Examination of Witnesses (Question Number
100-119)
Mr Niall Mackenzie, Mr David Capper and Mr Martin
Bond
2 JULY 2008
Q100 Viscount Brookeborough: Yes.
Mr Capper: In addition to what Niall
said, the way that new entrants after 2013 or after 2012 will
be treated is that the European Commission has proposed that there
will be a pot of five per cent of the total number of allowances,
which will be reserved for new entrants—so these are new
installations. So, for example, in a particular sector like, say,
cement, if there is a new installation after 2012 then, assuming
that the cement sector as a whole is still receiving free allowances
in phase 3 after 2012, the new installation in that sector will
receive free allowances under the same rules that existing installations
receive free allowances. So there should not be any distortion
between those existing installations and new installations.
Q101 Viscount Brookeborough: Thank you.
And you believe that Member States should not be constrained by
fixed levels of auctioning and would a minimum level of auctioning
be acceptable to you all?
Mr Mackenzie: Yes, we think there should
be a harmonised minimum level, so if the European agreement was
to have 80 per cent for sector X, 80 per cent of auctioning that
individual Member States in pursuit of their own environmental
ambitions or indeed the market conditions in different countries
you could have a higher figure. You cannot allow a complete free
for all because then there is an issue of subsidy to some sectors
and some countries. So you have to have a harmonised minimum but
if one Member State wants to effectively increase the costs for
its sectors then ministers in that country should be allowed to
do that.
Q102 Viscount Brookeborough: We would
often hear that the United Kingdom is very good at gold plating;
is this an option that you really want to leave open, that we
can go further than anybody else to lead?
Mr Mackenzie: One person's gold plating
is another's leading environmental ambition from the front. So
I think we would see that as increasing environmental ambition
and not one to effectively subsidise some sectors. We would take
the view that some industries in the UK may not have the same
competitive pressures that others do and reserve the right to
be able to increase their rate of auctioning.
Q103 Viscount Brookeborough: What about
redistributing auctioning allowances away from the UK?
Mr Mackenzie: Again we are opposed to
that because we do not think that the Emissions Trading System
should be the mean for distributing money around the EU—there
are structural funds and other measures for doing that. It has
to be said that this will be a challenging part of the negotiations,
given that it would appear that the Commission have created a
qualified majority who benefit financially from this proposal,
so seeking to change that in negotiations will be tough, but we
are committed to doing that and we have the support from quite
a number of Member States.
Q104 Viscount Brookeborough: I am not
suggesting that businesses would necessarily be for it, but to
a previous question you said that the funds received from auctioning
would not necessarily be committed to other environmental projects.
You seem to be rather ignoring the PR side of this of the environmentalists
who would like, probably, to see the funds being reallocated not
only to poor areas in the EU but also elsewhere.
Mr Mackenzie: I think the issue is do
you announce upfront that you are going to spend the money on
the environment or do you have a series of programmes and measures
decided at national level for which you then use the money. We
have not done the sums but certainly the amount of auctioning
we have in phase 2 of the Emissions Trading Scheme between 2008
and 2012 the proceeds from that are not as much as we spend on
the environment already in the UK. So there is an issue going
forward at what point will auction receipts exceed what we already
spend on environmental measures, given that they cover a whole
range of energy efficiency technological innovation and so on.
But obviously this is a decision for ministers.
Q105 Lord Brooke of Alverthorpe: What
role, if any, does the ETS have in supporting developing countries
to address their greenhouse gas emissions?
Mr Mackenzie: A major role. In fact one
of the main successes of the Emissions Trading System is that
the demand for market mechanism projects created under Kyoto comes
almost totally from the EU ETS because under Kyoto individual
countries can buy these allowances, these credits to meet their
own targets, but in Europe we have created a private sector demand
for these because they can surrender these allowances to meet
the regulatory requirements of the Emissions Trading System, and
because of that it has been a main driver in creating the market.
That then creates revenue streams in the developing countries
to help them invest and install low carbon technology.
Q106 Lord Cameron of Dillington: Hypothecation
in other words!
Mr Mackenzie: Market mechanism is better!
Q107 Lord Brooke of Alverthorpe: You
did cover carbon leakage to some extent earlier on. Could you
just run through the areas in which you think there may be problems?
Mr Mackenzie: We are very clear at this
stage that we cannot name sectors at this stage because we have
not finished the analysis in the UK as to which sectors are at
risk of leakage. We think in terms of the negotiations of the
package as well we have a very limited time frame and if we try
to inject decisions on individual sectors into that political
negotiation process it would risk derailing the process, and it
is important that we across Europe have a shared understanding
of which sectors really are at risk, based on the analysis of
the data. The Commission has started a data collection exercise
but it has to be said that the work which we commissioned, which
I referred to earlier, by Climate Strategies, Oxford Economics
and others shows that this is very complex and it is important
to get it right. We think that the Commission time table and their
proposal is too long because industry would not know until 2011
under their timescale. We think it can be brought forward a whole
year so that every industry would know where they stood and what
measures were in place to protect them if they were at risk of
leakage by the middle of 2010.
