House of Commons - Low carbon technologies in a green economy

Low carbon technologies in a green economy - Energy and Climate Change Contents

6 MOVING TOWARDS A LOW CARBON FUTURE

INTERNATIONAL ACTION

EU EMISSIONS TRADING SCHEME

196. In January 2005, the European Union Emissions Trading Scheme (EU ETS) commenced, as a cap-and-trade scheme that will help European countries meet their emissions reduction targets. Emissions trading is a key policy mechanism that allows emissions to be reduced at the lowest possible cost. The cost of emissions allowances is determined by the carbon market, and by the demand for, or availability of, allowances. The EU ETS covers electricity generation and the main energy-intensive industries - power stations, refineries and offshore, iron and steel, cement and lime, paper, food and drink, glass, ceramics, engineering and the manufacture of vehicles. Combined, these account for around 43% of UK CO₂ emissions.[261] We are currently in phase II of the EU ETS, which ends in 2012. Preparations are already being made to extend and improve phase III, which will run from 2013-2020. It is hoped that phase III will deliver more emissions reductions, more predictable market conditions and more certainty for industry.

197. However, the EU ETS has received much criticism. The Environmental Industries Commission told us:

The emissions trading scheme sadly to date has not been ambitious enough to drive the emissions reductions that are required and to stimulate a high enough carbon price that encourages investment and makes investment in low carbon alternatives cost effective. It remains to be seen whether that happens in phase three which will start in 2013.[262]

198. EDF Energy blamed the lack of robust carbon constraints and the weak price of carbon:

Low carbon investors face uncertainty created by a lack of a robust carbon constraint (despite the statutory UK budgets) and the weakness in the price formation process in the EU ETS. This price formation process will more than likely be based on short run marginal or avoidable costs (SRMC), rather than the long run marginal cost of more capital intensive low carbon technologies. This means that the EU ETS cannot provide a bankable price capable of underpinning the capital investment in low carbon technologies required to deliver deep cuts in CO₂ emissions. These present significant hurdles for early investment in low carbon technologies. The Government should recognise the role that the EU ETS can play in providing the right incentives to optimise operational decisions and should equally recognise the limitations of the EU ETS as an instrument to underpin long term investment.[263]

199. Others agreed: the Association of Electricity Producers told us "the primary driver for investment, leading to development and deployment of low-carbon technologies in the UK, is a carbon price";[264] the Regional Development Agencies told us, "the substantial fall in the price of carbon under the EU Emissions Trading Scheme is having a detrimental impact on low carbon investment and needs to be addressed";[265] and, the New Economics Foundation stated, "A tight carbon cap is needed to drive a price signal which will make any difference".[266] Without additional clarity to investors on the price of carbon, there is a risk that investment in low carbon technologies will not occur. This would threaten the UK's ability to meet its carbon budgets and decrease the likelihood of Europe reaching its emissions reduction targets. EDF Energy warned us "There is a further risk that failure to support the EU ETS in delivering its objectives may eventually lead to the failure of the EU ETS itself".[267]

200. We questioned the Minister about the need for a tight cap in order to give investors certainty about the price of carbon. He told us:

We must make the market in carbon trading effective, and our view is that in the European Emissions Trading Scheme one way we can do that is to give a credible cap and an effectively working Emissions Trading Scheme. So we want to see phase 3, to have a very tight cap; we want to see the Copenhagen Agreement reach a deal that does lead to higher commitments by the developed world to make carbon emission reductions, as a part of which the European Union will move its offer up from 20 per cent reduction by 2020 to 30 per cent, and we think then that if the cap in phase 3 represents that tighter position that we will start to see a decent and meaningful price for carbon that is reliable. So our view is that it is that kind of market mechanism that gets the price of carbon to where we need it to be, not artificial interference by politicians.[268]

201. We were also concerned about the effectiveness of an emissions trading scheme if some countries agree a floor price for carbon, and others opt for a completely open market. The Minister acknowledged that such an approach would be dangerous:

"It does contain within it the seeds of potential destruction of the whole because, as you say, people would be for artificial reasons buying and selling in one place rather than another, so it would be extremely dangerous for individual Member States to go down that road."[269]

The Department of Energy and Climate Change followed up on this point with supplementary evidence to us, stating that a unilateral floor price in, for example, the UK, "would be subject to a number of significant legal barriers, some of which breach EU law".[270] This assures us that it would be extremely difficult for any one country to proceed with a floor price in the absence of EU-wide agreement.

