Examination of Witnesses (Question Numbers
180-199)
Mr Phil Woolas and Mr Niall Mackenzie
9 JULY 2008
Q180 Lord Brooke of Alverthorpe: Cement?
Mr Woolas: Cement. Thank you very much.
Q181 Lord Brooke of Alverthorpe: We had
the CBI here this morning.
Mr Woolas: I would say at a global level
cement is probably where we stand the best chance of getting a
good sectoral deal, if we can get the Chinese on board, simply
because there are relatively few producers of cement around the
world and most of them outside of China are members of the international
trade body, so there is a family there that we can work on. Of
course, I would never say there could not be carbon leakage of
cement, but the threshold is higher. Just going back, I think
aluminium presents a particularly difficult problem for us. The
problem, as I understand it—and again I will have to ask
Niall to help me—is that because you set the price of aluminium
on the market rather than on the production margin, on the margin
of sales, they not unreasonably say, "How on earth can we
be expected to absorb those costs?" But then again the other
argument is, if you can get a European agreement then you can
protect yourself against carbon leakage internationally. I think
that is where we are at, Chairman.
Q182 Chairman: Aluminium is basically
solid electricity, is it not?
Mr Woolas: Yes.
Q183 Chairman: If it is not identified
as an industry which is subject to carbon leakage, it will go
to Iceland, you know, hydro-electricity. They will be the monopoly
producers of aluminium.
Mr Woolas: That is a very strong argument.
Where are we up to now?
Mr Mackenzie: I think that is quite right.
Obviously, aluminium is a fairly light product in the scheme of
things and a global price, and the main cost is labour cost and
energy costs in each country which produces it. I think the key
thing at the moment is that, first of all, we are consulting on
the criteria which are used to define sectors and we want to avoid
rushing to the wrong decision this year as part of the UK negotiations,
but to set clear criteria which will enable governments to make
the decisions. If we start naming one sector now, then another
50 come in and say, "Me, too," and all our time, particularly
all the Minister's time would be spent seeing endless delegations
from industry rather than building up the evidence on which to
make the decision and the negotiations in Europe. It is a very
important issue. The UK has already floated negotiations in Europe,
accelerating the timetable laid out by the Commission. We have
got quite widespread support for that faster timetable because
we realise that industry needs certainty as soon as possible,
and we are making very good progress. So I am as confident as
I can be at this stage—we are still waiting for the end
of our consultation period—that we will have a clearly agreed
definition of criteria for deciding which sectors are subject
to leakage criteria, which industry is confident are fair. The
issue then is ensuring that a Commission-guided process early
next year, the first half of next year, to get the data and the
evidence is transparent and has the confidence of industry.
Q184 Chairman: When we mention steel,
I take it the problem with steel is the nature of the international
market on steel, that it is so competitive and energy is such
a major factor that if you increase the European production costs
of steel effectively it looses market share disproportionately?
Mr Woolas: Yes.
Q185 Lord Plumb: The next question is
on the ambition of targets. I think this is very much linked to
where we started and the Chairman's first question, but since
then you have spoken of the cynicism about climate change and
of the folly that follows in the minds of many people and the
fatigue, perhaps, on all of these issues at the moment which are
of concern. What are your ambitions on targets, nevertheless,
because targets have already been set? What are your concerns?
Evidence suggests prices of €50 per tonne of CO2 are necessary
to make CCS profitable and €100 per tonne are necessary to
achieve the Kyoto target. There is a big difference. What are
your views on this? It has been suggested that the 20-30 per cent
emission reduction targets were insufficient to send that price
signal to the market. So how do you respond to this, to start
to think in terms of the possibility of meeting the targets?
Mr Woolas: The ministerial attitude amongst
our team and our colleagues across government to that question
is that we would be arrogant and foolish if we, as politicians,
were to determine what that should be. We must take our advice
based on science, we must use the committee on climate change
at the UK level to give advice on the overall long-term targets,
the carbon budgets and the medium term targets that follow from
that, recognising two things: one, as I say, that they must be
based on science, and two, that we must always remember why we
have a target, which is (a) so that we can reach it, and (b) so
that our emissions trading policies can work. In terms of the
price of carbon, we are living through a time where €50 per
tonne for CCS is the fashion. I could not honestly tell you, Chairman,
whether it is the right price or the wrong price, I just would
not know. Niall and the team have a much better feel for that.
