Examination of Witnesses (Questions 142
- 159)
TUESDAY 30 OCTOBER 2007
PROFESSOR MICHAEL
GRUBB AND
MR JAMES
WILDE
Q142 Chairman:
Good morning and welcome back to the Committee; familiar faces
on both sides. In 2005 you published a review of the measures
which were targetting both the business and public sectors in
the Climate Change Programme, and you said that one of the reasons
for your review was the fact that UK CO2 emissions were starting
to creep up again after having gone down for a while. Most of
us recognise that the fall was mostly about the dash-for-gas.
Of course, that trend has not improved since 2005; it continues
to creep up. Since all the scientific evidence that is accumulating
suggests that the problem is more rather than less urgent than
previously understood, are you now satisfied that the Government's
policies in terms of what business is doing are adequate for the
task?
Professor Grubb: Maybe it would
be useful if I tried to give a very brief summary of the main
conclusions from our study and then cross-check that against progress
in the last couple of years. The purpose of the study to which
you referred was specifically in the context of the Government's
Climate Change Programme review, and as The Carbon Trust we were
looking at the business and public sector options on policy issues
and trends. Firstly, I would clarify that we did not cover transport
or domestic use, and none of my comments really would relate to
those sectors. In the areas that we covered, I would say our broad
conclusions could be summarised as follows: that for the energy-intensive
sectors the Government already had instruments in place—the
issue was about strength of application—those instruments
being primarily the European Emissions Trading Scheme and the
Climate Change Agreements, which is obviously the topic of this
inquiry, and in that area the most important single thing seems
to be trying to ensure a reasonably strong European emissions
trading allocation for Phase II, and indeed clarity beyond. I
will come back to that in a second. I think in a way the bigger
finding in our study or the more, if you like, newsy item was
that about half of total emissions associated with business and
public sector use were from non-energy intensive sectors—light
industry, the commercial sector, the public sector, also many
SMEs, which would be harder to classify—and that there there
the policy mix really was not so extensive, the main instrument
was the Climate Change Levy, and in the course of our study we
received a lot of indications that for the less energy-intensive
parts it was not a very effective instrument. It was better than
nothing but essentially the price signal of the CCL on its own
for organisations which were either very, very small SMEs or which
were not energy intensive and totally focused on other things
was pretty modest. We came up with a number of suggestions relating
to possible actions for the less energy-intensive parts, and that
covered things like the proposal for a downstream cap-and-trade
scheme for large companies, not big intensive facilities like
the ETS but for measures relating to SMEs—information, product
standards, metering, and so forth. To address your question in
that context, how do we feel about progress in the past couple
of years, I think what I would say is that the Government did
push through a significantly stronger allocation ban on the European
Trading Scheme than some had expected and than many initial proposals
from European counterparts, particularly in the electricity sector,
and that was a very positive move, and unquestionably has helped
to strengthen the European Trading Scheme overall. We expressed
a view that allocations in the non-electricity sector could have
potentially been stronger, they could have involved some degree
of cutbacks compared with the broadly "business as usual"
allocations given under the UK Allocation Plan, but the overall
cut-back was a very significant thing. I think there are other
notable measures. The Government has moved forward and developed
a new instrument called the Carbon Reduction Commitment, which
we certainly like to think builds fairly significantly upon our
ideas and that has also been, in a sense, protected so that it
does include some of the public sector. It has been focused on
large organisations, which I think is probably appropriate. I
think it is still a little early to say exactly how strong that
instrument will be applied, but we are pretty happy with the progress
there, to be honest. I think metering is another area where the
White Paper came out fairly strongly. Qualitatively we feel that
the progress on instruments is good in the areas that we have
covered. It is not complete, there are still question marks over
the strength of application, and there is still uncertainty about
for example the European Trading Scheme post 2012, although that
is obviously not purely in the UK Government's hands at present.
Is it strong enough? Probably not. As you say, the size of the
problem is becoming more concerning. We are still facing upward
emissions, partly associated with the fuel price change in the
power sector. One could always want more and I think we need to
see more, but there has been substantial progress which broadly
we would be pretty pleased with compared with what things looked
like three years ago.