202. Companies interested in low carbon technologies need a robust and high price of carbon to drive investment. The Government must push for a tighter cap in the third phase of the EU Emissions Trading Scheme in order to encourage investment in low carbon technologies. Failure to achieve this will inevitably lead to a growing demand for the Government to introduce, at a domestic level, a floor on the price of carbon.

INTERNATIONAL CLIMATE AGREEMENTS

203. It was hoped that a robust international climate change deal at Copenhagen would be the driving force needed for the EU to enforce a much tighter cap on the EU ETS. E.ON told us "An agreement is required which will enable the EU to commit to a 30% reduction in GHG emissions by 2020 which will in turn lead to a tighter cap on emissions under the EU ETS over the period and a more robust carbon price".[271] The UK has worked hard on negotiating a global agreement, and a number of organisations, including the Association of Electricity Producers (AEP) and the Energy Technologies Institute (ETI) recognised that the UK has led by example on climate change issues.[272] The AEP were concerned that "without a strong agreement being reached in Copenhagen there is a risk that the emissions reductions targets could have a negative impact on the competitiveness of the UK".[273] In addition to UK competitiveness, other drivers for an international agreement on climate change include energy security and economic development.

204. No legally binding deal on emissions reduction was reached during negotiations at Copenhagen. However, it is important that the UK continue to push ahead with the move towards a greener economy in the absence of an international agreement. The ETI told us "the risk of failing to address the twin challenges of climate change and the depletion of North Sea oil and gas reserves is probably greater than any other risk to a sustainable UK economy."[274] EDF Energy also outlined the importance of continued investment in low carbon technologies:

While this [future international agreement] may be considered to be an ideal outcome in the long term, investor uncertainty will remain in the medium term. This is particularly relevant to the UK where decisions on the role of low carbon technologies in replacing capacity over the next 10 to 15 years need to be taken now and which will have a significant impact on the UK's carbon footprint over the next 30 years.[275]

205. We spoke to the Minister during the final week of negotiations at Copenhagen. At the time he told us, "[After Copenhagen] the markets ought to have some kind of reassurance about what is going to happen. If it does not then you are right, we need to be talking about other measures about taxation".[276]

206. The move towards a low carbon economy is in the UK's strategic and economic interest. The Government must push ahead with the deployment of low carbon technologies in the UK regardless of how other countries are choosing to deal with climate change. It is important for the Government to continue to lead by example whilst continuing to work towards securing a legally binding international agreement.

INVESTMENT

207. As we wait for a tighter cap on the EU ETS and a future international deal on climate change, it is important that other measures are implemented to stimulate investment in low carbon technologies so that the UK can meet its own emissions reduction target. The Department of Energy and Climate Change told us that they were developing a supportive market structure for the deployment of technologies, which included the use of tax credits, Renewable Obligation Certificates (ROCs) and the up-coming renewable heat incentive and feed-in-tariff for small scale electricity. We have already discussed the ROCs, feed-in tariff and renewable heat incentive in the context of different energy generation technologies, and we are broadly supportive of those measures. The Government's research and development (R&D) tax credit scheme is one policy measure that we have heard is encouraging the development of low carbon technologies, particularly in the aviation industry.[277] However, the South East England Development Agency (SEEDA) told us:

While the current R&D tax credit system allows companies to claim a tax repayment in cash based upon a percentage of losses incurred due to 'approved' R&D expenditure, these tax losses would normally only be recoverable as a reduction in taxes payable on future profits generated by the firm. While useful to increase cash inflow from losses, the amount that can be recovered is restricted to only a small percentage of the total losses incurred by companies involved in new product development - typically 5% of losses incurred. However, the 'Green Bond' would involve an immediate cash payment based on 100% of the unutilised accumulated tax losses, which would substantially increase the short term cash flow of the business and serve as a bridge financing through to commercialisation.[278]

208. The Government must maintain and continue to improve the research and development tax credit scheme, in order to encourage private sector investment in low carbon technologies. However, given the scale of the challenge we face, especially after the failure of Copenhagen, the Government must expand its green fiscal policy toolbox.

