Memorandum submitted by the Scotch Whisky
Association
1. INTRODUCTION
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. OVERVIEW OF
THE SCOTCH
WHISKY INDUSTRY
AND THE
INTERACTION WITH
CLIMATE CHANGE
MITIGATION POLICY
MEASURES
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. EU EMISSIONS
TRADING SCHEME
(SYSTEM)—THE
INDUSTRY'S
KEY CONCERNS
ON EU ETS POST
2012 (PHASE III)
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. UK EMISSIONS
TRADING SCHEMES
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. THE UK CLIMATE
CHANGE MITIGATION
POLICY FRAMEWORK—THE
NEED FOR
SIMPLICITY
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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