Mr Wilde: One thing I might add
is that in the building stock, building regulations and also the
Energy Performance of Buildings Directive, and the building labelling
associated with that, were key drivers as well in the market that
we highlighted in our review. On building regulations, the Government
is showing strong ambition. In the homes and domestic sector they
have made a target to get to zero carbon homes by 2016, with a
possibility of going a similar way in the non-domestic market.
If they are going to go that way it needs to be backed up by sound
reasoning and a route map to make that transition smooth and cost-effective
and to decide what the right definition of zero carbon is, whether
it is all on site within the envelope of that building. It is
very important that we do have strong building regulations. but
linked to that, if we do have those strong building regs, we also
need to ensure that there is compliance in the market and enforcement
of the regulations. On the labelling side the Government needs
to implement the energy performance certificates of existing and
new builds that are used every time you sell or you rent a building.
That needs to be implemented by April next year, which is not
far away at all, so it is going to be a challenge to get that
implemented well in time. A couple of other quick things. Another
area we highlighted in our work was product standards and the
importance of product standards in the SME market in particular.
I think the Government have made good steps there. It was a strategic
priority in the Energy White Paper and they have also signed a
voluntary agreement with the lighting industry to phase out high
energy-intensive light bulbs, so that is a good step in the right
direction. Financial constraints in the SME market were also something
we highlighted and in the Climate Change Programme Review which
came out subsequent to our review the Government said that they
would put more money into both interest-free loans for SMEs as
well as the equivalent for public sector emissions, which are
also material—about six million tonnes of carbon per annum—so
there is a big carbon prize there as well. We highlighted four
main areas for improvement: improved governance; tighter procurement
guidelines, leveraging in the large public sector spend; increased
capacity of energy managers; and improved access to capital. I
have mentioned the access to capital. The Government are also
doing things to improve the governance. In the comprehensive performance
assessment for local authorities, climate change is going to become
far more prevalent, but I think more can be done. I am not sure
that anything has been done about the energy management capacity
and also procurement. I think we could leverage in the public
sector spend an awful lot more.
Q143 Joan Walley:
Mr Wilde, if you can just enlarge a little bit on what you were
saying about procurement and how that could really make an impact.
What would need to be done to get procurement policies such that
this was something that was really taken as an important issue?
Mr Wilde: A nice example is in
the building sector. I think the Government procures one-third
of all new builds in the non-domestic sector. Central Government
have made a target that they are only going to use top quartile
buildings in terms of their energy performance, but they are not
actually tracking what the energy performance of their buildings
is or defining what top quartile is. Unless you actually make
that target real and you track compliance against it, you will
not have that market transformation effect, because if the Government
are only going to buy or use top quartile buildings, the market
will make sure that any building they are going to produce is
top quartile and it will help to transform the whole market, so
that is a nice example.
Q144 Joan Walley:
How should it be done and who should be doing it if that is really
going to be properly monitored and followed through?
Mr Wilde: I think the energy performance
certificates I was talking about before are a nice mechanism to
leverage there. If that is coming in in 2008, I think using those
labels to ensure that the Government are only buying or using
the top ranking buildings will help to stimulate the market that
way.
Q145 Chairman:
When you talk about the targets for zero emission buildings, that
is new buildings by 2016, and yet the vast majority of emissions
come from existing buildings. Unfortunately, our evidence in previous
inquiries was that the enforcement of building regulations is
scandalously feeble.
Mr Wilde: Absolutely right. 60%
of the buildings which will be around in 2050 are already in existence.
Major refurbs are a big opportunity point which is covered by
building regulations but the compliance issues around those major
refurbs are a concern.
Chairman: There is not any compliance
really. Des?
Q146 Dr Turner:
As a select committee, of course we do like to see the Government
responding to reports so we are only too happy to give you credit
for having stimulated the Government in its proposals for the
Carbon Reduction Commitment. Could you tell us a bit more about
it? Could you tell us how the scheme will work and which organisations
are to be covered?