Q108 Lord Brooke of Alverthorpe: We had
Greenpeace here last week in front of us and they were somewhat
more sceptical about the extent to which there is carbon leakage.
Mr Mackenzie: There is a risk. I think
they are right to be sceptical; every industry I have been speaking
to in the UK, apart from one, which I will not name because it
would not be fair, have said that they are at risk of leakage.
And so they should; they need to protect their industries' interests.
I think that all that we are saying and advising ministers is
let us look at the data and make sure that we have a solid basis
to make the decision rather than just trying to make an assumption
based, possibly, on lobbying power and possibly on other factors
as to which sectors are at risk; let us make sure it is based
on the evidence, and ministers do this in a transparent process
across the board of the EU.
Lord Brooke of Alverthorpe: As you pinched
one of my questions virtually, my Lord Chairman, maybe I can pinch
one of yours! I go back to an earlier issue and back to agriculture
and to New Zealand as well. You did mention that in New Zealand
agriculture is a very substantial part of their economy, yet they
are intending to go ahead and cover it by carbon trading in the
whole system. You said it is different there; could you say a
little bit more about how different it is and whether in fact
there is any possibility of using the model that they have developed
there to transpose it across here? Could you also say whether
you are working in collaboration with the New Zealand in a sense
you seeing them as a test bed?
Q109 Chairman: Before you answer that
I will come in as well! Within the UK agriculture in Scotland
constitutes a much greater percentage of carbon than the UK generally.
Are you taking account of differences with the devolved administrations
from sector to sector?
Mr Mackenzie: Yes, is the answer. The
issue with agriculture, I hope I was not suggesting that we are
different from New Zealand in agriculture—it is the same
basic problem. I think the proportion of their emissions that
come from agriculture is significantly different and that is why
they are looking at it perhaps sooner than we have. I think the
issues are still the same. It is the balance between the burden
of regulation and the incentives that you are trying to create
on farmers. The department commissioned work by NERA last year,
which looked at this issue, and concluded that the Emissions Trading
System was probably too burdensome for the vast number of small
farms to be practicable, and that project-based mechanisms might
be more appropriate. Since that work has been done we have learnt
more details about what New Zealand is doing and we are planning
to do some further analysis and review whether a lighter touch
and a different way of doing emissions trading might work because
New Zealanders obviously think it can. So we are going to look
very seriously at what they are doing. But picking the right mechanism
is the crucial thing, and again just as there are issues of carbon
leakage for industry there is exponentially more for agriculture
because you have to avoid creating an incentive whereby you reduce
the number of cows and sheep in our fields but we import more
meat and lamb. There is a whole range of issues to be looked at
and that is how we build mechanisms requires careful consideration.
We are looking at it and we continue to look at it and obviously
we can keep you informed as to our progress. I do not think any
of that will be in the timescale that we are looking at these
negotiations because the level of complexity is so great. But
one of the features that we are looking at in the Commission proposal
is the ability for individual countries to opt in other sectors
subject to criteria. I am not sure whether it is currently big
enough or flexible enough to opt in such a large sector as agriculture.
I referred earlier to the concerns about destabilising the Emissions
Trading System by bringing in too big a sector too quickly under
the wrong mechanism. So we have to decide what the right mechanism
for agriculture is, then if there is a market-based mechanism
is the Emissions Trading System the correct approach. I have to
say that we are undertaking further consultancy work and internal
review within the department.
Q110 Chairman: When you were talking
about leakage you quite rightly referred to the need to look at
the data and give advice based on the evidence. At some stage
a judgment has to be reached and what are the criteria, what sort
of data is it that you will use to make that judgment?
Mr Mackenzie: That is one of the key
issues we have asked industry in our consultation paper; we have
laid out the criteria, which I will get David to summarise in
a minute, and asked is this the right criteria? There is a big
debate we are starting with industry about whether impact on profits
is a good measure, given that profits vary year on year. So we
are very keen to have the debate and the Committee's thoughts
on the criteria we have suggested and whether they are the right
ones would be very valuable, because if we can get faith in the
system that we have picked the right criteria, the process for
judging industry against those criteria is transparent and open
and industry can see where they are heading, they can make investment
decisions fairly confident that they will come through this process
and things will be much clearer. Perhaps I can ask David to explain
where we are on the criteria.