THE GREEN FISCAL POLICY TOOLBOX

209. The Crown Estate told us that they were seeing the impact of the economic downturn on demand and investment for low carbon technologies.[279] There is a need for a policy framework that is flexible enough to adapt to accommodate emerging technologies over time, whilst providing the long-term stability that the market needs to create a step-change in the investment in existing low carbon technologies. The Environmental Industries Commission argued for:

a combination of demand side policies - such as tax, regulation and the rationing of emissions through carbon markets - that will create new markets for climate change solutions, and supply side policies - such as R&D and training - to facilitate the innovation, production and use of low carbon technologies.[280]

210. However, with limited public funding, it is important to focus public spending on technology areas where we have real strengths, or where there is an overwhelming need for public investment. The Association of Electricity Producers argue that "UK and EU energy policy should aim to facilitate a steady climate for long-term investment in low-carbon technologies and the Government must avoid 'picking winners'".[281] However, the Carbon Trust advocates an approach of picking winning 'technology families' and tailoring policy support towards those areas:

Having prioritised technology families, the next critical thing is having customised policy for that specific technology area. The commercial and technical barriers are fundamentally different for each technology type and those policies need to cover the technology push, so your R&D support, the proving funds […] and then the barrier removal. There is no point proving a technology if you cannot connect it to the grid or other types of planning barriers et cetera. Then you also need to create the right pull mechanisms, whether that is an incentive mechanism or whether that is just clarity for the market as to how to use this particular piece of equipment. It is really important to customise technology support. Neutral mechanisms essentially often favour the most mature technology and disfavour the less mature so you are making choices by doing that.[282]

211. Public funding is limited and therefore it is right that the Government prioritises its investment in low carbon technologies towards specific technology families where the UK has real strengths or where there is an overwhelming need for public investment. However, the Government must be careful of the way it portrays this message. Prioritisation of funding should not result in other technology families being completely disregarded. The Government's policy toolbox should provide flexible support for all low carbon technologies in addition to more specific policy mechanisms that address the technical barriers unique to individual technologies. These should be developed in consultation with the specific industry as and when they are needed. Today's emerging technologies might then develop to a stage where they could be prioritised in the future for more significant levels of public investment.

212. The Sustainable Development Commission (SDC) reported in A sustainable new deal that to fund a green recovery package "Four broad options present themselves: deficit spending; raising money through environmental taxation or the auctioning of carbon permits; issuing green bonds; or increasing the public ownership of energy-related assets".[283] They argued, "the Government has a long-standing commitment to the principle of environmental taxation but has completely failed to capitalise on it so far".[284]

213. The Renewable Energy Association are also in favour of new sustainable financing approaches. They showed particular support in their evidence to us for:

Establishing a Green Infrastructure Bank to catalyse private sector investment through the effective and efficient use of public finance to implement low carbon infrastructure investment.

Raising new finance through 'Green Bonds' for both institutional and retail investors to fund low carbon infrastructure and energy efficiency programmes.[285]

They went on to say that the fiscal system should be used to support the sustainable energy infrastructure through the following measures:

Reinstating 100% capital allowances for leased renewable energy infrastructure and generation assets.

Application of Enhanced Capital Allowances for all renewable energy equipment.

Adjustments to the commercial rating calculation methodology to ensure that energy users are not penalised for installing renewable energy systems.[286]

214. Green bonds have been promoted by a number of organisations as an excellent way of attracting investors to low carbon technologies and related infrastructure. The Minister told us "We like green bonds and we think the market should be delivering green bonds now. We do not think everybody has to wait for us to give them permission or for us to do it for them".[287] We commented that a framework for developing green bonds would be helpful in terms of encouraging the market to introduce such bonds. The Minister agreed this was an interesting idea and told us, "we have not at the moment got a proposal that we would give guidance to the market about the design of a green bond, but I will take it away and give some more thought to it".[288]

215. We recommend that, as a matter of urgency, the Treasury and the Department of Energy and Climate Change work together to develop a set of environmental taxation options and assess other green fiscal measures that could be used to drive forward investment in low carbon technologies. These should include auctioning carbon permits, issuing green bonds, increasing the public and community ownership of energy-related assets, or establishing a green infrastructure bank. In particular, we would like the Government to encourage the use of green bonds by establishing guidance to the market on the design and development of green bonds.

