Select Committee on Environmental Audit Minutes of Evidence

Examination of Witnesses (Questions 180 - 189)



  Q180  Jo Swinson: You have mentioned that you would be quite in favour of the hypothecation of the CCL money going back into energy efficiency investments. We heard from UK Steel a couple of weeks ago that they felt the 20% levy that they were paying was a blanket tax, that it was not necessarily incentivising them at all. They were suggesting that if they had that money they could spend it on the energy efficiency improvements themselves. Given your wish for hypothecation, do you think that would be a more efficient way of doing it, or do you not agree?

  Dr Bailey: I have heard that particular issue addressed in a number of different ways. My instinctive response is to say that is probably quite a sensible position for UK Steel where energy consumption is such a large proportion of operating costs and therefore they have a very strong normal market incentive as an internationally competitive industry to make energy efficiency one of their top-most priorities. Other slightly smaller companies that I have spoken to, still in the energy-intensive sector, say that the 20% is extremely useful to them because it provides something that the accountants will look at where they will see that 20% charge and say that creates an impetus. It raises the profile and of course the follow-on argument from that is if we do not meet the CCA targets then we are going to be encountering 100% climate change levy. There may be a few very high profile companies where the idea of a 20% CCL is effectively not creating any additional incentive, but for the vast majority I think it does create some sort of profile. Having said that, the one virtually unanimous thing that I have heard from talking to industry groups over the years is they deny any direct link between the levying of a carbon or energy tax—this is not just the United Kingdom, this is other countries as well—and increased investment in energy efficiency, and a lot of them also say that we would understand the rationale of the tax much more clearly, there would be much less obfuscation of it, if you like, if the money was not recycled via national insurance contributions but it was recycled back in terms of rewarding energy efficiency.

  Q181  Mrs Riordan: Companies involved in Climate Change Agreements have generally sought to achieve their own targets rather than rely on purchasing carbon allowances, though that would have been more cost-effective, and that tends to reinforce it in the industrial firms' view as a compliance regime rather than a trading scheme. Would you agree with that and what does that mean for the future development of the Trading Scheme?

  Dr Bailey: We are talking about the European Union Emissions Trading scheme here?

  Q182  Mrs Riordan: Yes.

  Dr Bailey: Yes, that certainly has strong resonances with the feedback I have had so far. We have been conducting some interviews very recently on the EU ETS, and certainly amongst the industrial sector we have quite strong risk averse behavioural characteristics whereby organisations are waiting until they get some sort of certainty about what their position will be in relation to their emissions cap and then only entering the emissions market if they absolutely have to. They are not particularly interested in the concept of emissions trading in the way conceived by environmental economics. As you say, they are using it as a compliance instrument as opposed to according to the theoretical principles of emissions trading. However, the EU Emissions Trading system is segmenting quite significantly. You also have what is being referred to as the compliance players, mainly the utilities, who are looking into the long-term buying future allowances; they are short on allowances so they are looking to acquire allowances and so they are trading into the future; they are hedging for the future basically. They are trying to get emissions allowances out of the industrial sector, which are risk-averse and will only tend to release EUAs onto the market when their position is actually known.[2]

  Q183  Dr Turner: What everybody is really aiming for is to stabilise the atmospheric concentration of greenhouse gases. You have made it quite clear that you have little confidence in the ability of the current portfolio of economic instruments to produce that effect. Do you think that is a view which is shared by Government and by business?

  Dr Bailey: I do not think it is shared by Government, without actually being privy to Government's view on this specifically. I think there is increasing questioning as this particular Committee takes evidence of some degree of unease about the ability of market-based instruments in their current form to deliver large-scale emissions cuts. I think it is probably a view shared by industry, yes.

  Q184  Dr Turner: Therefore, I have to ask you what you would do about it, both in terms of raising Government consciousness and designing instruments or methods of regulation that would achieve the result?

  Dr Bailey: I am afraid I do not actually have the complete solution to the problem, otherwise I would have come to the House rather earlier.

  Dr Turner: Aw shucks!

  Q185  Joan Walley: What about parts of the solution?

  Dr Bailey: One of the things that the industry sector is certainly talking about very strongly is the need to tackle those emissions which they have little control over, what they call the "over-the-fence emissions" in terms of electricity provision. I think I would make that one of the core priorities of the climate strategy to bolster renewable energies and to move to lower carbon fossil fuels at a much more rapid pace. The part of the solution that I have already suggested to the Committee is through continuation of the existing mechanisms. The Climate Change Levy now being linked to inflation obviously addresses something which was quite problematic for the Climate Change Levy—in effect it was stagnating when other prices were increasing so it was having a diminishing effect. The move to link to inflation addressed that to an extent, and continues to provide some amount of financial incentive for businesses to take energy efficiency seriously. However to my mind what happens with the revenue from the Climate Change Levy could be as important as the price incentive itself. Similarly, with the EU Emissions Trading Scheme we know what percentages of EUAs were issued free-of-charge in Phase I and Phase II. I know there are proposals from the German Government for full auctioning beyond 2012. One can see that that would potentially be a revenue generator which could be used to tackle some of those issues either through over-the-fence electricity or recycling back to industry to promote energy efficiency. If we are looking for what I feel is part of the solution that would be it. I cannot claim for one moment I can quantify what percentages of the solution that might be.

