Examination of Witnesses (Questions 180
- 189)
TUESDAY 30 OCTOBER 2007
DR IAN
BAILEY
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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