House of Commons - Environmental Audit

Select Committee on Environmental Audit Minutes of Evidence

Memorandum submitted by the British Cement Association

EXECUTIVE SUMMARY

— Early action has been taken by the cement industry to tackle climate change. Between 1990 and 2006, the BCA member companies have reduced direct CO2 by 29%, giving an annual CO2 saving of over 3.9 million tonnes

— The current climate change policy mix is cumbersome and inefficient, this will be exacerbated if cement companies become subject to the Carbon Reduction Commitment.

— The policy mix should be designed around efficient regulation that minimises overlap and duplication and should conform to Better Regulation Commission's seven tests for climate change regulation, including keeping administrative costs to a minimum.

— Overlaps between the Climate Change Agreement (CCA) and EU Emissions Trading Scheme (EUETS) should be removed at the earliest opportunity and especially prior to EU ETS Phase III in 2013.

— Climate Change Agreement (CCA) have done their part but are now largely redundant for industries whose CO2 emissions are wholly in EUETS; as such the CCL should be removed for EU ETS sectors if not then the EU ETS compliance to be used for achieving the CCL rebate.

— EU ETS is the cornerstone of UK policy going forward; CCA targets have a finite life of 2010.

— Encourage best practice by using benchmarking, as positive measures are more likely to be accepted in a globally linked trading system

— Adaptation to climate change is necessary; cement and concrete used as thermal mass in buildings will help to mitigate the climate change effect.

THE UK CEMENT INDUSTRY

1. The UK Cement Industry. The British Cement Association is the trade and research organisation that represents the interests of the United Kingdom's cement industry in its relations with Her Majesty's Government, the European Union and relevant organisations in the United Kingdom. The members of the BCA (Castle Cement, Lafarge Cement UK, CEMEX UK and Tarmac, Buxton Lime and Cement) are the major domestic manufacturers of Portland Cement producing over 90% of the cement sold in the UK. Additionally, BCA supplies services concerning climate change issues to Quinn Cement.

2. Energy represents an increasing proportion of the variable costs of cement manufacture (35% to 40%) and it is therefore a primary concern of the industry to take all cost effective measures to improve energy efficiency and thereby reduce its emissions of carbon dioxide.

3. The cement industry believes in the principle of emissions trading and has supported UK Government through its signature of the Secretary of State's UK Manifesto for the EU Emissions Trading Scheme (EU ETS), and its promotion within Europe.

4. Through their parent companies, Lafarge Cement UK, Castle Cement, and CEMEX are committed to carbon reductions through the World Business Council for Sustainable Development Cement Sustainability Initiative, (WBCSD CSI). In addition, Tarmac Buxton Lime and Cement has undertaken to adopt the commitments within the WBCSD CSI.

5. Specific Inquiry Questions

5.1 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?

5.2 The Climate Change Levy currently permits primary targets to be set in relation either to quantitative energy efficiency improvements, ("relative targets"), or carbon reduction, ("absolute targets"). In practice the majority of participants within the scheme opted for relative targets and whilst these have been in the most part met, they do not guarantee overall carbon reduction, since the level of production needs to be taken into consideration;

5.3. UK industry is over burdened with an excess of instruments relating to climate change. The UK cement industry is subject to the Climate Change Levy, (and the associated Agreements), the EU emissions trading scheme (EU ETS) and potentially the Carbon Reduction Commitment (CRC).

5.4 The Climate Change Agreements may contain relative or absolute targets and as such allow flexibility to both industry and government. There is no need for radical reform of the climate change levy or agreements given that the target periods end in 2010. In the post 2010 period the EU Emissions Trading Scheme will be well established and should form backbone of climate change policy in the UK. The climate change levy/agreements and the CRC should be useful for those companies that fall outside the EU Emissions Trading Directive[11] Annex I activities.

5.5 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)?

