Environmental Audit Committee - Autumn Statement 2012: environmental issues - Minutes of EvidenceHC 328

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HOUSE OF COMMONS

ORAL EVIDENCE

TAKEN BEFORE THE

Environmental Audit Committee

The environment in Autumn Statement 2012

Wednesday 31 October 2012

Andrew Raingold, Alastair Harper, David Powell, Ingrid Holmes, Jenny Holland and Andy White

Evidence heard in Public Questions 83 - 126

USE OF THE TRANSCRIPT

Oral Evidence

Taken before the Environmental Audit Committee

on Wednesday 31 October 2012

Members present:

Joan Walley (Chair)

Peter Aldous

Neil Carmichael

Martin Caton

Katy Clark

Zac Goldsmith

Mark Lazarowicz

Caroline Lucas

Sheryll Murray

Caroline Nokes

Mr Mark Spencer

Dr Alan Whitehead

Simon Wright

________________

Examination of Witnesses

Witnesses: Andrew Raingold, Executive Director, Aldersgate Group, Alastair Harper, Senior Policy Adviser, Green Alliance, David Powell, Economic Campaigner, Friends of the Earth, Ingrid Holmes, Programme Leader, E3G, Jenny Holland, Head of Parliamentary Team, Association for the Conservation of Energy, and Andy White, Director, Davis Langdon, An AECOM Company, gave evidence.

Q83 Chair: Everyone has their papers and their seats, so a very warm welcome to all of you to our session this afternoon. We do understand that, Mr Powell, you have to leave early, so please feel free to leave when you need to catch your train, and thank you to Andy White for stepping in at the last moment.

I think that this inquiry is an important one for the Environmental Audit Select Committee. We have a lot of ground to try to cover this afternoon, lots of different areas, and also, as we are all aware, a lot of witnesses as well, so it is going to be very difficult to try to cover the ground. Please do not feel that you each have to comment on every single area of questioning, otherwise we will not be able to finish by an agreed time.

The inquiry is also relevant, given the statements that we have heard from Michael Heseltine about growth, and it obviously links up to the Budget as well. In that context, could I start by asking you to comment on whether there is confidence in this whole Green Budget agenda. Certainly I for one was concerned by alleged reports in the press about the Chancellor referring to the "environmental Taliban". It has not been disputed or not, but could you give the Committee some sense of how important confidence and proper dialogue with the Treasury is in terms of informed understanding of the issues that we are covering in this afternoon’s session?

Alastair Harper: To kick off, I think the reason why we are having so many problems and why energy at the moment is too often on the cover of the newspapers is that policy certainty matters for the green community in a way that it doesn’t for other revolutionary industrial changes. ICT didn’t need that certainty to bring about the change it made to all the rest of industry, but green does because it is about changing things in environmental terms. So when you don’t have that certainty, you don’t get the movement in all the different sectors. As you saw on the cover of The Times during the Conservative Party conference, some major investors into the UK were saying, as the paper reported it, "Go green or we quit". They are saying that because when you are making a choice between one region and another for your low carbon investments, you need to know if the government has made a choice to support the renewable sector or is opting for the nothing but gas approach; you need to know exactly where you are going to be in terms of Fourth Carbon Budget, because it can’t be delivered unless you have certainty for electricity and the electricity market. That is why this odd signal from the Chancellor is causing some uncertainty in the private sector.

Q84 Chair: Does that uncertainty matter?

Alastair Harper: I think that we will get a green economy whether the Government wants one or not. The difference will be that the change will come much slower and it will be a lot more expensive, because the uncertainty is increasing costs and we will also be importing a lot more. If we don’t build it here, if we don’t give the certainty to global investors-companies from France, companies from Germany and capital that is coming from China, India, America- and if we don’t tell them what we are wanting them to deliver they will put their money elsewhere and we will have to import all this stuff anyway at a much greater disadvantage to the British taxpayer.

Jenny Holland: Can I just come in with a very concrete illustration of the really damaging effect that negative and ever-changing signals from Government about policy can have on a particular sector, in this case the insulation industry? We all remember, I think, the heady days after the general election when we were told that the Green Deal was going to bring energy-saving measures into 14 million homes. On the basis of those kinds of signals and the kind of confidence that gave the industry, the insulation industry took steps to invest, sort of confident in the notion that there was going to be a rosy future ahead. We were also told that the energy company obligation was going to be to the tune of £2 billion, so it all looked pretty good. But as time has worn on, of course the signals have become more and more negative and confidence has diminished as a result. The ECO is now only worth £1.3 billion, presumably due to the Treasury putting its foot down, and DECC’s impact assessments of the Green Deal and ECO have seen anticipated installations of insulation dropping further and further.

We feel that it would have been the right time a couple of years ago to put in place a proper system of structured incentives and for the Treasury to have released some money for a proper marketing exercise, instead of what we have seen, which is that ambition has been downgraded further and further, and with it, industry confidence. We now have a situation where a couple of weeks ago, DECC produced its updated energy and emissions projections, and where we see that the Green Deal is now anticipated to deliver only 30% of the carbon savings that were anticipated for it just a year ago, so on that basis, 14 million homes by 2020 drops to something like just over 4 million. The industry is anticipating job losses of 16,000-about 45%-by next year, and the situation looks pretty dire. We would say that that really isn’t the way for a supposedly joined-up Government to go about giving birth to its supposed flagship energy efficiency programme.

Q85 Chair: I am going to bring Sheryll in a moment, but just on this issue about joined-up Government, do you feel that the Treasury is sufficiently in touch with the other departments to resolve the issues that give that certainty for investors?

Jenny Holland: To be frank, I think the problem is that the Treasury doesn’t particularly want to be in touch with other departments. The feeling I get is that the likes of DECC and others find it really quite difficult to knock on the door at Treasury, which is certainly closed, if not downright bolted.

Q86 Sheryll Murray: You mentioned that you would have liked to have seen moves introduced two years ago. One of the problems is of course we are in an unprecedented financial situation, and two years ago, it was a very new Government, and do you not accept that perhaps some of the problem was that we inherited a debt that would not allow the Government to progress any quicker than they have? We are only now just seeing the Green Deal coming in, and it is really unfair to criticise a new Treasury team when there were contributory factors that it inherited.

Jenny Holland: I would agree, but only up to a point. The thing is this was the flagship programme of the new Government. The kinds of sums of money that would have been required to do a little bit of Government marketing and a little bit of Government underwriting would have been absolutely infinitesimal in Treasury terms and it would have given a great deal of confidence both to the industry and to the public at large that the Government was as committed as it said it was to this flagship energy efficiency programme. These were small sums of money. Generally speaking, the kinds of financial incentives that might have been required, that would have been helpful to put in place or to signal at that time can be made to be revenue neutral, so they are not some huge incumbrance by any means on Government commitments and Government coffers.

Q87 Sheryll Murray: In my constituency, the local council and other local people have come together to formulate what they are calling Cornwall Together, which is a scheme people can join so that they source an energy provider using the bulk purchase deal to perhaps secure better energy efficiency and prices. Do you think these sorts of schemes will benefit everybody if they are rolled out nationwide?

Jenny Holland: Absolutely.

