Examination of Witnesses (Questions 83
- 99)
TUESDAY 23 OCTOBER 2007
MR ANDREW
WARREN
Q83 Chairman:
Good morning and welcome to the Committee. You are familiar with
this Committee and you are an old friend of some of us and we
are delighted to see you. As a general point to start off with,
knowing how closely you have been involved with the energy efficiency
policy, how do you think the Government has been doing on energy
efficiency generally over the period since the Climate Change
Levy?
Mr Warren: First of all, thank
you very much indeed for inviting me back to this Committee. I
think this is actually the first time I have had the privilege
of appearing under your chairmanship. It is a great privilege
to be here. Thank you very much indeed for your kind opening words.
You ask basically how progress is going overall. I recall back
in 1999 that the EAC did a full-scale study into energy efficiency—actually
it was the last time you did that—and you concluded that
what was necessary was a real step change in the whole attitude.
That was a phrase that was picked up by Government in the 2003
Energy White Paper and in a number of other subsequent documents.
I was thinking about whether we have actually seen a step change,
and I think my conclusion has to be, no, we have not; but we have
seen a sort of soft shoe shuffle on all this. In other words,
we are moving forward, mostly, but I would not actually describe
it with any very great excitement.
Q84 Chairman:
Against that background, how do you think the Climate Change Levy
has helped or not helped? In particular, in light of the evidence
that we had last week and some of the written evidence we have
had, it seems quite difficult to identify how much of the energy
savings that have been secured over the last six or seven years
are actually attributable to the Levy, and how much are attributable
to other factors. For example, the engineers last week made great
play on reduction in energy use and emissions; but of course then
it transpired that part of that was due to a fall in production.
Mr Warren: It is always difficult
to disaggregate these things. I think it has been particularly
difficult relating to the 100% Climate Change Levy payers. In
the paper we put before you we did express some scepticism as
to the impact that the Levy has had on those who have not entered
into Agreements. So far as the Agreements are concerned, with
the 51 industrial sectors now involved in this, I think we can
come to an altogether more positive conclusion. There are savings
which have been identified. I think just under two million tonnes
of carbon is the latest figure that the Government have put forward,
and which I think the National Audit Office have endorsed. I think
it is fair to say that had those Agreements not been undertaken
it is improbable that most of those savings would have taken place.
To that extent certainly the Agreements have to be a good thing.
In theory they would have taken place because, as you well know,
most of the Agreements were not exactly onerous. They require
people on refurbishment basically to do stuff which pays back
within a couple of years or so, and by no means all of that. The
fact remains that those savings are apparently real. We do say
in our evidence we would like to have further identification of
the savings actually on the public record, and further obvious
auditing of whether or not the figures that have been published
are accurate. If we look at the figures which we have been presented
with those there do appear to be positive benefits which have
accrued from that particular policy instrument.
Q85 Chairman:
It is true, as you will know better than me, that so much of the
energy efficiency changes that businesses make, they make entirely
in their own interests, quite apart from the wider environmental
benefits. Do you think there is a scenario in which actually a
new Government initiative with lots of bells and whistles is a
good thing, because it reminds businesses that they ought to be
doing more almost regardless of the actual detail of the incentives
provided?
Mr Warren: Obviously it is always
worthwhile drawing these issues to people's attention, but we
have had a basic thesis for a long while, propounded in the written
evidence to you, about the fact that you need to have a three-part
programme. You would need to have carrots and sticks, for obvious
reasons, and tambourines to draw attention to things. One of the
reasons why the Agreements I believe work is because you obviously
had carrots there, because you were getting the tax break; sticks
that if you did not do them you would not get that tax break;
but also, exactly what you were referring to, the tambourines
that there was something new on the horizon. I suspect that probably
one of the reasons why the Agreements delivered savings in the
way in which, if you like, one would have anticipated that rational
man might have delivered is because they were quintessentially
cost-effective in the first place, and just simply it is much
more fun saving money from the taxman than it is just saving money.
