IMPACT
10.18. As we have already noted, the focus of
Government policy hitherto has been the energy intensive industries,
which are generally covered by CCAs. However, while energy intensive
industries may look like low-hanging fruit, there are problems.
Mr Gilbert, of the BCA, noted that energy represents 35 percent
of the cement industry's costs. Thus reducing energy use is inevitably
a much higher priority for the industry, even without Government
intervention, than it would be for an industry in which energy
represented, say, one percent of costs. Thus Mr Gilbert noted
that the cement industry does "very intensive benchmarking"
against competitors in Europe, China, America and Thailand, while
Dr Harris said that "energy efficiency has always been a
priority for the aluminium industry in order to stay competitive,
not only against competitive materials but against the aluminium
industries in other parts of the world" (QQ 587, 592).
10.19. The danger, therefore, is that a continuing
focus on energy-intensive industries will at best come up against
the law of diminishing returns, and at worst may simply drive
them out of business or out of the United Kingdom. Many such industries
can only reduce energy use to a certain level—cement, for
example, is produced by the de-carbonation of limestone, and,
as Mr Gilbert explained, a significant proportion of carbon
dioxide emissions are an inevitable product of this process, "governed
by the rules of thermodynamics and chemistry" (Q 588). Raising
the effective price of energy could therefore have dire consequences—described
in stark terms by Dr Harris:
"If there is a view that an increase in energy
price leads to a reduction in energy consumption, you have to
accept the view that primary aluminium production will inevitably
move out of the UK; it will move out of Europe and it will move
to those parts of the world where energy is available at a lower
cost … I then have to point out that … aluminium will
still be used in the UK, but it will be produced in primary smelters
in other parts of the world that are less energy-efficient. Effectively,
if we are looking at global warming, the position will have got
worse." (Q 587)
10.20. The effect of the law of diminishing returns
may be compounded for some industries by the cycle of capital
investment. The cement industry, for example, has been through
a period of major investment in new equipment; this equipment
will not be replaced for a considerable time. In other words,
for many industries reductions in emissions are not a matter of
gradual, year-on-year increments, but of periodic major investment,
yielding rapid improvement, followed by periods when emissions
stay relatively static.
10.21. This unevenness in the capital cycle may
have contributed to specific concerns over the account that has
been taken of past improvements in energy efficiency in assigning
carbon allocations to particular industries. Mr Richard Boarder,
of Castle Cement, and a member of the Emissions Trading Group
since its establishment in 1999, confirmed this point: he was
"desperately disappointed that early action has not been
recognised in that allocation plan", with the result that
"our most efficient plant has the lowest allocation"
(Q 600). Dr Welsh argued that the allocation did not "take
into account several years of programmes to reduce energy consumption
in non CCA sites"—in other words, while companies previously
involved in CCAs would see "relatively modest" reductions
under the EU ETS, businesses not subject to CCAs could be looking
for reductions of up to 50 percent (Q 584).
10.22. In marked contrast, large sectors of business
have in effect been overlooked. Mr Farrow noted that Government
policy "is all focused very much on the manufacturing sector",
whereas "they need to think a lot more about what sort of
policy tools to use to push energy efficiency issues in the commercial/SME
sector". Dr Welsh drew attention to a recent survey, showing
that "around half the SMEs were totally unaware of initiatives
on the carbon reduction side", some of the SMEs being "relatively
energy-intensive". Furthermore, there was an impression that
CCAs (which include an 80 percent exemption from the Levy) were
something of a closed shop—while in principle "any
sector that is prepared to sign up to quite tough energy reductions
ought to be able to develop a climate change agreement",
in practice the Treasury imposes "a huge amount of red tape",
with the result that "a lot of the companies ask whether
it is really worth it"
(QQ 569, 570, 581, 582).
10.23. We also asked the Carbon Trust, which
is tasked with promoting energy efficiency in the business and
commercial sectors, about its level of engagement with SMEs—that
is companies with up to 250 employees. Mr Delay said that
the criterion was energy use; some SMEs, such as small chemical
plants, were significant energy users, and would be targeted by
the Trust. In contrast, the Trust did not address "those
whose energy patterns are typically domestic"—including
some 3.5 million SMEs with five employees or less. He described
the energy consumption of this sector as "tiny"—less
than ten percent of total business energy consumption
(QQ 107-109).
10.24. The Action Plan contains no firm proposals
on small businesses. Indeed, having noted the difficulty in identifying
and targeting such a diverse group, it merely announces that the
Government have decided not to extend the EEC to business customers.
