UNCORRECTED TRANSCRIPT OF ORAL EVIDENCE
To be published as HC 1561- ii

House of COMMONS

Oral EVIDENCE

TAKEN BEFORE the

Transport Committee

SULPHUR EMISSIONS BY SHIPS

Tuesday 1 November 2011

Mike Penning mp and Godfrey souter

Evidence heard in Public Questions 128 - 161

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Oral Evidence

Taken before the Transport Committee

on Tuesday 1 November2011

Members present:

Mrs Louise Ellman (Chair)

Steve Baker

Jim Dobbin

Julie Hilling

Kwasi Kwarteng

Mr John Leech

Paul Maynard

Iain Stewart

Graham Stringer

Julian Sturdy

________________

Examination of Witnesses

Witness: Mike Penning MP, Under-Secretary of State for Transport, and Godfrey Souter, Shipping Policy Division, Department for Transport, gave evidence.

Q128 Chair: Good morning, Minister, and welcome. As you know, we are considering the European Commission’s proposal to introduce stricter controls on sulphur emissions by ships. Proposals have been agreed internationally but the Commission is pursuing much stricter emissions. Do you have a view on that?

Mike Penning: We are signatories to the MARPOL Convention; the previous Government signed us up to these international obligations. I am where I am on these obligations, but we are very conscious that the Commission has been looking at areas beyond MARPOL. We have no intention as a member state-I have written to the Commission President to tell him that we think that MARPOL goes far enough, particularly the revised Annex VI. We are telling the Commission in the strongest possible terms that enough is enough. We believe that we should not go any further.

Q129 Chair: Were you aware of the Commission’s proposal? Was there any prior discussion?

Mike Penning: It was mooted, but, although you often hear things being mooted, they do not always develop because the Commission has a different system of developing policy. Was I surprised? No, I was not, because there is a tradition of gold braiding and going beyond international obligations. We don’t think that we should do that, and we have said so to the Commission.

Q130 Chair: When you first heard about it-when, as you put it, it was mooted-did the UK make any kind of representations through our representatives at Brussels or here?

Mike Penning: I cannot speak about prior to my becoming a Minister when the coalition was formed, but we certainly wrote to the presidency after I became a Minister. Godfrey, did we make representations before the change of Government?

Godfrey Souter: As far as I am aware, we did not make any representations beforehand. We expected the Commission to proceed to implement revised Annex VI. Obviously, if we had had a concern that it might seek to add extra provisions, we had no idea what sort of provisions they would be. The Commission knows very well that the United Kingdom is a strong supporter of the IMO and of the conventions that the IMO has negotiated and adopted.

Q131 Chair: When did the Department first become aware that a change was being discussed?

Godfrey Souter: I think that we first heard about it earlier this year. However, we reasonably expected something to be done because the original Sulphur Content of Liquid Fuels Directive of 1999 was amended by the European Union in 2005 to take account of the original MARPOL Annex VI. We necessarily had an expectation that European law would be brought in to revise the 2005 directive in line with the revised Annex VI.

Q132 Chair: Was it not thought that there should be some sort of representation or involvement in the discussions that were taking place once it was realised that something more was being considered?

Godfrey Souter: I am sorry, I did not quite hear.

Chair: Was there not a view in the Department that the UK should be involved in putting counter points, perhaps, or in the discussions once it was known that the matter was being raised again?

Godfrey Souter: As I said, the Commission is well aware that the United Kingdom always supports the IMO conventions that it adopts.

Q133 Chair: I know that, but were we active in trying to make our views known once the Department became aware that something was going on?

Godfrey Souter: We did not specifically write or speak to the Commission, telling it that we did not want it to go beyond the MARPOL Convention. No, we did not do that.

Q134 Chair: Why was that?

Godfrey Souter: Because it already knew our position; it already knew that our position was always that we did not want European law to go beyond the IMO conventions.

Q135 Chair: Were no specific steps taken by our representatives here or in Brussels to reinforce those views once the Department became aware that the issue was being raised?

Godfrey Souter: That is correct, but once we saw the proposal and knew the specific points on which the Commission was seeking to go beyond the convention, then, as the Minister said, we did convey our views. We conveyed our views to the Commission once we had specific points to take up with it.

Q136 Chair: When was that?

Godfrey Souter: I think that was in August.