I think it does concentrate minds if you are being told you can
save money in that way. I think we have seen this in the residential
sector too in the way in which people have sought to deliver the
Energy Efficiency Commitment by dint of using ostensibly
money off the council tax. It does concentrate minds in a way
which you would not get if you were merely making the very rational
argument that there is an awful lot of cost-effective energy saving
which at the present moment is foregone.
Q86 Colin Challen:
We have heard obviously that some savings have been made anyway,
and that the CCAs have provided motivation for management to do
more. Would that be an argument, which has been made to this Committee,
that CCAs should be extended to those sectors currently excluded?
Mr Warren: The complication with
CCAs is that they are by definition voluntary Agreements. I think
what you are positing there is that there should be compulsory
Agreements? Is that accurate?
Q87 Colin Challen:
Yes.
Mr Warren: In theory of course
you could do that. You could do that right across the entire economy
and essentially enter into compacts with any particular industry
or trade. The complication has been that you have got to have,
for instance for an Agreement to work, a trade association which
can bring all the relative companies together. If you do not have
that then it becomes a much more complex matter to enter into
an Agreement, unless of course you are suggesting that there should
be Agreements with every single one of the four million registered
companies. That might be your other way of attempting to do that.
What has been fascinating on this is the fact that the NAO work
does show that there has been at least a couple of hundred or
so companies or, more accurately sites, that have been involved
with this, which have not delivered. Yet the owners of those sites
have not been penalised, just simply because they fall within
a sector which has in practice apparently delivered on the agreed
savings. I must say, that must be fairly galling for others in
that sector. One hopes there is at any rate some fairly unofficial
pressure on those who have been laggards to do something. I can
see intellectually what you are driving at. I just think in practical
terms trying to get Agreements with all four million businesses
in the country, along the lines that we have set these up, is
probably more trouble than it is worth. The Carbon Reduction Commitments,
which is not actually the subject of this Inquiry but, as you
may know, the Government put forward in the last Energy White
Paper earlier on this year, are being extended to other areas
which are at the moment outside the Agreements. Those are being
done on an individual company basis, and only actually with really
quite large companies. My concern is that if you get down to really
very small companies then entering into anything as sophisticated
as an Agreement, it is quite difficult to deliver. Having said
that—if you go back to the Chairman's initial question which
is how are we doing—if you want an area where we are not
doing well, or not doing much at all, it is with small and medium-sized
businesses where there really have been very few policy measures
which have been brought to bear and have any impact. The only
one that one can really think of is probably the Climate Change
Levy. I suspect, and I know from surveys undertaken, that most
businesses have no knowledge whatsoever of the fact that there
is a small percentage on their bill which is going for the Levy.
If it has had an impact it is only one that econometric modellers
can find.
Q88 Colin Challen:
It has been very useful, as we have heard, setting up networks,
good practice and so on. When those networks and good practices
are established is there a continuing need for Agreements to maintain
motivation of managers or would it simply fade away without that
incentive?
Mr Warren: I suspect having this
tax break, for the reasons that I alluded to before, does have
a much more powerful impact upon a company in terms of getting
them to look at their energy bills, than mere exhortation. Effectively
what we are doing with this tax break is to say to companies,
"Come on, if you don't deliver even these really not desperately
demanding savings, then you will lose out".
Q89 Colin Challen:
Also they are doing something which by then becomes quite natural
to them; it is built into their thinking. Why should they get
a tax break for it because they have made the change? You actually
really have a permanent tax break of things that then just come
naturally.
Mr Warren: I think the complication
with trying to take a tax break away is that those who have received
it are likely to kick up a substantial fuss about it. One of the
things which again in our written evidence we have alluded to
is the fact that when the concept was first put forward under
an inquiry headed by Colin Marshall, who was then the President
of the CBI, the suggestion was that the tax break would not be
80% but 50%. Personally I have never seen any evidence whatsoever
to suggest that we would not have got just as much in terms of
savings from a 50% tax break, as the Marshall Inquiry proposed,
as opposed to the 80% we received.