Professor Grubb: The fundamental
reasoning first was that when we looked at how these sectors behaved,
in practice, it was extraordinarily common to get stories from
energy managers who had virtually no budgets, no interest or support
from the board and who, frankly, felt in a somewhat token position
in some cases, and that the boards of these companies were busy
with other things and energy was just written off as an unavoidable
cost. What we therefore proposed was a system in which companies
overall and not individual facilities would be responsible for
their entire UK-wide emissions, in the sense that they would be
required to go out and acquire allowances to cover their required
emissions and to report those in their annual reports, and that
thereby that would force companies to make sure they actually
measured and tracked emissions across their entire UK operations
and built that into the financial reporting chains though which
they basically govern company operations. That would give a strong
incentive for the board, which found that it had to understand
its carbon emissions, to project its carbon emissions and then
go out and buy allowances. We very strongly recommended that the
allowances should be 100% auctioned. We recommended that there
should be no free allocation, partly because of the sheer complexity
of trying to negotiate and we just thought administratively it
would be a waste. We recommended it should be revenue-neutral
and we felt the simplest way of doing that would be through rebates
on the CCL. We recognised that obviously a scheme like this needs
to be fairly careful in terms of its boundaries. We looked at
options associated with half hourly metering, but recognising
there would be various ways of drawing the boundaries around a
scheme. The way the Government have taken that forward in terms
of some of the high-level developments—for various reasons
the option of recycling against CCL rebates was dropped but other
ways have been taken forward. I think the principle of auctioning
has been maintained. I think the boundaries have been slightly
narrowed to really focus on around 3,000—
Mr Wilde: 6,000 megawatt hours.
Professor Grubb: 6,000 megawatt
hours. The first three years would be a fixed price system but
the understanding is that it would then move into absolute caps,
which in effect is an auctioning system, and companies would go
out and have to say, "We are going to need this many allowances,
we need to go out and buy them and we will be transparently accountable
for that or we will have to buy on the market." A lot of
the essentials we feel were important in what we are proposing
are preserved in the Government's design at present. As always,
there is an extraordinary number of details that have had to be
resolved and sorted out and it has been out for two rounds of
consultation.
Q147 Dr Turner:
Do you share our concern, based on the experience of the initial
phase of the European ETS and of the Climate Change Agreements,
that the Government will be too lenient in setting up the Carbon
Reduction Commitment in order to get people into the scheme? They
will be set very easy targets—in fact Defra are suggesting
that people be able to determine their own emission targets—and
that there will be an introductory phase to tempt people into
the scheme without auctioning. How many years do you think it
would be before the Carbon Reduction Commitment actually delivered
serious carbon savings if the Government is going to be that lenient?
Mr Wilde: I think the first thing
about the scheme is that it is a mandatory scheme, so if your
energy consumption as an organisation, whether it be in the private
sector or the public sector, is outside the EU ETS and CCA Agreements,
you will be in the scheme; it is mandatory. It is linked to half
hourly electricity metering. So that is the first thing—they
do not get a choice about whether they are going to be in the
scheme. I think the introductory phase is really important because
the experience from the EU Emissions Trading Scheme was that we
are not quite sure exactly what the baseline emissions of the
covered sectors will be, and I think if we look at the Climate
Change Agreements and the Climate Change Levy there is a big awareness-raising
effect when you introduce a scheme like this, so the fact that
you have got that uncapped period whilst you are getting a sense
of the overall emissions within the scheme from the Government's
perspective so it can set a more realistic cap but then from participants'
perspective so they can get used to the running of the scheme,
makes a lot of sense, and that awareness-raising effect will start
to drive emissions reductions straight away. In 2013, you can
start to set a cap and the advantage of this scheme versus the
EU ETS and the Climate Change Agreements potentially is that the
cap will be set in aggregate overall so you are not setting a
cap for individual installations. If the coverage of the scheme
is 13 million tonnes of carbon, or something along these lines,
you may decide overall we are going to cut that 13 million to
11 million, or whatever the number may be, and that means that
the sector as a whole needs to respond and those companies that
can reduce their emissions do so; those that cannot.
