Inside Track

With the best of the summer behind us, DECC has now published its eagerly awaited consultation on the future of the Climate Change Agreements. CCA consultations appear to developing an interesting definition of the seasons with this consultation announced in the Budget for the summer, following an autumn consultation in December last year. That aside the substance of the consultation is nothing new to the CCA community having been briefed a number of times by the succession of DECC officials. However some of the additions have surprised me.

Chief amongst these is the proposal that the Environment Agency should act as the administrator of the CCAs in England. Although the proposal to appoint an administrator came as no surprise, I feel it flies in the face of the coalition government’s stated goal of reducing the administration and cost burden on industry.

I had expected something on reducing the burden on government, but we had been assured that no decision had been made as to who would administer the scheme. I understand the government’s desire to reduce costs, but I’m concerned that a move to a new administrator risks the loss of expertise both within government and industry.

I also can’t see how the additional administrative burden required to transfer all the data, history, and knowledge of the agreements of 10,000 sites to a new administrator won’t add costs and complexity.

I feel strongly, and have argued that the sector associations, who have over 10 years of experience in managing the scheme and working with their respective industries, would be best placed to take on the role of administrating the scheme. This would of course require a robust audit process, but I think it represents the best opportunity to reduce cost and administrative burden for both industry and government.

Another gripe is the decision to not allow trading in the CCA, although again not surprised by government’s proposal, I am disappointed that the CCA started as a trading system and should continue as a traded system. However, we have lobbied tirelessly on this and government knows our position well.  

Those concerns aside there are many positives and I broadly support many of the recommendations set out in the consultation, for example the proposal of two year (24 month) target periods will not only ensure government’s desire for participants to be continually measured, but reduces the burden of annual reporting.

All in all it looks like this will be an interesting consultation.

Defra has today published its review of waste policies.  Announcing the publication at a CIWM event this afternoon, Secretary of State for Defra, Caroline Spelman, said:

“For too long, we’ve lagged behind the rest of Europe, although we are catching up fast. Communities and businesses can help us become a first-class zero-waste economy and unlock the real value in the goods that people no longer want.”

Although mainly focussed on domestic waste policy, there are particular aspects relating to business that EEF welcome – such as supporting energy from waste where appropriate, and for waste which cannot be recycled, and a greater focus on how business can benefit from improved resource efficiency. Of course, Defra could have been bolder in trying to address C&I waste. For too long it has been in the shadows.

I would say that on the whole this is a welcome step forward in the government’s approach to business waste. Many of the issues which have concerned business, especially smaller companies have been addressed and measures to aid collection of their waste and reduce regulation and costs are welcome. The proposals to support waste from energy that cannot be recycled is an especially bold move, although the issue of costs compared to landfill and access new capacity may remain an issue and therefore regional planning will be paramount.

We look forward to working with government to make these proposals happen.

I attended an excellent round table discussion this morning organised by Reform, where Greg Barker, the Climate Change Minister was the main speaker.

It was very encouraging to hear a DECC minister say things like “manufacturing is vital to rebalancing the economy” and “more must be done to support manufacturers”. For too long now EEF has been trying to get the message across that in order to have a UK low carbon economy, you need to have a vibrant economy, one which manufacturing, even energy intensive manufacturing, is supported and encouraged by government.

The short term test for government is what is said next week in terms of how it responds to the fourth Carbon Budget (2023-2027) recommendations from the Committee on Climate Change. Will it adopt the proposed budget of 1950 MtCO2e, that incorporates a tightening of the UK targets to 2020 which would replicate an EU move to -30% to 2020. If it does without any caveats, then we are in trouble and totally out of step with the rest of Europe, let alone the rest of the World. The unilateral cost increases to our economy would be significant and certainly not encourage investment in the UK. More so, it would provide a low carbon market that only overseas based companies (who aren’t subjected to costly climate change policy) could capitalise on.

We need long term policy certainty that aligns itself with investment cycles of industry. We need targets to be realistic and affordable, as deindustrialisation is not the answer and we need government to be working with manufacturing to ensure that the UK manufacturing base grows in a low carbon way and is seen as world class.

Government is saying the right things, but the coming months will be the test to find out if it will do the right things. Mr Barker, if you mean what you say, then we as manufacturers welcome that DECC is listening to our concerns.

I was pleased to see an article published in the Proceedings of the National Academy of Sciences that highlights the old story of consumption emissions. It is good to see formal scientific studies published on this issue for time to time, as I think this important debate often gets swept under the carpet.

Consumption emissions are the total GHG emissions consumed in a particular country, including embedded emissions in imported goods.

At EEF we know from experience that government isn’t too keen to discuss whether or not the UK should be calculating its emissions on this basis, or stick to the historical way of just counting emissions that take place directly in the UK. We published a report last summer which highlighted that whilst net emissions in the UK have fallen since 1990, by taking account of imported goods, this shows that UK emissions continue to rise. Hence why you can see why government isn’t too keen to consider changing the way it counts carbon emissions.

