House of Commons - Environmental Audit

Select Committee on Environmental Audit Tenth Report

The Energy White Paper and the Action Plan

52. The Energy White Paper envisaged energy efficiency, together with renewables, as playing a central role in future energy policy. It set out anticipated savings by 2010 of 11 MtC from energy efficiency measures and suggested that a further 10 MtC of efficiency savings could be achieved by 2020. Half of these savings were expected to come from the domestic sector and half from business.[51] While a wide range of policy instruments or measures were cited as potentially contributing to these efficiency savings, there were few detailed proposals though an Implementation Plan was promised within a year.

53. In April 2004, over a year later, DEFRA finally published the long awaited Action Plan.[52] This included revised figures for energy efficiency savings by 2010. It reduced the anticipated savings from the domestic sector from 5MtC to 4.2 MtC, but increased business efficiency savings from 6 MtC to 7.9 MtC. It included no new fiscal measures beyond those introduced in the 2003 Pre-Budget Report and the 2004 Budget (see above, paragraphs 6 to 8), but envisaged a key role in the domestic sector for an expanded Energy Efficiency Commitment and, in the business sector, for the Climate Change Agreements and Emissions Trading.

Energy Efficiency Implementation Plan:

forecast carbon savings (2010)

	MtC
Households Projected Carbon savings (MtC pa)
Measures already in the UK Climate Change Programme	1.5
Energy Efficiency Commitment from 2005, Decent Homes	1.4
Warm Front	0.2
Community Energy	0.1
Building Regulations 2005	0.8
Other measures	0.2
	4.2
Business & public sector
CCA	2.4
Revision of CCA targets	0.9
Extension to new sectors	0.5
UK and EU ETS	2.0
Carbon Trust (incl ECAs)	1.0
Building Regulations (non housing)	0.6
Public Sector	0.5
	7.9
Total	12.1

Source: Defra

A carbon gap

54. In their evidence to us, the Carbon Trust referred to a 'carbon gap' between the savings which the Climate Change Programme is expected to deliver and the Government's target to reduce carbon emissions by 20% by 2010. They pointed out that changes to baseline projections (largely driven by higher GDP growth and more coal burn) mean that the existing package of measures in the Climate Change Programme may no longer be sufficient to keep the UK on track to deliver the expected absolute emissions level. While the overall size of this gap amounted to some 4 MtC, effective implementation of planned measures would reduce this by over 2 MtC, leaving a carbon gap of some 1.6 MtC (6 million tonnes of carbon dioxide).[53]

55. However, in discussion with them and in our own subsequent analysis, a more fundamental problem emerged—the difficulty of calculating the impact of efficiency measures in the absence of the revised energy projections which the DTI has still to publish, and before both the Spending Review and the review of the Climate Change Programme had been completed or even begun. The DTI's previous energy projections, EP68, were produced in November 2000 but quickly became out of date. The DTI produced some provisional data in 2003 to inform the allocation of allowances as part of the EU Emissions Trading System, and has continued this analysis to underpin the UK National Allocation Plan (April 2004) and in a related working paper which the DTI published in May 2004. The revised energy projections, however, have still not been published.

56. Indeed, in dealing with energy efficiency, there is a sensation of standing on shifting sands due to the difficulty of producing reliable future forecasts and evaluating the impact of current policy measures. If the baseline forecasts prove to be wrong and demand for energy rises faster than expected, then there is no guarantee that the absolute target level of emissions will be delivered. The Carbon Trust commented that the absence of firm forecasts and evaluations on which to base the Action Plan rendered it vague.

"It is not as clear maybe as we would all have liked to see. I think the elements are there in the Implementation Plan but probably not in sufficient detail to give any definitive view …. ..it is quite difficult to be precise around the numbers when neither the funding nor the gap has been confirmed by Government's own analysis, which is due to be carried out this year. I think there will be a case to say this is a Plan which, for various reasons, was published maybe six months earlier than would have been ideal."[54]

57. As an example of this lack of clarity, Mr Rea picked out building procurement and the commitment to procure buildings that are in the top quartile in terms of energy efficiency performance. While he considered that this was certainly the right thing to do, he pointed out:

"the Action Plan does not talk about is how we are going to do that, how we are going to make that happen, what is the methodology which defines how we measure top quartile, how that links to the EU Buildings Directive and what would be a sensible timescale to roll that out across the government estate. As ever, the devil is in the detail, and I think that is one good example."[55]

58. It is unfortunate that the Energy Efficiency Action Plan has had to be produced before a number of key evaluations on which it should have been based—including Spending Review 2004, the revised DTI Energy Projections, and the review of the Climate Change Programme. As a result, it is impossible to assess to what extent the measures it contains are sufficient to deliver the absolute emission levels required, or even unclear whether the various components of the Plan will indeed deliver their forecast benefits.

