Examination of Witnesses (Questions 120
- 140)
TUESDAY 23 OCTOBER 2007
MR ROBERT
BELL AND
MR JOHN
HUDDLESTON
Q120 Chairman:
It sounds a pretty relaxed regime if you as a company can fail
to meet your target but because your chums have done better than
their targets then you can get the discount, but in other situations
where the whole sector has failed you still get the discount.
How do you manage to do so badly and still get the discount?
Mr Huddleston: Sorry, how do I
manage?
Martin Horwood: How can you fail?
Q121 Chairman:
What you have described is a situation where some companies are
able to claim a discount despite the fact that they have not achieved
their own target but their sector has, but then you also went
on to say that even when a sector fails to achieve its target,
all the companies may still get the discount.
Mr Bell: This was always constructed
as a one-way gate, partly for administrative simplicity and partly
as another risk management technique. It was a one-way gate in
the sense that if a sector passed we were not asked to look within
that at who passed and failed, but if a sector failed you could
look then and pass the ones that had passed and fail the ones
that caused a problem, so that was always very well-known at the
beginning, so it is not necessarily true that everyone will always
pass; if a sector fails then some may fail themselves.
Chairman: I think this scheme was devised
by the same person who devised the A-level system whereby everybody
passes with a double AA. Joan Walley.
Q122 Joan Walley:
In your opening comments, Mr Huddleston, you said there were some
sectors that were perhaps more on the ball with this than others
or some sectors were performing better than others. I just wondered
if you could give the Committee some idea of the sectors that
you would rate highly in terms of understanding and implementing
this whole agenda and the sectors that perhaps you would not rate
so highly, because obviously that has implications for what you
just said about pass and fail rates.
Mr Huddleston: The sector associations
that are very good in the management of their CCAs, some examples
are the Chemical Industries Association, the Paper Federation,
the Aluminium Federation; they are examples of sector associations
that I know of that have good control of the CCA process but also
then go out to their members on a regular basis and assist them
and educate them. They are large organisations, they were the
original energy-intensive sectors; the sectors that are not seeming
to offer such a high level of support to their members are some
of the smaller sectors—the horticultural sector, the agricultural
sectors—where there is in some sense a slightly different
problem because they actually have a lot more members, a lot of
very small members. It is generally the sectors where there are
small groups and the sector association itself is small, and therefore
the environmental director or environmental manager within the
sector association is also the guy that does the CCAs and is also
having to do health and safety as well, so it is pressure on their
time as much as anything.
Q123 Joan Walley:
Presumably you work with the sector associations to assist them
with all this, that is part of your consultancy remit, so what
can you do to actually make them understand better that even with
their limited capacity they can actually help roll out this agenda?
Mr Huddleston: We do not have
the resources to work closely to develop a training schedule or
anything like that; our role is more resolving issues on a day
to day basis and assisting them to understand the process such
that they can disseminate it. We have not got involved in recent
years in assisting them with that dissemination; we did right
at the start in 2000 and 2001 but we have not had the resources
to do that subsequently.
Mr Bell: What we did do originally
with the sectors is that there is quite a lot—certainly
for the original sectors there is a large education job to be
done in the potential for energy efficiency. The whole concept
of "all cost effective" energy savings was new to some
sectors. It was actually quite well into the process—there
were two years before the levy and the agreements came into place
while we developed this—that we realised that they did not
actually think in terms of a "business as usual" trajectory,
an "all cost-effective" trajectory and beyond that technically
possible, and there was a lot of misunderstanding in that they
thought we were looking for targets which were aimed at all technically
possible, for instance, and that gets across to, perhaps, the
education that has to be done initially when a sector engages
with CCAs, regardless of whether or not you give them help subsequently.
Just bringing sectors up to speed with the way to think about
energy efficiency, refits, capital investment, low-hanging fruit,
behaviour change, that is a common education that we can take
sectors through at the beginning.
Q124 Joan Walley:
I am just wondering where anyone gets this awareness or education
or training from.
Mr Bell: Sectors can go to other
consultancies and pay for help to help them respond to this but
that is not our remit under the CCAs.
Mr Huddleston: There is support
on an individual basis that the Carbon Trust offer. They offer
a survey product specifically aimed at assisting companies to
meet their CCA targets.
Q125 Jo Swinson:
I just have two questions, going back to the figures. We are told
by the NAO that 6% of the target units claimed the discount, despite
having failed to meet their targets. How confident are you in
that figure given that you have only audited 9%? Is that 6% of
the 9% you have audited are in that circumstance—and that
is extrapolated across the whole field—or is it that that
6% is taken from the industry figures and only 9% have been audited?
