The role of carbon markets in preventing dangerous climate change - Environmental Audit Committee Contents

Memorandum submitted by the Scotch Whisky Association


  1.1  The Scotch Whisky Association[45] welcomes the opportunity to provide the Committee with its views on emissions trading schemes.

1.2  Whilst we believe that emissions trading will help national governments and the EU to meet their respective challenging emissions reduction targets, our response will highlight some key issues which have arisen from our experience of emission trading both in the UK and within the EU, notably:

    — "Carbon leakage"—the methods that are being developed to assess sectors which are exposed to "carbon leakage"/international competition fail to identify unique sectors such as Scotch Whisky.

    — New Entrant Reserve—to date operators which increase the production capacity of their installations have not been able to access allowances from the NER. The criteria which will determine access to the NER Phase III (EU ETS) will require careful consideration.

    — Benchmarking—great care will be needed when the benchmarks for Phase III (EU ETS) are being developed.

    — Need to redefine the organisational criteria for the Carbon Reduction Commitment to avoid competitive distortions.

    — Simplification of measures—there is a need to simplify the UK complex climate change policy mix.

  1.3  The Scotch Whisky industry takes the threat of climate change very seriously. Distilleries are inextricably linked to the environment relying on high quality and abundant water supplies, quality barley supplies and available land to make and mature our product. Distillers have a long and proud history of taking active steps to protect the environment and especially improving energy efficiency and reducing emissions of greenhouse gases (GHG).

  1.4  Through their participation in the Climate Change Agreement (CCA) of the Spirits Energy Efficiency Company[46] (SEEC), Scotch Whisky distillers have improved their energy efficiency by 18% (based on provisional results from Milestone 4) on 1999 levels. In meeting their CCA targets, distillers have saved over 170,000 tonnes CO2 since 2001-02. These improvements have been achieved through extensive and far-reaching capital investments in energy efficient/emission reduction technologies. That is not to say that the industry is resting on its laurels; member companies are now investigating alternative (low/zero carbon) energy forms to produce this iconic Scottish product with published plans for three sites to switch to biomass as an energy source in the near future.

  1.5  The Association is currently working with members to develop a wide-reaching environment strategy for the industry. Energy, greenhouse gas emissions, and sustainable resource use are among the priority areas which have been identified. The industry and Association are now focussing on what action to take in these important areas to reduce its environmental footprint.

  1.6  The Association supports the submission of the CBI to this inquiry. Our comments below relate to aspects of emissions trading schemes that are of specific relevance to the Scotch Whisky industry.


  2.1  The Scotch Whisky industry is one of the UK's top five export earners (of manufactured goods): in 2007 exports of Scotch Whisky (to over 200 markets around the world) contributed over £2.8 billion to the UK balance of trade. Exports account for over 90% of all sales of Scotch Whisky. The industry provides over £800 million to the UK Exchequer in taxes; over 9,000 people are directly employed, many in economically deprived areas in Scotland.

2.2  There are over 100 Scotch Whisky distilleries in Scotland. Of these, seven are grain distilleries which produce new-make grain whisky spirit which, after maturation, forms the backbone of blended whisky. Some grain distilleries also produce grain neutral spirit (GNS) which may be further distilled to produce other spirit drinks such as gin and vodka. The 90-or-so other distilleries produce new-make malt whisky spirit. Distilling is one part of the production process. To become Scotch Whisky, new-make whisky spirit must mature in Scotland for a minimum of three years (although in reality maturation of 8-10 years is the norm for many blended whiskies (longer maturation is preferred for single malt brands)). Upon maturation the whisky is then blended and bottled, often in large-scale operations located in the central belt of Scotland.

  2.3  All distilleries are eligible to participate in the sector's (SEEC) Climate Change Agreement. The industry's large-scale bottling operations and other facilities which are not co-located with the distillery operations are not eligible to be included in the sector's CCA. We have challenged this anomaly (see para 4.2).

  2.4  By virtue of their size, six of the seven grain distilleries (and one bottling facility), which account for approximately 60% of total new-make whisky spirit production, are caught by the EU Emissions Trading Scheme (EU ETS).