My attitude is to be cautious and take the advice. What we are
committed to is the idea, to bring it down to the means as well
as the end, of carbon capture and storage. The fact is that unless
the world can get carbon capture and storage, particularly with
coal-fired power stations, then we are not going to meet the target
or come anywhere near meeting it. It is about half of the problem
in the world. Our view is that we want the UK in particular and
the European Union in general to be the crucible of the technology
so that again we can get a competitive advantage. Again, we find
the debate in public on this puerile. People say to me all of
the time, "Don't give it the go ahead unless it is carbon
capture ready." Well, I do not know what that means, other
than having a field next to a power plant. It is not a demonstrated
technology. The only way, I am advised by engineers, we will be
able to demonstrate it is when we build it. So I believe we have
to base our understanding of the policies on that point. In terms
of where we go from here, I do not believe we should predicate
our policy on developing carbon capture demonstration projects
just on the carbon market. We have got to have plan B, and plan
B means somebody has got to build it.
Q186 Lord Plumb: How do you think other
countries would respond, in a similar way to your own feel on
this? The whole problem, I suppose, is that we are stepping into
the unknown. We have got no history to guide us as to where we
are going. This is why I certainly would have many doubts about
setting any sort of target in the circumstances we are in, having
just come across London in a taxi, which took about an hour. You
cannot ever tell what CO2 is being thrown up from thousands of
vehicles all jammed together in a small plot.
Mr Woolas: I think the debate needs to
be more mature. This is again my personal view, that when people
say we must not give the go ahead to coal-fired power stations
unless they can have carbon captured by an arbitrary year of 2020,
I believe that proposition is meaningless. I think it is like
saying you should not perform cancer research unless you can cure
cancer by the year 2020. Well, if we could say yes to that we
would have already had the technology to cure it. I understand
why it is said, but I think it is pure politics. It is not based
on anything. The Government has to have a strategy for making
it happen and I believe we have a strategy. Of course, there is
a consultation which has been produced by the Business Enterprise
& Regulatory Reform Department. It is outside of my portfolio.
Then, of course, the question is, can the carbon market help it?
Well, the roll out of it, yes. The UK is in a good position. There
are two, I am told, carbon capture facilities in the world, one
which I think is BP in Algeria, or is it Shell? I think it is
BP (and apologies to Shell if it is them) in Algeria. The other
is a Norwegian example in the North Sea where the CO2 is pushed
back down into the geology as part of the extraction process for
gas and oil. That is a long way away from the carbon capture of
coal-fired power stations, but this is the technology which matters,
alongside nuclear, in the world economy and I want us to be there.
I believe if you are an environmentalist you should be supporting
clean coal-fired power stations because of the way in which the
world energy markets currently are. Everybody has heard the figures
for China.
Q187 Lord Plumb: In this Chamber in particular
we have had Lord Ezra advocating this, the former Chairman of
the Coal Board. He has been advocating this as long as I have
been in the Lords, which is now 11 years. When do we get the first
one in the UK, and where?
Mr Woolas: I cannot possibly say where,
because -
Mr Mackenzie: There is a competition
being run at the moment.
Mr Woolas: —I would probably be
in prison if I answered you, and also I would be lying because
I have not got a clue where it is going to be. The demonstration
project at the European level, the technology, has been chosen.
Mr Mackenzie: Yes, and for the UK we
have also got the competition which BERR are running. We are hopeful,
or committed to having it operational by 2014 at the latest, but
part of the debate about funding is how quickly you can get it
up and running. As the Minister says, if you want to get something
done quickly you are not necessarily going to get the carbon market
to the price it might need to get it done quickly. So it will
be a combination of carbon market and other sources of funding,
as the heads of government made clear in their June Council conclusions,
that the Commission and Europe are looking as a matter of priority
as to the right kind of funding mechanism. As you will well understand,
there is a lively debate within government as to what possible
mechanisms those might be.