Q90 Colin Challen:
Perhaps we could liken it to mortgage interest relief which was
introduced to encourage the home-owning democracy. That seems
to have succeeded—the interest relief was withdrawn and
nobody really complained. We all now just accept that you do not
have the subsidy on buying a house any more. Is that not a similar
case?
Mr Warren: If you will forgive
me, Mr Challen, I think actually to be fair one of the reasons
why there was very little impact on that was the mortgage relief
was limited to, I think, £30,000 and there was only the tax
break on that initial amount; and as house price inflation increased
the £30,000, whilst obviously important, was a relatively
small proportion and an ever-decreasing proportion of the cost
that people were having to bear in buying homes.
Q91 Colin Challen:
The National Audit Office highlighted in its report that energy
prices generally have risen since 2001, so the impact of the Climate
Change Levy on energy costs has declined as a proportion of overall
energy costs. In fact they say, "Therefore, companies do
not recognise the Levy as a major decision driver". Is the
Levy itself driving any energy efficiencies, do you think; and,
if not, by how much should it be increased?
Mr Warren: The Levy itself, as
far as the 100% payers are concerned, appears to have had very
limited impact for exactly the reasons that the National Audit
Office have identified. Earlier I did make the distinction between
those who are often completely unwittingly paying the Levy at
100% and those who are threatened with paying the Levy at 100%
but, because they have undertaken these Agreements, have actually
got a very heavy discount on it. It is that discount which has
led to action. I really am very dubious as to whether the arrival
of what was not a very heavily publicised Levy upon ordinary businesses'
bills, those outwith the 51 sectors, has made more than a marginal
difference. To answer the other part of your question, yes, obviously
if you start putting prices up very heavily then sooner or later
it will impinge upon even the most purblind. The question is effectively,
how much do you have to put the price up in order to do that?
I would suggest that in the case of a lot of those in the commercial
sector, where you are talking about energy prices forming at most
2% and often below 1% of total revenue expenditure, it is going
to have to go up a great deal. We have seen, and you have just
evidenced the fact from the National Audit Office, that since
2001 there has been a real increase in prices which undoubtedly
has led to some increase in interest in this area; but I do not
think that anyone would suggest that any more than a fraction
of the ostensibly cost-effective savings which can be found across
the whole of the commercial sector are being picked up. Manifestly,
if you are going to rely on price alone, you are going to have
to hike that price up a lot. It has always been our view, as I
think you know, that merely having a stick does not work. I used
the metaphor earlier about the stick. You need carrots, and you
do need the noise going on of the tambourines as well. Put that
together and you can actually make a very effective set of policies.
That is why I think the Climate Change Agreement, simply because
it does tick all those boxes, can be described quite legitimately
as a success.
Q92 Colin Challen:
To be clear, you are not saying then that the energy increased
costs since 2001 have made a marked difference on the carbon emissions
of the companies that have faced those extra costs?
Mr Warren: Just to clarify this,
are we talking about the companies involved in the Agreements,
or the companies outside of the Agreements?
Q93 Colin Challen:
Put to one side the Levy, energy costs have gone up considerably
but you seem to be saying that has not really in itself driven
efficiencies?
Mr Warren: Transparently it has
driven some; but the fact remains that, obviously as prices go
up, then the cost-effectiveness ratio improves so that all sorts
of energy-saving measures which were marginal then become undoubtedly
very cost-effective. Of course there is some investment going
on—it would be very foolish to pretend it was not. The fact
remains in terms of the potential for rational savings, which
an economist would identify, comparing that with what is actually
happening on the ground, we are only essentially getting a fraction.
Q94 Dr Turner:
In 1999, when the CCL was a proposition, you argued strongly that
the tax had to be accompanied by a recycling of revenue directly
to aid energy efficiency investments otherwise it just becomes
"a nice little earner for the Treasury". Of course we
have had some. We have had some upfront recycling. We have had
some funding of the Carbon Trusts, Enhanced Capital Allowances
and so on. How effective do you think this recycling of the Climate
Change Levy revenue into energy efficiency improvements have been?