  2.5  At this stage it is not clear how many industry sites will be subject to the Carbon Reduction Commitment when it begins in 2010 but because of how businesses are structured, there is likely to be distortion in the application of the scheme (see paragraph 4.2).

  2.6  One grain distillery is also caught by the Large Combustion Plants Directive.


  3.1  The Association has closely followed the development of EU ETS since its inception. Over the last 12-months, much of our attention has been focussed on the changes to the European emissions trading directive and the consequences for EU ETS going in to Phase III (2013-20).

3.2  Our concerns on the proposed new directive are summarised below:

    3.2.1  International competition and "carbon leakage"

    Scotch Whisky competes with all alcoholic beverages in the global drinks market and is highly exposed to international competition. The vast majority of globally-traded spirit drinks[47] are not caught by EU ETS. This puts Scotch Whisky at an obvious competitive disadvantage as our direct competitors (both EU and non-EU based), for example Cognac, whiskies from America, Canada and Japan, Cachaca (Brazilian molasses-based spirit), Indian Made Foreign Liquor (Indian made molasses-based spirit—Indian "whisky") or Soju (Korean spirit drink)), are not required to purchase emission allowances.

    We are concerned that the unique circumstances of the Scotch Whisky industry will not be fully acknowledged in any assessment to determine "at risk" sectors/sub-sectors which are exposed to "carbon leakage". As by law, Scotch Whisky must be distilled and matured in Scotland, emissions from production (distillation and maturation) cannot be exported abroad. However, Scotch Whisky is very significantly exposed to international competition (90% of Scotch Whisky sales are overseas). The competitive position of the industry is put at risk if consumers move to cheaper products (produced both within the EU and further afield) not exposed to the costs of EU ETS (or indeed the costs of other climate change initiatives).

    The increasing use of auctioning (and reduction in free allocation) during Phase III will further place industries such as Scotch Whisky at a competitive disadvantage.

    3.2.2  Electricity generation/Combined Heat and Power

    Two grain distilleries operate CHP plants which, in addition to providing heat and electricity to the distilling operation, export surplus electricity to the grid. The new directive appears to penalise CHP, which itself delivers significant net emission savings, as operators are set to only receive a free allocation for the heat supplied by CHP. CHP technology should be encouraged as it has an important role to play in helping to tackle climate change. Companies operating CHP plants already face high energy (gas) input costs to generate both heat and power; at the same time they are helping to reduce GHG emissions. We strongly believe that on-site generation and use of heat and electricity should be eligible to receive a free allocation to encourage efficient power plant investment.

    3.2.3  New Entrant Reserve

    The proposed rules for the New Entrant Reserve now appear to allow allocations to be made to existing installations if a "significant extension" is made. There is as yet however, no clear definition of the term "significant extension". Many distillers are seeking to increase the capacity of their existing distilleries to meet the anticipated global demand for Scotch Whisky. We therefore believe that the NER should be available to operators of installations which increase their production capacity.

    The NER, as proposed, may also act as a further barrier to the development of CHP as, "no free allocation shall be made in respect of any electricity production by new entrants".

    3.2.4  Allocation methodology

    It appears that EU-wide benchmarking will be used to determine allowance allocations to installations. However, EU-wide benchmarks will not work in all sectors, particularly diverse sectors such as food and drink. It is not possible to produce a meaningful mechanism to benchmark litres of alcohol produced in a grain distillery against other products such as poultry and cigarettes which are also covered by the food and drink sector in the UK's Phase II NAP.

    An allocation methodology based on benchmarking will therefore require a return to at least the specific sectors/sub-sectors that were included in the UK's Phase I NAP in which the six EU ETS affected grain distilleries (ie the UK spirits industry) were categorised/classified as the spirits sub-sector. Even then many factors such as product mix, co-product production, cereals processes, CHP and utilisation factors will need to be factored in to any benchmarking methodology.

In addition, due to the limited scope (ie small number of installations covered) of EU ETS on the EU spirit drinks sector, producing an "EU-wide" benchmark for such a relatively geographically restricted sector may therefore be problematic.