THE ROLE OF PUBLIC PROCUREMENT

216. Through public procurement the Government can play a critical role in driving investment in and development of low carbon technologies, resulting in stimulus for industry and job creation. The Energy Savings Trust believed that:

If government is seen to be taking a lead on this issue, then it will inspire others to do so and add weight to their claims to be a leader on tackling climate change. Public buildings are also ideal in terms of providing anchor loads for large scale district heating and CHP systems. These can then be expanded to include building in the nearby areas.[289]

and the Energy Technologies Institute notes that:

The scale of public procurement is such that it should play a major role in building the demand for goods and services that are closely related to consumer needs. Buildings retrofit and energy management and low carbon vehicles present the greatest opportunities. Minimum standards are also a powerful way to improve the performance of consumer goods and services, whether they are double glazing units, lights or refrigerators.[290]

217. The British Electrotechnical and Allied Manufacturers Association also noted that public procurement also provides an opportunity to set more rigorous standards: "The benefits of this are to establish the credibility and performance of 'new' technologies, to drive a focus on lifetime costing approaches rather than just capital cost, and to ensure that the public sector is setting the right example".[291] The area of lifetime costing is fundamental to achieving zero carbon buildings. Willmott Dixon told us that although the Government's recent procurement documents do not specifically mention whole life costing/life cycle costs "The Office of Government Commerce Centre for Expertise in Sustainable Procurement has recommended that whole life costing should be considered in projects by public sector clients".[292]

218. There is potentially an enormous role for public procurement in the move towards a green economy that will allow the Government to lead by example. This is especially the case for public buildings. In order to achieve zero carbon buildings, we believe that the Government's procurement documents for building materials and technologies should specifically mention whole life costing/life cycle costs.

RESEARCH AND INNOVATION

219. The Government supports the development and deployment of low carbon technologies through a number of targeted funding policies at a European, National and Regional/Devolved level. This includes funding designed to support technologies at each stage of their development: underpinning scientific research is funded by the Research Councils; the Technology Strategy Board, the Carbon Trust and Energy Technologies Institute support the development and early deployment of emerging technologies; and finally, the Environmental Transformation Fund (ETF) and other funding programmes within it provide support for pre-commercial deployment. The Environmental Transformation Fund is not open to direct funding requests. Instead, funding programmes within the ETF publicise when funds are available.

220. Despite the various agencies and types of funding, there is still a perceived gap in funding—the so called 'valley of death'—for technologies that have emerged from the research and development phase as proven concepts but have not yet reached a point where they can be commercialised. We have already discussed the failure of the Marine Renewables Deployment Fund and the improvements made by Government in developing a Marine Renewables Proving Fund (para 67). However, the valley-of-death remains a problem for low carbon technologies in other sectors.

221. E.ON are currently working with the Energy Technologies Institute on technologies at the pre-commercialisation stage:

E.ON is currently working on a pioneering project, within the ETI, for example, to develop a next-generation offshore wind turbine with Rolls Royce. The ETI will also be addressing technologies such as carbon capture and storage and electric vehicles. Traditionally, E.ON's R&D department (E.ON Engineering) has also been involved as active members of bodies including the Engineering and Physical Sciences Research Council (EPSRC) and the Electric Power Research Institute (EPRI), which include a wide industry membership base. E.ON conducts collaborative research with industry partners through both public funded means (e.g. via the Technology Strategy Board) and private partnerships with original equipment manufacturers (OEMs) such as Alstom and Doosan Babcock, as well as other utilities.[293]