Mike Penning: I can let you have a copy of the letter that we wrote to them.

Q137 Mr Leech: Minister, the big differences with the proposals being put forward by the Commission are in relation to ships at berth and passenger ships. What impact do the Government believe it would have on British shipping if we had to abide by these Commission proposals?

Mike Penning: There are two things. First, if we enter into international obligations as a shipping nation, we believe that we should adhere to them. Going beyond those would put other member states that have signed and agreed to the IMO convention in a difficult position. We believe that it will be detrimental, and I know that you have heard evidence on that from the shipping industry, particularly from the cruise-line industry, that this could well push some ferries out of business. We think that there will be a detrimental effect on the booming cruise-line business.

Secondly, other member states have real concerns, particularly the Baltic states, and Ministers from that part of the world have spoken to me about it; they believe that we will see a reverse, a modal shift, if we push the cost of ferries up; for instance, it would be cheaper to drive down the coast and come through the tunnel than to use existing ferry lines. We think that it is a step too far. We and the previous Administration negotiated hard on the revisions to Annex VI, and we do not think it should go any further for those reasons.

Q138 Mr Leech: The MARPOL proposals go quite some distance, and they are certainly seen as a challenge by the shipping industry. There has been much discussion about whether the technology is available to get sulphur emissions as low as needed or, alternatively, whether low-sulphur fuel would be available. Are you confident that the industry can reach these targets?

Mike Penning: You raise two separate points. The first is on the availability of low-sulphur fuel for the first-stage requirements. Yes, we are confident about that. There may be short-term shortages in certain bunkering situations. That is why we believe that there should be an interpretation of MARPOL that in those circumstances allows fuel to be used that would not normally fit the criteria, because you have to be pragmatic about the availability of fuel for bunkering. If the fuel is not available, are we going to let the ship sit at anchor or drift? We have to be pragmatic about this.

There are areas of MARPOL under discussion, for instance, on averaging the engines in particular ships. If there are four engines in a ship and one does not meet the criteria but the other three do, would the mean be acceptable? Our interpretation of the MARPOL agreement is that it would. I know that some members of the shipping industry feel that they would like to average across their fleets. [Interruption.] I apologise; that is probably the shipping industry phoning to tell me that I am wrong on that, but there we are.

Secondly, I read some of the evidence given to the Committee last week, and there is clearly a difference of opinion between some of the technology companies and the industry. There are ships operating now-you would be amazed if I did not mention this-that use scrubbers. Scrubbing technology is there and it does work, but there is a cost implication; and there is some discussion and disagreement between the technology companies and the shipping industry. One thing that I would say is that we lead the world in R and D on this technology, and it gives us a great opportunity not only to address the emissions issue but for British businesses to get into the market and create jobs.

Q139 Kwasi Kwarteng: What do you think of the accusation that the shipping industry was badly prepared for this change?

Mike Penning: I do not think that it was badly prepared. Like any industry, some parts of it were quite well prepared. There are companies-Godfrey could name them-that are already using the technology, and I have met some, but others out there bury their heads in the sand for a while, thinking that it may never happen. However, we are talking about some long end-dates, especially given when the MARPOL Annex VI revisions took place.

But, at the same time, this is a very difficult industry. The margins out there are very tight indeed, and we have seen many companies contract and reduce the number of ships. However, this is an opportunity, especially as so many of the older ships have been laid up and then gone to scrap. The newer ships coming through will not only meet the criteria but will vastly exceed them. The largest ships in the world, which will come on stream soon under the Maersk Line Fleet, will be 50% cleaner than their predecessors. It is an opportunity, but there will always be accusations that the industry is not ready. It is a big industry, and we have 200 cruise liners operating around the world, and a big British and red ensign fleet.

Q140 Kwasi Kwarteng: As a follow-up, do you see a world in which the Government might give financial assistance to the shipping industry so that it can meet its requirements?

Mike Penning: No.

Q141 Kwasi Kwarteng: You have ruled that out, have you?

Mike Penning: Yes.

Kwasi Kwarteng: Good.

Mike Penning: Where is the Treasury? We have had quite interesting financial schemes with the shipping industry over the years-I know that the Committee has considered them-including schemes to do with tonnage, light dues and so on, but we are not likely to do that at all.

Q142 Chair: What kind of financial assistance did you have in mind?