Although it doesn’t paint a wonderful picture, surely only by including these additional emissions can government really get a grip on how the UK can play its part in tackling global climate change. Without this we are just off shoring the problem, some might say, arranging the deckchairs on the Titanic. Worst still, a policy of just counting net emissions, can put UK manufacturing at a disadvantage against its global competitors, by imposing costly climate change policy here, whilst those overseas competitors increase their share of the market.

The UK looks good because net emissions have fallen, but globally all that has happened is the emissions have gone elsewhere and the problem of climate change has not been tackled at all. It doesn’t take a genius to work out that this is not the answer to solving this global issue.

So another report has been published which states that the EU should alter its 2020 GHG emissions target from -20% to -30% below 1990 levels. The Ecofys report believes that meeting the renewables 2020 target will ensure a -30% saving from 1990 will be achieved, made easier by the recession.

The report states ‘The cap of the Emissions Trading System will need to be adjusted if energy efficiency and renewables targets are to be met’. I can see the logic here, but surely it is a big ask, expecting the renewables target to be met at a reasonable cost. It seems to me that the conclusion of this report – that the EU can move to 30% easily – is based largely on this assumption.

To me it is like saying ‘we can meet any target, if all the measures needed to meet that target are put in place and actioned’. Surely the problem is rarely the targets, but measures put in place to meet those targets. For the UK, the renewables target is a good example, in terms of meeting a GHG target.

The same could be said for energy efficiency, which is surely the easiest nut to crack. Projected savings here are often at low or no cost to implement, yet why are energy efficiency measures not taken up as much as all the reports would have us believe. Is it that these efficiency measures are not fully costed, does the rebound effect play a significant part, or that efficiency measures installed today, become the less efficient pieces of kit tomorrow. Of course we shouldn’t underestimate behavior and how difficult it is to change that.

I am starting to feel sorry for the EU ETS, as anytime something happens either to the economy, or other climate change policies, there are always calls to tighten the EU ETS target, with pundits stating it’s not working. One thing this shows is having a basket of different policy instruments that claim to have the same aim – to reduce GHG emissions – that often pull in different directions doesn’t work effectively to achieve this one aim at least cost. One could say that a renewables target is not a target to reduce GHG emissions, but a target to increase renewable energy generation. If the aim was soley to reduce GHG emission then surely we would just have a GHG emissions target and let the market decide the most cost effective way of achieving this.

Finally, the Ecofys report uses the argument that -30% is easier to meet because of the recession. The first fact is that once the recession is over and production returns to pre-recession levels, so will the GHG emissions, less an amount for ongoing abatement measures. So on this point, the tighter target isn’t easier to meet because of a recession that takes place 10 years before a target needs to be met. Fact number two; all the companies I know lost a magnitude more money during the recession than they might have got from selling ETS allowances and therefore don’t have a massive ‘war chest’ to save for 2020 when the target becomes so tight, that either you buy allowances to cover the shortfall between target and emissions, or you cut production.

Rather than reaching for ambitious, but unachievable targets, the EU should adopt a policy mix that shows that growth and an economically sustainable transition to a low carbon economy are not mutually exclusive.

Something slightly overlooked in the Budget this week, was the clear sign that government will not be looking to reduce the number of sectors that are currently eligible to enter into a Climate Change Agreement (CCA), once the current scheme ends in 2013.

The specific CCA HMRC briefing, issued on Wednesday, states “The Government announces that the CCA scheme will be extended to 2023 and the 54 participating sectors will continue to be eligible for the scheme.”

I believe that government had held fairly developed internal discussions about reducing the number of sectors that might be eligible to enter into a CCA from 2013. But, speaking to a few government officials since Wednesday, the message was that government had, for now, decided against this.

We think Government could go further. In fact, EEF believes there is room to expand CCAs to cover more manufacturing sectors to incentivise energy efficiency, a key policy position that we set out last June in our report ‘Changing the Climate for Manufacturers’, only weeks after the Coalition came to power.

Within all the myriad of speculation of what will be in the Budget later today, I hear that government might use compliance with the revised Energy Taxation Directive, which is due to enter into force from 2013, as an excuse for introducing the Carbon Price Floor tax on the generation of electricity in the same year.

Surely the Chancellor can’t use this as justification of introducing a unilateral UK carbon tax as they are mutually exclusive.

The Energy Taxation Directive proposes an EU wide minimum tax of €20 per tonne of CO2 on direct emissions, levied at the end user. But crucially emissions covered under the EU Emissions Trading Scheme are excluded from this tax. Yet it is these emissions that are targeted by the proposed Carbon Price Floor. The Treasury proposed to levy this tax upstream on the electricity generators on the fuels they use to generate electricity. These emissions are also caught by the EU Emissions Trading Scheme and therefore excluded from the Energy Taxation Directive.

If there’s one thing we know for certain, it is that the private sector needs certainty. Certainty of future policy direction. Certainty of how government actions will impact their business operations and costs. Certainty not just for the short term, but for the long term, that can be factored into business investment and planning cycles that reach far out into the future.

