Examination of Witnesses (Question Numbers
200-208)
Mr Phil Woolas and Mr Niall Mackenzie
9 JULY 2008
Q200 Chairman: Let us assume for a moment
that the response of a significant sector of industry is to basically
not go down the technological change route but to go down the
route of just buying credits. Is there any concern at all that
that might just add to inflationary pressures, the wage-price
spiral effect?
Mr Woolas: Yes, there is. There is the
consequential fear that if you are just offsetting you have to
ensure that those mechanisms are robust. They have got to be tested
to destruction, otherwise you are not even achieving your goal
of reducing emissions, and the world will not forgive us if we
make that mistake. So yes, there is a concern. There is a fundamental
change in the way finance decisions are going to be made. The
experience we have is quite strong that the corporate sector,
we judge, is ahead of the game. They get it. They get the competitive
advantage point. You only have to look at the take-up of green
tariffs by business to see how they see the position helping them.
We think that is sustainable, despite my pessimism about the potential
political situation, crucially where there is competitive advantage
in developing technologies. One cannot divorce this agenda from
the water efficiency agenda. One of the biggest wastes of energy
is heating hot water, both in the home and in industrial processes.
What is called industrial symbiosis is of critical importance.
I mentioned the food processing industry before. Water saving
in food processing can have a huge beneficial impact on energy
saving as well. So this is the path that we are laying out. Are
there fears? Yes, there are significant fears, but are those fears
greater than the fears of the status quo, in terms of economics
not just in terms of the environment? No, they are not, because
fuel prices are more inflationary, I would suggest, than the scenario
I am painting. I guess that is politics, is it not?
Q201 Lord Cameron of Dillington: How
do you think the EU is going to police all this? How are Member
States going to police it? It is effectively done by Member States,
but have you thought about it in this country?
Mr Woolas: How we police the emissions
measurement?
Q202 Lord Cameron of Dillington: Yes.
The emissions and the scheme, to see that the claims being made
by companies are verifiable?
Mr Woolas: Well, we are creating an industry.
We have some of it in place already. We have just made a change,
have we not, in fact?
Mr Mackenzie: We do not see a need for
another European body. That is probably the last thing that is
needed. What we have in the system already is that independent
verifiers have to come and check the emissions. One of the confusions
in the current scheme is that each Member State has got slightly
different rules, so it is hard to see whether it is being applied
equally. When we are all operating the same rules, I think we
can rely to a significant extent on competitors telling tales
on each other if they are not happy with the level of checking
up by the national regulator in different countries. Then we have
a very effective process for the Commission taking action, proceedings
against countries which are not implementing it properly. There
will always be slight variations, but as long as the key principle
is that people surrender the right number of allowances at the
right time or face a heavy fine (and the level of fines will go
up in phase 2 and phase 3) we should be confident of good compliance.
Everyone who is involved in policing the system knows that it
only takes a few cases to devalue the whole system, and then the
carbon price would collapse.
Q203 Lord Cameron of Dillington: So independent
auditors paid for by the companies themselves?
Mr Mackenzie: That is the kind of system
we are doing, yes.
Q204 Chairman: That is the Member States'
responsibility, is it?
Mr Mackenzie: Yes, although the change
in the system which the Minister referred to is allowing mutual
recognition. At the moment with some countries, Germany for example,
you have to pass an exam in Germany. So there is an EU-wide accreditations
organisation (the acronym of which escapes me) which accredits
all kinds of standards, bodies, and the proposal is that they
would oversee it.
Q205 Chairman: I must admit, I am not
particularly worried about Germany. I get slightly more worried
when we move to Bulgaria and Romania.
Mr Mackenzie: I will not comment on the
merits of other individual countries, other than to say that Bulgaria
and Romania have only just joined the scheme. We have had two
years' experience ahead of them, so there will inevitably be a
learning curve.
Mr Woolas: Can I just add to that, Chairman,
the other developing policy, of course, is in the carbon reduction
commitment scheme, where emissions are measured indirectly by
energy use, and then of course you are into another situation.
Q206 Chairman: It is a wonderfully complex
scheme, venture, is it not? It is a bold experiment, and I do
not mean that in any deprecating sense at all. I think it is an
enormous challenge, but the balance of the unintended consequences,
perverse incentives—have you started to spot any of the
dangers?
Mr Woolas: I can give a politician's
answer, Chairman, to that. We have got the experience, as Niall
has said, of trading schemes based on sulphur dioxide in the United
States. We have got the experience of Montreal, the ozone depletion,
but I feel very much that the scale of this change in the way
in which we run our economy is daunting. Ministers talk about
the new industrial revolution, and I believe that is where we
are at. I think we are in the foothills of it. I believe it is
the best chance the developing world has of becoming more prosperous,
because of the superstructure that is being put into place. It
is easy to get into hyperbole about this, but I do believe that
the public debate underestimates the scale of it, not overestimates
it. So it is extraordinarily exciting and extraordinarily important,
and the inquiry you are having into the workings of the ETS—if
I am right and the ETS is the keystone of the policy—is
of huge importance.
Q207 Chairman: It is fairly likely, is
it not, that in setting something up like this a few fairly significant
mistakes will be made initially? Is there the ability there to
move in, rectify, change and learn from the basis of experience?
Mr Mackenzie: I would say yes, and we
are doing that. It does sound a bit of a mantra now, learning
by doing, but there was over-allocation and the Commission stepped
in and sorted it in phase 2. Too much free allocation, increasing
the rates of auctioning. High rates of auctioning are the solution
to most things because it takes the bureaucrat out of the process.
Those who need the allowances buy them and the market then provides.
There are likely to be perverse incentives and we just have to
keep an eye out for it. That is why it is extremely helpful to
have consultations and inquiries such as this, because people
coming and looking at things fresh will see things which have
been missed. We talked last week about the threshold of small
emitters. That is something we are particularly careful of, that
when you draw a line and some people are inside the scheme and
some are outside there is a real risk of a significant change
of commercial behaviour to either get yourself in to get free
allowances or to keep yourself out so that you do not have to
buy allowances. That is one of the difficult issues and we are
already talking at length to one sector which is are concerned
that whichever line we take would go through the middle of its
industry and there would be competitive distortions within that
industry. Obviously, with such a wide range of different industries
involved in this we have to try and make sure that the framework
is the best it can be.
Q208 Chairman: Finally, one of the delights
of your Department and of this Committee is that there is such
a wide range of things we look at, and we try and see whether
there are crossovers, things we have not thought of. In fisheries
there is the concern that people have fishing quotas but do not
have fishing boats, and in agriculture people have milk quotas
without necessarily having cows, so what about having credits
without necessarily being emitters, in other words buying up and
speculating?
Mr Mackenzie: People can buy and speculate,
it is a commodity, but the beauty of the verification process
we have in place, possibly learnt from the cases you referred
to, is that someone goes and checks the installations there.
Mr Woolas: There will be a futures market.
Q209 Chairman: There already is in London,
so it is a good thing.
Mr Woolas: Well, part of my policy is
that it should be. It is going to happen and we are going to lubricate
it. The voluntary scheme in Chicago is already a success. If and
when they get a federal cap-and-trade scheme, it will be a huge
success and the flows of money will be very significant. I think
there are tremendous economic opportunities.
Chairman: I think that is it. Thank you
very much indeed.
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