Select Committee on Environmental Audit Minutes of Evidence


Examination of Witnesses (Questions 20-39)

MR MICHAEL ROBERTS AND RICHARD JACKSON

WEDNESDAY 14 NOVEMBER 2001

  20. It is interesting, what you were saying earlier, an example about congestion charging as opposed to increases in petrol, fuel pricing. Is the CBI moving to a position—and I think RAC in their evidence to us, or was it AA in their evidence to us, were saying something similar—where, rather than simply saying to the Government `this taxation policy, our members don't like it and it won't work', you are beginning to move to a point where you are saying `why don't you try this instead, because we think it will work'?
  (Mr Roberts) I think, for all organisations, such as ourselves, that are engaged in public policy, trying to promote an alternative, rather than simply being negative, is a constructive way of trying to take the debate forward in any particular area. That does not mean that we will not be firm in registering our concern with a particular option that is being taken forward by Government, and the Climate Change Levy, I would suggest, is one particular case in point where, for many years now, since the idea was first mooted in specific form in 1998, we have been saying to Government that our belief is that it is a deeply flawed instrument, in many regards. And, yes, we have suggested alternatives, for example, the role that emissions trading might play in trying to promote carbon reductions by business; but, in proposing an alternative, that has not stopped us from being fairly outspoken, I would suggest, in our opposition to that particular instrument.

  21. You have not been too convincing, or you have not convinced an awful lot of people, about the value of emissions trading, as opposed to, I think your argument is more likely to be accepted on congestion charging, but there are some who would suggest that throwing up emissions trading is simply a way of avoiding doing something else, rather than really suggesting something that is effective?
  (Mr Roberts) I think my first answer to that would be that we have not suggested that emissions trading is the only tool in the box to reduce carbon emissions in this country. What we have suggested is that it is one of a number, and particularly we believe that it could be effective, because, in its pure form, at least, trading establishes an absolute limit of carbon emission, it places a value on that carbon, and thereby incentivises the market to find the most cost-effective ways of delivering that specified reduction in carbon reduction. The further benefit of trading, if it can be made to work in practice, is that under the Kyoto Protocol it has an international dimension, which is positive from our perspective in two ways; one is that potentially it engages the international community in what is, after all, a global problem, but, secondly, by involving potentially a larger number of players, it increases the liquidity in the market for carbon and therefore it reduces the cost of reducing carbon in the world as a whole.

  22. You have clearly embarked upon what is an important part of your remit, evaluating Government's proposals on environmental measures; have you been bringing that evaluation together, and could you share some of your thoughts with the Committee?
  (Mr Roberts) We have been trying to put some thoughts together. I should rewind a little bit and refer to a publication that we produced in 1998 called `Coming Clean', again, to which we refer in our memorandum, which really tried to set out, as it were, the theoretical principles by which we felt policy-makers should pursue the use of economic instruments in the round, including tax, as a way of achieving environmental objectives. And, for us, I think, as an organisation, it was a particularly useful exercise in identifying what it is that might or might not work in this field, and it has been a useful context within which we can comment on individual proposals. However, we became conscious more recently that that only went so far, and it really did not provide us with an analysis of what has actually happened on the ground in this particular field. And, again, as we allude to in our memorandum, we have been undertaking some work, which my colleague Richard Jackson has been particularly engaged in, which is to try to assess how the environmental taxes which currently operate in the UK have actually performed against not only their environmental objectives, but, if you like, from the point of view of competitiveness, which is one of our key concerns. And that work, I have to say, is still under way, so in our memorandum we have been able to give you, I think, a flavour of where our thinking is going at the moment, but I would urge you to treat the conclusions as very much interim rather than final; we hope to report in final form at the end of the year.

  23. You have given a couple of examples of environmental taxes that you do not think would be particularly effective, and you gave one example, I think, getting rid of lead in petrol, as an example of an environmental tax that was effective; are there any other examples of environmental taxes that would be effective? I will ask another question. Are there any good examples of countries in which the government is particularly well attuned to the business interest, which have a good record on the environment, environmentally-friendly governments? Or are there any examples the other way round?
  (Mr Jackson) Can I just come back to your previous question and just say that, with the report that we have been undertaking, we have been looking at each of the individual taxes, and, yes, there have been negative points to each of the individual taxes, but there have also been some plus points; and to give you an example of, I suppose, a plus point would be with the Climate Change Levy. Obviously, we have our concerns with the Climate Change Levy, but it could be argued that the Climate Change Levy has brought energy efficiency and climate change to business and it has raised awareness of the issue to business, as do a lot of the taxes; whether taxation is the right measure to tackle the problem is another question.