59. It is therefore difficult to assess the overall impact of the plan. Indeed, our suspicion is that the scale of the 'carbon gap' might prove to be considerably larger than the Carbon Trust suggested. We noted above (paragraph 18) that the May 2004 DTI working paper included a forecast of 139.8 MtC emissions in 2010 against a target of 132 MtC, and that there might therefore be a gap of nearly 8 MtC. In publishing the revised energy projections, the Department of Trade and Industry must highlight the extent of any 'carbon gap' and reconcile the impact of current policies to the 20% UK target for 2010 of 132 MtC.

Domestic energy efficiency

60. The Treasury consulted on fiscal instruments for energy efficiency in both 2002 and in 2003, but the Pre-Budget Report (November 2003) contained no new policy measures in this area. Budget 2004 included three measures—a reduced rate of VAT for ground source heat pumps, the possibility of a reduced rate of VAT for micro-CHP from 2005, and a landlord's energy saving allowance to promote investment in loft and cavity wall insulation within the rented sector. The Action Plan added several further non-fiscal measures—in particular the doubling and extension of the Energy Efficiency Commitment, through which the majority of domestic savings are to be delivered.

61. In giving evidence before the Budget, the Energy Saving Trust and the Association for the Conservation of Energy suggested that much more needed to be done to promote domestic energy efficiency, given the ambitious goals for energy efficiency set out in the Energy White Paper; and they cited an array of proposals for taxing inefficient products and homes. They expressed disappointment at the inertia displayed by the Treasury and indeed the Sustainable Energy Partnership referred to a 'deafening silence' on this score.[56] Indeed, we received a considerable amount of written evidence in this area, much of which corroborated the views expressed by these two organisations.[57]

62. The Energy Saving Trust subsequently expressed mixed feelings on the package of Budget measures. They welcomed the Landlord's Energy Saving Allowance, though they considered that it might not have as significant an impact as one might initially expect. As Mr Sellwood pointed out, from the perspective of landlords, "if you can get 60 per cent rebate on something that is fine, but if you can get 100 per cent rebate by doing nothing in the first place that is even better." The reduction on ground source heat pumps was an unexpected surprise, though they accepted that it was not necessarily the most significant of measures; but they were disappointed in the lack of a firm commitment on micro-CHP and by the Treasury's rejection of their proposals for inefficiency charges.[58]

63. We questioned the Economic Secretary on these issues. His responses did nothing to convince us that these budgetary measures would have any significant impact.[59] The reduction on VAT for ground source heat pumps is peripheral, while that on micro-CHP remains somewhat equivocal and distant. The proposal to introduce a Landlord's Energy Saving Allowance is welcome, but may not turn out to be as significant as initially envisaged. Indeed, the Treasury has made no attempt to forecast the carbon savings which might arise. Moreover, the Budget did not include any proposals for encouraging energy efficiency in the private housing sector—though in view of our current study on sustainable housing, we have refrained from further comment on this topic in this report. It is disappointing that the Treasury, after consulting in both 2002 and 2003 on fiscal measures for domestic energy efficiency, was unable to include in Budget 2004 a more significant package of measures.

64. The Energy Saving Trust also expressed concern over two issues relating to the Energy Efficiency Commitment (EEC).[60] The first related to the decision to scale down the anticipated savings from a factor of three to only two. Indeed, it was this change which had led to the reduction in planned carbon savings from the domestic sector from 5 MtC to only 4.2 MtC. The EST argued that the EEC needed to be three times the existing level, in order to make the step change necessary in terms of meeting the original targets in the Energy White Paper, and that the DEFRA figures for likely savings represented a serious underestimate of what was achievable. Given the somewhat technical nature of the dispute,[61] we are not in a position to assess the merits of the argument but it does strike us as strange that the Energy Saving Trust was not more fully involved in agreeing the figures included in the Action Plan.

65. The second issue concerned the nature of the anticipated savings. The EST pointed out that 70% of the total savings expected from the EEC related to cavity wall insulation. In practice this amounted to installing four and a half million cavity walls and Mr Sellwood expressed some concern over the commitment required to achieve this target.

