Memorandum submitted by John Huddleston
and Robert Bell, AEA Energy & Environment
BACKGROUND
AEA is a leading international energy and environmental
consultancy (750 people) specialising in policy support and programme
management for policy implementation.
AEA have been involved in all aspects of UK
sustainable energy policy since the 1970s. In the 1980s and 1990s,
we ran the Government's industrial energy efficiency programmes
and have supported the Carbon Trust since its formation in 2000.
We are also a major consultant to the European Commission and
other international agencies.
Information provided by AEA was used by Lord Marshall
to form his recommendations in the report into "Economic
Instruments and the Business Use of Energy" in 1998, which
in part led to the Climate Change Levy and Agreement.
We have been in contract with Defra since 1999
to provide technical support and auditing services for Climate
Change Agreements (CCAs). AEA has provided extensive support to
formulate both the structure and continuing operation of the agreements,
including:
— development of the details of the
agreement framework;
— negotiation of both individual organisation
and sector targets;
— target period assessments and analysis;
and
— auditing of sector associations and
individual facilities to ensure accurate reporting.
We offer the following observations on the agreements.
SUMMARY
These were groundbreaking agreements. We believe
they have achieved major savings of carbon dioxide emissions but,
very importantly, they have improved industry's knowledge of,
and attitude to, the energy implications of its processes and
its potential to save emissions. CCAs are reaching the end of
their period of operation; a follow-on instrument can be designed
to build on the strengths of the current agreements to continue
the savings through the next decade.
OBSERVATIONS ON
CCA DESIGN AND
TARGETS
The following points affected the design of
the Agreements in 2000. These are given only to describe the context
at the time. Agreements designed now would be different to meet
the current context, partly because of the experience gained and
partly because of changed circumstances. We comment on this later
in the submission. The current agreements have a ten year span
and can be changed only by negotiation.
1. In 1999, the political and environmental
climate was considerably different. There was a driver for energy
efficiency, but not for absolute carbon savings. The world has
changed.
2. The agreements were a novel instrument
in the UK and there was considerable pressure to develop a package
that industry would sign up to quickly and so get a process of
improvement underway. Many companies and sectors had difficulty
accepting that energy savings were available with investments
that would be beneficial to their bottom lines. Boardrooms were
not well informed about this potential, and/or did not give such
investments high priority. For instance:
— Some sectors argued that all possible
technological advances had been achieved in their field. Despite
the fact that history suggested that breakthroughs, then unknown,
would continue to occur, they found it difficult to sign up to
targets that they regarded as a leap into the unknown. Unless
they could see exactly how savings would be made over the 10 years,
they did not want to commit.
— Some sectors found the basic concept
of differentiating between "Cost Effective" savings,
and "All Technically Possible" savings difficult to
accept. Whereas the Agreement sought to capture only the former,
some sectors believed they were being asked to sign up to the
latter as well. There is now much better understanding of the
approach and terminology.
Several risk management measures were therefore
included specifically to overcome industry's reservations, but
these added to the complexity of the agreements.
3. There was no pilot phase, and there were
few useful precedents. There is now considerable experience of
working to energy efficiency / emissions reduction targets. We
believe this has benefited CCA participants in entering the EU
Emissions Trading Scheme, through reduced set up costs, enhancing
British businesses ability to compete within the EU.
4. The advent of emissions trading (both
the UK and EU) has increased the complexity of CCAs.
5. Establishing a transparent definition
of energy intensive industry proved difficult. The initial use
of the IPPC directive to define eligibility was expedient and
necessary, but produced many anomalies. The later additional definition
based on the EU Energy Services Directive is an improvement.
6. Sectors had considerable concerns about
the supply of commercially sensitive information to Government
and the agreements were structured to accommodate these concerns.
This causes problems for the analysis of the results. Since then,
the Freedom of Information Act has been implemented and precedents
are available, eg the EU Emissions Trading Scheme, which should
make this less of an issue in future and hence allow better analysis.
7. The agreements are mainly developed on
a "bottom-up" process where individual target proposals
are combined into a sector target. This allows for more appropriate
targets to suit individual circumstances, provided the sector
target is judged demanding. This gives greater ownership of the
targets by the organisations, as they are not simply imposed.