David Powell: Just to come back to your original question, Chair, we are talking about inherently long-term investment here, we are talking 20, 30, 40 years. Of course it matters to people right now what messages they are getting about how serious the Government is about that. If the Chancellor is spreading doubt about whether he will stick to the Fourth Carbon Budget, then of course you are going to worry about whether or not your investment is sound. Lord Stern has said that Government-created policy uncertainty is the single biggest deterrent to investment in the green economy, and so these things do matter. I think what the Committee on Climate Change and what everybody probably around this table would say is that it matters. The Government isn’t going to fund all of this stuff itself. What the Government needs to do is open the door to the private sector to come and build this, and the way it does that is by getting the cost of capital as low as possible, and the way it does that is by not spreading the wrong messages about how serious it is about this agenda. So it does matter.

For all of that though, I would say, Ms Murray, that when you are talking about inherently long-term investments, it is the wrong framework to continually put that through two to three-year spending constraints, and we will probably talk later on about the levy control framework that Treasury has brought in. That is having a material impact on risk because the Contracts for Difference, which will fund the future energy system, are going to be part of that. If you know there is going to be a cap after which you won’t be able to use them, that has a material impact on risk. So I would say that it isn’t appropriate for 20-to-30-year investment timescales to put everything through a short-term spending lens.

Andrew Raingold: Just following on from David’s comments, the businesses and investors we interact with, either through our membership or wider network, believe that the Government’s perceived commitment to the transition to a low carbon economy is being severely undermined by both the inconsistency of ministerial messaging, and in particular, the commitment and statements regarding the role of unabated gas in the power sector post-2030. It was for this reason that we wrote to the Chancellor on 8 October-that was the day of the Chancellor’s speech to the Conservative Party conference and the same day as the Siemens’ letter that Alastair mentioned-and we cited the Committee on Climate Change’s evidence that a significant role for unabated gas post-2030 is inconsistent with meeting carbon budgets, and it is also damaging, right now, infrastructure investment, business development and investment in supply chains. It relates very well to a CBI report called The Colour of Growth which said the UK risks losing out on £400 million worth of net exports in 2014/2015 if this policy uncertainty continues.

Q88 Chair: You were talking there about perceptions of what the Treasury is or isn’t considering. Are you in direct dialogue or are you and your organisations in direct dialogue? Do you have channels of communication that provide an informed opportunity to address some of these issues?

Andrew Raingold: As far as the Aldersgate Group, we were invited to stakeholder roundtables with a Treasury Minister in the run-up to all Budgets, but those meetings have been discontinued, as far as we are aware, so dialogue has been quite limited.

Ingrid Holmes: We are managing to have some limited dialogue, but it is through relationships with officials rather than at a political level, and I think perhaps some of what is going on at official level is quite different to the political message.

I just wanted to come in on this issue of confidence in the forward green agenda in the UK. When we look at the amount of investment needed across the UK’s infrastructure, according to Treasury’s own estimates, it is around £40 billion to £50 billion a year. If you break that down into what could be accounted for as either low carbon or low carbon enabling, it is upwards of around 75%. Currently, it is beyond the capability of banks and many companies to deliver that investment, so we are talking about the institution investor community, who are inherently cautious. When that cautious community sees mixed messages from Government, that adds up to increased uncertainty over a long-term commitment and questions about whether it is really an opportunity or not. The political risk adds to costs, as David said, but also remember that this capital can go anywhere in the globe, and if there are clearer opportunities to pursue elsewhere, that is what will happen.

Q89 Peter Aldous: Andrew referred to a limited dialogue with the Treasury. Was it ever thus, or is that a particular characteristic of this Parliament?

Andrew Raingold: Just to pick up on Ingrid’s point, we have quite regular dialogue at an official level, but we have had much less dialogue in this Parliament at a ministerial level than we did in the past.

Andy White: Yes, I just wanted to make the point from a business viewpoint that, as Ingrid mentioned, uncertainty about the CRC and the feed-in tariffs makes it more difficult to attract private investment and has kept business investment out.

I represent the Environmental Industries Commission and one of things they were looking for is a fully-funded sponsoring unit for the UK’s environmental industry within Government to co-ordinate the cross-departmental policies affecting the growing of a green economy. That means having a dialogue not just with the people who are interested in these sort of things in a greater detail at DECC or Defra, but across the Treasury.

Q90 Chair: You have given us one example of something that you would like to have in the Budget to restore confidence. In a sentence, do you each want to offer something you would like to see?

David Powell: About two sentences. I would like to come immediately back on that.

Chair: Do it quickly, then.

David Powell: I think the fundamental reason for the policy uncertainty is that the Treasury and the Government seem to see the green economy as something you do on the side; you do it as well as the non-green economy. You have a high carbon economy and a low carbon economy, and one bit-to answer your question, Chair-of the energy community that probably does have policy certainty is the fossil fuel industry in the UK. They have had five separate tax breaks given to them in the last seven months alone-if it is still October; yes, it is-and that is extraordinary at a time when we are supposed to be decarbonising, weaning our economy off fossil fuels. We want to see an end to tax breaks for fossil fuels in the Autumn Statement and the Budget, and the current consultation that the Chancellor is proposing on tax breaks for shale needs to be done, and we haven’t had any dialogue on that, for example. Nobody has approached environmental groups, as far as I know, to see what they think. If that is not done transparently and openly, then we think that is of limited use and should be abandoned.

Ingrid Holmes: I would endorse that, but also this is linked to the Budget, but we have an Energy Bill coming up and the clearest signal that could be given to investors would be that piece of legislation, a clear target for 50 grams per kW hour, carbon emissions by 2030. That is a clear direction of travel.

Andrew Raingold: I would say firstly the high-level messaging is really important, so a clear commitment to the green economy and the role that is playing, even at the moment, in driving growth, competitive advantage and jobs, and then, to echo Ingrid’s point on the Energy Bill, we would like to see the adoption of a 2030 decarbonisation target combined with a levy control framework that will allow that target to be met effectively.

Jenny Holland: In the Autumn Statement we would like to see fiscal incentives for energy efficiency. I hope I will get more of a chance to talk about that later on.

Chair: We will come on to that.

Jenny Holland:, I completely agree with Ingrid and the others about the Energy Bill. We would also want to see the capacity market mechanism modified in such a way as to properly bring forward low carbon solutions and demand-side solutions. The insulation industry, whose plight I was referring to earlier on, would like to see some sort of transitional arrangements in place whereby they will not see their industry fall off a cliff at the end of 2012. That could include some kind of arrangement where, for the first year of ECO, low-cost cavity wall and loft insulations were included.

Andy White: Nothing specific from me, just generally more coherence.

Alastair Harper: I think we will get to energy efficiency and infrastructure issues, but I definitely agree about the importance of the levy control framework. I think £9 billion by 2020 will be really vital if the Government are going to deliver their Fourth Carbon Budget stance.

Chair: Thank you. We will move on to energy-related issues.

Q91 Caroline Lucas: Allowing further investment in gas is one of the most significant announcements in what we are expecting from the Autumn Statement. Can you just say how damaging you think another dash for gas would be? I don’t know who to direct that to.

Ingrid Holmes: Do you want me to pick up on that? Over the last five years, gas has been responsible for around 80% of our energy price increases, so I think it is far from clear that gas will continue to be cheap in the future, and I think the key question is, do we want to burn or do we want to build energy? We have undertaken some analysis, looking at various investment-based scenarios through the future energy system, and found that if the Government delivers less on any of the key technologies it has in mind-so CCS, energy efficiency or even nuclear-then under a gas-heavy system, we could see consumer costs increase by nearly 100%, whereas if you go forward on a renewable-energy heavy system, you risk manage that much better with costs likely to go up by around 8%. So I think we need to be framing this not just around the environmental impacts, but also risk managing the ability of policy to deliver and technologies to deliver.

