Memorandum submitted by the Carbon Trust
As you will be aware, the Carbon Trust is an
independent company primarily funded by Government and tasked
with helping the UK move to a low carbon economy by working with
business and the public sector to develop low carbon technologies
and help organisations reduce their carbon emissions.
We read with interest the NAO review which concluded
that the introduction of the Climate Change Levy contributed to
a significant refocusing of attention on energy use and that this
has driven energy efficiencies and emissions reductions relative
to business as usual in both energy intensive and less intensive
industries. It however also found that the extent to which the
Levy has continued to drive further energy efficiencies in more
recent years harder to discern, especially with the addition of
other policies and drivers since its introduction. Econometric
analysis suggested that the Levy has permanently raised managerial
awareness, although its impact on energy prices has been limited.
The NAO's survey conducted in early 2007 also suggests the Levy
is no longer seen as a major driver of improvement in energy efficiency.
On the Climate Change Agreements, the NAO concluded
that the Agreements have stimulated additional energy efficiency
improvements and emissions reductions. The negotiation of Agreements
and the development of monitoring regimes to measure progress
against Agreement targets raised awareness of the potential for
energy efficiencies which were then achieved. It found that not
all Agreement targets were stringent, but early overachievement
against them was the result of genuine significant improvements
in efficiency as much as weak targets.
In 2005 the Carbon Trust carried out a detailed
review looking at how policy measures impacting the business and
public sectors might evolve to deliver significant carbon savings,
while at the same time maintaining or enhancing the competitiveness
of UK companies. This included analysis of the Climate Change
Levy (CCL) and Climate Change Agreements (CCAs). The findings
were summarised in the report "The UK Climate Change
Programme: Potential evolution for business and the
public sector" (Carbon Trust, November 2005), to which the
Committee could refer for further detail and we have attached
a copy for reference[1].
Below is a high level summary of the report findings regarding
the CCL and CCA, which you will see broadly agree with the NAO
conclusions.
The CCL and CCAs, along with other measures such
as the EU Emissions Trading Scheme (EU ETS), Building Regulations
and the Energy Performance of Buildings Directive (EPBD), form
powerful building blocks in the current Climate Change Programme
for business and public sector. However, the Carbon Trust believes
that implementation issues across all of these instruments could
limit their ultimate carbon delivery. Moreover, the current package
of instruments is not providing sufficient incentive for change
across the less energy intensive segments, where energy costs
are less material, and where in particular the current CCL does
little to drive change and structural failures persist.
CCAs create a good incentive to secure low-cost
emissions reductions in energy-intensive industry outside EU ETS
sectors. In addition CCAs offer insurance from a policy perspective
against EU ETS price uncertainties and under-delivery. Overlap
between the CCAs and the EU ETS is not problematic from an economic
perspective at this stage but the overlap does create administrative
burdens. CCAs have been successful in that they have driven material
emission reduction. However, we recognise that there are information
asymmetry and administration issues in particular in terms of
negotiating targets. Over time we see a strong case for building
on the success of the best elements of CCAs by moving sectors
covered by CCAs into either the EU ETS (mainly energy intensive
sectors) or the Carbon Reduction Commitment (mainly less energy
intensive sectors) as outlined below.
In "The UK Climate Change Programme"
report we made a strong case for the adoption of a new mandatory
auction based trading scheme for large, less energy intensive
organisations that fall outside the EU ETS and CCAs. The basic
idea has been taken forward by government and developed into the
Carbon Reduction Commitment (CRC). One of the other options investigated
as a means of incentivising change in this group included increasing
the CCL rate. This would increase carbon savings in some sectors
but economically acceptable CCL increases would have little impact
in service sector energy use, where emissions are forecast to
increase significantly if action is not taken, due to the relatively
low price sensitivity in this sector where energy is a very low
proportion of overall costs. The report also looked at restructuring
the CCL to a consumption-based carbon tax which would increase
carbon delivery, but only very slightly. Therefore on balance
we believe that the introduction of the CRC is the best option
for the large non-energy intensive organisation both from an emission
reduction and competitive point of view.
The Government committed to proceed with the
Carbon Reduction Commitment (CRC) in the Energy White Paper in
May 2007, and Defra is currently consulting on implementation
of the scheme. With the introduction of the new CRC scheme, one
potential option would be for CCA companies, once the CCA reaches
the end of its current term, to then either enter the CRC or be
covered solely by the EU ETS. If this were the case, it would
be important that these companies maintain their CCL discount
to maintain competitiveness and that CRC revenue should be recycled
to business to accelerate progress on emission reduction. This
simplification would benefit the economy in a number of ways.
It would accelerate emission reduction by further aligning incentives
and removing information asymmetries between the business and
government objectives and it would also keep administrative burdens
to a minimum, whilst not affecting the competitiveness of current
CCA companies.
We believe the specific issues posed by the
Committee are important ones to be considering and we look forward
to giving our views on these more specifically in person.
19 October 2007
1 Not printed. Back
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