Mr Capper: What has happened with the
criteria is that the European Commission has proposed some high
level criteria on the face of the directive. The key test that
they put down is the ability of sectors or sub-sectors to pass
on the cost of the allowances without a significant loss of market
share. Under that they have four sub-criteria which allow them
to make an assessment on that headline measure. This obviously
helps industry to some extent in that they have some sense of
how the Commission will be undertaking this assessment. What we
have done in terms of our consultation document and our impact
assessment is to attempt to flesh out these criteria in more detail.
This is primarily to give industry more certainty about how the
assessment might be done and therefore to inform the UK's negotiating
position on exactly what these criteria should be as we sign up,
hopefully, to the deal in December.
Q111 Chairman: Anything more specific?
Mr Mackenzie: We can send you the criteria
I have drawn to your attention, and the impact assessment, if
that would be helpful, which sets out what we are currently thinking
and what we actually ask industry[2].
Q112Chairman: Are you getting a feeling that
other Member States are thinking in the same terms when it comes
to criteria, or are people jumping up with all different sorts
of criteria.
Mr Mackenzie: Very much a consensus and
I have to pay tribute to the work that David has done in terms
of negotiating with other Member States. We have a common position
with four or five other key Member States where we are getting
quite a lot of consensus and there is a lot of support amongst
officials around Europe that this is a good way to deal with it;
growing support amongst politicians who see that having a clear
and open process for doing it. It is in everyone's interests in
terms of being transparent and fair. Obviously the devil is in
the detail but we want to try and make sure—and that is
one of the main things we certainly want out of our consultations—that
the UK industry understands what the criteria are and feed back
to us their concerns with it or how it can be improved. We are
not saying that we know everything, and we are very keen to get
the feedback from industry, particularly given the analysis that
we commissioned earlier last year, which showed the relationship
with quality of data, and if you are going to make judgments you
want to make sure that the data is fair and accurate and not open
to abuse to get someone to get the right answer for that industry
or for that environmental outcome. We want this to be a genuinely
open and transparent process.
Q113 Lord Wallace of Tankerness: My Lord
Chairman, I preface my question by saying I register an interest
in relation to renewable energy, but maybe not directly to linkage
but I put that on the record. You have referred to, in reply to
Lord Brooke, about the importance of ETS and supporting developing
countries and you have also touched on New Zealand. Clearly there
are other parts of the world which are developing similar systems
and it was one of the issues in the current US Presidential campaign
as well. In terms of devising this particular scheme what steps
are taken to try and facilitate linkages between the different
schemes that either are already there or may emerge?
Mr Mackenzie: The basic first step in
the Commission's proposal is to actually amend the directive to
allow it to allow a new mechanism to link and to give a process
which is very welcome, and we have pushed the Commission hard
on before they published the proposal and we are glad to see it
is in there. Then there is a lively debate to be had through the
whole of this review of the Emissions Trading System. If we take
certain decisions either on carbon linkage or anything there is
a risk that we make it harder to link with other schemes, and
things like a small emitter threshold. If we decide a smaller
emitter threshold at one level if we linked to another scheme
would it have to have the same level or a different one? We think
that most of these things are negotiable and they can be changed
to have sufficient flexibility. We have again of course in our
consultation and indeed in the impact assessment, criteria for
linking that should inform the decision whether we link with an
American or Australian scheme, and things like environmental integrity
impact on the allowance price; and just how robust their monitoring
and reporting is. So I think we want to try and agree—I
do not want this to sound like officials always resort to criteria—that
having a criteria and evidence base on which the political decision
to link can be made is a sensible way forward. So we are confident
that we will have the ability to link.
Q114 Lord Wallace of Tankerness: Is there
an actual experience of that or do you have particular schemes
in mind?
Mr Mackenzie: At the moment we are effectively
the only scheme, national scheme—or international scheme.
There is the CDM, obviously, which is project based in the developing
world. There are individual states in America setting up schemes
but not a federal system. The Australians hope to introduce one
this year; and we have already referred to New Zealand. Those
are the ones that are in existence, or who are about to come into
existence. They hope to learn from the mistakes we made—phase
1 was very much learning by doing—and we hope to learn from
some of the mistakes they make in further improving the Emissions
Trading Scheme. As long as we are based on the same basic principles
of environmental integrity and a tonne of CO2 is a tonne of CO2
come what may, then most schemes should be able to link. The technical
difficulty will be the detail of linking, but I think we have
to see other schemes up and running before we can make the decision
to link, because just as we are wary about expanding the Emissions
Trading System to new sectors in the European economy linking
it to another economy has the same risks, so we have to understand
the risks. We may take the decision that it is worth impact X
on the European markets to get the deal, we may not; but, again,
that is what ministers would have to decide, as to widening the
market. It is very hard at this stage to judge what the correct
judgment would be because we will be linking with something that
does not yet exist.