Q148 Dr Turner:
Can I come back to whether you could speed up the transitions
to effectiveness, because if the scheme is mandatory the Government
has got lot of control, if it chooses to use it; it can make it
bite quicker if companies have no way of evading it. Could the
introduction be made sharper and more effective?
Mr Wilde: I think it is difficult
at the moment and because of the paucity of data in the market
place it is very hard to actually identify the 4,000 to 5,000
thousand companies that are going to be in the scheme or know
precisely how much they are emitting. To get to the point where
we are ready to implement the scheme in 2010, the first step is
identifying the participants, and so once you have identified
them then you need to get a sense of exactly how much they are
emitting so you have a sense of the overall emissions.
Q149 Dr Turner:
How will you assess their emissions anyway? Are you just going
to have to go over their accounts and see what their energy bills
are? Is there any other more effective way of doing it? If that
is all that is involved, that should not take long, should it?
Mr Wilde: In the first instance,
they get identified by the energy suppliers who tell them that
they need to provide the information to government about how much
they are consuming through their half hourly meters and that will
happen in 2008. That will basically be the means by which you
work out whether you are qualifying for the scheme or not, when
you have to be within the scheme. Post that, once the scheme actually
begins, the companies will be given good information by their
suppliers, there will be obligation upon suppliers to provide
good information, and that is an important part of the scheme
because transparency of energy performance in the market was an
issue, and then the companies or organisations themselves provide
that information to government. So it is a light-touch admin scheme
where there is self-certification and self-monitoring.
Q150 Dr Turner:
Can you see scope for evasion in that because otherwise it would
seem to me that the scheme will start off with all the knowledge
that you need to set the baseline.
Mr Wilde: I think that is one
of the things that needs to be taken into account. The scheme
needs to be designed sensibly with not too much admin and auditing
at a level of maybe 20% of all participants, or maybe slightly
less, will help to ensure that there is compliance because there
are big reputational risks for the companies concerned if they
do not comply.
Q151 Mr Hurd:
If I can just be permitted a supplementary to Des on the Carbon
Reduction Commitment. Do you think there is a risk that the policy
landscape is getting increasingly over-cluttered? Would it not
be simpler just to send a stronger price signal to these companies
through a reformed Climate Change Levy, perhaps backed up by stronger
incentives for energy efficiency?
Professor Grubb: Certainly one
of the potential concerns is the complexity and that is an issue
that businesses have frequently raised. On the other hand, there
was equally strong reaction from companies that simply relying
on a price signal would have ultimately to be a very high price
signal to get some of the changes we are looking at, in part because
particularly outside of the energy-intensive sectors a lot of
these companies just do not quite behave in the way economic theory
might predict in terms of carefully appraising all of their costs
and investing optimally in energy efficiency. There are bundles
of reasons for that. I alluded to one or two of them, and we ran
through the various kinds. A particularly important one for these
sectors is often the problems around buildings. The fact that
they may not own the buildings they occupy and therefore they
do not control the fabric, and just the fact that energy managers
may not be well empowered in the way that would be, frankly, desirable
or the way that the board might do if they felt they were under
a lot more public scrutiny associated with something like the
CRC and the projection of emissions and the need to justify that.