Lord Cameron of Dillington: There is
almost a hint there about hypothecation!
Chairman: No, we do not want to get on
to hypothecation!
Q188 Lord Cameron of Dillington: The
Commission has proposed that 20 per cent of revenue from auctioning
allowances should be earmarked for climate change and renewable
energy actions, and I know the Government is sticky on hypothecation.
The CBI were saying that this was a good idea and they were actually
quoting this morning about the carbon reduction commitment scheme,
which involves hypothecation, and I know the landfill tax, which
I have something to do with, is totally hypothecated. I am just
wondering whether we might be able to use some of the auctioning
of the allowances for research, for instance, to make the carbon
capture and storage an economic viability, and all sorts of other
routes. My view is that the auctioning of allowances could be
seen as being purely a tax, which might therefore bring the scheme
into discredit if, for instance, decisions were taken on carbon
leakage and other factors. People might become suspicious if this
was merely enhancing the Government's income and I think it would
be beneficial if we could prove that actually this money is going
to reduce carbon and greenhouse gases in some way or other. Discuss!
Mr Woolas: Shall I read it out, or shall
Niall?
Q189 Lord Cameron of Dillington: It is
very much a political thing.
Mr Woolas: We do not hypothecate revenues
as a matter of principle. The UK is against the hypothecation
of specific revenue streams for a particular purpose. It is an
inefficient means of determining public expenditure priorities.
We do, however, consider policies on their merits and will therefore
consider the need to incentivise CCS alongside other valid policies.
The serious answer to your very important question is that, as
you know, most governments take these views, as you know better
than I do, that you cannot do that because of the order in public
finances. There is the other point, I think, that as this grows—and
it will grow—the more it grows the proponents of hypothecation
would have to, at some point, I think, break the link. I just
throw that in as an observation. On the other side of the argument,
clearly we believe it is in our interest to incentivise the CCS
policy. The other point, of course, is that because we have placed
this in the European Union context, hypothecation does breach
the principle of subsidiarity, and I think that is a genuine problem.
Those who would want to criticise us for reasons of selling newspapers
would not know which way to attack us!
Q190 Lord Brooke of Alverthorpe: One
of the issues which concerns me with the current position we are
in is the growth of people in fuel poverty and I was wondering
whether in fact we could not look to possibly hypothecate money
being taken from auctioning to be used to ease the social burdens
which the additional costs will come to bear with the carbon policy?
Mr Woolas: We held recently, you probably
read, Chairman, the Fuel Poverty Summit (as the headline writers
called it) which Ofgem hosted at Central Hall and that was one
of the issues discussed there. We believe the social obligation
which we placed in the carbon emissions reduction target, this
prior obligation, is a substantial resource to help alleviate
fuel poverty. We are in, as you know, the first year of three
years of that scheme and therefore my attitude generally is that
anything we need to do over and above that—and it is a substantial
resource and there is, of course, a time lag on implementing energy
efficiency measures, you cannot just turn on the tap that quickly—would
therefore be in the next CSR period. However, of course, we are
debating at the moment what other measures we need to take, particularly
in preparation for, God forbid, a harsh winter this winter with
fuel prices being so high. We are advised by the Department of
Health to look at in the region of 25,000 excess deaths if there
is a bad winter. Of course, that is a subjective statement, obviously.
The difficulty is, we do not know which 25,000. We have got the
issue of fear of not being able to pay the bill, as well as the
reality in some cases. We are partly, if I may say just for the
record, a victim of our own policy in that the definition of "fuel
poverty", which is what public attention is around, is our
own definition based on ten per cent of income. It interestingly
does not include the winter fuel payment allowance as income.
Do not ask me which of my predecessors agreed to that, but I guess
it was to make it even more challenging. I am not trying to excuse
the difficulty at all. It is a very important point. The answer
to your question is that we are discussing what measures we could
take.
Q191 Lord Brooke of Alverthorpe: I think
you might also be making a case now for hypothecating the £400
fuel allowance!
Mr Woolas: The Fuel Poverty Advisory
Group, of course, do advocate that and they advocate better targeting
of the winter fuel allowance, because of course there is no hypothecation
whatsoever. One of my constituents told me that she spent the
money in Spain, and it was very warm there!
