Select Committee on Environmental Audit Minutes of Evidence

Examination of Witnesses (Questions 200 - 206)



  Q200  Joan Walley: No, I am talking about with other countries where there is outsourcing. If you do not manufacture in the UK or in Europe but you shift manufacturing production, say, to Indonesia or wherever it might be, where does the competitiveness issue then come into it?

  Professor Ekins: Clearly there can be competitiveness effects under those circumstances. The only thing I would say on all the pollution haven hypothesis literature which I know about, which is not something I have studied very recently, certainly up until about five years ago all the studies that sought to show that there was a so-called "pollution haven effect", that sought to show that companies did move to places with low environmental standards and regulations in order to get competitive advantage, the data do not show that. The reason is quite simple: that environmental regulations tend to be a very small part of most industries' cost base, even when they are relatively energy-intensive; other things like labour markets are much more important; proximity to markets; proximity to raw materials; skills bases; these things are really what drive location. That is not to say there will not be some exceptions—of course there will, because companies are interested in reducing costs; that is part of what they are all about. If they look at all the issues that decide their location, and environmental regulations are a big part of that, there are huge energy taxes where they currently are and they can find somewhere that satisfies their priorities in other areas and will greatly reduce their energy tax bill, one would be surprised if they did not move. It is precisely the same argument I was making earlier that prices matter. When prices go up managers, once they have been alerted to that fact, tend to pay attention.

  Q201  Dr Turner: The Climate Change Levy is based on energy rather than carbon. The Trade and Industry Committee back in 1999 concluded that this was basically because the Government was trying to protect the coal industry, but of course since then coal has got cheaper than gas, and our CO2 emissions are going up. Do you think that slightly regressive situation could have been changed if the Levy had been targeting carbon instead of energy?

  Professor Ekins: In my view, from what I remember there were two reasons why the decision was taken to go the energy rather than the carbon route. The second one was a desire to protect households, because had the electricity sector been included, the power generation sector been included directly in the Climate Change Levy as it is in the EU Emissions Trading Scheme that would have had an upward impulse on electricity prices which would have fed through into the household sector as well. I think that was another important argument I remember being rehearsed at the time. Of course Lord Marshall in his report recommended a carbon tax; that was his first recommendation which the Government then moved away from. Because you will have gathered that I think prices matter, I think were the price of this energy to be related to its carbon content so that more carbon-intensive users paid more, there would definitely be an incentive to switch. Of course if the incentive is on the firm, the firm does not have a great many opportunities to switch as I think you were hearing in previous evidence. The incentive needs to be on the generator, because it is the generator that has the capacity to switch between different kinds of fuels. Certainly at the time, the information base as to the carbon-intensity of individual generators, that information base was not available. Through various carbon disclosure directives there is a much greater requirement now for generators to disclose the information about what their energy sources are, and indeed that information will soon have to be made available on customers' bills. Conceivably you would be able to differentiate an electricity tax based on the carbon intensity of that electricity, but it would not be simple and it would certainly greatly "complexify" what at the moment is a relatively administratively easy instrument. Given that power generators are now included in the EU Emissions Trading Scheme and once that has a reasonable price involved with the allowances (which of course it does not have at the moment but might have from next year) the generators will get an incentive to switch fuels from that source, and then the Climate Change Levy perhaps can continue in its present fashion.

  Q202  Dr Turner: Do you think the Climate Change Levy should be reformed to target carbon and, if so, how would you do it?

  Professor Ekins: As I say, I would certainly have been in favour of its introduction as a carbon tax back in 1999, or when it was implemented in 2001, but I think the world has moved on. I think the fact that power generators, who are the people who have the capability of fuel-switching, are now subject to the Emissions Trading Scheme very greatly weakens that argument; whereas I think there is certainly an incentive to keep a tax on the electricity use of electricity consumers; because I think energy efficiency, however we generate our electricity, is to be desired; and I think it is a good thing for businesses to have an incentive to save electricity, whatever the electricity source because they all have environmental implications associated with them.

  Q203  Mr Hurd: Do you agree with the Chairman's assessment in the previous session that the problem is not so much the mechanics of the various policy instruments that are available to Government, the problem is in the application and the political process? Do you think the Government should be more explicit in linking policy instruments to absolute reductions in emissions and less tolerant of creeping language around (and the CBI used the expression) "efficient growth" in emissions?