Mr Huddleston: They are separate
sources if you like. We ourselves do not necessarily know who
has passed or not. The rules of the agreements as they were formulated
were that if a sector passes then we have to satisfy ourselves
that it passes but they are not obliged to give us individual
information about the performance of the members of that group.
Q126 Jo Swinson:
The other thing was just to pick up on Tim's point of all the
different ways that a company can still get its discount, even
if it has not hit its targets. How common or perhaps how rare
is it that a company actually does not get the discount and has
to pay the full whack?
Mr Huddleston: It is very rare;
there were only about 25 to 28 companies that got decertified
this time, so it is quite a rare event that people do not get
the discount.
Mr Bell: That can be one of the
arguments for our submission that a lot of the risk management
techniques could now be removed. There was a great deal of nervousness
at the time about these agreements from industry and the targets
were very much a negotiation, they were a deal. The starting point
of our remit was all cost-effective and, as you know well, on
average the agreements were negotiated at 60% of all cost-effective.
In addition to that, industry in that negotiation managed to get
a whole set of risk management measures—tolerance bands
and product mix changes, and John could list you about half a
dozen risk management techniques which were all to help them increase
the probability of passing. That was right at the time because
these were ground-breaking agreements, industry did not have good
data, they were very nervous about looking forwards. I remember
one sector well, in the middle of negotiation, effectively claiming
that despite 100 years of technology advance that was all going
to stop in 2001 and nothing new would be invented in the next
ten years. That sounds a bit sarcastic but in other words if they
could not see something, they were not prepared to take our word
that all through history technology improves and something would
come up in 2006/2007. They are now much better informed and a
lot of that could be wiped away, that insurance policy.
Q127 Joan Walley:
Just sticking with this theme really, in your memorandum you state
that "organisations have not responded to CCAs in the rational
manner predicted by economic theory". I hear what you say
about this was a groundbreaking way forward at the time, but given
that the climate change levy has been designed by economists,
could you just say why you think it has not delivered what it
could have done and could you perhaps say what this means for
the market-based approach to reducing carbon emissions that we
base things on at the moment?
Mr Bell: We had been working in
the field of energy efficiency obviously for many years before
the climate change agreements came along, and it is certainly
my firm belief and the belief of expert colleagues like John that,
to echo what Andrew Warren said, the whole game changed with climate
change agreements; there was something about the psychology of
getting the tax back that changed. We had been producing case
studies and help for industry for many years which showed cost-effective
savings were there, but it was not taken up. Okay, you can argue
many reasons about other calls on capital and so on, but businesses
just do not always act rationally, they are busy people, they
do not do a spreadsheet every night and decide the best way to
behave. That was the experience through the Eighties and the Nineties—clearly
in the Eighties when industry was up against it this cost-effective
saving was there but they did not take it up. The whole interest,
the power of energy managers and the interest of the boards changed
during those two years and that is one bit of evidence that businesses
do not—life is too complicated, they do not always take
the economically rational view. You can also say why did not more
trade their way out of the climate change agreements with a low
carbon price? It does not work like that in practice when running
the business, so the bottom-up nature of climate change agreements
where you are forcing people to think of concrete things they
can do and in return they get the carrot, that cuts across a lot
of the economic theory.
Q128 Joan Walley:
With the benefit of hindsight, is that the way forward, do you
think?
Mr Bell: Certainly, we feel very
strongly that one of the big benefits of the climate change agreement
is that it has forced people to think about concrete actions.
You could imagine, I suppose, in many, many years to come that
the trading mechanisms—the markets were operating so perfectly
and the price of carbon was so realistic that that would be sufficient,
but we are well off that, we are still in the very big transition
stage where the carbon price is not necessarily sensible or predictable
and other ways of getting people to think about hard actions is
a very, very good complement to a market-based approach.
Mr Huddleston: Trading does not
necessarily bring other benefits which are improving the performance
of the company in way of its operation and looking at its processes,
so CCAs have made people think much more about how they can save
energy and how they can improve their general profitability because
there is great pressure on them to do that.
Mr Bell: It also gives some help
to entering into the EU ETS. We have got companies which have
talked about one area where they have been in a CCA and one where
they have not and the great advantage of the CCA history of making
them think about energy and thinking about their data has made
them a better informed player in the EU ETS because it is thinking
about the realities of life.
Q129 Martin Horwood:
The incentives and information side does not really seem to have
worked does it, because there is a market in tradable allowances.