  Q186  Chairman: The problems do not really lie on the nature of the instruments being used, but their application. A cap and trade scheme which had a tight cap and involved 100% options would be quite effective. Similarly, you could use the price signal through the tax system. We froze the fuel duty escalator some years ago and the Climate Change Levy itself has not been raised in line with inflation, so in a sense it is not the fault of the instruments but rather the way in which they actually have been implemented that has made them so ineffective?

  Dr Bailey: In what regard?

  Q187  Chairman: Since we are not on target to reduce emissions by as much as we need, we all are groping around saying, "Why is that? What shall we do?" What I am saying is that emissions trading is potentially a perfectly effective way of achieving that goal, except that we have not actually tried it. We introduced Phase I with limits that were so high no-one had to make any cuts; we gave away the alliances so the only benefits were received by the biggest polluters; and there was no carbon price which drove investment in low carbon energy; but that is not because emissions trading is per se a flawed concept—actually it is quite a good concept if it is properly applied?

  Dr Bailey: I would agree with that wholeheartedly, and that has been the point I have been trying to put across when I have been asked: do I see the current portfolio of instruments as effective or ineffective? Your point is exactly correct, yes. What I am saying really is that the scale of the problem is such that one needs to fight it in every possible way, and that would be through tighter emissions caps and allowing the European market to do what it can, but also through the auctioning and the use of the revenue from auctioning to create an additional spur. I have not thought through all the complexities of how that would operate.

  Q188  Chairman: One of the difficulties I think about the revenue is the scepticism of business and consumers about what actually happens. We have seen it with the Climate Change Levy; a tiny little cut in NICs and then a year or two later a big hike in NICs I think to pay for the Health Service. That makes people a bit cynical, I think. We heard last week from the Minister in a debate we had in Westminster Hall that the Government was absolutely against hypothecation of revenues. Do you share the concern that if that was the case it is going to be quite hard to get business to support, for example, auctioning a much greater percentage of allowances in the EU Scheme, because they will think the governments that run the EU Scheme will swipe the money?

  Dr Bailey: All the evidence I have from my research suggests if there was a very clear and transparent system where it could be demonstrated to industry groups that the monies were not being swiped by Government but were being genuinely used to promote and reward initiatives in energy efficiency, then the acceptability of what initially appears to be an unpopular approach would increase quite markedly. If that avenue is to be pursued seriously I think there would need to be further research on that to confirm that on a wider basis. I would not want the Government to go forth and implement that on the basis of what I have said today.

  Chairman: Nevertheless, what you have said today is quite encouraging on that point.

  Q189  Jo Swinson: Your research has focussed on the different approaches taken to tackling climate change in different countries. How does the UK compare to other countries you have looked at; what might we be able to learn from what they are doing better than us?

  Dr Bailey: As I say, my research has mainly taken place in Germany, the United Kingdom and Australia. Probably the best direct comparison is with Germany. I have to say I think the British Government has handled the whole process of transition to this type of market-based regulation in a much more skilful manner than has the German Government, where effectively the Federal Government took on the role of the negotiated agreements, the self-commitments, and they became thoroughly embedded in the industry psyche as a way that industry should be dealing with climate change issues. The Red-Green Coalition in 1999 decided to move towards a taxation-based regime and encountered enormous resistance. In a way similar phenomena have been observed within Australia, where we had the Greenhouse Challenge, followed up by the Greenhouse Challenge Plus in 2005. It is embedded within industry—there is a certain way that things should be done in relation to industrial emissions. Making the further transition to market-based instruments howsoever applied has encountered much stronger resistance and led to quite significant delays. The British Government, by parcelling the whole lot up together effectively, providing what was at the time a reasonably clear set of signals as to the long-term intent of Government policy and providing flexibility avenues through Climate Change Agreements, through the EU Emissions Trading Scheme and so on and so forth, did actually manage to ease that transition. Of course that is a story about the past. I return to the comment I made at the beginning of this about having potentially a limited shelf-life in its current form and the question is: how should one reform it? Generally speaking I have been quite impressed by the way the British Government handled what was quite a difficult transition.

  Chairman: Thank you very much, that is very helpful. We much appreciate you coming to give evidence.

2   Note by Witness: This means that different segments of the market are operating to different time horizons and speculating to different degrees and in different ways. Utilities are, basically, much more speculative and long term than the industrials, and only time will tell whether market forces will translate this into a credible abatement incentive. Additionally, when one creates a market, the incentive for market players is to maximise returns or minimise costs. These outcomes may be achieved through investment in abatement but there are also plenty of other ways that markets can achieve these ends, not all of which are necessarily compatible with the environmental objectives of emissions trading. Back

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