However, E.ON recognised that funding for university spin-outs and start-up companies as they go from small scale prototypes to commercial deployment is still a problem.They warned that often, the investment model involves a short-term view: "Typically this involves a rush to premature commercialisation, followed by technology failure, which damages industry confidence and sets back progress, allowing better supported competitors from overseas to become market leaders".[294]

222. The Carbon Trust were also aware of this problem, they are trying to overcome it through their Business Incubators scheme:

Our Business Incubators help them [early stage companies] to find the funding they need. We provide expert advice from business planning, HR strategy and market analysis to preparing for that vital pitch to investors. So far we have helped 82 companies to raise £84 million in private investment.[295]

In addition to this, the Carbon Trust's Venture Capital fund has invested £12.5 million in its 12 portfolio companies, leveraging £110 million from the private sector.[296]

223. Pushing technology through the demonstration phase remains a major barrier to commercial deployment. We welcome the introduction of the Marine Renewables Proving Fund, which has bridged the gap between research and development funding and funding for pre-commercial deployment in the marine sector. However, the stage between proven concept and full scale commercialisation remains a problem in other sectors. We recommend that DECC set up a science and innovation advisory group to bring together energy innovation stakeholders (including the Carbon Trust, Technology Strategy Board, Energy Technologies Institute and others), with a view to overcoming barriers to innovation. The advisory group's first task should be to conduct a review of the effectiveness of the Environmental Transformation Fund and funding programmes within it. The advisory group should also consider whether it would be advantageous for DECC to set up a funding programme that is open to direct funding requests, rather than specific calls for projects.

JOB CREATION AND SKILLS

GREEN JOBS

224. Last year's report by Innovas, Low Carbon and Environmental Goods and Services: an industry analysis, identified approximately 881,000 so-called 'green jobs' in the UK's low carbon and environmental goods and services sector. This could potentially grow to over 1.27 million jobs by 2015.[297]

225. As we move towards a green economy and expand our low carbon industries, there is likely to be a negative impact on jobs in the traditional fossil fuel based power industry. We heard from the California Chamber of Commerce that often a green job is not a new job, it replaces an old job; for example, a coal worker becomes a wind worker. There is a balance to strike between job creation and job destruction and it is more accurate to talk in terms of the net effect on employment.

226. As we move from old technologies to new low carbon technologies, old jobs will be replaced by new green jobs. The Government should develop methodology for reporting the number of net jobs created, taking into account jobs lost through displacement of old industry.

227. We have already expressed our support for the Government's prioritisation of certain low carbon technology families. As a matter of principle, when deciding which technology family to support, the Government should take into account not just the possible contribution of those technologies to reducing carbon emissions, but also their employment and economic potential. There is no reason why supporting low carbon technologies cannot be combined with the UK's economic self-interest.

THE SKILLS GAP

228. A number of organisations—including the Regional Development Agencies, National Grid, Global Marine Systems, Energy and Utility Skills, and the Sustainable Development Commission— recognised the importance of a skilled workforce in delivering a low carbon economy.[298] However, Energy and Utility Skills (EU Skills) warned us about the potential skills gap in delivering a low carbon economy:

If you look at the ageing workforce that already exists in the power industry and … the needs that they are going to have increasingly over the next three sets of five year periods…against the backdrop of a poor sector attractiveness [and] against the backdrop of demographic change. That is going to have a significant impact on our ability to deliver the low carbon economy opportunity. If we do not look at those in a combined way we will not be able to deliver the skills that are needed for both sectors.[299]

229. Train to Gain is currently one of the Government's flagship programmes to support employer-focussed training. However, EU Skills told us that many of the skills needed for the low carbon economy would be incremental, "adding new capabilities to individuals with established skills."[300] One of the implications of this is that "people who develop those incremental skills will not obtain full new qualifications and they are not eligible for Train to Gain type support."[301] To date there has been a fragmented approach to skills training for renewable energy and low carbon technologies. However, the Minister told us EU Skills has successfully persuaded the Government that there should be a national skills academy for power.[302] Moving forward, this should drive a more coordinated approach.