David Powell: I would say that I am not sure that gas is cheap now. When the Chancellor says that gas is cheap, it is in defiance of the fact that bills have essentially doubled over the last decade as a result of the rising price in gas, and the EU’s estimates are that is only going to go up. We need to get our bills off gas if there is to be consumer narrative around the green economy. Our analysis at Friends of the Earth is we probably need and should be putting in place about 8 GW of gas by 2030. That is the baseload gas that we are looking at. What is currently in the pipeline is, we understand, somewhere in the region of 25 GW by 2030, so either that is going to have to be hardly used at all, or it is going to have be used with CCS, but at the moment, there is no indication that either of those things are the case. We are just getting the dash for gas.

Q92 Caroline Lucas: Does the 25 GW include shale gas as well?

David Powell: I don’t think they are specific. I am not sure at this stage.

Just the final thing I would say is it does create a constituency as well, so what worries me a great deal about the dash for gas is that it does create a vested interest, which is another reason to oppose closing down gas. If you build a gas station, you are not going to be very inclined to get rid of it at some point in the future, so I think the whole rhetoric leads to that.

Jenny Holland: I have already said something about the fact that we want to see the capacity market mechanism as published in the draft Energy Bill modified and I think that is in part relevant to your question. The capacity market proposals in the Energy Bill on the face of it do not preclude low carbon generation and demand-side solutions bidding into capacity market auctions, but the lessons from similar capacity markets in the US-there is one in New England and there is one in the Mid-Western and Mid-Atlantic states-are absolutely clear. They have overwhelmingly supported either the continued operation of high-carbon supply side solutions or the building of high-carbon supply side solutions, and because capacity markets are specifically designed to foster rapidly responding reliable capacity, you don’t have to make much of an imaginative leap to know that by definition, gas will always be the favoured technology under such a capacity market mechanism.

From a demand-side point of view-I have to throw this in, don’t I, coming from where I come from-the experience is also very much less than heartening with less than 10% of the capacity bidding into those auctions coming from demand-side resources, of which only about a third was actual energy efficiency as opposed to demand-side response solutions, interconnectors and storage and so on. As I said before, because we want to level the playing field for low-carbon generation and demand-side solutions, we and Friends of the Earth are looking to try to amend the Energy Bill when it is published in its proper form, whenever that will be, to ensure minimum levels of carbon generation and demand-side solutions are included in the auction and that a merit order is put in place when it comes to dispatching the solutions when there are peaks in demand.

Andy White: The question is: are you going to change behaviour if you carry on with the same sort of processes, effectively, and the same suppliers? It is a matter of changing behaviour. On behalf of EIC, I suppose we wouldn’t comment necessarily on the gas or whatever, but we are looking more at environmental industries and we are looking at reducing demand rather than on the supply side.

Q93 Caroline Lucas: I know we are going to come to reducing demand shortly, but just while we are still on impacts of some of these proposed tax changes, I have been really struck, first of all, by how all of you can answer much more with very strong economic arguments against some of these measures. In other words, the economic argument and the environmental argument have synergy between them, which I think is an interesting point to underline.

In terms of trying to get the message across to the Treasury, particularly since on this issue as well, as I say, it is not the case that environmental interests would lead in one direction and economic interests would lead you in another, I wanted to ask you about the tax information and impact notes that were introduced last year as a way of trying to do impact assessments on some of the proposed changes in the Budget. How useful have those Treasury-inspired notes been and have you had any influence over them, and have they been a useful forum over which you can have some debate?

Andrew Raingold: I think they have been a step in the right direction and it is very useful to go beyond the direct fiscal analysis and take into account wider economic, political, social and environmental objectives in a more systematic way,. However, they clearly do not contain sufficiently robust analysis. They need to be improved, and in particular, the notes for the field allowances, which outline the tax breaks for the gas industry, because the overall aim in that note is in relation to the Government’s overall aim of maximising the economic production of the UK’s hydrocarbon resources. When you look at the environmental impact of that assessment, it really just says, "The gas industry is regulated by the EU ETS", without mention of the wider context of the carbon price in EU ETS, which is very low and suffers from an over-allocation of allowances, so that is not an effective driver for decarbonisation.

I think the second point there relates to the wide environmental impacts, and again the note simply says, "This is a very heavily regulated industry so the impact on wildlife is expected to be very minimal", so clearly there is much wider environmental issues that need to be addressed.

Q94 Caroline Lucas: Would you think it is a priority for your organisations to be focusing on trying to get better notes, or do you think it is a bit of distraction in terms of getting the policy change that you would like to see?

Andrew Raingold: I think it could be helpful, but similarly to the impact assessment process, it seems to be done after the policy decision has already been made. So if they were really part of a constructive consultation process, then that would be very helpful.

Ingrid Holmes: I think it is back to the Treasury definition of environmental taxes, isn’t it? It is an intent, rather than trying to measure any effect or impact, and if it truly was an environmental tax, you would be trying to change behaviour and therefore measure the effectiveness of that to determine whether it was worth doing going forward.

David Powell: I just really wanted to underline Andrew’s point. I think it is very cursory information that is in these things, and I think they are of very limited use, to be honest. Not only is the thing about the potential spillages from oil and gas about a sentence long, it says, "Well, the industry is regulated; that is not a problem". The Guardian were reporting at the weekend there have been 4,000 oil spills in British waters since the year 2000, of which only seven have been fined. So clearly that sort of level of information doesn’t tell the whole story, and what I would rather see is rather than a longer piece of paper, I would rather see the Chancellor talk about this stuff. When he announces field allowances, I would rather he talked about the environmental impacts and the carbon impacts, because otherwise a piece of paper that sits in a buried bit of the Treasury’s website isn’t particularly useful, I don’t think, particularly not if they are post-rationalisations, which is what it feels like they are.

Q95 Caroline Lucas: Sorry to be jumping around, but my last question is about incentives, and you have already mentioned a little bit with Jenny, for example, talking about the overall decarbonisation target being a useful incentive, if you like, when it comes to the new Energy Bill. But looking at the tax system in particular, you have been understandably critical of tax incentives that have been given to fossil fuels. Where else do you feel that in particular tax incentives could be used or should be used?

Ingrid Holmes: This sounds like an energy efficiency question, but one of the obvious indicators of a need to make properties more energy efficient is to clearly link that to stamp duty and when you buy and sell a property, highly energy-efficient properties have a lower level of stamp duty and inefficient properties have a high level. This sort of malus-bonus idea could be applied to vehicles as well. It has been used in France quite effectively. That seems like a big gap currently.

Jenny Holland: I think I have already outlined what I would want to see. I presume you might be coming to the issue of energy efficiency in more detail a bit later on.

Caroline Lucas: That is very helpful.

Andy White: I want to make one point about the incentives. That is, I suppose, part of what I do, I am a property tax consultant, and certain incentives work very well; certain incentives aren’t so good. One of the best incentives was the land remediation relief, which created an industry that now employs a lot of people and we can import/export technology to other countries. I believe the ERC are taking a few representatives to China to talk about sort of decontamination over there and that sort of thing. So that is one of the benefits of incentives, as we see it.

David Powell: I just very quickly wanted to bang the drum for amending the landfill tax. The landfill tax has been done well, which is fantastic, but it is very blunt. There is a proposal that Friends of the Earth supports to modify it so that it starts to incentivise not sending stuff to incineration, so there will be a tax on incineration that would rise over time. That will help maintain the revenues, but also stop materials that are valuable to the economy going into landfill, and we would be happy to send the Committee a note.