Q192 Chairman: But it did not pay for
the three months?
Mr Woolas: It did not pay for the whole
bill, no, but she was very grateful!
Q193 Lord Brooke of Alverthorpe: Could
we have a look at the allocation of the allowances again? I mentioned
that we have seen the CBI this morning and taken evidence from
them. They submitted a policy paper to us which refers to the
Government's suggestion that there be a two stage process to the
allocation of free allowances. First, a sector-specific cap would
be set based on the shares of the 2005-07 verified emissions and
that cap would be then divided between installations according
to benchmarks. Could you explain your policy is a bit more detail
there, please?
Mr Woolas: I would have to ask Niall,
Chairman, if I may.
Mr Mackenzie: This is a technical issue
which we floated to industry, because looking at the Commission's
proposal how they see the allocation of allowances working is
that there are three pots of allowances, or three categories—the
electricity supply industry, who have no free allocation, a pot
which is reserved for those subject to carbon leakage, who get
extra free allowances, and a middle pot for the rest. The process
then by which individual installations receive their allowances
would probably be based on technological benchmarks, how much
fuel you would use for your average cement works, let us say,
which then you calculate CO2 emissions from. We had a concern,
on reading the Commission's proposal, that there was a risk that
different industries might suffer or be treated unfairly purely
on the basis that one industry had a better benchmark or were
better at calculating it and suggesting a benchmark, or agreeing
a benchmark amongst themselves in Europe, so that for every tonne
of fuel burnt cement got, let us say, one and a half allowances,
whereas the aerospace sector got something less. So we have just
floated the idea, is it better to have an absolute limit for each
sector? So, say, the cement sector has a limit based on its 2005
historic emissions, for example, and then they divide that amongst
themselves, and then aerospace, or steel, or whoever, has something
based on their historic emissions as the starting place and then
the negotiations or the benchmarking divides it up amongst themselves.
There are pluses and minuses for both approaches and it is really
just to flag the concern we had to industry: do you think the
Commission's proposals run the risk of being unfair for your sector?
Obviously we will be interested to see what kind of response we
get from industry. Part of the difficulty in all these issues,
as I am sure you will appreciate, is that they are very technical,
they are very difficult. We are trying to move this negotiation
as quickly as possible and it may well be that even if we concluded
and industry came back to us and said, "Yes, we would like
sector caps," we may not be able to get it in as part of
the negotiations because it is such a change from what the Commission
propose. But we are doing our best to try and understand, with
industry, what is the best and fairest system for dividing up
free allowances to those industries. Obviously, the simplest solution
would be a 100 per cent option for everyone, because then you
do not have to worry about how fair it is in giving out essentially
money, but obviously you come back to leakage and the burden on
industry. So it is essentially a question to industry, "Is
what we have suggested a fairer approach?"
Q194 Lord Brooke of Alverthorpe: Now
a question on domestic offsetting. The Commission's proposal includes
a new Article (24a) on domestic offsetting. What is your view
on the deployment of such credits?
Mr Mackenzie: Again, traditionally the
Government has taken the view that there is probably no merit
in joint implementation in the UK because it is very difficult,
given the wealth of Government policies on emissions reductions
to find something that is truly additional in the UK. The proposed
new Article, however, does leave open the possibility of Member
States doing that, or indeed one of the main benefits of this
new Article we see is that if there are new types of credits created
by the Copenhagen deal or subsequently, there is a mechanism for
introducing them into the Emissions Trading Scheme and allowing
industry to buy those new kinds of credits. They could be for
a new sector. Just last week we had forestry and if a new mechanism
or a new type of credit was created for a particular kind of forestry
project, this might be the mechanism which allowed the EU to agree
that that could be used as a compliance mechanism. So I think
we see it mainly as an enabling clause rather than something we
have specific proposals for to see how it could be used.
Q195 Lord Brooke of Alverthorpe: Have
you picked up any ideas from elsewhere in Europe on an innovative
use of this?