Mr Warren: I am very flattered
that you have done your homework to go back to what I was saying
in 1999. I had forgotten I had used the expression "nice
little earner" then. I have got into trouble with people
both from the Treasury and in Number 10 subsequently for using
that expression, but I do not resile from it. It has proved to
be a nice littler earner. The last figure that the National Audit
Office produced on the revenues on this, and that was a couple
of years or so ago, suggested that the total revenues coming in
were around £¾ billion a year; of that a proportion,
about 10%, has gone to the Carbon Trust who are doing excellent
work, as this Committee has identified before. I am not sure really
how much the Enhanced Capital Allowances are actually costing
the Treasury. They do have merit actually as a means of attracting
people's attention; and there is a list now of about 400 or 500
products the Carbon Trust holds of specific named products which
can qualify for the Enhanced Capital Allowances. I have never
seen any figure from the Treasury as to what their "losses"
have been as a result of companies picking up on the Enhanced
Capital Allowances. One has to recognise that actually the losses
can only be on interest, because effectively all you are doing
is saying instead of getting that capital back and having to amortise
it over three or five years, depending on the size of the company,
you can do it just over a single year. There is therefore, if
you like, a potential loss of interest there for the Treasury
but not much else. It has still been a useful mechanism to put
an imprimatur onto the 400 or 500 products which are covered by
this. The converse of that is products that do not qualify under
the Enhanced Capital Allowances, which are predominantly those
involved in the fabric of a building, insulants, glazing and so
forth, they to that extent lose out. Enhanced Capital Allowances
have been quite helpful, but after that we stop. After that it
has been a nice little earner for the Treasury. I do know that
when this was originally announced—and it was part of the
Colin Marshall package that was originally proposed which was
the progenitor of the Climate Change Levy and the Agreements—part
of that said what we should be doing is increasing taxes on bad
things, too much fossil fuel energy, and decreasing taxes on good
things, getting people into work. For one year the National Insurance
rate did go down, and it went down so as to make this actual revenue
neutral, but the subsequent year it went back up again and that
has been the position ever since. In effect, this has been a nice
little earner, and it has continued to be a nice little earner,
and as the rates go up it will be an even better little earner.
This Committee has in previous reports pointed out the fact that
the way in which the Treasury has tended to look at using the
financial system for concentrating minds on climate change has
essentially been by penalising rather than providing incentives.
In other words, it has been drawing the revenue in but not actually,
if you like, extending that revenue. Whilst the Climate Change
Levy and Agreements have been described by the former Chancellor
now Prime Minister as being very much the jewel in the crown of
the Climate Change programme, I suspect that one of the reasons
why the jewel will shine so well is because the revenues do flow
in in rather large measure to the Treasury.
Q95 Dr Turner:
We had a row of business witnesses sitting where you are last
week and we asked them if they could tell us anything about the
impact of the Carbon Trust's grants and loans and they could not.
Does your Association have any view on the actual impact of the
Carbon Trust's activities in promoting R&D in energy efficiency?
Mr Warren: Yes, it does, and it
is actually mostly pretty positive. There are certain schemes
that we are very keen on that they do. I instanced in answer to
one of the Chairman's questions about the problems in finding
programmes for helping small and medium-sized businesses. They
have a very sensible zero interest loan scheme which has been
around for several years, and which is available only to smaller
businesses; it is a very uncomplicated one and it is delivering
tremendous savings. If I have a criticism of the Carbon Trust
on that, it is that the number of small businesses to whom this
could be applicable who know about it is actually very small;
but certainly those who have subscribed to this, and who have
got zero interest loans payable back at the end of a five-year
period to install energy-saving measures, have found that actually
it has been a tremendously successful programme. I am giving you
an instance of one particular programme which is being helpful;
but it is no part of my function to sit here and defend absolutely
everything the Carbon Trust does. Apart from anything else I do
not know everything the Carbon Trust does! One point that has
been made, and it is one that this Committee has picked up on
before, we found it so when it was originally proposed and we
continue to find it ludicrous that, uniquely in Europe, we choose
to have two Trusts to deliver our carbon saving: we have a Carbon
Trust and an Energy Saving Trust. Frankly, we do not see why we
need two ways of telling the time. Those two Trusts should be
amalgamated.