However, short of a very extensive and expensive programme of
industry research, the only people theoretically who really know
what can be achieved are the organisations themselves. Studies
such as the "GAD reports"[4]
and work under the Energy Efficiency Best Practice programme[5]
were agreed to provide the best available data, but naturally
had gaps in some areas. However, in 2000-01, many companies themselves
did not have any idea of what they could reasonably achieve and
so considered the targets suggested by AEA as crippling. Experience
has shown the AEA view to be largely correct, but negotiated deals
had to be achieved. Industry's knowledge is now much better.
OUTLINE OF
ONGOING CCA STRUCTURE
Here we give AEA's views of the basic outline
of future agreements. Clearly there would need to be additional
work to develop these basic principles. These points generally
respond to question 6 of the committee's list of specific subjects.
1. The truly energy intensive industries
should continue to have the opportunity to claim a reduction in
their CCL and a development of the current CCAs is the most effective
vehicle to achieve this.
2. The psychology of CCAs (in that targets
must be met to claim a tax reduction), the method of target setting,
and the method of operation, all stimulate board level interest
and empower energy managers. Furthermore, organisations have not
responded to CCAs in the rational manner predicted by economic
theory. For example, in some sectors, organisations willingly
share overperformance with underperformers to achieve a positive
sector result. Companies in general seem to have achieved targets
in their own right rather than extensively purchasing carbon allowances
which would be more cost effective.
For both of these reasons, CCAs have a constructive
function alongside trading systems.
3. Targets should be absolute carbon dioxide
in order to give certainty of results. It would also emphasise
the value of carbon dioxide emissions in business decisions. To
be consistent, the value of the levy should be based on the carbon
emissions associated with the fuel.
4. There needs to be clear separation between
EUETS, CCAs and the Carbon Reduction Commitment (CRC). Overlap
between CCAs and CRC has been minimised by the proposed design
of the CRC. Overlap between CCAs and EUETS should be eliminated
by having an indirect emissions CCA for EUETS incumbents, ie they
should have CCA targets for reducing electricity usage. We believe
the price signal associated with the pass through of carbon costs
by electricity suppliers is insufficient to stimulate specific
actions.
5. The eligibility criteria should be changed.
For some IPPC sectors, the value of the energy used is small in
comparison to the administrative resources required. IPPC should
be reconsidered and replaced by a simplified version of the more
recent CCA criterion based on 3% energy costs, but without the
import penetration criterion. This would be in line with the EU's
directive on the taxation of energy products and electricity.
The import constraint should be dropped to maximise the number
of organisations eligible. A transition to full levy would have
to be agreed for those sectors no longer eligible.
6. Targets should be negotiated on a "bottom
up" methodology. This builds on the strengths of CCAs that
give a more customised approach to target setting. This engenders
greater ownership of targets within the organisation, as the means
of achievement is real and pertinent to the managers concerned.
In the current agreements, some sector targets were set "top-down"
due to the lack of data on individual organisations. After over
six years of CCAs, all eligible facilities should have adequate
records and an understanding of their savings potential, without
needing to resort to "top down" targets.
7. The current timings of biennial milestones
and four yearly target reviews should be maintained. This gives
reasonable certainty for business and a continued incentive, with
a timescale to allow sensible planning and with the scope to adjust
targets with time.
8. Involving the sector associations has
generally been beneficial in the negotiations and operation of
the agreements. Good sector associations can provide advice, training
and can spread best practice. Some sector associations provide
an excellent service—a means of improving the less effective
sector associations needs to be put in place.
9. As stated above, several risk management
options were introduced in the current agreements, though some
have now expired. Providing a risk management option is important
for business confidence. However, the only risk management measure
now needed is a link to a trading system.
10. The level of the CCL should be increased
to bring it back to its level compared to energy costs as it was
in 2001, or higher in order to be cost neutral to Treasury.
4 October 2007
4 For example-Industrial Sector Carbon Dioxide Emissions:
Projections and Indicators for the UK, 1990-2020. ETSU (now AEA
Energy and Environment) Reference EPSC20616001/Z/1-April 1999 Back
5
Now the "Save Energy" aspects of the Carbon Trust Back
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