the design of the scheme. It now appears to be working well and SMMT would suggest little change is needed to maintain it as an effective policy instrument. Although the targets are based on energy use, they have delivered large actual carbon savings.

  SMMT has serious concerns that the CCAs are not being given due credit for the environmental benefits they have achieved, and in particular notes that the NAO report suggests that the targets "have not been as stringent as possible" (page 27). The targets in the automotive sector were generated after the government sent an independent consultant to a cross section of automotive sites to assess potential energy efficiency savings. The targets finally agreed went beyond those the independent consultant recommended. Through hard work, early action on investment decisions and also improved volumes the sector has gone beyond its efficiency targets in the previous milestone periods. In 2004 the targets were toughened in the pre-arranged target review. A similar review is due in 2008.

  The CCAs also ensured better collection of energy data—and more access to the data for the trade association. The move to better monitoring of the data ensured that better management of the energy use could be undertaken. The data could also be used to compare sites and this in turn also helped speed up the process of improving energy efficiency. The data also enabled the sector to be more open and transparent in its activities. In this respect SMMT has published a sector sustainability report since 2000. The availability of the energy data also enabled the sector to input into development of other initiatives to reduce energy use, eg the EU ETS.

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)?

  SMMT still believes that the efficiency aspect is very important. Absolute caps can be useful and SMMT is exploring the impact of moving towards them in CCAs, but they could penalise growing companies or sectors. The proposed carbon reduction commitment (CRC) revolves around absolute caps, but is set to include some element of a growth factor in the league table, which will influence an organisations position in the published results and for revenue recycling. SMMT fully supports this position.

  Relative targets can help reward sectors which are growing and which would be penalised by absolute emission targets. A growing healthy manufacturing sector is vital in sustaining jobs and the economy.

  The CCAs involve an efficiency remit in both relative or absolute emissions targets (SMMT members use largely relative targets, but some have switched to absolute).

  SMMT is particularly keen to ensure that CCAs are not removed or adjusted to involve some element of auctioning, as with proposed CRC and the EU ETS. Such a move would affect the competitiveness of UK businesses, with energy intensive companies then subject to not only the full levy costs, but also the cost of buying allowances.

  Having 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. Automotive manufacturing sites usually clearly label and chart details of efficiency per vehicle on the work stations.

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?

  The CCL and CCAs are now established and run relatively smoothly. If the CCL is to stay then the CCAs must also be retained, to ensure energy intensive sectors can remain competitive. SMMT believes that the current situation of only partial site coverage of CCAs within our sector adds an unwelcome complexity and cost to the scheme. SMMT would like to see an impact assessment of moving towards full site coverage, or widening the eligibility criteria of CCAs. Full site coverage would make the scheme simpler to administer, monitor and report. It would also mean that investment opportunities throughout the site to improve efficiency could be taken, rather than a focus on CCA (or EU ETS, etc) aspects of the site. However, any changes to the current regime would also include more work.

  However, SMMT would not like to see CCAs move towards an element of auctioning the emissions rights—as this would impact on the competitiveness of the sector, which is highly open to international competition. SMMT is also concerned about the impact of duel regulations. It is also important that organisations which are in a CCA or the EU ETS are not covered by the Carbon Reduction Commitment (CRC) as well, as this would further increase the administrative burden without significant environmental benefit and would not generate any additional awareness of climate change issues.

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, the steady fall in the value of allowances, due to oversupply from the voluntary UK ETS, has meant that it now provides little incentive to go beyond a site's emissions targets. Without trading though several sites would find it impossible to pass their targets, so it is imperative that the trading element remains.

5.  What have been the economic impacts of the CCL and CCA on the organisations subject to them, and the wider UK economy?

  Within the automotive sector the CCL has added to the cost of producing vehicles and they components in the UK. A large proportion of the industry cannot join agreements—as do not have the IPPC processes deemed necessary by government to join an agreement. For example only 25 sites have a CCA in the automotive sector, but it is estimated there is in the region of 3,000 automotive companies within the UK, most of which do not meet the eligibility criteria to join the CCAs.

  Those sites in CCAs have clearly faced increased costs too. The levy costs those 25 sites some £6.5 million in 2006 (approx £250,000 per site). The monitoring, reporting and verification process is relatively expensive—taking some 40 man-days per annum per company, as well as the costs of installing meters, verifiers, and so forth. The arrival of CCAs coupled with high energy costs and effective efforts by companies to reduce their energy use and improve their efficiency have ensured significant savings in energy use in both relative and absolute terms in the automotive sector. This has helped UK firms remain competitive. However, the loss of MG Rover and Peugeot's Ryton plant highlight the economic climate and competitive pressures UK automotive sites are constantly under within a global market place for automotive products.