5.6 The UK cement industry response to the EFRA Committee on the pre-legislative scrutiny of the Climate Change Bill[12] supported long-term greenhouse gas budgets, rather than targets limited to carbon dioxide. The UK cement industry opposes absolute caps on energy because such an instrument may severely damage the operation and competitiveness of the UK cement industry. Furthermore it would restrict the range of fuels used in the cement industry because the use of alternative fuels[13] generally increases electrical energy use due to additional handling and preparation. Barriers to alternative fuel use in the cement industry would seek to restrict the waste management options for the UK industrial, commercial and domestic sectors and potentially redirect wastes to landfill or incineration without energy recovery and thus increasing the UK climate change emissions.

5.7 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?

5.8 Although the Stern Report[14] advocates the use of environmental taxes alongside emissions trading and regulation, this is in the context of a coherent policy package. However, it is clear from Stern Review and the evidence presented to the Treasury Select Committee inquiry on the Stern Review that these instruments are to be used as alternatives. It is counter-productive to impose more than one instrument in order to achieve the same or very similar objectives. This is currently the case for many of the energy intensive industries, which are subject to the UK CCL and EU ETS. The matter will be further exacerbated should they additionally fall within the ambit of the proposed Carbon Reduction Commitment. Overlaps of this kind do not result in further emissions reductions and do not adhere to the seven tests for good climate change policy from the Better Regulation Executive.[15]

5.9 When more than one carbon-reduction instrument is applied, the industry or installation concerned is subject to the substantial additional costs associated with monitoring, auditing, and reporting to slightly different criteria. In the case of parallel operation of the CCAs and EU ETS, there is the additional complexity of reconciling the target achievement in each scheme and the carbon credits purchased or sold—the so-called "double trading" issue.[16] This alone highlights the incompatibility and inefficiency of the current situation. Annex I illustrates the complexity of the current situation where IPPC installations have energy efficiency conditions are also subject to CCA/CCL and EU ETS with differing boundary conditions.

5.10 BCA believes that it is essential to remove the duplication between the UK CCL and EU ETS. Companies could then focus their efforts on the reduction of carbon emissions rather than focusing on compliance with the differing rules and regulations for the two schemes.

5.11 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?

5.12 Carbon Trading is an effective management tool within climate change policies. There have been examples in the UK cement sector where companies have needed to purchase allowances because production difficulties meant that they found it difficult to meet their targets. Likewise, other cement companies have been able to call upon banked allowances from previous over achievement to meet a subsequent shortfall. Overall the cement sector has overachieved and there have been real carbon savings. Overachievement of the UK cement industry CCA targets is due to significant investment rather than unchallenging targets. UK cement companies have invested significantly in new kiln technology and new fuel handling capabilities that have resulted in a good CCA performance.

5.13 On the other hand, in the 2006 compliance year, most trading in UK Trading Scheme by the UK Cement Companies has been purchasing or using banked credits to meet the requirements of the target adjustments resulting from the complex "double trading" arrangement. As such, the usefulness of the original CCA targets has been in some cases completely overwhelmed by these double trading arrangements.

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

5.15 Cement is a strategically vital and generally locally produced commodity;[17] however, the manufacturing process is fundamentally energy intensive. The climate change levy is a direct taxation of fuels and would add around £25 million per year to the cement industry without the 80% discount. Consequently the CCL rebate is vitally important to the UK cement industry profitability, desirability for investment and essential to ensure that cement is manufactured in the UK near to where it is used. The UK cement industry is a small employer and as such the discount in National Insurance Contributions does little to mitigate the impact of the Levy. Although the UK emissions trading scheme can be used as mitigation for failed targets so the lowest cost of the CCL to the cement industry is £4.9 million plus admin., reporting etc per year. Energy intensive industries greatly depend on the CCL discount, but there is uncertainty over its future. Industrial companies with CCAs are currently uncertain about the climate change policy that will be applied to them by Government at the end of current CCAs. The cement industry feels strongly that an early start to discussions about the future of CCAs is essential. This is necessary not only to ensure that Government and energy intensive industries can start planning for target periods after Milestone 5, but also to ensure exemption from CRC. Entry into CRC would add yet further complexity to industries, which have parallel obligations under CCAs, IPPC and EU ETS. Whilst the CCL is set to continue beyond Milestone 5, energy intensive industries covered by CCAs are only able to claim the 80% CCL discount up to the end of the 6th certification period up to March 2013, subject to further EU State Aid approval. A conclusion on this issue is needed before the 4th CCA reconciliation period to ensure that cement, and other energy intensive industries, can plan investment and properly assess the potential business impact of CRC.