Mike Penning: The Committee has looked before at light dues, tonnage taxes and things like that. There are lots of schemes out there which are specific to maritime, but I do not have a scheme in mind; and I certainly have no clearance from people way above my pay grade in the Treasury to offer financial assistance. The industry has known that this is coming for some considerable time, and some companies are well prepared and others are less so. However, I stress that we do not need to go any further than the Annex VI revision.

Q143 Mr Leech: Is there any evidence to suggest that any other EU states will provide state aid? I know that the Commission has said that, under certain circumstances, state aid will be acceptable in order to deal with the problem. Are any countries planning to do so?

Mike Penning: I am not aware of any. However, member states-I have to say this in the politest possible way-tend to interpret Commission maritime law differently from us, including on state aid. We will keep a close eye on what other member states are doing and ensure that it fits within MARPOL. If a member state wanted to go further than MARPOL individually, that would be entirely their right, but the Commission should not be looking to do so.

Q144 Paul Maynard: We had evidence from the Governments of Guernsey and Jersey regarding their concerns over the possible implications of these amendments to accessing the islands. What contact have you had with Guernsey and Jersey in the Department over this, and will you be seeking a derogation if these proposals go ahead?

Mike Penning: I have not had any formal discussions with Guernsey or Jersey; I was in Jersey last year and met my opposite number there, but he did not raise the matter with me. I am more than happy, of course, to meet them at any time to discuss their worries. I understand their concerns, particularly on short-haul ferry operations, but we have no plans for a derogation because we have no intention of implementing the Commission’s proposals any further than revised Annex VI.

Godfrey Souter: That is right, but may I point out that the whole question of islands that are remote but within the EU is not relevant to Guernsey and Jersey? The additional provision that the Commission has come up with to treat passenger vessels outside ECAs as if they were inside ECAs does not apply to Guernsey and Jersey. The fact of the matter is that those islands are solidly inside the ECA. For the purposes of the IMO’s MARPOL Convention, the North sea extends down to the western end of the English channel. Consequently, Guernsey and Jersey are inside the ECA for the purposes of MARPOL. Short of going back and renegotiating MARPOL, which the UK Government do not intend to do, they will have to comply.

Q145 Julian Sturdy: Minister, last week we heard from the European Commission policy officer, Christian Wimmer. He admitted that certain fuels were starting to disappear from the market; he was referring to the heavy fuels. I believe that heavy fuels are being sold at the moment for less than the price of crude oil. Refineries are selling those fuels at a loss; they are a by-product of the refining process. Mr Wimmer admitted that new technology allows refineries to refine more of the heavy fuels into higher grade and low-sulphur fuels. As a result, there is less heavy fuel available, and as new technology moves on the refineries are refining more; it is obviously in their economic interests to do so. Is it not the case that the market will drive the move to lower-sulphur fuels, and are we not moving away from heavy fuel oils through pure economics?

Mike Penning: I think that there is a case for saying that. Over the last 10 to 15 years, the oil industry has changed the way in which it refines-not only through changes in technology but changes to where it refines in particular. Many of the refineries that I knew when I was a refinery fireman simply do not exist any more in the UK, and Shell Haven on the Thames is probably the classic example. The industry wants to refine in ever larger high-tech refineries and move the refined product around the world as a cash commodity. However, there are still many "old-fashioned" refineries around the world where heavy oil products will continue to be produced until they are phased out. Building new refineries is hugely expensive, but the oil industry sees that it can earn more from a better refined low-sulphur product than it does from the traditional product. Frankly, it sees where the industry is going and where the IMO has given a lead-up time.

The IMO’s targets are realistic. They certainly are not silly in that you are not going to wake up one morning and find that this is the problem. You are right to say that the market will be driven by the availability of bunkering facilities. However, as I said a moment ago, I stress that we have to be realistic. For instance, there will be times, especially in the early years, when for one reason or another low-sulphur fuel may not be available for bunkering. Should we then ban the industry from using heavy oil at all? If we did, the ships would have to be laid up at anchor or drift, and that would be impractical and silly. On the other hand, the industry has to realise that we are serious in pushing this forward, not only as a nation but as an international organisation.

Q146 Chair: Can the Government do anything to assist with the availability of compliant fuel?

Mike Penning: Not really. It is a supply and demand situation, just as it is for us in the UK with other fuels. This is completely off my brief, but one reason why diesel is so expensive in the UK is that we have a shortage, which drives up the market. The UK simply does not refine enough products.