"I have to tell you that the last three years have seen a three per cent, a five per cent and, with all that we and others have done, a 13 per cent increase… so in the last three years that market has seen a 20 per cent increase. Actually it has to double every three years between now and 2010 in order to meet the overall target, so we believe there is still a lot to do in terms of incentivising that market."[62]

We also note that many of the easy pickings may already have been achieved as a result of earlier energy efficiency campaigns, and that it may prove successively more difficult for energy companies to achieve the scale of increase in deployment which is necessary.

66. We share the concerns expressed by the Energy Saving Trust about the scale of the savings which can realistically be expected from the Energy Efficiency Commitment, and about the commitment required to achieve these savings. While it may be right for the Government to adopt a cautious approach here, it is surprising that it did not seek to involve the Energy Saving Trust more fully in agreeing the figures in the Action Plan.

Business use of energy

67. The Government's policy for encouraging energy efficiency in the business sector involves a range of policy instruments including Enhanced Capital Allowances (ECAs), the Climate Change Levy (CCL) and Climate Change Agreements (CCAs), and both the UK and EU Emissions Trading Schemes (ETS). The savings forecast in the Action Plan from these various policy instruments are set out above (paragraph 49), and amount in total to 7.9 MtC by 2010. We offer here some observations on a few specific aspects of these policies.

68. Enhanced Capital Allowances (ECAs) were originally introduced in Pre-Budget 1999 as part of the Climate Change Levy. The initial proposal was that £100 million of revenues from the CCL would be recycled to industry in order to promote energy efficiency measures. The Treasury subsequently increased this figure to £140 million in subsequent budgetary reports—though we note that it has desisted from quoting such figures more recently. In previous reports we have pointed out that the actual cost to the Government of this measure only amounts to the interest lost on the deferred tax liability, and in their evidence the Carbon Trust endorsed this point.[63]

69. The Carbon Trust confirmed that the Inland Revenue did not monitor the impact of ECAs as it was not considered cost-effective to do so; but that they themselves, in conjunction with the Treasury, had been carrying out a special exercise to assess the effect on companies. This evaluation suggested that take-up amounted to £100 million a year—somewhat less than the estimate the Treasury included in previous Budget Reports.[64] We asked the Carbon Trust whether, in carrying out this evaluation, they had been able to distinguish the impact of different policy instruments, and in particular how much of the efficiency savings would have resulted in any case from the introduction of the Integrated Pollution Prevention and Control (IPPC) regulations. The Carbon Trust confirmed that they had not been able to distinguish these impacts and they referred us to the Treasury when we requested a copy of their evaluation.[65]

70. We welcome the evaluation which the Carbon Trust has recently carried out of the impact of Enhanced Capital Allowances (ECAs), and the Treasury should publish it immediately. But we remain concerned about the extent to which efficiency savings from ECAs would in any case have resulted from the introduction of the Integrated Pollution Prevention and Control regulations.

71. Moreover, these difficulties demonstrate the need to evaluate regularly the impact of fiscal measures, and this constituted one of the earliest recommendations of the Committee. In its response to that recommendation, the Treasury committed itself to carry out such ex post evaluations on a systematic basis and the Financial Secretary to the Treasury acknowledged the need for monitoring in evidence he gave to us in 2002.[66] We recommend that the Treasury should fulfil its earlier commitment to this Committee and regularly carry out systematic ex post appraisals of environmental tax measures.

72. Industries subject to the Climate Change Levy can claim an 80% discount for those installations covered by the EU IPPC regulations, provided that they enter Climate Change Agreements (CCAs) which include energy efficiency targets. The Government's latest Pre-Budget Report (December 2003) included two proposals relating to the CCL:

The first proposal will allow businesses to be able to claim their discount by participating in the EU Emissions Trading Scheme, rather than by continuing with their Climate Change Agreement and specific energy efficiency targets.
The second will extend eligibility for the 80% discount to certain energy-intensive sectors, subject to further consultation and state aid approval, using a specific energy-intensity threshold.

73. The Government has previously argued that it was legally impossible to extend eligibility to energy-intensive industries in this way. In 2000, the Financial Secretary told the Committee that

"Any alternative [to the use of IPPC] would need to have a clear rationale (in the way that IPPC does), would need to apply legal certainty, be simple to administer, and be consistent with the EU state aid rules, and none of the alternative definitions that have been put to us so far meet the criteria that I have just set out."[67]

The Treasury now considers that the introduction of the EU Energy Products Directive provides a basis for extending eligibility for Climate Change Agreements to energy intensive industries. Yet it has failed to set out the rationale for introducing such an extension at this time or to include this measure in the table of environmental impacts appended to Chapter 7 of the Budget Report.