It continues, "we will … continue to examine, with the
Carbon Trust, Energy Saving Trust and others, the scope for ways
to realise further energy efficiency improvements in this part
of the business sector" (p 43). This amounts to a confession
of failure.
10.25. Finally, we have considered the current
dispute between the Government and the European Commission over
the overall level of the United Kingdom National Allocation Plan
(NAP) under the EU ETS. The United Kingdom NAP was submitted in
April 2004, and proposed an allocation of 736.3 MtCO2
(200.8 MtC).[101] This
was approved by the Commission on 7 July. However, on 27 October
the Government announced that they would seek the Commission's
approval to an amendment, increasing the allocation to 756.1 MtCO2
(206.2 MtC). The reason for the change was a change in the projections
for "business as usual" emissions, which indicated that
the baseline would in fact be higher than expected. The Commission
having formally agreed the UK NAP in July, in the process stating
that "the total quantity of allowances to be allocated …
shall not be exceeded", refused to accept the revised NAP.
At the time of writing the Government have agreed to make allocations
to individual sectors according to the original NAP, while apparently
considering legal proceedings against the Commission over their
refusal to accept the revised version.
10.26. This confusion comes at a time when the
Government have for the first time conceded that the United Kingdom's
targets for reducing carbon emissions are unlikely to be met—a
situation that will not be helped by the allocation of an extra
5 MtC to industry. Lord Whitty was robust in dismissing any criticism,
noting that the original projections had been out of date, and
asking rhetorically, "If the facts change, I change my opinion.
What do you do?"—to which the response might be that
projections are not facts. All that has happened is that an error
in these inherently hypothetical projections has been exposed.
10.27. Opinions differ on the merits of the Government's
position. The CBI believed that once the error in the projections
had been spotted the Government was "absolutely right"
to apply for a revised allocation (Q 583). The Carbon Trust, on
the other hand, drew attention to the "lobbying on behalf
of the CBI and other industry bodies … at a time when energy
prices are increasing significantly", which had made it politically
"quite hard" to implement the EU ETS aggressively. Nevertheless,
their own analysis, according to Mr Delay, had identified "quite
credible scenarios whereby companies will be rather successful
at passing on the cost to the consumer and may well end up benefiting
from the Emissions Trading Scheme". This would not cover
all sectors—aluminium, for instance, would suffer owing
to its exposure to international competition (QQ 85, 101).
10.28. In the longer term, Mr Delay identified
some potentially graver risks in setting the NAP at too undemanding
a level. The worst result would be the complete failure of the
ETS—"the carbon price will not be sufficient and it
will end up … a white elephant because there is no carbon
to be traded" (Q 101). Or, particularly as NAPs across
Europe have been "fairly weak", it might not generate
enough of an incentive for business "to manage their emissions
in a sensible way". This could create long-term unpredictability,
as the second phase might have to be "much more aggressive"
to compensate. In the absence of a long-term steer through the
ETS, "business is not able to sensibly make investment decisions"
(Q 96).
10.29. Energy-intensive manufacturing industries
have contributed a disproportionate share to the reduction in
United Kingdom carbon emissions. They continue to be subject to
strong international competition, along with rising energy prices
and a raft of regulation. There is a serious risk that much of
this industry will simply be driven overseas, contributing to
a net increase in global emissions. We therefore look to the Government,
in the interests both of the economy and the environment, to take
full account of the ongoing competitiveness of these sectors within
global markets when they consider further climate change targets.
10.30. At the same time, there is considerable
potential for energy saving by the commercial sector and SMEs,
which have so far been overlooked. Reaching SMEs will be a challenging
task, but it is one the Government appear to have shied away from.
We recommend that the Government urgently explore ways to encourage
reductions in energy use by SMEs.
10.31. The dispute over the United Kingdom
National Allocation Plan has potentially serious consequences.
However, while we have sympathy with the views of the CBI, we
cannot help concluding that this is a crisis of the Government's
making, which adds to the difficulties faced by industry in long-term
planning. We urge the Government to seek a rapid resolution to
this dispute, even at the expense of some compromise.
10.32. We further recommend that the Government
re-examine the allocation of carbon allowances to individual industries
and companies. It is essential that allowances should be based
on real energy efficiency, relative to competitors at home and
overseas, whether or not efficiency improvements have been as
a result of Climate Change Agreements.
98 
