Select Committee on Environmental Audit Minutes of Evidence


Examination of Witnesses (Questions 57 - 59)

TUESDAY 16 OCTOBER 2007

MR NICK STURGEON, MR STEVE BRYAN, MR RICHARD LEESE, MR RAY GLUCKMAN AND MR MATTHEW CROUCHER

  Q57  Chairman: Good morning and welcome. Can I say at the outset, as we have got five witnesses together, it is going to need a bit of a management. We have got about an hour or so to get through a few subjects, so I would love to hear from all of you but if you have not got anything particular to add to an answer on one question which has already been said by somebody else, do not feel obligated to respond on every single occasion. Given that you represent quite a wide range of businesses, are there some common concerns about the Climate Change Levy that costs all your members? Would you be able to identify any?

  Mr Gluckman: Can I kick off on behalf of the group? I am Chairman of one of the working groups of the Emissions Trading Group, and all of us sitting here are members of the Emissions Trading Group. I am going to try to co-ordinate responses on behalf of everybody here, but recognising that the Emissions Trading Group represents an enormous range of different activities, including steel, which we have just heard from, and several sectors that are here and others that are not here today. Nick Sturgeon, from the chemical industries, was going to kick off to talk about some of the common themes.

  Mr Sturgeon: We have got, I suppose, four points by way of common themes between us. First of all, in terms of the current CCAs, we believe they are a success story; we have made effective reductions in our energy use under those agreements and we support their continuation for intensive sites like ours. We need something like the Climate Change Agreement to continue to get relief from the Climate Change Levy, and that simply would not be on offer under the Current Reduction Commitment. That is our first point. Our second point is just to note that we have, at the moment, considerable administrative complexity. Some of our sites are only partly covered; some sites are partly covered by CCAs and partly covered by EU ETS, with some activity still not picked up by either scheme. I think that is a confusing picture. We also have overlaps in coverage of EU ETS and CCAs on our sites. Ideally, we would want to get to a situation where we do not have any co-existence with or without overlaps of these instruments on site, and simply have one instrument per site. In terms of any future instrument, we would want to see that continue to minimise competitive impacts, and I have commented on the need to continue to get relief from the Climate Change Levy. At the same time, that instrument needs to be environmentally effective. We want to be sure it has a shape which does not displace activity perhaps to other regions of the world which are not carbon-constrained. Finally, I have noted already the number of schemes we have got and the number of carbon prices we are operating under. Ideally, we would like to have a mix in the UK which ensures that operators, regardless of the scheme they are in, are operating to a single, predictable carbon price, or at least a harmonised carbon price, and which is predictable where we do know where the emissions path is going, so we have some certainty in planning our investments. Many of these intensive sectors have long asset life-cycles, so that is important. Those are our common themes.

  Q58  Chairman: That is a helpful summary. Thank you very much. The Pre-Budget Statement last week confirmed that the levy is going to increase in line with inflation and that the agreements will remain through till 2017. What is your reaction to those announcements?

  Mr Gluckman: Universally, the ETG is very positive about the announcement on the extension of CCAs. Indeed, in the last four or five months, we have written to both Defra officials and Treasury officials requesting that they start the process of thinking of what is going to happen after 2010? We could not believe there was going to be nothing after 2010, so we welcome that announcement. We also have a view that the NAO report gives a surprising balance between an apparently successful impact through the announcement effect of the CCL by itself, and an apparently slightly disappointing performance under CCAs. That is how I read the summary of the NAO report. I think this group here, we all agree that we feel it is the other way round; that the CCL by itself is a small price signal. It was originally set at around the 10-15% level back in 2001 of the energy price then and, as has been observed, when the energy prices went up the levy did not go up with it so it is less, as a percentage, now, and many people have compared it to a 10 or 15% tax on cigarettes or alcohol—would that influence people's behaviour if that was the level of tax on it? It is not a strong enough price signal. All of those of us that have been involved with Climate Change Agreements believe that they have the benefit of isolating the targets from the price signal. So as we have these volatile energy prices going up and down, which clearly change the drivers on businesses financially, but we have still got targets that we have to meet. So ETG strongly supports the target side of things, and in our written submission we pointed out some things which reflect what, I think, the EEF said a few minutes ago, that as well as the tangible target improvements there are subtle secondary effects of CCAs. One of the ones that I believe is really important is it has brought energy to become a board level issue; finance directors of big companies are keen to get a tax discount in a way that, surprisingly, people that are paying the tax just do not notice it in the same way. So getting that tax discount is a subtle tool but it is a very effective tool. The other enormous benefit that we have had has been the building up of networks within industry. One of the big pluses of Climate Change Agreements compared to other tools, like EU ETS and, possibly, the proposed Carbon Reduction Commitment, is that they focus in industry groupings, and we have brought those groupings together at lots of meetings—hundreds of meetings—over the last ten years, and I think those have been useful.

  Mr Leese: Maybe I could add a point that concurs with the steel view earlier. The Climate Change Levy costs the cement industry around £4.9 million per year, and that does not necessarily in itself drive energy efficiency or carbon reduction. The UK cement industry has invested £500 million over recent years, which has led to a reduction in carbon dioxide emissions of 29%—3.9 million tonnes from the 1990 baseline. So I do not think an increase in line with inflation of the Climate Change Levy will necessarily drive further reductions, given the fact that there are significant overlaps between the Climate Change Agreement and the Levy and the EU ETS. We would seek to remove those overlaps moving forward.

  Q59  Mark Lazarowicz: On the point that Mr Gluckman made, I can see the attraction of a tax discount, but the fact is you have to pay the tax in the first place to have a tax discount. So the logical conclusion, surely, is to increase the tax even more so you can give bigger tax discounts which will have an even more powerful effect on changing future behaviour.

  Mr Gluckman: It would if you gave the whole of the industry a Climate Change Agreement opportunity. Bear in mind the Climate Change Agreements are voluntary; it is an interesting difference with other polices like EU ETS and the proposed CRC are mandatory schemes where, if you are covered, you have to do it. So where CCAs are a carrot and a stick, the carrot is the CCA discount and yes, you are right, if you doubled the level of CCA but gave it back again you are not having a financial impact on industry, particularly if you gave 100% back, or nearly 100% back, instead of 80%, but there is a message that you can give to your finance director that if we do not meet our targets then there is a payment to suffer, if you double the level, that is twice as bad as it currently is. So it is quite a powerful tool if it is applied properly.


 
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