Examination of Witnesses (Questions 200
- 206)
TUESDAY 30 OCTOBER 2007
PROFESSOR PAUL
EKINS
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 exceptionsof
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 moneywhich 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 signaland 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 permitsit 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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