So the first answer is there do need to be different instruments
because the failures and obstacles to energy efficiency are different
and are much more complex than just price alone. There has been
extensive debate as to whether if all that is true why do you
need price at all, and I think that is an equally clear answer,
that very frequently for these companies it is the combination
of things which force managerial change and make the board realise
that there is a cost associated with being inefficient which is
the driver, and so I think it is the combination of having price
and the right design of those instruments that far and away drives
the most effective change in these sectors. Is it becoming too
cluttered? I think there is a very legitimate case that with the
EU ETS, the Climate Change Levy, the Climate Change Agreement
and the CRC, it is getting quite a complicated landscape, along
with the building regulations and so forth. In our study, we suggested
that the Government should look seriously at the option of not
extending the Climate Change Agreements because we felt that was
a middle sector which could move either into an expanded EU ETS
or in part into the Carbon Reduction Commitment, and that would
be a substantial simplification. I understand for various reasons
that the Government will be extending the CCAs. I can see an argument—and
I have not actually looked at it enough to know how strong that
argument is—that actually business does want some foresight
as to what the rules are going to be and, let us face it, we did
say in our report that only if the EU ETS looks solid enough and
clear enough and the CRC equivalent has been reasonably robustly
proven so that business really knows what it is dealing with that
will these have a credible impact. Speaking of today, we cannot
really say that either is the case about what these things will
look like post 2012. Can I add one other thing in relation to
the previous question. It is a very important issue and the history
of allocation under these schemes has frequently been too generous
in the first round. I think that having the CRC starting as a
fixed price auction avoids some of those complexities of initial
allocation. You can find out through the auction and the associated
auditing processes the data to which James referred. The thing
that James did not add is that some serious foresight into what
the Government has in mind about the degree of cutbacks in this
sector for the CRC when we move into the capped phase from 2013,
if that is when it is to be, could send a very useful signal right
now. I think what is very important is that these sectors do not
get the idea that they have just got to pay for these allowances
in the fixed price auction phase and then they carry on paying
at about the same level and maybe they do not need to worry about
it. I think if there is a clear signal that these sectors are
going to have to deliver substantial reductions when the scheme
moves into the capped phase, that will also be another string
to the bow of driving change.
Q152 Mr Hurd:
Our inquiry is into the Climate Change Levy and, in theory, part
of the revenue from that policy instrument is recycled through
the work of The Carbon Trust. Specifically in relation to interest-free
loans to the small business sector, how popular and effective
are those proving as a policy instrument in terms of emissions
reductions and in terms of cost effectiveness?
Mr Wilde: They are actually a
very popular and very effective mechanism. Since we introduced
the scheme as a pilot, the financial amount of loans committed
has doubled year on year until the fourth year, which was last
year, and reached £18 million, in which year we gave 480
loans and saved about 50,000 tonnes of CO2. The good thing about
those carbon savings is that the persistence is very high because
it is associated with capital investments. The persistence is
around nine years so we are saving a lot of carbon through this
scheme and it is also cost effective. There is an overall net
benefit to the economy.
Q153 Mr Hurd:
Are those carbon savings audited? Are they subject to some external
scrutiny? What is the methodology for measuring that?
Mr Wilde: We have implemented
a very robust way of tracking our carbon and we now have limited
assurance on it through accountancy. I think we are the only people
out there that do actually have limited assurance over the processes
we use to track our carbon, so we take a lot of effort to go loan-by-loan
looking at exactly which bit of kit they have put in place and
how much carbon is being saved and what persistence it is likely
to have. Historically it has grown very rapidly. We have reached
the £18 million of loans committed last year; this year we
are planning to have around 900 loans and £26 million committed;
and next year we are looking to do about £50 million, so
there is a huge potential to grow the scheme and at the moment
we are constrained really by the amount of capital we have. There
is loads of demand out there.
Q154 Mr Hurd:
To what degree is private sector capital leveraged?
Mr Wilde: That is one of the things
we want to do. The first of the two options is that we get more
funding from the Government, and we have asked for that through
the CSR bid. The other option is that we use Government money
to pay the interest expenses and leverage in private sector capital.
That is something we are very keen to explore, we are talking
to the Government about whether or not we can do that. There is
a big potential future opportunity as well in this market and
we are using three principal ways to promote this interest-free
loan scheme. The first is marketing direct to customers, so on-line
radio, trade and regional press, direct mail, and we have a current
campaign on-going. The second really important route is through
suppliers, so we allow the suppliers to sell their qualifying
equipment and sell at the point of sale the fact they can get
an interest-free loan, and that has a real market transformation
effect. At the moment 70% of all our leads are coming through
suppliers that are offering this high energy efficient equipment
and offer the loan at the same time at the point of sale. We also
cross-sell through our site surveys so we give about 5,000 site
surveys across the market per year and a lot of the opportunities
we identify through that may well qualify for loans, so we cross-sell.