  Professor Ekins: It is quite clear to me that we are not on a trajectory of a 20% carbon reduction by 2010 nor, and I have not seen the latest proposals in the Climate Change bill, the window that has been proposed a 26-32% reduction by 2020, so much more will have to be done. I think it is worth remembering in the context of the UK that the UK is unique in that it has taxed business use of energy much more heavily than it taxes the household use of energy. Undoubtedly in my view there is scope for greater use of the price mechanism in households in order to seek to get energy efficiency gains from that source. I think it is going to be important for business to continue to contribute carbon savings. I think that increasing the Climate Change Levy, as we have had at least for inflation for the first time this year, is an important move in that direction. I rather hope that it will continue to increase on an escalator basis in order to keep managers on their toes and ensure that they do continue to realise the kind of cost-effective energy efficiency improvements that the Climate Change Agreements I think have shown are available.

  Q204  Dr Turner: Andrew Warren told us last week that Climate Change Agreements might have had the same effect, the same impact, on carbon emissions if, instead of giving away an 80% discount, it was only 50% as apparently was originally proposed and this could have saved the taxpayer at least £100 million. What do you think of that statement?

  Professor Ekins: It is an interesting hypothesis. I am not sure how I would devise a means of establishing whether it was likely, because I think that the key to the success of the Climate Change Agreements was to catch the attention of managers. People like me and the IEA have been telling businesses for many years that there were extensive cost-effective potential improvements in their energy use. Especially the energy-intensive sectors would always come back and say, "No, we don't believe that. We're very efficient at managing our energy. We have a good incentive to manage our energy properly and so we don't think this is the case". What the Climate Change Agreements did was to really put feet to the fire on that issue, because the Government produced an independent assessment of the potential and then said, "We're going to give you a financial incentive to reach these targets", and the financial incentive was big: it was an 80% reduction. A 50% reduction is also quite big, but clearly it is less than an 80% reduction. Would it have caught the attention of managers to the same extent as an 80% reduction? Perhaps it would, and perhaps Andrew in that sense is quite right. On the other hand, had it been only a 20% reduction then I do not think he would have been right to the same extent because people would have said, "Not worth us giving time on this. This is small beer"; but an 80% reduction really did catch the imagination and did cause people to put real managerial effort into this issue, which is what was required.

  Q205  Dr Turner: If it had been 50%, what effect do you think that would have had on the competitiveness of the energy-intensive industries, like Joan's ceramics?

  Professor Ekins: Again, they do pay 20% and we did look at some of the sectors that pay 20% and we could not find any kind of effect. Even the tax they were paying was a very small part of their energy bill; and their energy bill was a relatively small part of their total costs. Had that tax been two and a half times the size, which is obviously what it would have been if it had been 50%, obviously there would have been a greater impact. They would have been contributing more to the public purse; and the National Insurance reductions would not have cost the Treasury money—which they ended up doing because Government gave back more to business through the National Insurance reductions than it had raised from the Climate Change Levy and that would not have been the case if it had been 50%, because that is what the original calculations were based on; and that would mean obviously that taxes could have been lower in other sectors for the same level of public expenditure and the same public fiscal stance. To work out the detailed economic implications of that is obviously beyond me at this session, but I think it would have been very small. I would have been very surprised if you changed a very, very small proportion of expenditure to simply a very small proportion of expenditure whether that would have made a difference on the great majority of sectors: but there could easily have been some exceptions to that statement and you can be sure that the industrial lobby groups, if those exceptions exist, will find them and will present them as a general rule.

  Q206  Mr Hurd: Do you support the introduction of the Carbon Reduction Commitment, or do you think we would be better served by keeping the policy landscape simple and sending a stronger price signal through the Climate Change Levy?

  Professor Ekins: That is an interesting question. I suppose if I am to be honest and if I look at the 26-32% carbon reductions that the Climate Change bill suggests that we need by 2020 I would say we would probably need both. The advantage of all these trading schemes has meant that carbon, which is a notoriously abstract quantity, becomes visible. It becomes visible in terms that business people in particular understand. It is something they can trade; they can buy and sell it; it has a price; they cannot see it but they can warm to that. I think introducing a trade scheme for that sector is probably a good thing, because the one thing we know about that sector is that its energy use is currently very invisible to it. You get landlord/tenant problems and all these kinds of issues in commercial property such that people do not really know what their energy use and carbon emissions are. If the Carbon Reduction Commitment can impact that situation then I think it would be very useful. Obviously if you have that allied with a proper price signal—and we do not know what price signal the Carbon Reduction Commitment is going to generate because we do not know the details of how many permits are going to be given and what the trajectory is going to be downward of those permits—it seems to me what the evidence of the CCL and the CCAs have shown is that if you combine a price signal with an awareness of the issue, and obviously the increased public awareness is also important as well, then we might start seeing some real action.

  Chairman: Thank you very much indeed. We have come in on time for once!

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