Mr Mackenzie: Certainly other Member
States are looking at things, like the French are looking at forestry
credits, kind of domestic offsets which we are talking to the
French about to see if there is scope for the UK doing something
on joint implementation. So this is one of the issues where we
do keep it under quite close review. As I am sure the Minister
can explain, we have consulted over the summer about the offsetting,
voluntary offsets within the UK, and we need to join up all these
different strands.
Mr Woolas: We spent two hours yesterday
debating it in the standing committee, so that offset my offset!
Chairman: Let us look at the non-ETS
sectors. Lord Plumb, as a farmer, is obviously keen that agriculture
should make its full contribution!
Q196 Lord Plumb: I was going to start,
Chairman, by suggesting—and I was going to ask your permission
to raise this—that Greenpeace said that agriculture and
transport should be excluded. I have never been very interested
in what Greenpeace have said before, but I was particularly interested
in that! I will not ask that, unless you would like to comment
on it, which would be very interesting, of course. On your strategy
for promoting reductions in those areas not covered by the scheme,
is there any balance there? Is there any balance being struck
or a sharing of the burden between the reductions across both
sectors? If you have any evidence on that we would like to hear
it.
Mr Woolas: If I could start, Chairman,
with the overall framework, which of course is found in the Climate
Change Bill. The idea of five year carbon budgets and the idea,
as the Chancellor announced in the Commons, that next year's financial
budget will be parallel with a setting of a five year carbon budget,
three periods hence, or 15 years on a rolling programme through
to 2050, presumably, we obviously put huge store by that. I cannot
answer your question with great certainty because we are dependent
upon the advice of the independent committee under Lord Turner
to set those carbon budgets and the commensurate mid-term targets
for the emissions reductions they will be based on, and indeed
comment on policies that we are currently carrying out and the
obligation being put onto the Government. We, in the bill, asked
for that advice before December 1st, which is the day before the
Queen's Speech and the new parliamentary session, in a beautiful
bit of parliamentary symmetry, I thought, but got no credit for
whatsoever! I just put it on the record. But seriously, the flow-out
from that will be critical. The carbon reduction commitment, which
has already been referred to, will affect the mid-energy users,
and in terms of what will change the behaviour of public and private
sector finance directors, I think the carbon reduction commitment
will have a much bigger effect than anything else we have done.
The ETS is intended to cover, of course, the bigger companies
which have economies of scale and can plan strategies with that
benefit. We are now talking about local council finance directors,
supermarket directors, directors of finance of government departments.
I think right across these sectors there will be behaviour change
which comes as a result of the setting of carbon budgets. They
are really the priorities, along with the domestic, home retrofitted
energy efficient kit. Crudely put, our attitude is that the new
homes and the new towns are pretty easy to regulate for. The big
challenge is retrofitting existing homes. Those are really, if
you like, Chairman, the pyramid of how we see things with the
ETS, the carbon reduction commitment, retrofitting, and of course
transport being alongside that. I am not sure where that leaves
us on the other sectors. Niall, is there anything I should add
to that?
Mr Mackenzie: No, I think you have covered
it.
Mr Woolas: That is how we see it, right
or wrong.
Q197 Chairman: Can I ask some slightly
off-the-wall questions? First of all, you want the threshold of
small emitters to be increased, do you not?
Mr Woolas: For the CRC?
Q198 Chairman: Yes.
Mr Woolas: My difficulty there is that
I tend to look at it in terms of how much it costs.
Q199 Chairman: Yes, it is the transaction
cost.
Mr Woolas: I get lots of advice on gigawatt
hours and terawatts, and to be honest I have little understanding
of what that means. I know what 240 volts is, but other than that
I do not really know! So I tend to ask myself the question, how
much does it cost? What is the electricity bill for these organisations?
It comes it at about half a million pounds. That, of course, is
half a million pounds on last summer's prices, not half a million
pounds now and therefore it is a moving feast. Then, of course,
the costs, as you rightly say, of the operation of the scheme.
We will roll out the information and awareness on the carbon reduction
commitment in a significant way this autumn. We want to get it
out there. We have got to talk to individual organisations. At
the moment, we are in a vulnerable position because obviously
the detail has not been worked out and people are now asking for
details. So I tend to look at it in terms of the price.
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