Q96 Martin Caton: I would like to return to the issue of subsidies for oil and gas that you have already raised. Of course, in the Rio+20 outcome document, the Government signed up to removing harmful subsidies for fossil fuels at the same time as you have said the Treasury are providing tax allowances and other incentives for North Sea oil and gas. What needs to be done to drive the Rio+20 agenda here in the UK, and in particular, what needs to be done to get rid of these subsidies?

David Powell: What needs to be done is the Chancellor needs to stop giving them out, as I said. So there have been five in the last seven months alone. Just to take the two that were announced in Budget 2012, they have been given for one reason only, and that is to get more investment happening in the North Sea. They are not being given for any other reason. The oil and gas industry reaction told you everything you needed to know about whether or not that was going to increase oil and gas. They described it as a turning point for the UK oil and gas industry. It will bring in over £1 billion to the Exchequer in five years alone. That is not compatible with the move to a green economy, not just for carbon reasons but because of the creation of vested interests, because of the opportunity costs. Quite simply, the Chancellor needs to stop actively increasing the production of oil and gas in order to tax it. It is one thing to tax something bad that already exists, that is absolutely fine and we should be doing that, but it should be transitional to ultimately lead to it going away. What is happening here, it is actively encouraging more oil and gas production in UK waters in order to tax it, which is very much against the spirit of a green tax shift, leaving aside how you apply that.

Chair: I think you wanted to come in, Alastair.

Alastair Harper: I think it would be really helpful for the Treasury and all of Government to recognise that a tax break does subsidise an industry. I heard the Secretary of State for the Environment speak a few weeks ago about how he doesn’t believe in any subsidy, denying there was any for shale gas. This was a couple of days after a big tax break for shale gas had been announced. I think recognition of where the Government is economically benefiting the sector is really important. It is also important to see that we don’t unnecessarily help mature industries and that we give tax breaks or subsidies to develop the new technologies we need, not to prop up something that is very mature, almost senile.

Chair: Does anybody else want to come in, Zac? Because I know Neil wanted to come in as well.

Neil Carmichael: On the subsidy issue?

Chair: Yes.

Q97 Neil Carmichael: Yes. I was going to raise the issue, not about tax, but about infrastructure investment in connection with energy, and that is the need for more connectivity for energy. We discussed this, did we not, at your excellent group, Andrew, the other day? It seems to me that what would really help a sensible energy policy is the ability to have more connectivity both within Britain and between Britain and Europe and I was just wondering your views about that. That could become quite an interesting infrastructure investment project in the Autumn Statement, paving the way for more. Any comments?

Ingrid Holmes: I can pick that one up. We have multi-financial framework negotiations going through in Brussels at the moment. There is a piece called the Connecting Europe facility, EUR £9.1 billion for things like grid infrastructure, energy in particular. That facility would be extremely useful to support these international investments that could enable us to export energy if we have excesses, or import if that is a lower-cost option. I am not sure the UK has been particularly positive on that front at the moment, but that would be very helpful to see that go through.

Q98 Zac Goldsmith: Just quickly on the fossil fuel subsidies, some PQs have been answered recently that I think showed that the Government is willing to allow the use or allow access to-and it has changed the name, so apologies-Export Credit Guarantee Department, Export Guarantee or whatever it is called nowadays. It would allow use of funds through that vehicle to support fossil fuel projects that would not meet our domestic standards. It has been a cross-party agreement for years now that the Export Credit Guarantee Department will be reformed so that those kinds of things would not happen. So I am wondering whether or not you have had any discussions either among yourselves or with Government as to why the Government is finding it so hard to realise the aspiration that was set out, not just before the election, but also in the Coalition Agreement. Why is this a problem that all Governments seem to be unable to grapple with?

Chair: Difficult one. I think that is a pass.

Alastair Harper: I don’t have the answer for that, but I do think it is something that it is important, and you are right, if there are mixed signals and if a direction is being lost, then yes, it needs to be part of the discussion.

Chair: This is a cross-cutting Committee, and obviously what happens with Export Credit Guarantee Department-or whatever its latest name is-is important and obviously it is a question of having that consistency. If you have any further thoughts on that, particularly from any of your members, we would be interested to hear it, because such cross-cutting consistency is really important.

Q99 Zac Goldsmith: Can I just make a point, really, rather than a question? I am surprised that is not an issue that has caught on, either among environmental correspondents or if not all NGOs, but many NGOs. It seems to me that this is a really obvious standout issue when we are talking about fossil fuel subsidies and consistency of the Government’s approach. I am amazed that this is such a small issue, and it doesn’t seem to be on the radar at all. We do not need an answer to that, but I needed to make the point.

Chair: I think it is a carry-on from that. How the Government take forward the sustainable development goals post-Rio should be looked at in detail, so it is something that can be returned to.

Q100 Simon Wright: What do you make of the Treasury’s definition for an environment tax?

Ingrid Holmes: The OECD’s definition of a tax is it can be about effect, intent or yield. I think you kind of embrace the effect. You could argue that VAT for example produces environmental outcomes because it lowers consumption by raising costs, but I do not think any of us would agree that VAT is particularly a green tax. There is an intent, which is the definition that HMT has adopted-that is, we have decided it is an environmental tax and therefore it is. We can start to pull holes in that argumentation around the carbon floor price in particular. We know that carbon pricing has done very little to change investment behaviour, apart from stimulate some switching from coal to gas. It is not likely to be the main tool with which we change investment decisions around the low-carbon economies. So that leaves you with your last definition, yield. What do you do with that money? This is particularly an issue when you are talking about green taxes, it is about changing behaviour, it is important to have the sticks but also the carrot, so you want to be using money taxed on bad environmental behaviour to incentivise good environmental behaviour. There are adjustments you can make to some of the taxes that have been classified by the Treasury as being green taxes, if you were to use carbon pricing to allocate more money to support the Green Deal, to reduce demand, that could then be seen as a clear green tax. But unfortunately that is not where we are at the moment and very definitely risks eroding support for these sort of instruments.

So, in summary, I don’t believe that the Treasury definition does what we need it to do.

David Powell: I agree with that, but I will come to that in a second. I wish I wasn’t but I am profoundly cynical about what has happened here to environmental taxes. The spirit of the Coalition Agreement was to take a strategic look at environmental taxes across the board, look at them strategically and try to increase the proportion of taxes coming from environmental taxes. What has happened is essentially that problem has been redefined away. The basket of environmental taxes that ONS had has been shrunk by 90% and you are left with six taxes, all of which were scheduled to rise anyway. There we are, problem solved, we said we would do it and we have done it. It is not in the spirit of an environmental tax shift. It is not in the spirit of taxing bads rather than taxing goods. I wish it didn’t look like that had been done just to get around these perennial problems of fuel duty, VED and air passenger duty, but that is how it looks.

The silver lining might well be that there has to be even less justification now for not using the revenues from the taxes that are in the baskets, the six taxes, for explicitly environmental ends. That is something we would definitely like to see as a salvage operation for this redefinition. But we don’t feel that the spirit of that commitment is going to be met now and that is a real shame because I think all of our organisations hugely welcomed that commitment in the Coalition Agreement.

Q101 Simon Wright: In regard to that commitment, do you any of you see any activity that you feel there is an appetite beyond the narrow one described there to meet this commitment? Do you think Treasury are playing an active role working with other Government departments to identify where that commitment may be more fully met or more broadly met?

Jenny Holland: No.

Simon Wright: Okay; fine.

Chair: That is clear.