  4.1  Whilst distillers were not direct participants in the UK Emissions Trading Scheme, members have experience of trading emissions in the scheme for CCA purposes, either banking or selling surplus emissions or purchasing emissions to offset any shortfalls in their CCA performance/targets. Whilst the recent cost of allowances has been much lower than envisaged when the scheme was set up, those distillers which have generated a surplus of UK allowances have, on the whole, not had them verified due to the high cost of verification and relatively low trading value. Indeed, in Milestone 3, one distiller which had previously generated a surplus of emissions in Milestones 1 and 2, was required to surrender a small amount of allowances to bring it in to compliance (due to the EU ETS double counting target adjustment mechanism (see below)). It chose to purchase the required volume of allowances from the open market rather than verify allowances it had generated in meeting previous milestone targets.

4.2  Based on the latest published proposals, it appears likely that some industry sites will be included in the Carbon Reduction Commitment (CRC) when it begins in 2010. Despite much of the industry being covered by EU ETS and the CCAs, we understand that the way in which a company is structured will determine whether it is also caught by this third emissions trading scheme. For example, SEEC's CCA includes two Scotch Whisky companies which both operate the same number of distilleries covered by the CCA. Each company operates a bottling hall (CCA exempt). Electricity use at the bottling halls may exceed the 6,000 MWh electricity use threshold currently set for the CRC. In theory, both companies should be able to opt out of the CRC as the emissions from their CCA-covered distilleries far exceed the 25% emissions threshold required for opt-out. However, one of the (near identical) companies will not be permitted to opt-out as its CCA-covered distilleries are operated by a subsidiary (we understand that emissions arising from subsidiaries will not be considered to come from the parent organisation). This anomaly therefore has the potential to create a competitive distortion within the Scotch Whisky industry. This position could very easily be remedied if the rules of the CCAs are changed to allow the industry's stand-alone bottling halls to participate in SEEC's CCA. As it has been confirmed that the CCAs will be extended to 2017, this presents an ideal opportunity for the government to address this long-standing anomaly.


  5.1  Whilst the UK has developed ground breaking regulatory measures to help combat climate change, those measures have been developed in a piecemeal fashion leaving industry, such as Scotch Whisky, with a plethora of complex, bureaucratic and contrasting policy measures. We strongly believe that there is an urgent need to simplify the current policy framework in this field.

5.2  As our response has already highlighted, the Scotch Whisky industry is heavily regulated for climate change purposes. Each scheme has its own system of complicated rules. Whilst each policy measure, if viewed in isolation from the others, appear to tackle climate change in a logical way (not withstanding the eligibility criteria problems of the CCA), when brought together, they are complex to say the least.

  5.3  For example, EU ETS targets emissions from combustion installations—some distillery processes (eg drying) are outside of the scope of EU ETS. EU ETS operates on a calendar year basis. CCAs primarily target energy use at the distilleries; the reporting period is October to September every two years. As some grain distilleries are caught by EU ETS, a mechanism has been introduced to avoid double counting of emissions which are covered by EU ETS (only combustion emissions) and the CCAs (generally an entire distillery's emissions). As the two schemes operate to different timescales, the overlap mechanism used for Milestone 4 (1.10.07 to 30.9.08) of the CCA used emissions from the calendar year 2007 to adjust the CCA target—an overlap of just three months.

  5.4  The overlapping nature of the schemes also risks disturbing long-term/medium-term capital investments.

  5.5  The introduction of the CRC in April 2010 may add further complexity.

  5.6  We therefore believe that there is scope and the need to simplify this complex policy area.

3 March 2009

45   The Scotch Whisky Association (SWA) is the trade association representing c90% of the Scotch Whisky industry. SWA members are distillers, blenders, bottlers and those engaged in the wholesale and export trade in Scotch Whisky. Back

46   SEEC is a joint venture between the SWA and Gin & Vodka Association. SEEC's CCA includes 55 of the 100 or so malt distilleries in Scotland and all seven grain distilleries. Back

47   With two exceptions, we are not aware of any other distillery producing a globally traded GI (Geographical Indication) spirit drink that is caught by EU ETS. Back

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