You seem to be painting a picture of a market that does not really
work because people try to hit the targets but they do not really
look rationally at how they might have achieved that by tradable
allowances; is that fair?
Mr Huddleston: If I could comment
on that, the way that people have worked—the agreement set
them a target to be achieved and so in an ideal world, and most
companies do this, they will set about an energy plan, they will
measure what they are doing, they will look at the methods of
performing savings and see what needs to be done. There will be
energy and other efficiency benefits in doing those actions, people
do not do things generally solely from an energy efficiency point
of view, but after a period, say after a year, they will look
at the results when they come to their milestone review period
and they will see how they performed and generally they will fine
tune their pass and fail situation by trading. So the general
approach of the energy managers concerned has been to see what
they need to do and then generally, if they want to do this, the
CCAs have empowered energy managers.
Q130 Martin Horwood:
Have they really used the trading system in practice?
Mr Huddleston: Only as a fine
tune, that is my point. They do not start out at the start of
the two-year period thinking we have got to save this much energy
at the end, what they will do is they will measure, they will
undertake actions and they will fine tune.
Q131 Martin Horwood:
Does that mean that the whole system was a bit loose and perhaps
the cost of these allowances was too low; there was not enough
of an incentive there to do your utmost and then trade if you
could not?
Mr Huddleston: It has surprised
us more recently that more people have not traded their way out
by buying allowances when they were so cheap.
Mr Bell: They seem to use it not
at the beginning of the two years to say "What is the most
cost-effective thing for my company to do, trade or invest?"
they use trading just as an insurance policy that they get out
of the drawer at the end if they need it.
Q132 Martin Horwood:
What I am saying is do you think that would have been different
if the price had been higher, there would have been more of an
incentive?
Mr Huddleston: It would have made
it worse.
Mr Bell: It would work the other
way; if they had to pay more to buy carbon that would be even
less incentive for them to think forward in that way.
Mr Huddleston: If the carbon price
had been higher we would have expected them to do more energy
efficiency things.
Q133 Martin Horwood:
We are rather in this bizarre situation where they relate that
they were able to trade within the UK ETS but the UK ETS has now
finished.
Mr Huddleston: Yes.
Q134 Martin Horwood:
But CCA participants are still able to trade ETS credits, is that
right? How is it going to work?
Mr Huddleston: The direct part
of UK ETS is finished. The bank account is still open and the
registry for UK ETS is still open and will remain open certainly
until 2010, I assume. It has not been discussed but for the duration
of the current agreement people can still trade on UK ETS.
Q135 Martin Horwood:
You argue in your memo that there is a clear separation between
the EU ETS, CCAs and the carbon reduction commitment. Does that
mean you are expecting these people to be operating simultaneously
in sort of parallel universes, or is the logic having these systems
joined up and enabling the people with CCAs to use credits from
the EU ETS or the CLC?
Mr Huddleston: It would be good,
as has been mentioned by previous speakers, to get a common carbon
price. I must admit I have not solved the answer of how to bring
all these schemes together but one might note that the plans for
CRC, carbon reduction commitment, are that there will be a one-way
leak from EU ETS to carbon reduction commitment and it may be
sensible in due course to merge the UK ETS with the CCA registry[7]
and there is scope for simplification there, but it is not clear
quite what that should be at the moment.
Q136 Martin Horwood:
Do you think this is a problem in forward planning for businesses,
this whole area and what looks like the increasing complexity
of it?
Mr Huddleston: I would hope that
the three schemes have very clear boundaries and that people will
know when they can trade on whichever scheme. I would not have
thought it that much of a problem.
Q137 Martin Horwood:
Do you think every boardroom understands what the boundaries are?
Mr Bell: I would doubt that but
we are really talking about this transition in the next few years.
At the moment, companies that are covered by both in some way
still have to deal with that complexity and there is a complex
mechanism for making sure that you do not get double rewards for
the same carbon saving. What we are suggesting is that there will
continue to be companies that are affected by both but there is
a far simpler way of dealing with that double counting than the
present one, so it is just a cleaning up really, it is not solving
some fundamental problem that you are talking about.
Q138 Mr Caton:
In your memo you reminded us that at the outset of these agreements
many companies did not accept that they could actually make significant
energy savings, and then when the levy came in lo and behold they
were actually able to deliver.
Mr Bell: Yes.
Q139 Mr Caton:
In our evidence session last week we had various industrial lobbies
arguing that now for energy-intensive industries there is very
little potential for further cuts. Are they right?
