Select Committee on Environmental Audit Minutes of Evidence

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

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