Although the publication of the European Commission low-carbon roadmap on Tuesday (8 March 2011) was welcome because we finally received confirmation that the Commission will not pursue an emissions reduction target of -30%, it nevertheless provides only partial certainty.

Whilst the political road to Tuesday’s announcement has been a rocky one, it ended with an almost sensible outcome with the Commission finally acknowledging a firm evidence base is needed ahead of any target announcements being made. We have gone from DG Climate Action “leading the way” by forcing the EU to move to tighter top down targets for 2020, to sensible voices in other parts of the Commission and Member States calling for a better understand of what such a move might do to the EU manufacturing sector. Therefore, for now, the 2020 target remains at 20%.

But what is still highly uncertain is the intention by the Commission to consider setting aside a significant amount of carbon allowances in the third phase of the emissions trading scheme (ETS), which begins in 2013 and runs until 2020. Why can’t the Commission just tell us: Is it going to take some 800 million allowances permanently out of the system or not? Whilst we firmly believe that this is a market and should be left as one, the uncertainty of whether the market is going to be artificially tempered with or not is even more unwelcome than disrupting the market itself.

Surely such indecisiveness will not help us meet our climate change goals, but delay action and make Europe an uncertain place for future investments.

New energy tax threatens to undermine growth agenda

Imagine if the government were to allow teachers and nurses more time off but failed to consider the impact on the students and patients that depend on the services they provide. It wouldn’t happen. Never in a million years. Yet it is with astonishment that the government appears to have designed a new tax on energy without considering how it will impact those who use energy, just those who generate it.

The carbon-floor price sounds fine in principle. We support the idea of a carbon tax and believe it would provide a clear, more consistent and stable incentive to energy users to reduce high-carbon energy and fuel use; to use high-carbon fuels more efficiently; and, to provide electricity generators with a stronger incentive to invest in lower-carbon forms of energy. If designed properly it could be a cost-effective mechanism to meet climate change objectives and ensure security of supply into the 2020s.

However, this support is conditional on countervailing measures to ensure that the overall cost burden on manufacturers does not increase. Indeed it is entirely logical that a carbon tax should lead to a consolidation of the many climate-related costs that fall upon manufacturers. And there is quite a few. As it stands 20 per cent of energy costs are as a result of climate change policy in the UK. By 2020 it is estimated that this will rise to 70 per cent. The carbon floor price will result in a cost increase on manufacturers, equivalent to a tripling of the climate change levy rates.  

Make no bones about it. These unilateral UK-only costs will factor into the investment decisions made by global companies: Whether to put future investment in the UK, or in a region of the world where these costs do not exist.

The Treasury’s accompanying impact assessment in fact is refreshingly honest in its assessment that the floor price will have “a significant impact on a small, but important number of energy sectors in the UK”. It helpfully lists these sectors. But it does not attempt to quantify the impact. Nor does it consider those who are operating on tight profit margins.

But this is only part of the picture. Indeed, we note with concern that this is in addition to the proposals outlined in DECC Electricity Market Reform Consultation which contain measures that aim to achieve a similar outcome that the CPF consultation aims to achieve this time through ‘Contracts for Difference (CfD). In addition to this, we are being asked to contribute to parallel consultation on the CRC energy efficiency scheme and climate change agreements. And this year the rate of climate change levy relief for manufacturers able to enter into a climate change agreement has been reduced from 80per cent down to 65per cent relief - a tax increase on manufacturers of £50 million per annum.

It is all such a mess. It has become impossible comment on individual measures as we are seriously lacking the government’s wider view. At the moment, from where we are sitting, it seems chaotic. Government needs to draw breath and clearly articulate its vision on climate change policy. Seen in parallel with the growth review, the government is sending some very mixed messages.

There has been a lot of coverage in the last week about the theft of approximately 475,000 EU ETS permits from a Czech Carbon Trader. What is interesting about this case is of course how it could happen in the first place, given that each and every EUA (carbon allowance) has its own unique serial number. How are these dodgy allowances sold, one can almost imagine a sub market, conducted in the shadows, where EUA are traded for brown packages full of Euros.

What is more interesting is how holding these stolen allowances in different parts of Europe will have a greater or lesser degree of risk attached to possession. It is only in cases like this do we remember that possession of stolen property is treated very differently, depending on which Member State you are in. For example, in the UK if you are found to have any of these allowances in your registry account, they are stolen goods and although you believed they were legitimate when you bought them, they could be confiscated without compensation. However, in Belgium (and other Member States), if you purchased the EUA in good faith, at a reasonable price, they are legally yours and you would not stand to lose money over the transaction. Even if they were taken off you, I understand you would be compensated for your loss.

This might go some way to explain the motivation for the theft in the first place, apart from money. It begs the question, if you are based in the UK, how do you know the allowances you have recently purchased are legitimate and how do you know assess the risk.