5.16 Under the EU Emissions Trading Scheme the UK Government has stated[18] a desire to shift away from free allocation of allowances towards auctioning. With annual emissions of around 10Mt CO2 per year the UK cement industry is extremely exposed to auctioning in the absence of a global carbon dioxide trading system. The cost of auctioning to the UK cement industry could be 10Mt at €35 is €350,000,000 per year based on a recent forecast by the Deutsche Bank.[19] The combination and magnitude of costs associated with the CCL plus EU ETS auctioning would signal the demise of cement manufacture in the UK and agree with recent comments that environmental taxes do not compare to the environmental impact from the activities they are directed against.[20]

5.17 The climate change agreements have served to promote the use of alternative fuels in the cement industry by making them exempt of the levy and carbon neutral in terms of meeting the targets. In doing so there has been a small but positive impact on the UK economy. The use of alternative fuels in the cement industry provides a cost effective solution for industrial, commercial and domestic waste management; in 2006 the cement industry replaced 15% of its fuel with waste resulting in the saving of around 250,000 tonnes of coal equivalent. The differences between the CCA and EU ETS definitions for "carbon neutrality" means that the EU ETS provides less incentive to replace fossil fuel with waste alternatives. However, other benefits exist from using alternative fuels such as the lower emissions of sulphur dioxide.

5.18 Should the Climate Change Agreements be reformed in any way? For instance, should the Agreements be simplified, or the sectoral targets made more stringent?

5.19 Beyond March 2012, the CCAs should cease to exist for sectors subject to EU ETS, provided that the CCL is not applied to them or the 80% discount can be applied in another way. In the interim, Government has the opportunity to revise CCA targets in 2008. Any proposal for the reduction of carbon emissions must take into consideration the potential for abatement of each of its participants. Most of the energy intensive industries have made significant reductions under the UK Climate Change Levy, the EU Emissions Trading Scheme, and other measures; see annex II. As a consequence, of around £500 million investment in the UK cement industry over recent years, the potential for further reductions is limited.

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

5.21 It takes around seven years to design, build and commission a cement plant that will have a lifespan of about 30 years. At a cost of around £150 million new cement plants are the main method for step changes in plant efficiency. However, the industry has already undertaken a significant investment programme and with the current uncertainty and overlaps in the UK climate change policy the prospect of further investment in manufacturing facilities is limited. The recent announcements[21],[22] from global cement companies confirm this. Investment has been diverted toward import facilities where UK manufacturers have recently invested in import terminals.[23]

5.22 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?

5.23 All countries and all industries will need to adapt to climate change and the UK cement and concrete industries will play their parts. There is still plenty of scope for the Government to capitalise on energy saving improvements in buildings, especially in the field of thermal mass. Thermal mass is a term used to describe the ability of a material to absorb and retain heat. It can be used to good effect in the fabric of a building by allowing it to absorb excess heat gains during the day and subsequently releasing them at night with the aid of natural or mechanical ventilation. This is particularly relevant in a warming climate. This process has the effect of moderating the temperature swing within the building and lowering the peak temperatures experienced during the summer by approximately 3C.[24]