Q102 Simon Wright: As David said, given the strictly defined environmental taxes are already projected to increase, do you see any scope either within those defined taxes or the wholly new environmental taxes that might, nonetheless, fit within the Treasury’s broad definition of an environmental tax where more progress could be made in raising revenues from environment taxes?

Alastair Harper: To answer a bit of your previous question, I think there are areas where the Treasury is pushing for revenue from environmental measures, such as the carbon floor price and through changes they made to the carbon reduction commitment. I think the problem with that, especially the CRC, is it is a very negative change to something that was both a carrot and a stick. They removed the carrot. You end up with a situation where the Treasury only sees the environment as something that works if it enriches the Treasury, which might be why they have a limited view of how much of a positive impact it has on the economy as a whole.

In terms of where environmental taxes work, it may not be what the Treasury thinks of as environmental taxes but a CBI report from the summer polled their members who rated landfill tax and vehicle excise duty as highly effective. They had a clear purpose and a function that works well alongside other policy measures; meaning there is no overlap. "Those sorts of environmental taxes work when they are well designed, well implemented, because they encourage investment, drive environmental behaviour and generate Government revenues." It is nice to have businesses that want to generate Government revenues.

Treasury should consider exactly where are the things that could change, that could nudge businesses in the right direction. CRC is an obvious one for that. Right now it doesn’t work, how do we fix it to ensure it compels business action to deliver environmental outcomes.

Andy White: You end up with a slight conflict. You are trying to change behaviour but if you change behaviour too much then you lose the benefit of the taxes themselves, or money to the Exchequer. There is that sort of conflict always there. What are environmental taxes there for? It is a big question. Are they there to raise money or to change behaviour?

Q103 Zac Goldsmith: I just want to jump in on that point that Andy just raised. That is always the argument that is used about genuine environmental taxes. What is the best example in your view of a tax that has been so effective that it has rendered itself obsolete?

Andy White: Sorry, "that has rendered itself obsolete"?

Zac Goldsmith: Obsolete maybe is the wrong term. What is the best example of an environmental tax putting itself out of business?

Andy White: I am trying to think of one that would be a good example of that. It is more of-

Zac Goldsmith: It is logical, but it is almost a nice problem to have.

Andy White: Probably you would never apply it because you are looking at something that has an inelastic demand to a certain extent and so you immediately tax something and the demand goes away or it changes the behaviour totally. So it is very difficult to pick that up. I am not sure that you would ever enact something like that, so it is a very difficult to say that I can definitely put my finger on one unfortunately.

David Powell: I mentioned the landfill tax already. That is one such tax, for two reasons; firstly, because the amount of waste being generated has gone down and because the amount of tax levied has gone up. The revenues from that are projected to shelve off over the next few years, which is one of the reasons we are proposing modifying it to make it a less blunt tool to include incineration, which we would strongly argue should be taxed in the way that they currently-

Q104 Zac Goldsmith: So the revenue will come down even though the price is going up?

David Powell: Yes, because for various reasons the amount of waste being generated is going down.

Q105 Zac Goldsmith: So they are not in sync?

David Powell: There is more one factor, yes.

Andy White: Coming from a construction background, there are now interesting ways of dealing with waste on site and that sort of thing, which probably means that you do lose quite a lot of that impact.

Q106 Chair: Looking to where this definition of environmental tax fits and what the Treasury is doing, you mentioned the Coalition Agreement. Given that is up for review at some stage, do you see that as being an important arena, if you like, where some of these discussions can be played out and, if so, what process might apply so that some of these things that we are talking about here can be part of that review?

David Powell: Because you are looking at me I will come in quickly. I am not going to comment on the mechanics of the Coalition Agreement, but what I would say is that it is not a great deal of use putting things in an agreement if you then just redefine your way out of having to meet it. So it is more a broad comment, and the point I would like to make is that you have to be serious about the things you put into the agreement.

Ingrid Holmes: In addition, you want to have your strategy set out and then develop instruments underneath to deliver that. To develop the instruments from a bottom-up process would not make sense, so it depends on whether there is a shared strategy going forward on this, which I suspect would be unlikely.

Q107 Mr Spencer: We missed the breaking news on this side of the table that the Coalition Agreement was being reviewed. Clearly the one thing I think will be in the Autumn Statement is motoring and I was just going to give you the opportunity, one, to say do you think the strategy is right and clear, and two, to give us a wish list, what would you like to see in the Autumn Statement in terms of road strategy and motoring taxation?

Alastair Harper: Some brief comments on it. It is a real pity that we lost the tax benefit for businesses using low carbon vehicles in the Budget because that was a good signal to businesses, it encouraged a new market and the more that we look at taking low carbon vehicles out of the exemption from various car taxes, the more mixed messages we start to give about the trajectory for the green economy. This is an important thing. We have Ford in Dagenham choosing to do their low-carbon R&D work there and then building it next door in the factory. We attract those global companies to do their stuff for Europe in the UK because of the signals we have set. I think anything in the Autumn Statement that undermines that kind of direction would be a real pity because the petroleum engine is not going to be here forever. If we are at the forefront of what comes next that is something that we should be proud of.

David Powell: I think it would be a shame if we continue to have these perennial scraps around fuel duty 3PL and 3PR and 1PL and 1PR. What we desperately need is a strategy for transport. I do not get the sense that there is one. Public transport is getting proportionately much more expensive than driving is. One of the reasons why the redefinition of environmental tax is so frustrating is because the VED is clearly demarcated on different carbon bands and that clearly does make an impact. I spoke to the Campaign for Better Transport about this, and they were very clear about that.

I think we need to see two things. Firstly, we do need a consistent signal. If the Chancellor signals a rise in fuel duty, he will not just back in over public pressure on it, for example. But I think we need to see a whole host of other incentives as well. What you might call de-deployment incentives; for example, the measures that were given before the last election to encourage the recycling of cars, the scrapping of cars, that sort of thing, to trade them in for lower-carbon alternatives. There are all sorts of measure within car use to make that lower carbon but also against the policy certainty idea, you can’t build your tax base on something that is perennially held to political fortune.

Q108 Mr Spencer: Just to be clear, David, obviously you talk about this push and pull between whether it is right for consumers or whether it is right for the Treasury, are you suggesting and would you support an increase in that fuel duty and the Treasury to hold its nerve, if you like? Is that what you are calling for?

David Powell: Fuel duty is a pretty blunt instrument. The overall price of the oil and fuel duty together is what affects the price that people pay at the pump. The oil price is going up, so clearly there is a price incentive operating there. What I think is more important is if the Government says it is going to do something that it sticks to it, because then you do not have these political battles going on. You do not have these political structures of fortune. But there are other instruments like the VED, which have been hugely effective and need to be used more, where you are hitting people at the point of purchase and the point of decision making. There have been some rumours being flooded around in the news this week about a two-tier VED system where some part of VED would be used to pay for a privatised roads network. You don’t know how much of that is just kite-flying. If you start to lose the impact between environmental behaviour and motoring taxes, you start to lose one of your big incentives to change the way people travel. In the absence of a particularly coherent strategy that would be a concern.

Mr Spencer: Everyone is happy, then.

Q109 Chair: Just on that, when we did our air quality report one of the issues that we raised was the need to have a much more informed public debate about the issues. Do you think this is an area that perhaps isn’t very well understood in terms of the tension between the short-term cost of living and the long-term environmental aspects?

Andy White: If I may make a very personal comment on that, I think that is absolutely the case that those things are not particularly well understood. The impact of motoring and health and pollutants and health and that sort of thing is not well brought together in terms of the public understanding of the other impacts of motoring.