Q147 Chair: Have the Government considered funding research into abatement technology in alternative fuels? Have there been any discussions of that nature?

Godfrey Souter: We are not funding research into alternative hydrocarbon fuels, but the Department has on the stocks a small study into the possible use of liquefied natural gas and what steps might need to be taken to put in place the necessary infrastructure for the bunkering of liquefied natural gas. So we are looking there.

Mike Penning: It is a really difficult issue around the world. Bunkering is a strange piece of terminology, but basically it means a source of supply rather like a petrol station. If you go to Gibraltar, you will see many ships moored there, and most of them are there for bunkering or they are impounded. They take on supplies and fuel. For many years, LPG, which has been spoken of as a possible fuel, is not readily available for bunkering, which makes things difficult. That is the reason for the drive to obtain low-sulphur fuels.

Q148 Kwasi Kwarteng: What consultations have you had with other Departments, particularly Defra, about these changes?

Godfrey Souter: Officials have worked closely with Defra. The evidence that the Department submitted to the Committee was written in part by Defra officials; about three paragraphs on air quality aspects were written by Defra. That Department is solidly in favour of the application of the revised MARPOL Annex VI.

Q149 Kwasi Kwarteng: Who is guiding this? Are you taking guidance from them? How does it work?

Godfrey Souter: We are in the lead, but Defra is of the same mind. Essentially, we are both very much aware of the importance of protecting the environment and public health. We have exactly the same agenda on this.

Mike Penning: The one area in which I am particularly interested is that we should not talk only about sulphur because there are other particulates that come out from heavy oil which are particularly dangerous. Some of the technologies and scrubbers remove most of the other nasties, but not all of the technology does that. I am quite keen to see that, where ships are using heavy oil but using technology to clean it up, wherever possible, it takes out other nasties-for want of a better technical term-as well as the sulphur, as those other things are not particularly nice.

Q150 Mr Leech: Back in April 2011, the Department gave £5 million to the Mayor to deal with air quality in terms of particulate matter. Is the Department confident that the MARPOL proposals will help us reach our air quality targets, particularly in London?

Mike Penning: It will help, but there are obviously other emissions. As you know, the Department has been pushing for alternative fuel and technologies, particularly for motoring. Only the other day, I saw a hybrid 28-tonne HGV, one of the first to be used by the Stobart Group, Renault is bringing out a 28-tonne-plus hybrid, and I recently opened the first of the new plug-in points at service stations for all electric cars. It has to be part of a package, but maritime emissions are serious because 95% or 96% of all products that come into the UK come in by sea. As an island nation, we are vulnerable to emissions from ships. Parts of the shipping lanes are very close to our coast, particularly in the English channel, and we get those emissions if the wind is in the wrong direction.

Q151 Mr Leech: Is the Department doing any work to see what impact the emissions from ships are having on London, and whether they are responsible, at least in part, for us failing to meet our air quality targets? Although £5 million has already been given to the Mayor of London, you said that it is not the Department’s intention to provide money to the industry to deal with the problem. However, we face up to £300 million of fines if we do not reach these air quality targets.

Mike Penning: I may be wrong, but I believe that the £5 million was not specific to maritime emissions. It was also money to help with the London emissions. It was across the sector. I am not aware of us doing any research, as it would probably cost more than the £5 million that we have given him. However, we will work with the Mayor and whatever studies are being done there, and see whether we can continue to help.

Q152 Chair: What do these proposals mean for the work of the Maritime and Coastguard Agency? Will it be able to enforce new regulations on ships that are just passing through UK waters?

Mike Penning: If we wished, we could send out an inspections team in our territorial waters, but the cost implications of doing so would be astronomical so we intend to do it within the ports. That is interesting because people’s concept of ports is that they are often small, but Scapa Flow is a port and a huge piece of water. It is exactly the same with the Forth; it is a port but not a tiny one. We do not intend to stop ships in our territorial waters, but we reserve the right to do so should we wish.

Q153 Chair: Would it be practicable for the MCA to enforce the new regulations if this went ahead?

Mike Penning: It would not be practicable to have an ongoing scheme for boarding ships. The cost implications would be astronomical.

Q154 Chair: When discussions take place about the Commission’s proposals, what will your three key messages be? What will you be saying?