230. In addition to up-skilling existing workers in the power industry, it is also important to prepare the next generation of workers with the appropriate skills for the green economy. The Minister told us "Every school in the country, every FE college and every university will be delivering this and equipping people with the skills for this low-carbon economy of the future".[303]

231. The Train-to-Gain programme is of no use in providing the incremental skills training that is necessary to re-skill workers transferring from old industry jobs to new green jobs. We recommend that the Government reassess the efficacy of the Train-to-Gain programme, as it is currently not appropriate for the needs of the green economy.

PUBLIC ENGAGEMENT AND BEHAVIOURAL CHANGE

232. A key driver in the deployment of low carbon technologies and the move towards a green economy is consumer choice. The British Electrotechnical and Allied Manufacturers Association (BEAMA) told us that the Government needs to work with industry to overcome the lack of consumer awareness about the energy saving products available in the marketplace and the often simple steps that need to be taken to deliver efficiency savings.[304]

233. The Government has made a concerted effort to engage the public on the issue of climate change through its Act on CO₂ campaign. As part of this campaign, the Department of Energy and Climate Change launched its 'bedtime-stories' advert last year. The advert aims to make adults think about the impact their carbon emissions are having on their children's future. The Advertising Standards Authority (ASA) received over 350 complaints about the advert, with most complainants questioning the scientific basis of the claim that climate change is man-made. The last few months has seen a serious of events, including the hacking of emails from the Climate Research Unit at the University of East Anglia and inaccuracies in reports by the Intergovernmental Panel on Climate Change, which have damaged the credibility of climate science.[305] This has resulted in increasing public scepticism about the basis for the Government's carbon budgets. The Minister told us:

People ask why are we making all this effort, and it is one thing to say that there is a scary future out there if we do not make this change because of very catastrophic climate change, but another much more positive message is that we can have a clean, green and prosperous future.[306]

234. The Energy Services and Technology Association told us "When the battle against anthropogenic climate change has been won, a much more all-encompassing one concerning sustainable consumption patterns will still need to be addressed."[307]

235. Public cynicism about the evidence for human responsibility for climate change has the potential to destroy the Government's chances of meeting its carbon budgets. However, the use of low carbon technologies and the move towards a green economy is not just good for the environment, it also makes good economic sense. Energy efficiency reduces consumer bills and low carbon industries have the potential to create new green jobs to help pull the country out of recession. Public attitudes can change, but only if the public sees a direct benefit. The Department of Energy and Climate Change should commission a study through the Economic and Social Research Council to investigate the best way to achieve long-term behavioural change in energy efficiency.

LONG-TERM FRAMEWORK FOR CHANGE

236. The scale of the potential challenges we face with respect to energy supply and changing climate are enormous. The Minister acknowledged, "the country needs a step-change to get to where we need to be in 2020 and in 2050."[308] In the UK Low Carbon Transition Plan the Government committed to producing a Roadmap to 2050, which we hope will provide more detail about this long-term transition.

237. We look forward to seeing the Government's 'Roadmap to 2050', which should take an overview of milestones between now and 2050 that will help the country meet its carbon budgets. The Government must develop technical roadmaps in collaboration with industry for all major low carbon technology initiatives, for example, the deployment of CCS or the development of marine energy. The move to a green economy will be a long-term transition. The Government must continue to seek cross-party support for low carbon initiatives to avoid letting party politics get in the way of achieving emissions targets.

261 Department of Energy and Climate Change, www.decc.gov.uk Back

262 Q 78 [Mr Stevens, Environmental Industries Commission] Back

263 Ev 194, para 27-28 [EDF Energy] Back

264 Ev 145, para 10 [Association of Electricity Producers] Back

265 Ev 250 [Regional Development Agencies] Back

266 Q 28 [Mr Simms, New Economics Foundation] Back

267 Ev 195, para 31 [EDF Energy] Back

268 Q 479 [Mr David Kidney MP, Department of Energy and Climate Change] Back

269 Q 485 [Mr David Kidney MP, Department of Energy and Climate Change] Back

270 Ev 183, Annex D [Department of Energy and Climate Change] Back

271 Ev 187, para 3 [E.ON] Back

272 Ev 143 [Association of Electricity Producers] and Ev 205 [Energy Technologies Institute] Back