Q110 Peter Aldous: If I could move on to the area of energy efficiency. This is something we have touched upon. Do you believe the Government is doing enough through the tax system or fiscal incentives to support energy efficiency?

Jenny Holland: This is me, and I guess you have anticipated my answer.

Peter Aldous: I think I have already had part of it.

Jenny Holland: I think the answer is definitely no. I talked earlier on about ever decreasing levels of Government ambition, particularly for the Green Deal and the ECO. If you look at what DECC said in its carbon plan last December, it set out a vision whereby every practicable cavity wall, 7.5 million of them, and every practicable loft, another 7.5 million of them, would have been insulated by 2020, and chuck in 1.5 million solid walls as well. It is quite clear that the policy is not in place at the moment to make that happen. We are not just talking about insulation. DECC commissioned a report from McKinsey, which I am sure you have all seen, in July that looked at capturing the full electricity efficiency potential of the UK and what McKinsey found was that current policies are on course to deliver only a third of the possible energy savings by 2030.

The Committee on Climate Change likewise pointed to the fact that insulation installations are currently well below their indicated trajectory and recommended in their last annual progress report that new fiscal incentives needed to be put in place before the launch of the Green Deal in autumn 2012. You could say it is a bit late for that, but on the basis that Greg Barker tells us that it wasn’t launched on 1 October I guess there is still a little bit of time to make up some ground.

The particular incentives that the Committee suggested and many others before them have suggested-and we ourselves-were particularly stamp duty and council tax related incentives. If I can just say a little bit about both of those, I think it is fair to say that most studies to date have focused on rebates, council tax rebates or stamp duty rebates where householders get some money back when they install energy saving measures. There is a lot of literature out there on rebates and I am very happy to send the Committee links to all of them. But over recent times-and I just wanted to focus on that a little bit today-we at ACE have become more attracted to the idea of variable council tax rates or variable stamp duty rates that relate to and reflect the energy efficiency of the property. The key reason for that is that unlike one-off rebates they would, over time, start to embed energy efficiency in the value of the property. We think that is something that is really missing at the moment. The number of bedrooms and the condition of your bathroom and kitchen are amply reflected in the value of your property but the energy efficiency of it is not.

What we are saying is you could have a basic stamp duty rate, say that was the equivalent of band D, and then you would pay, say, 0.5% less if you had a particularly energy efficient property, going up to band A, and you would pay more if you had a rather less energy efficient property. We think that this would, over time, as I say, mean that energy efficiency became embedded in the value of properties, which would be a very helpful overall signal to send out to the populace.

You could do something very similar with rates of council tax, which has the added attraction that it moves through the housing stock more quickly because obviously it is not just reliant on something that is done at the point of sale and purchase. It also would not be masked by other associated transaction costs, because frankly when you are buying a property you do not quite know how much of this enormous overall bill is down to stamp duty or solicitors’ fees or whatever. Again, I would be happy to send the Committee more detail on our thinking on that.

Chair: That would be helpful.

Jenny Holland: I would like to list a couple of other incentives that we feel as though we have been banging the drum on for a long time, as has this Committee I know and other Select Committees. The first is an extension to the landlord’s energy saving allowance, which is due to finish in April 2015. A number of people in this room on both tables were involved in seeing onto the statute book in the Energy Bill 2011 a minimum energy efficiency standard for the private rented sector, which comes in in 2018. To spur improvements before that date, which is very necessary in our view, the landlord’s energy saving allowance should be extended at least to 2018 and be raised from its current level of £1,500 to £3,500, which would be enough to bring about three-quarters of F-and G-rated properties up to band E, which is the anticipated minimum standard level.

Just another one in the residential sector, we would like to see the current 5% reduced VAT rate extended to cover A- and B-rated windows and there would not be any dead weight compliance associated with that because they are not mandated by building regulations. In the commercial sector we have also been banging on for a long time about the need to roll out display energy certificates to the whole of the commercial sector, not just public buildings. We thought we were nearly there-another interesting example of Government not necessarily working in a joined up way-last year on the Energy Bill when Greg Barker said that DECC was very supportive of such a notion, as were BIS and CLG, and somehow or another it all unravelled because some less enlightened forces, shall we say, managed to get the ear of Treasury and scupper it.

Mr Goldsmith will remember this all too well because it was he who brought forward an amendment to try to achieve this during the Committee stages of the Energy Bill.

A couple of other things in the commercial sector-I think we might get into some more detail later-we would like to see the revenue-recycling element of the carbon reduction commitment reinstated and, again, we would be quite interested in seeing some de-deployment incentives in the commercial sector. For instance, the equivalent of scrappage schemes for lighting, heating and ventilation controls. Sorry it was a long answer.

Q111 Peter Aldous: You have actually answered most of the supplementaries, but I will just take one more. Just talking about the Green Investment Bank, Government is supporting the Green Deal and non-domestic energy efficiencies, two of those five priorities of the Green Investment Bank. What would you like to see the Green Investment Bank do in these areas?

Jenny Holland: I think I have already alluded to a couple. Ingrid, do you want to come in?

Ingrid Holmes: On the energy efficiency agenda specifically? I think there is some talk of the Green Investment Bank supporting the Green Deal Finance Company, which is a private sector led vehicle that has sprung up, currently funded with a £7 million loan from DECC, and I think that is the key contribution from the private sector players, which would seem to be right. The Green Investment Bank was originally conceived as a bank that could provides low cost finance to energy efficiency and going through this intermediary pushes the cost of capital up. So they may need an additional layer of funding from Government to bring those costs of borrowing down to the end users, i.e. people wanting to do investment in their home. I do not think we are quite there yet, because we have decided to go through this convoluted route but the GIB will be critical in delivering finance.

Q112 Peter Aldous: One final question. I get the feeling that you think there has not been enough in terms of the incentives to kick start these measures, do you think that is down to the cupboard being relatively bare in terms of finance or a lack of understanding as to the economic arguments for supporting energy efficiency?

Ingrid Holmes: I think it is a bit of both and they are both interlinked. In my opinion some of the issues around growth in the economy relate to lack of consumption and lack of investment and energy efficiency ticks both of those boxes. So the reason we keep coming back to the economic case is that is the way to engage Treasury. We have, through Customer Focus, worked on a piece on the macroeconomic benefits of energy efficiency, so comparing things that Governments might do, like VAT cuts, fuel duty cuts, general capital spending and general capital investment to a ramped up investment programme in buildings to try to stimulate the economy. Both over a 2015 and a 2027 timescale energy efficiency out performs all those other options.

Then you come to the question of how are you going to finance this, and the obvious pot of money, given all of our discussions to date about fuel taxes, is to use those carbon revenues coming through from 2013 onwards to support that as a means to start to deliver scale and socialise this idea of the Green Deal.

Alastair Harper: Also with the Green Investment Bank there is something obvious and quite simple it can do for the Green Deal, which is to cover the first defaults. If that happens it will attract a lot more private sector banks to get involved with the Green Deal because they know the security is there and, more importantly for the consumer, it will bring down the interest rates.

Ingrid Holmes: Can I pick up on that because one thing the Green Investment Bank will say is we cannot do non-commercial high-risk investments without money from Government to underpin that. So that is something they will absolutely definitely say they won’t do but that is where the Government funding to underpin that early GIB money comes in, that is the role that that plays. So it is important to understand that distinction.