Q155 Mr Hurd:
And are you building data on how much money companies are saving?
Mr Wilde: Absolutely. Overall
this scheme will have a net benefit to the UK economy. When you
take into account the investment costs and the energy savings
there is a net benefit to the economy.
Q156 Mr Hurd:
And the other instrument is enhanced capital allowances? How does
that measure up, because it sounds like interest-free loans is
an effective instrument which could be leveraged more. How is
the enhanced capital allowance side performing?
Mr Wilde: We promote that scheme
on behalf of the Government and the associated Energy Technology
List. That is a list that Joan and I were talking about last week.
It lists high energy performing products across a wide range of
categories. There are about 14,000 products on that scheme and
each year we are trying to raise the bar of what qualifies. It
is typically the top ten to 25% performing products in a given
category. Last year, for example, we added 2,000 products and
took away 1,200. One of the big drivers within this scheme is
the effect it has in transforming the market, so a lot of manufacturers
improve the products they are bringing to market just to get on
the ETL, whether or not they think their clients are going to
claim ECAs or whether they are not. For example, the public sector
buys a lot of equipment off the ETL and they cannot claim ECAs,
so a big driver for change is that energy technology list in its
own right. In terms of the ECAs, the Treasury have estimated how
much is being claimed and round about £170 million to £130
million per annum is being claimed through the scheme. Awareness
in the target audience is actually pretty high, it is around 40%,
and we promote the scheme with a wide range of different marketing
activities. There are issues around which products can qualify
for ECAs and that is one thing the Government are consulting on
the moment, and we will feed in our thoughts on that. There are
three example issues around what is excluded from qualifying for
ECAs. One is that only plant and machinery can qualify. That means,
if you look at lighting for example, 80% of expenditure on high
efficiency lighting cannot qualify for an ECA. The second area
is that systems cannot qualify; it is for individual pieces of
equipment, so you can unlock a bigger opportunity if you allow
systems to qualify. The last one is that sector-based equipment
cannot qualify, so it needs to be equipment that is applicable
for a broad range of sectors, it cannot be specific to a single
sector, so there are opportunities to expand the qualifying types
of equipment or systems that would allow this scheme to have a
bigger effect going forward.
Q157 Mr Hurd:
Finally a broader question on the Climate Change Levy. It brings
in about £700 million a year in terms of revenue to the Exchequer;
the Carbon Trust budget is around £100 million a year—how
much of the remaining £600 million is recycled by the Government
into improving energy efficiency? Finally, does the Carbon Trust
still consider itself to be financed by the Climate Change Levy?
Mr Wilde: A large proportion of
our funding comes through the Climate Change Levy, but we do get
funding from other sources such as DBERR and the devolved administrations.
In terms of how much money is recycled from the Climate Change
levy to energy efficiency investment, the ECAs is the £170
million in 2005-06 I was talking about before. Beyond that I am
not sure how much would be recycled directly back because when
they introduced the scheme they gave the reduction in the national
insurance contribution and I am not sure there was any other kind
of direct recycle back.
Q158 Mr Hurd:
Do you think there should be a clearer link between a tax on energy
and incentives for energy efficiency?
Professor Grubb: I was going to
add one point which is for a period there was also, in effect,
at least some payment to industry through the original UK Emissions
Trading Scheme, although now those incentive payments have expired,
and I think the Government generally, particularly the Treasury,
is not in favour of much hypothecation, or as little as humanely
possible.
Q159 Mr Hurd:
We had noticed!
Professor Grubb: As James said,
the Carbon Trust does get funding from a number of sources and
primarily it would not consider itself "funded by the CCL".
Is more hypothecation desirable? I think some has proved very
useful. I think the concept of environmental taxation does not
rely on hypothecating the revenue. The prime purpose is to make
pollution more expensive and thus give an incentive for polluters
to move away from those activities to invest in cleaner things.
Hypothecation of a serious eco tax in that sense is useful at
the margins to oil the wheels, to provide the kind of information
and the support the Carbon Trust does. I would not support wholesale
hypothecation.
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