Q96 Dr Turner:
Can you suggest any ways in which you would like to see the recycling
of carbon levy revenues beefed-up?
Mr Warren: I have given you one
obvious example there, which is the zero interest loan scheme
for small businesses, which really has been extraordinarily helpful
on this. There is no question at all that using grants and loans,
even for investments which are ostensibly very cost-effective,
does tend to get the attention of more senior people than those
who are directly involved with energy management. The Enhanced
Capital Allowances is a wonderful wheeze for exactly that reason—that
gives those who are supplying those 400 or 500 products which
qualify under the Enhanced Capital Allowances a means to be able
to draw attention to their product and say, "Look, the Treasury
so believes in this that they will allow you to offset the capital
cost on this in the first year". As we have seen, actually
the number of companies who actually do that are relatively few;
but the feedback we have certainly had is that that is helpful
in terms of drawing the attention of more senior people in the
company to the fact that this is an area where they should be
looking at, and it is one where they should be considering investment.
I would like to see that money, much as I seem to have said in
1999, recycled directly into helping those who, if you like, are
essentially bearing the burden of the extra taxation on this.
Dr Turner: Perhaps we need to make sure
that their accountants are more aware!
Q97 Martin Horwood:
Can I just draw you onto the part of your memo where you echo
the National Audit Office in drawing attention to what you call
the perverse outcome of the manufacturers of energy efficient
products actually suffering the same penalties as everybody else.
You called this "a singularly perverse outcome, which it
is still not too late to reverse". What would you do to reverse
it?
Mr Warren: The answer is that
what one would seek to do is to identify obviously those products
which at the moment can legitimately be described as providing
energy efficiency services; and, having identified those and recognising
that they are paying the Levy at the moment, find some means of
removing those products from having to carry the Levy at any rate
at all. I instanced in our written paper the fact that a number
of these sectors, a couple of the insulating sectors, the glazing
sector, currently enjoy the 20% rate, but there are others who
are paying at the full rate of 100%. It does seem to be perverse
almost to be doing this because, after all, one of the main objects
of the exercise is, strangely enough not to create a nice little
earner for the Treasury, but to try to concentrate the minds of
the companies who are paying the Levy on investing in sensible
energy-saving measures. If you put up the cost of those measures,
then you are helping to undermine the basic objective.
Q98 Martin Horwood:
If we just take an example. If we are moving towards eventually
banning high energy light bulbs, is it not still worth incentivising
several different competing manufacturers of light bulbs to reduce
their energy footprint as part of the manufacturing process; or
should they receive a lower incentive to do that than other companies
in other sectors?
Mr Warren: I suspect, as far as
they are concerned, their footprint compared with the footprint
which their products have is relatively small. Their products
will help to reduce the overall level of carbon emissions. Manifestly,
you cannot make anything without having some carbon impact. If
you are deterring other companies from investing in those products—it
might be the high efficiency lighting which you refer to, or any
other—if by dint of putting up the costs on those products
you are deterring others from investing in them, then that must
be counterproductive.
Q99 Martin Horwood:
You do not worry that introducing allowances in a sense for more
energy-efficient products is going to introduce a level of complexity
into what at the moment is actually an admirably simple system?
You can imagine if we got onto biofuels the arguments which would
result in exactly what the carbon impact of that product was.
Mr Warren: Obviously it would
make it more complicated. I am not sure that I subscribe to your
view that it is an admirably simple system. For a start, there
has to be 51 different sets of negotiations.
|