74. The Economic Secretary made great play of the fact that Climate Change Agreements had delivered three times the target amount of emissions savings.[68] This was based on the assessment carried out by Future Energy Solutions in April 2003 of the first target period (2001-02).[69] The CCA scheme was originally expected to deliver 3.3 MtC savings by 2010.[70] The assessment concluded that the cumulative energy saving as a result of the agreements amounted to 3.7 MtC by 2002 compared to a 2000 baseline. Thus the CCA scheme would appear to have already delivered more than the entire target savings envisaged by 2010. However, most of these savings[71] arose from the steel industry where there was a huge fall in output during 2002 resulting from severe operational difficulties and major structural changes. If the steel sector is excluded, the savings from the remaining sectors amounted to a more modest 1.1 MtC.

75. We have various concerns relating to the Climate Change Agreements. In 2001, DETR were unable to provide us with baseline data for each sector,[72] and it is unclear from the latest monitoring reports how robust and auditable such data now is. Moreover, we note the concern expressed by the National Audit Office in its report on the UK Emissions Trading System over the difficulties DEFRA faced in assessing baseline performance and determining initial allocations.[73] If DEFRA were unable to avoid such problems in negotiating with 34 individual firms, there is every reason to suppose that they faced more formidable challenges in negotiating with 44 trade sectors.

76. We are sceptical of the figures quoted for emissions savings from Climate Change Agreements and recommend that baseline figures and future assessments, including that for 2004, are independently audited. We are aware that DEFRA is now renegotiating targets for future assessment periods (2006 and 2008) and we accept that, as the scheme rolls on, more reliable data from previous assessments will become available on which to base such targets. However, we were unable to readily identify from DEFRA's website overall targets set for particular assessment periods or indeed the baselines against which performance in 2002 was assessed. In addition, the relationship between this data and the basis on which the CCA scheme is assessed under the Climate Change Programme is unclear. The transparency of reporting could be improved and it would be helpful if DEFRA assessment reports could include a more strategic overview of performance, including progress against targets under the Climate Change Programme.

77. Moreover, for those firms and sectors which continue to participate in Climate Change Agreements and opt-out of the first stage of the EU Emissions Trading System, the UK is obliged to demonstrate that the targets they face are equally demanding. We will be interested to see what progress DEFRA makes on this score, and how many industries decide to opt out of the CCA scheme to participate in the EU ETS while preserving the 80% rebate from the Climate Change Levy which they enjoy.

Conclusion

78. A central theme emerging from this report is the difficulty of assessing progress on energy efficiency in the absence of robust and reliable energy projections and systematic ex post appraisals of the impact of specific policy measures. For this reason it is difficult to come to any conclusive view on the extent of any shortfall between the savings which current policies will deliver and the absolute level of emissions we need to meet. However, as we have suggested, there are grounds for supposing that this shortfall might be more substantial than currently envisaged, and that the Government will need to adopt more radical policies and implement them with still greater commitment if we are to attain the challenging objectives it has set.

79. In this context, we fear that the Treasury is failing to exploit opportunities for more imaginative policy initiatives which might deliver the step changes needed rather than steady incremental progress. It is particularly frustrating that—over four years after the RCEP Energy Report and two years after the Strategy Unit Energy report—relatively little progress has been made in the important area of domestic energy efficiency. Moreover, the Treasury needs to commit itself afresh to a strategic program of environmental tax reform, as the zeal so abundantly manifest in the 1997-2001 Parliament appears to have been lost. The crucially important series of reviews which are taking place this year and next provide an opportunity for it to look afresh at the scale of the challenges we face and re-assess the adequacy of the policy mechanisms we have in place to meet them.

51 DTI, The Energy White Paper, paragraphs 3.5-3.7. Back

52 DEFRA, Energy Efficiency: The Government's Plan for Action, April 2004, Cm 6168. Back

53 Q 285 and Ev 70. Back

54 Q 287. Back

55 Q 286. Back

56 EAC, Third Report of Session 2003-04, Pre-Budget Report 2003:Aviation Follow-up, HC 233-II, Ev 23-26, Q 86ff etc.

Back

57 Ibid.Ev 92-145 passim. Back

58 QQ 357ff. Back