Andrew Raingold: There are also significant opportunities for large organisations to reduce their energy use that will lead to both cost reductions and environmental savings, but the main problem here is that the policy framework is much too complex. There is a plethora of different regulations and carbon prices and that doesn’t provide a clear enough signal to business. Where this needs to be addressed fundamentally is through DECC, who are currently drafting an energy efficiency strategy. Treasury have to be involved in this process and it has to touch a number of areas, not just the regulatory framework but also the Energy Bill and how energy efficiency could be on a par with subsidies for the supply of energy.

Jenny Holland: Can I just come in very quickly? I think a lot of it is about a lack of understanding and, I might say cynically, an unwillingness to understand in some cases, because as I said to you in terms of both stamp duty incentives and council tax incentives, for instance, both of those schemes could be made to be entirely revenue neutral as far as the Treasury is concerned. So we are not looking at some huge raid on the pot. We are not looking at that at all.

Ingrid mentioned the Energy Bill Revolution campaign, the carbon tax recycling campaign that I think most of the organisations, and indeed most of the people in this room are supporting, which is excellent. Again, even the earlier research, let alone the more recent research to which Ingrid alluded, demonstrated quite clearly that recycling those carbon tax revenues in the way that the campaign is calling for could lead to the creation of up to 50,000 direct jobs and up to 200,000 indirect jobs. So those are powerful economic arguments, the likes of which I think we shouldn’t be having to struggle quite so hard to make to the Treasury.

Alastair Harper: We need to go beyond heat in tackling energy efficiency, we need to go beyond what the Green Deal does and get at that 38% of electricity consumption that McKinsey reports we can reduce by. Currently the Government is very interested in-or at least the Prime Minister is, I don’t know if he has told anyone else-switching as a way of reducing bills. There are only two ways to reduce bills: one is to change the energy you use, and one is to not use that energy, the second part being the cheapest.

We at Green Alliance have argued that the best way is to make a market for energy reduction that rivals the market for energy supply. We think one way of doing that is through an energy efficiency feed-in tariff, where you encourage a market to reduce the amount consumed in an area, in a sector, in a business. To produce, and this is being pretty cheap, 1 megawatt of electricity would be £100, the cost, we submit, of avoiding that should be less. From how it has already been done in certain states in America it would be £30-so a third of the cost to remove the electricity than to create it. If we measure it in the same way, if we use the same system for supply subsidy we can put it straight into the Energy Bill and through the feed-in tariff system that already exists.

Q113 Zac Goldsmith: That is exactly what I was going to ask. The most important part of the proposals originally was to put energy saved on a par with energy generated and create that mark up. There is no doubt that works from a financial point of view. I think the reason why that has effectively been dropped, because that is not currently on the table other than a sort of vague aspiration, is the Government could not work out how to create a reliable benchmark. It is very hard to know how much energy is saved because you can always put more appliances in a building or whatever it is that consume more energy. It is hard to know how much you would save.

The question to you is, how can you get around that problem and what can we do at this stage to ensure that that exciting part of EMR is not lost altogether, because without it we don’t have a hope of meeting the targets that we are talking about.

Alastair Harper: The measurement is already there. It already works in Texas. You can see how they have done it and how it has succeeded.

Q114 Zac Goldsmith: There are no problems with the benchmark?

Alastair Harper: No, certainly not. The larger you do it the more that the rebound effect and so on don’t matter because you see on the large scale exactly how it succeeds, and the idea-

Q115 Zac Goldsmith: So why is the Government not convinced, then, by the Texas model?

Alastair Harper: I think, frankly, it has not been taken seriously enough within DECC. It has been taken seriously by some at a political level but that has not cascaded to the civil service and it has not been reinforced enough by Government. It is starting to happen now because of recent comments by the Prime Minister to bring down bills and so on, but they need to see that this model works. I have spoken to organisations like Deutsche Bank who have said they can do it right now. They invited DECC officials to come down and see exactly how they would do it.

Q116 Zac Goldsmith: Is that the main obstacle at the moment in DECC? It is a failure to understand how-

Alastair Harper: I think we still need political leadership and we need leadership that sees that switching does not reduce the energy cost for everyone; it just switches who pays the cost. If you want to reduce bills for everybody, energy efficiency is the way forward. That understanding needs to come right from the heart of goivernment.

Q117 Zac Goldsmith: So it is technical rather than political the problems that are holding this up?

Alastair Harper: I don’t think the technical was a problem, it was cited as a problem.

Q118 Zac Goldsmith: Yes, but the perception that it is technically difficult rather than lack of political will. There is no other agenda there that you detected that is preventing that from-

Alastair Harper: I think this is something the private sector on the supply side see as a distraction and don’t push for that reason, because they see there is a lot going on with electricity market reform now and don’t want it-

Q119 Zac Goldsmith: Presumably it is direct competition to them?

Alastair Harper: That would be a conclusion. I think that some would feel that way, some are more open-minded. It is an opportunity anyone can partake in.

Q120 Zac Goldsmith: Have you seen any signs then of undue influence by the big suppliers?

Alastair Harper: I wouldn’t want to accuse anyone.

Jenny Holland: I think it is highly regrettable and we are not the only people to be saying it. The ECC Select Committee were pretty excoriating in their criticism of the Government at the time the draft Energy Bill was produced. So it is highly regrettable, in our view, that demand reduction does not feature at all in the draft Energy Bill when it was published before the summer recess.

We do now have assurances from DECC that they are about to produce a consultation on demand reduction options and they are hoping that that will come out at the same time as the Energy Bill has its first reading, which will be some time in November I think is what we understand nowadays. At the same time they have commissioned a lot of research, which arguably they should have done a little while ago, and what they are saying to us now is that if as a result of that research into various demand-side solutions they see that primary legislation is required to bring whatever it is into being, they will take the opportunity of the Bill’s second reading, in whatever is its second House, to bring forward a suitable amendment. In the meantime, we, Friends of the Earth, WWF, Greenpeace and Green Alliance have signalled our intention to bring forward some kind of broad framework amendment around an electricity efficiency incentive as soon as possible after the Bill is introduced, which we hope will at least stimulate the kinds of discussions that I think you and others feel have been rather sadly lacking so far.

Q121 Dr Whitehead: The demand-side reduction as such features in the draft Bill, and indeed may only feature in a future Bill towards the end of its passage through the House, which could be a problem. One of the issues going around is the extent to which demand-side reduction measures stand alone in their own right, de-deployment initiatives as it were, as opposed to measures which cut across or duplicate or move into areas where other initiatives are under way. One of the concerns about perhaps placing demand-side initiatives into Contracts for Difference, for example, is the extent to which that then competes with other forms of renewable low carbon energy, especially if that is levy catchers as it is likely it will be. What mileage do you think there is in terms of looking at perhaps capacity payment arrangements for verifiable and active demand-side permanent reductions, such as ND lighting, such as dynamic demand measures, such as the optimisation that can institute demand-side reduction structurally in the system and would not then be dependent on competition with other areas of reduction?

Jenny Holland: We did cover some of that ground before you came in and I was very much making the point that as things stand the capacity market mechanism within the draft Bill, while not precluding the participation of low carbon generation and demand-side solutions, effectively does so because high carbon supply side solutions will be favoured in terms of their ability to bid into the capacity market auctions. I did say earlier on that we are keen to see the capacity market mechanism amended, modified, when the final bill arrives in Parliament in such a way as to perhaps ensure a certain minimum level of participation for demand-side solutions, and in such a way also perhaps to ensure that there is a merit order in place in terms of the despatch of the various solutions when those times of peak demand come about.

