Select Committee on Environmental Audit Minutes of Evidence

Examination of Witnesses (Questions 142 - 159)



  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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