Mr Bell: I do not think so, that
sounds a bit of a re-run of the arguments we had with them in
the year 2000. For example, there will be some sectors, because
of the particular process that they have, which might almost be
running up against a theoretical law of physics reason why they
cannot do more, if it is a very narrow technical area, but more
generally, for instance, I mentioned that when we set out the
opening negotiation it was aimed at all cost-effective carbon.
The model that we were running to inform our negotiating position
there did not just stop at 2010, it ran out to 2020 and, actually,
the four megatons of saving which the NAO quotes as being the
cost-effective saving up to 2010, even then we were predicting
that at 2020 there was another three megatons of carbon to get
cost-effective because the model allowed for long investment cycles
and things that we would not do until late on. Even back then
when there was a lot of discussion at the time in the select committee
about whether our targets were too tough I was asked—I was
reviewing the evidence over the weekend—"Will it all
have been done by 2010?" and I categorically said "No"
because with the best will in the world there is long investment.
In addition, beyond all cost-effective savings, you can go to
what was then at the day a higher level of saving which was technically
possible but not cost-effective. With the changing oil price,
of course, some of what in those days would have been deemed all
technically possible but not cost-effective moves down into the
cost-effective range, so from that high level modelling point
of view I would say that there are still savings and then John
could quote many examples on the ground of examples of technologies
not yet taken up—for instance, looking at it in a more detailed
way, one common issue in industry that saves a lot of energy is
to install the most efficient motors; it is a large amount of
energy that is used just in motors and it crosses all industry
sectors. We know there is not yet full penetration of that technology
and we could give other examples, so for both the top-down look
and what we see on the ground we would argue that there are still
cost-effective savings to be taken in most sectors, though maybe
not all for the reasons I said at the beginning.
Mr Huddleston: We do not necessarily
hear exactly what companies do in order to meet their targets,
they are not required to tell us, but my feeling is that at the
start of the agreements, in 2001/2002, once companies knew that
the game was on and it was going up to board level people found
more savings, probably much more low-hanging fruit than they actually
anticipated and that and the current activities have mainly been
directed more at the utility side of energy use and there is scope
in many sectors for more energy-saving capability on the process
lines—heat recovery, as Robert said installing more efficient
motors, but generally looking at how am I making it and indeed
why am I making it rather than just looking at a new steam system
or a new compressed air system. There is still a lot of that basic
stuff to be had but there is also another level of thinking which
is yet in some areas to be had, saying are we doing this processing
in the most efficient way or can we schedule it differently or
whatever. That is why I think there are more savings to be had.
Q140 Jo Swinson:
Just to follow up on that and just looking ahead to the future,
obviously it makes sense to target first the savings that are
cost-effective and that is the basis on which the CCAs have been
negotiated in the past, but do you think in the future there will
be scope for negotiating the savings that are not necessarily
cost-effective on the basis that we have got this challenge to
deal with them and there will be costs to individuals, but there
may eventually need to be a cost to business that is not a cost-effective
saving?
Mr Bell: I would answer that in
two ways. Firstly, I suppose there are all sorts of mechanisms
and taxation that brings in a real cost of carbon and that will
be informed, if the markets work, by the amount of carbon that
we want to save by 2050; that will just change what is presently
the boundary between what is possible and what is cost-effective,
so that just means a gradual tightening of the screw so that the
real cost of carbon if you are going to make 60% cuts by 2050
is realised; that is the economic answer. Also then the point
that John made is relevant, that there could be a type of cost-effective
saving which is not really in the current agreements and that
is not about "if we make this thing now how can I make that
with less energy", but, "can I make something different
that still meets the needs of the consumer". Over the coming
decade my own personal view is that, as John has said, that is
going to be the new thinking because despite what I have said
so far there is only so much you can do to make that more efficient.
If we are going to get 60% or even more, as you know they are
talking about by 2050, you have got to think about why you make
that in the first place and can you make something different,
and that would be a very interesting new set of agreements maybe
in ten years time.
Mr Huddleston: People are doing
things which are less cost-effective but they are doing them now,
partly because there might be other business reasons and partly
because some companies are genuinely quite green. We know that
the sector that makes insulation products, mineral wool, has done
actions that are not cost-effective and it would have been far,
far cheaper to buy carbon but they have chosen to take those actions
because it is better for the industry in the long run.
Chairman: Gentlemen, thank you both very
much indeed for coming.
7 Note by Witness: The witness meant to refer
to the CRC registry, not the CLA registry. Back
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