Just on the idea of an electricity efficiency fit, unlike Green Alliance, for the reasons that you articulated, I think we would prefer to see a freestanding electricity efficiency fit that cannot then be seen to be competing with renewal technologies in terms of the funding point.

Q122 Martin Caton: We understand we might well see the Treasury setting out further plans to boost infrastructure in the Autumn Statement. What do you want to see from the Treasury on infrastructure?

Andrew Raingold: Firstly there needs to be a more strategic view of how the investment in infrastructure meets the Government’s wider aspirations for the transition to a low carbon, resource efficient economy. I think also on a specific level, when you look at the infrastructure loan guarantee scheme, not one of the five criteria against which projects are judged includes sustainability. What we have seen in the past is, if at the beginning of a project sustainability is a high priority, the project can lead to very significant cost savings. This is what happened in the construction for the Olympic Park site, for example. It is not as if the whole of the Olympics was a hugely sustainable Olympics but the construction of the site was pushing boundaries in terms of industry best practice, and in the end, the findings from the Government is that by doing that the Government saved money. So I think ensuring sustainability is a priority on an individual basis for infrastructure projects across the board and would help drive forward the benefits of a green economy.

Q123 Martin Caton: Would you all agree that if there is going to be something on infrastructure, it should be introducing a sustainability criteria in any infrastructure projects?

Ingrid Holmes: I disagree with that. I am not sure that sustainability is particularly part of the infrastructure plan discussions although there were probably efforts to get it in there and similarly with the guarantee scheme that element was probably absent. I think it leads to a question of how we do that. Therein is the trick. You could have some kind of a qualitative criteria around any assets guaranteed, which must be proven not to lead to locking in a high-carbon trajectory in the UK, but we would have to think a bit more about what that would be like in terms of effective screening criteria.

Alastair Harper: If you are doing an infrastructure plan, it must consider two things. What is going to get the most short term injection of capital into the UK and what are we going to need in the long-term? I think at the moment too much of what I read about infrastructure shows the same three things come up-gas, airports and roads. Basically that means the stuff we built last time we thought nationally about what kind of infrastructure we need. I presume people are going back to their old textbooks from then. I think it is important we look at what is the stuff that the UK needs now and needs in the next 20 or 30 years.

Green Alliance analysed the Treasury’s own infrastructure pipeline for spending for this financial year and took the top 20 of those projects by cost and split them between low carbon and high. We found 88% of those projects were low carbon. Of that we found that only 6% of it was wholly public money while 61% of the high carbon came from public money. So in terms of the initial return you are going to get, this is where the private sector wants to invest right now, the reasons being pretty obvious. It is building stuff we do not have yet. It is building offshore, onshore wind, it is building fibre optics, building the connectors for all of that, it is building low-carbon transportation. Essentially a gas, road and airport infrastructure push would be a big refurb job, it would be tarting up and embedding stuff that we needed a generation ago rather than looking at what the UK needs for the next generation and where the private sector wants to put its money right now.

Q124 Martin Caton: Thinking about the limitations that we now know are on the Green Investment Bank, both when it is going to be allowed to start borrowing and the cap, would introducing this sort of sustainability criteria into the 50 billion infrastructure borrowing partly overcome the gap that clearly there is now for the Green Investment Bank?

Andrew Raingold: I think it would help. It also opens the door to assess fundamentally if we still need borrowing restrictions on the Green Investment Bank, because the ability of the bank to borrow from capital markets is essential for its success and for the same reason that we need the loan guarantee scheme to drive growth and jobs now, the same argument could be made for the Green Investment Bank. There is no good economic reason to constrain the bank as current Government policy. That needs a fundamental review.

Ingrid Holmes: I think, in addition, there are real risks in continuing to place these kind of responsibilities with essentially Treasury civil servants. We have quite a long track record of underwriting daft projects-Metronet £2 million bail-out by taxpayers. Again this is one of the core reasons for the creation of the Green Bank; it was friendly, arm’s length bankers that can negotiate with the private sector and get a good deal. So to have this happening outside of the GIB just seems to make no sense.

Alastair Harper: I agree with what Andrew said about the Green Investment Bank. Now is the time it should take risks because it provides certain for investments when there are so few. Because of the state of the wider economy, in fact what we need is these vast injections of capital; that is why we need the GIB to be able to get out there now. It seems crazy that stuff is having to be made up around it to encourage large-scale investment while one tool ready to go still remains unchanged.

Q125 Chair: Can I just return to what you were saying about the people planning the different projects turning to their textbooks and come up with the same old designs? Is this an issue about academic research and the current thinking and how that is linked to innovation, and how that is linked to understanding the linear investment world? Is there a need to make connections between, if you like, education for sustainability in terms of where the future lies? Is that something that is not being properly brought together?

Alastair Harper: I think that is true. We have discussed that when infrastructure is planned within Government it does not look at it in those terms. I understand that BIS’ infrastructure plans consider low carbon but not in the fundamental way that their own data shows it matter. You need to understand this isn’t a sweet PR exercise; it is the mainstream. We are finding ways that the environment is dictating the way that our economics can work and our infrastructure can work and we need to embed that understanding into any infrastructure plan.

Q126 Mark Lazarowicz: One last question. In respect of planning, in terms of the loan guarantee grant scheme for infrastructure projects, the Government has 50 billion that it wants to spend, I think by the end of 2013 but it is a very short timetable, and it seems to me the pressure on it to spend that money on anything relating to infrastructure is going to be very strong for all sorts of reasons. I think the possibility about them not being sustainable must be quite high. Are you and your various NGOs, trade bodies, whatever, trying to act formally about debate because it does strike me there is not a great deal of thinking, with respect to colleagues here in the Treasury, about how that sustainability element of 50 billion is going to be provided? Are you giving them ideas? I don’t think much else is happening in some quarters. What are you doing to contribute, to make suggestions as to where that 50 billion goes?

Andy White: Personally I think there is an element where a project has to have got to a certain stage for you to be able to do something that quickly. We, as an overall company, AECOM/Davis Langdon, have been looking at putting suggestions forward for certain projects but obviously from our point of view they are projects that we would like to go ahead anyway and give us income as well so there is a vested interest in that. The green agenda does not come into that at all.

David Powell: Slightly off the question but the BBC’s Stephanie Flanders did a piece about this. She said, "How many projects are there going to be that meet these criteria that the Government are putting on here". I just wanted to underline your concern that there are going to be many things that are shoved already in the plan, whatever the other criteria are. Duly noted that we should go back and come up with some concrete suggestions, because I do think it is a real concern.

Ingrid Holmes: The other thing to add to that is this platform evolved to try to bring that institutional investor capital in, the inherently cautious money. There are a number of large pension funds very interested in doing direct infrastructure investment but they want to invest in operational assets that have a revenue stream from day one that are proven to work. Where this guarantee scheme is focused is on greenfield assets, new build and there is just a fundamental mismatch there. So I am sceptical, on top of everything else, how much demand there is going to be for this programme.

Alastair Harper: Not in terms of capital need for our economy, but for pure environmental impact. I know the RSPB have been putting in a lot of resource into this, measuring how infrastructure can be truly green, not just in terms of carbon impact but wider impact on water and on our wildlife and so on.

Chair: At this stage I will bring it to an end. We have covered an enormous amount of ground. We have virtually had a full turn-out from the Committee as well. We are sorry that the Treasury is not engaging with us in advance of the Autumn Statement, but hopefully the inquiry that we are doing will lead to an informed Autumn Statement, at least in terms of the debate afterwards. Thank you all very much indeed for coming along.