House of Commons - Trade and Industry

Select Committee on Trade and Industry Ninth Report

IMPACT ON INDUSTRY OF THE CLIMATE CHANGE LEVY

II MEETING THE KYOTO TARGET

9. Witnesses were strongly supportive of the need for the UK to meet the emissions reductions target resulting from the Kyoto Conference and recognised the probability of more stringent targets being set beyond 2010.[16] Many told us that the firms they represented had contributed to reductions in greenhouse gas emissions during the 1990s and were planning to reduce their emissions still further.[17] The Chemical Industries Association, for instance, told us that its existing voluntary agreement with DETR on emissions reductions was "making an active contribution" to the achievement of the UK's Kyoto target.[18] The Electricity Association endorsed the emissions reductions target and told us that "the electricity industry...has made significant progress in respect of climate change, reducing its CO₂ emissions by 25% since 1990".[19] The Minister for Energy and Industry told us in oral evidence that he was pleasantly surprised that industry now fully accepted the need for climate change to be tackled, including by curbs on industrial greenhouse gas emissions. He suggested that "the overall shape is in position; now it is a case of working through the detail".[20] It is now widely accepted that the UK must meet its Kyoto target for reductions in greenhouse gas emissions and further more stringent targets thereafter. The question is how, not whether, greenhouse gas emissions can be reduced.

Which Sectors Should Contribute?

10. Many witnesses from industry suggested that the burden of achieving the Kyoto target was being placed on the industrial sector in an inequitable fashion and that the domestic and transport sectors needed to make greater contributions.[21] Ministers stressed that the domestic sector had been excluded from the remit of the Levy for social policy reasons and that other mechanisms to improve the emissions performance of the domestic and transport sectors had been developed.[22] The Energy Intensive Users Group said it did not believe that "there are any economic reasons to exclude the domestic sector from the tax" and suggested that the benefits system would be a better means of alleviating fuel poverty than exempting the entire domestic sector from the Levy.[23] The UK Offshore Operators' Association emphasised Lord Marshall's conclusion that "all sectors of the economy — business, domestic and transport — will need to play their part".[24] The Institution of Chemical Engineers argued that the Government's approach lacked a "holistic view" of the need achieve a "step change in the behaviour [of]...both producers and consumers".[25] We share Lord Marshall's view that all sectors of the economy must contribute to reductions in greenhouse gas emissions. The Government must not make industry bear the brunt of the emissions reductions required for the UK to meet its Kyoto target because of the perception that this might be the easiest and politically most expedient course.

Meeting the Target: Alternatives to Taxation

11. When taxation is used to encourage the business and commercial sectors to use energy more efficiently, the Government stands back from mandating the degree of emissions reductions which it would like to see achieved by individual firms, sites and processes, relying on reductions being delivered by the market instead. Another approach to emissions reductions, and the one most commonly used up until now, involves the Government regulating, directly or indirectly, the amount of greenhouse gases emitted. Regulation of emissions can come in several guises, including:

the Government capping emissions for individual firms or plant over a period of time, penalising instances of caps being exceeded. This is broadly the approach taken by the EU Integrated Pollution Prevention and Control Directive (IPPC) which will apply to 6,000 industrial installations in the UK when it comes into force on 30 October 1999[26]
agreements being reached between firms and the Government about energy efficiency improvements which can be made, or emissions reductions which can be achieved, over a period of time. The Chemical Industries Associations entered into a non-binding agreement with DETR in 1997 to improve its members energy efficiency by 20% between 1990 and 2005.[27] The Government is proposing reaching binding agreements with various industry sectors to improve energy efficiency in return for lower rates of Levy[28]
emissions trading, which combines a regulatory approach with market incentives. Permits to emit greenhouse gases can be allocated or auctioned to firms which may then buy or sell them according to decisions about their optimal levels of emissions. An international system of emissions trading is provided for in the Kyoto Protocol and a pilot scheme for carbon emissions trading is being developed in the UK.[29]

12. Some witnesses from the industrial sector argued that regulatory approaches to emissions reductions were preferable, and more cost effective, than the use of taxation.[30] Regulatory mechanisms can provide more certainty for firms about the extent to which they should reduce emissions and the timescale in which reductions need to be achieved. Firms are only penalised in the event of a failure to stay within assigned limits or to achieve targets. Nevertheless, there are significant disadvantages to the widespread use of regulatory approaches:

there is a limit to the number of firms or plant which the Government can thoroughly assess and set caps or targets for, which limits the extent to which regulatory approaches to emissions reductions can be applied to small and medium sized enterprises
regulatory approaches require new, effective monitoring and enforcement procedures to be in place, with significant resource implications
regulatory approaches run the risk of not achieving emissions reductions in the most economically efficient manner, by being too stringent or, more likely, too lenient in terms of the emissions reductions they require.[31] Firms would tend to be better judges of their capacity to improve energy efficiency than the Government, suggesting the possibility that some firms' or sectors' caps or targets might not be particularly demanding.