5.24 Traditional masonry built houses and larger buildings incorporating concrete elements provide a high a level of inherent thermal mass and perform particularly well, they also last for many years and thus provide a low energy solution when the whole building life cycle is considered. For example, the energy consumption of a naturally ventilated high thermal mass office is typically about half that associated with a modern, good practice air conditioned office such as Building Type Three described in Econ 19[25] and the "in use" energy consumption of a house is typically 90% of its overall embodied and in use energy requirement. This is particularly important given the recent findings of research undertaken by Arup and commissioned by DTI, which highlights the key role that thermal mass is set to play in minimising overheating and helping avoid air conditioning as climate change drives up temperatures. Predicted changes in the UK climate, indicate that average annual temperatures are likely to increase by 2C to 3.5C this century.[26] This will result in warmer summers and increase the demand for energy intensive air conditioning systems. To counter this, the exploitation of thermal mass in building design could make a useful contribution in preventing growth in this area. As the operation of buildings account for 50% of UK CO2 emissions, as well as a large proportion of UK energy use, even a small improvement in this sector will translate into significant savings in both CO2 emissions and energy.

5.25 The consideration of "whole life" building impacts is particularly relevant given that architects and specifiers currently use the Building Research Establishment (BRE) "Green Guide" methodology[27] which narrowly focuses on embodied impacts of construction materials and not the impact of the building during its "in use" phase.

5.26 As the largest procurer of construction industry services, Government is in a privileged position to set the benchmark for sustainable construction projects for schools, hospitals, other public buildings, as well as transport infrastructure projects. Setting benchmarks in the built environment that can be exported to developing nations will signal the UK as a leader in climate change issues. These too should not be short term solutions, but look to the longer term and be based on whole life performance not just initial or lowest cost. The same principles should be extended to local government.

5.27 CCL or CCA are not the best fiscal instruments to encourage energy or carbon saving during product use. Reduced level of VAT or grant aid of some sort would be more useful.

5.28 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?

5.29 The use of ECA in the cement sector has had limited effect on the climate change agreement targets. The main improvements in energy efficiency have been through the investment in new cement plants and investment in, and use of, alternative fuels.

5.30 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?

5.31 The cement industry (via electricity prices) already pays for the renewable obligation and the investments in renewable technology and as such further taxation is not necessary.

5.32 The cement industry broadly supports renewable energy development in the UK but cement producers vie with the electricity supply industry (ESI) for combustible biomass material. The current status of the RO means that co-firing biomass is incentivised only in the electricity supply industry (ESI) and as such this distorts the supply/demand of potential co-firing fuels.

5.33 The RO therefore places a market restriction on the use of biomass fuels in the cement industry which could impede its ability to meet targets under Climate Change Agreements and EU Emissions Trading Scheme in the future.

5.34 These impacts could be far reaching because alternative fuel handling takes significant investment which could be diverted elsewhere by the multinational parent companies of the UK cement producers.

11 DIRECTIVE 2003/87/EC OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL of 13 October 2003 establishing a scheme for greenhouse gas emission allowance trading within the Community and amending Council Directive 96/61/EC Back

12 Ev 146 EFRA Committee Draft Climate Change Bill Fifth Report of Session 2006-07 (5 July 2007) Back

13 Alternative fuels include those that are not coal and petcoke such as tyres, solvents, paper/packaging waste and biomass fuels Back

14 Stern Review on the economics of climate change, HM Treasury Back

15 Better Regulation Commission seven tests for better climate change regulation: Back

16 Defra document CCA 23, "Avoiding double counting between CCA and EU ETS", 23 March 2006. Back

17 Around 90% of the cement consumed in the UK is manufactured in the UK, but imports are rising. Back

18 EU ETS Phase II Regulatory Impact Assessment-Auctioning, February 2007. Back

19 ENDS Europe DAILY 2368, 30/07/07-EU carbon price forecast to hit new highs. Back

20 The Case Against Further Green Taxes; The Tax Payers Alliance, September 2007. Back

21 Lafarge Cement UK (21 May 2004) confirmed that it is delaying the development of its new cement works at Snodland in the Medway Valley. Back

22 CEMEX UK Operations (14th March 2006) has announced that following the completion of a feasibility study, the company has suspended an application for planning permission for a new cement plant at Barrington, Cambridgeshire "due to uncertainty over the future of CO2 strategy in the UK". Back