Q115 Lord Wallace of Tankerness: That
follows to another question you answered when you pointed out
the different proportion of agriculture in Scotland to the rest
of the UK. Climate change, as I understand it, is actually a devolved
issue because it is not expressly reserved, but there are many
aspects of climate change that clearly are reserved matters. What
is your relationship, dialogue with the devolved administrations
to the extent that it is relevant for the position of the UK in
negotiations?
Mr Mackenzie: Apologies, I should not
have just said "yes" to the Chairman's question. We
are in very frequent contact with all the devolved administrations
because although environment is obviously devolved EU negotiations
are not. The beauty of the Emissions Trading System is that there
are economies of scale, so we want to make sure that we have reflected
the needs of the whole of or the relevance of the UK economy,
so we are in very frequent contact with them. None of the negotiating
positions that we are discussing within government go anywhere
until the devolved administrations have had a chance to discuss
them. Ministers meet periodically as well to discuss this and
other issues, but I think it is fair to say, certainly at working
level, if not weekly contact then almost weekly contact, particularly
with my colleagues in Scotland who obviously have a larger number
of installations in the Emissions Trading System than Wales and
Northern Ireland. But we are in very close contact and we draw
on their knowledge and understanding of the sectors and their
economy.
Q116 Chairman: Could I ask the ultimate
sceptical question, which is something along the lines of why
a global Emissions Trading System makes considerable sense the
effect of regional schemes result in carbon leakage on the one
hand or they result in your own producers being landed with additional
costs which make them internationally less competitive.
Mr Mackenzie: I do not think that is
the case. The analysis we have done on phase 1 of the Emissions
Trading System, learning by doing, there was very much towards
the end the price of the allowances reduced to virtually nothing
because of the over supply in the market. Despite that there is
clear evidence that the people were pricing carbon into their
investment decisions. There has been some analysis by academics
suggesting that before the price fell there was evidence of people
focusing more on energy efficiency. One of the industry consultancies—Point
Carbon—did a survey last year which said that something
like 65 per cent of Emissions Trading Scheme participants had
secured some abatement because they were aware that this was now
costing them. If just having a price affects people's behaviour
and makes people in industry actually count their emissions, which
they did not do before, again that is the same answer to those
who say rising fuel prices mean we do not need a carbon price
as well. But, yes, you do because that only takes you so far.
The issue then about leakage is that leakage does affect some
sectors but only a few sectors. There are then two issues with
that: an international global deal is the best solution to leakage
because then all industry is caught by the same carbon price or
a similar carbon price; but if in the absence of a global scheme
you have regional schemes you can trade mechanisms to protect
the few sectors that are likely to be at risk, probably by means
of extra free allocation of allowances rather than building a
wall around Europe to protect your industry, which does not sit
well with World Trade Organisation systems. But it is doable and
again I think that the UK view is very much that this is all a
time limited problem; that we will reach the global agreement
at some point; and the issue is how long is the gap in which these
sectors are at real risk of leakage?
Q117 Lord Cameron of Dillington: Could
you explain how you arrived at the figure of £6.49 billion
being the benefit to the UK of your proposals over the current
Commission's proposals?
Mr Mackenzie: It is based on two things.
To start with, this is a partial impact assessment on which we
are effectively asking people's opinion, so we are not saying
that is the price; and, as you know, there are a range of scenarios
in the partial impact assessment. Our figures are based on internal
modelling jointly done between Defra and BERR, which contain a
range of assumptions. I am not an economist but economists tell
me that all modelling has assumptions which are challengeable;
they could be right, they could be wrong. So that figure is our
best estimate with the current information that we have. We gain
some confidence in that figure in that the efforts of our modelling
is very similar to the work that the Commission has done. They
have, I think, used three different models and have come up with
broadly similar figures. So we think they are in the right region
of analysis. The other point I should make, obviously, is that
these figures are contrasting the proposals before us now, which
we are considering, to change the system with the old directive.
They are not against not having a scheme, these are the cost benefits
of moving from the current directive to the new one.
Q118 Lord Cameron of Dillington: You
have not really answered my question, you have just given me a
lot of caveats.
Mr Mackenzie: In terms of how it is broken
down and different costs and so on?
Q119 Lord Cameron of Dillington: Yes.
Could you give me the main headline figures?
Mr Mackenzie: The headline figure in
terms of cost—and these figures are all net present value—£0.94
billion is the total cost to the UK, which we estimate, which
is the cost of industry, installing and buying the technology
to reduce emissions, or buying the allowances. We cannot split
between the two because different industries and different companies
may—
2 http://www.defra.gov.uk/corporate/consult.euets-2013amendments/partial-ia.pdf
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