13. The IPPC regime is planned to continue until at least 2007 .[32] By encouraging agreements with industry sectors and the development of emissions trading, the Government is clearly committed to regulatory approaches to emissions reductions. Regulation, of one sort or another, is one tool in the Government's kit, but other tools are needed to ensure that the UK meets its Kyoto target. We are not persuaded that the Government can set emissions reductions targets, or establish effective monitoring and compliance procedures, for the great majority of small and medium sized enterprises. Nor are we convinced that the Government is better able than the market to steer firms towards the energy efficiency improvements needed to cut emissions. Indeed, we were surprised by the enthusiasm expressed by so many business representatives for Government intervention in their industries when we have become accustomed to the mantras that "the market knows best" and "the Government should regulate with a light touch". Regulatory approaches to emissions reductions have a role to play in ensuring the UK meets its Kyoto target, but we reject the argument that regulation by itself will prove sufficient.

EMISSIONS TRADING

14. Lord Marshall, noting the likelihood that international trade in greenhouse gas emissions permits would be up-and-running by 2008, concluded that "it may not be sensible for Government to introduce a statutory scheme in the UK at this stage".[33] His thinking was influenced by the difficulties involved with speedily setting up an effective national emissions trading system and the possibility that any such system might not be compatible with an international system established later on.[34] Witnesses were divided over whether or not Lord Marshall had shown undue caution in his assessment of the viability of a national emissions trading scheme. Mr Lehmann of the Energy Saving Trust said that "emissions trading is quite a nice name and it sounds very, very marketed, but it has to start off with somebody deciding how much carbon emissions are permitted from each firm in the land. That is a very, very tough and tall order".[35] Mr Hewett of the Institute for Public Policy Research warned that it had taken ten years for a sulphur emissions trading scheme to be established in the US and that there would be a lot of "wrangling over the issue of permits and how they are allocated" when a carbon emissions trading scheme was initiated.[36] Many witnesses from the industrial sector disputed these points.[37] The Major Energy Users Council described the grounds on which the introduction of a full-scale emissions trading scheme had been rejected as "spurious" and claimed that "many City institutions (including the International Petroleum Exchange, the London Stock Exchange and the Bank of England) are of the opinion that the Government had over-estimated the time required for carbon emissions trading schemes to be established".[38]

15. The Minister for Energy and Industry said that "I passionately believe that Lord Marshall under-estimated the value and the benefits of emissions trading". He told us that the Government was pressing the CBI and the International Petroleum Exchange to develop at least a working model of an emissions trading scheme, for discussion.[39] Mr Agar of the CBI and Mr Porter of the Association of Electricity Producers both told us that, on 30 June 1999, Michael Meacher and John Battle had been present at the launch of an industry pilot emissions trading scheme which was backed by several major companies. [40] Mr Agar thought that at least an outline of what could be achieved by the scheme would be clear "before the end of the autumn".[41] He stated that "at least parts of the Government believe that we should be pressing ahead rather faster with emissions schemes for the United Kingdom" and Mr Porter called for "much more serious consideration" to be given to emissions trading.[42] We were surprised to hear of the depth of the Minister for Energy and Industry's commitment to emissions trading. The Government has sent out mixed messages on the feasibility of a national carbon emissions trading scheme being quickly introduced. We see no reason why the UK should hold back from developing its own carbon emissions trading scheme ahead of the proposed international scheme, which the UK might be in a strong position to influence. We seek early clarification from the Government of its views on whether a national carbon emissions trading scheme, if feasible, should be introduced prior to the start of an international scheme.

16. In his Report, Lord Marshall said that "participation in trading will probably never extend to the small business sector".[43] Many witnesses accepted this conclusion, although the Association of Electricity Producers did not and the Major Energy Users Council suggested that small firms could employ agents to trade in emissions permits on their behalf.[44] The Economic Secretary to the Treasury envisaged some small and medium sized enterprises participating in emissions trading schemes electronically, but only "a very long way down the line". She emphasised the Government's view that, for this reason, the Levy and emissions trading schemes were "complementary rather than substitutes for each other".[45] One of the major aims of the Climate Change Levy is to incentivise small and medium sized enterprises, many of whom are not likely to become involved in emissions trading, to use energy more efficiently. The Levy cannot therefore be dismissed as a short term measure, introduced in lieu of emissions trading and likely to be abolished once such trading begins in earnest.

16 Ev, p57; Apps, p1 paragraph 2, p3 paragraph 1,pp10,16, p19 paragraph 2, pp35-6, 40, p44 paragraph 14, pp56, 59, 62, 71; Marshall Report, paragraph 5 Back

17 For instance Apps, p23 paragraphs 11-18, pp68, 71-2 including paragraph 2; C&E response from National Farmers Union paragraph 2 Back

18 Apps, p19 paragraph 2 Back

19 Apps, p1paragraph 2 Back

20 Q3 Back

21 Ev, p58 section 4; Apps, p1 paragraph 2, p10 paragraph 2, p15 paragraph 26, p19 paragraph 4, p23 paragraph 7, p29 paragraph 5.2, pp42, 59; C&E responses from the Utility Buyers Forum p2 and the UK Steel Association section 2.1 Back

22 Qq8, 111 Back

23 Ev, p15 Back

24 Apps, p10 paragraph 2 Back

25 Apps, p59 Back

26 Memorandum from the Parliamentary Office for Science and Technology, Appendix 56; Marshall Report, paragraph 31; for more information on how regulatory approaches to emissions control work in practice see Trade and Industry Committee, Fourth Report, 1997/98, Coal, HC404, paragraphs 72-87 and HC404-II pp103-79 Back

27 Apps, p20 paragraph 19 Back