Mike Penning: The three key messages are these. First, it will of course have an impact on the maritime industry. Secondly, the IMO negotiations on revising Annex VI took a long time; as an international community we are at one on that, and we should not break up that unity simply because the Commission wants to go further. Thirdly, we have absolutely no intention as a member of the European Union of going any further than the existing IMO commitment.

Q155 Chair: Is that no intention, even if the Commission approve this proposal?

Mike Penning: We will do everything that we can in order not to go any further.

Q156 Chair: Who is likely to support you in that position? It is qualified majority voting.

Mike Penning: This is a chicken-and-egg situation. We do not know. All that I can say is that I have had conversations with other member states-I have already alluded to those that I have had with some from the Baltic area and Scandinavia-who are very concerned about the IMO proposals, let alone the increased proposals from the Commission. My officials indicate that they are very concerned. The Commission is not going to get an easy ride on this, but we will make our case. However, instead of going into the situation being willing to negotiate with the Commission, we are not willing to negotiate. We are not willing to do this.

Q157 Graham Stringer: Minister, you said that you read the transcript of our previous meeting. Were you as surprised as I was to find that the Commission has not done an impact analysis on the potential transfer of jobs in cruising to the Mediterranean?

Mike Penning: To be honest, yes, I was. Indeed, I was quite concerned about much of the evidence, particularly that which was given in answer to the questions you put, Mr Stringer. For instance, the Commission seemed not to be aware of the UK’s position, even though we had written to it formally. It was not a secret. We were not hiding it under a bushel. Unlike certain kinds of shipping-for instance, the boxes coming up from the South China sea and that part of the world, or the ferries-the cruise industry can go where it wishes. That is the nature of it. Of course, as a customer you might say, "I want to be in the Baltic", or, "I want to be in this part of the world." There tends to be a small minority of people who just love cruising; it is a hugely growing industry. The predictions for 2015 are that 2 million Brits will be cruising.

The cruising industry has been very robust through the difficult financial times that we have had, and numbers are still increasing, but people are not spending quite as much money on their ships and so their margins are tighter. Like anyone in business, if your margins are tight and you have an option, you might take it and cruise elsewhere. The Commission needs to address that point. All the evidence seems to show that the cruise industry may use this as a parameter for where it cruises.

Q158 Graham Stringer: In your negotiations and discussions with the Commission and other member states, will you be asking for an impact assessment to be done?

Mike Penning: Yes; and as well as asking for an impact assessment we shall be asking the simple question, "Why?" Given how much work was done to get MARPOL revised, for the Commission to come in after that and say that it should go further is a bit of a slap in the face for the IMO. The IMO does fantastic work. It is the only UN body in London, and we are very proud of the fact. At the same time, it managed to bring the international community together over a very difficult piece of work. As member states, we set it out, we agreed it and we signed it, like most other European communities, only to be told, "Hold on a second; we think that it should go further." We were not surprised, but to say the least I am very concerned.

Q159 Kwasi Kwarteng: On the point raised by my colleague about the impact on jobs and wages, you expressed surprise that the Commission had not made an assessment of that. Do you have any thoughts about the possible impact on jobs in the industry?

Mike Penning: We have a view on it now, with MARPOL as it is, and we have done some work on that. We have not done any work on what the Commission proposes because no one envisaged that it would go where it has. I understand that we do not have formal proposals from the Commission.

Godfrey Souter: We have its initial proposal, which is up for discussion in the Council of Ministers and the European Parliament. However, that will of course be modified as the legislative process in Brussels goes on. Where we end up could be quite different from where we are now.

Mike Penning: Then, of course, I am committed as a Minister, should we have to bring something through, to having the impact assessment done again on the new proposals.

Q160 Chair: What is your understanding of the timetable on this? When do you expect negotiations to start?

Mike Penning: The initial proposals will be dealt with at the next Council of Ministers; they then go to the European Parliament, which, like any Parliament, tends to make things go on a bit. Quite rightly, in our submissions, we are not going to budge on this; although I cannot speak for other member states, others are clearly very concerned. Like Godfrey and my officials, I suspect that what the Commission ends up coming out with may be completely different from what our friend from the Commission was saying the other day.

Q161 Chair: Do you want to make a prediction?

Mike Penning: No.

Chair: Thank you very much.

Prepared 18th November 2011