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?

  SMMT would like to see the CCAs widened to whole site coverage and for the eligibility criteria to be widened to allow easier entry for sites into CCAs in the first instance. The former could be achieved by adjusting the 90/10 rule to become a 60/40 rule. None of the SMMT sites have full site coverage, which makes administration and monitor, report and verification (MRV) complex and costly. It could also lead to unbalanced investment decisions at a site level.

  The agreement documents themselves do appear overly complex and surrounded by legal jargon.

  There is already a review process for sectoral targets in place and SMMT's targets were made more stringent at the last review. This process is acceptable, although the hard work and efforts of firms (and sectors) should not automatically necessitate a tightening of the targets, as this does discourage the drive for greater efficiency.

  Where the CHP is not all in the CCA then the reporting of emissions is cumbersome, and so could be simplified.

7.  What are the main barriers to accelerating energy efficiency in the business sector? How can these be overcome?

  Resource—both financial and manpower/time is restricted. Automotive manufacturers are efficient at making automotive products. Dealing with complex policy and legal documents is time consuming. The CCAs took a significant effort to develop. New schemes, such as EU ETS or CRC often duplicate the efforts. Some sites find they have to MRV their environmental performance multiple times, but sometimes to cover slightly different time periods and for slightly different aspects of the sites. SMMT has been working with government on Better Regulations, but the process has been slow. The arrival of the new CRC highlights this issue further.

  On a competitive level, the benefits of achieving greater energy efficiency in the UK are welcome and desirable. However, the automotive sector is truly global—85% of what is sold in the UK is imported and 75% of what is made here is exported—and many if not all of the sites located here are not tied to the UK, many are owned by multinationals. SMMT is therefore keen to ensure that automotive sites in the UK do not face regulations and targets which make them uncompetitive in the global market.

  SMMT is particularly keen to ensure that policy instruments, such as EU ETS and CRC, do not place too great a burden on companies by moving to full auctioning of allowances.

  Uncertainty over how the aforementioned policy instruments will change going forward also acts as a barrier to investment decisions about improving energy efficiency.

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?

  Energy intensive abatement technology has to be implemented in many of the SMMT sites which increase energy usage. This should be considered when setting CCA targets.

  Stricter building regulations, which have increased insulation use, will make it easier for manufacturers of such products to meet relative targets.

  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. It is estimated that 85% of a vehicles life cycle emissions come from the in-use phase, just 10 per cent from the construction and 5% from recycling/destruction. So the efficiency of the vehicles in use phase is key to its overall emissions impact.

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?

  ECAs have not been extensively used in the automotive sector. However, they are useful. The most disappointing aspect of ECA is that those operators with arguably the most need for the relief—non-profitable companies—do not get it. This should be addressed to make this a more equitable incentive. Increasing the size of the ECA from 100% to 200% would help make the scheme far more attractive. Expanding the list of products that the ECA can apply to would also help increase the take up.

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?

  The only financial saving from renewable energy is that the levy is not paid. However, the energy used still needs to be reported in the CCA. It may be useful if renewable energy would not count towards the CCA reporting, and targets could be met by installing or buying renewable energy. If only part of the energy is from renewable sources this could be apportioned to the CCA area.

  CCL would stimulate the market for renewable electricity, but the market for this green energy is dominated renewables obligation certificate (ROCs). The market would need to become more liquid for CCL to have an impact incentivising further the growth of renewable electricity.

SUMMARY

  SMMT believes that the CCL and CCAs raised awareness and encouraged members to go beyond business as usual improvements in reducing energy use, and therefore emissions. This achievement has been made possible by hard work, increased investment and in terms of efficiency gains also by improvements in output. CCAs increased the importance of energy management in the boardroom and allowed for top-down commitment from directors, but also for bottom up action by people on the production line, who could see the impacts their actions were making through better monitoring and reporting processes.

  SMMT is concerned that there is an excess of instruments relating to climate change and this is leading to dual regulations and an administrative burden. SMMT has been working with government on better regulation and would welcome a review of the interaction between the CCL/CCAs, EU ETS and the proposed CRC. SMMT has questioned the need to the CCL to continue in its current form, but if it does then it is imperative for the CCAs to continue, as they protect the competitiveness of energy intensive industries. SMMT is concerned that if the CCAs were removed or replaced by a CRC style scheme the competitiveness of an industry which is highly open to international trade and competition would be damaged.

28 September 2007





 
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