  24. What about the second part of my question. Are there any good examples of countries, that you can quote, which are particularly well attuned to business interests, and as a result have developed really good environmental measures?
  (Mr Roberts) In terms of, I suppose, within Europe, the countries that one traditionally thinks of as being positively attuned to delivering environmental improvement are The Netherlands, the Scandinavian countries and, I suppose, Germany, as well. In terms of whether or not they pursue that agenda at the same time as being business friendly, as it were, one example which occurs to me is the case of Germany and the way that they have approached energy taxation, and I use this by way of comparison with the arrangements here, with the Climate Change Levy, where our understanding is that in Germany there are, as here, arrangements to treat favourably energy-intensive industries, but the definition of the industries which need to be treated favourably in Germany is far wider than is the case here, with our Climate Change Levy. So our understanding is that in Germany all manufacturing companies are eligible for an 80 per cent discount on their industrial energy tax; in this country, a limited sub-section of the manufacturing community is eligible for the 80 per cent discount, to the extent that 40 per cent of energy used by manufacturing is not captured by the discounted arrangements. And, in our view, that is an example of where perhaps there has not been given enough thought to the competitiveness dimensions of energy taxation, whereas the Germans seem to be a little bit more amenable to that approach. Does that help provide at least one example to answer your question?

  25. I was waiting for you to give an example in the United States, with a very-business-friendly Government, a not particularly environmentally-friendly Government?
  (Mr Roberts) One economic instrument which is an American example, is trading. The trading scheme on sulphur dioxide, which was implemented in the United States, has not been entirely problem-free, but our understanding is that the experience has been a pretty positive one, from the point of view of the business community, and one which has delivered genuine environmental improvement in terms of the reduction of SO2.

Chairman

  26. When you say a German example, it just illustrates the point that in Germany there tends to be the approach that they have high taxes but lots of exemptions, a sort of cultural habit of theirs, if you like, and it is simply reflecting that rather than anything else, a different attitude towards energy taxation?
  (Mr Roberts) It may be; it may be that the example was not the best one that I could think of.

Joan Walley

  27. But would you not say, for example, in the case of Germany, there is a great deal to be said for improved competitiveness, as a result of the taxation measures that there are?
  (Mr Roberts) I am not sure I quite understood.

  28. That they are much more able to take advantage of the market and able to be more productive, because there is a market which is actually linked to the taxation that there is? You have just got to think, for example, of different things which are manufactured in Germany which we do not manufacture here because there is no market because it is not linked to the taxation system; it actually produces greater competitiveness in the longer term?
  (Mr Roberts) I think there is a broad issue which you do rightly put your finger on, which is a sense, that is expressed by many of our members in relevant sectors, that other companies' governments have been perhaps more proactive in stimulating industries which produce, as it were, environmental products; and particularly that countries such as Japan, and in fact the United States, are being far more proactive in supporting research and development capability into the green technologies of the future, and so stimulate sectors which then develop those areas. And in responses we have been making to the Government on the need to promote research and development more generally, through a tax credit regime, this is one of the areas that is in the minds of our members.

Chairman

  29. Just following on what Mr Owen Jones was asking you, I did not get your answer to his question about which environmental tax was causing you most concern?
  (Mr Roberts) Causing us most concern?

  Chairman: Yes. You indicated one or two which were better than you might have anticipated, but you also . . .

  Mr Challen: Which you have the least problem with.

Mr Jones

  30. The top trend, or the bottom trend?
  (Mr Roberts) The top trend; can you wait for our report? But, to be serious, I think the most contentious environmental tax at the moment, in our view, is the Climate Change Levy. What is interesting is that it is clearly early days yet, and it is difficult to understand just what sort of impact it is having on the ground. But some of the official figures which came out in the summer, in terms of impacts on manufacturing prices, looking at all of the impacts on manufacturing prices, there were some provisional figures which indicated that the impact of the Climate Change Levy was almost as large as all of the other impacts which have an upward pressure on manufacturing prices.

Chairman

  31. The effect of the Climate Change Levy was as great as what comparator?
  (Mr Roberts) Was as significant as all the other factors combined that were also contributing to upward pressure on manufacturing input prices.

  32. What do you mean by `all the other factors', sorry; I am not quite with you?
  (Mr Roberts) In terms of, for example, I am not absolutely au fait with the figures, but I think it would be something like the effect of the level of sterling on input prices; so it is a combination of those things which impact on manufacturing prices.

  33. And the Climate Change Levy was having as big an impact as all that, if I am right?
  (Mr Roberts) It was of the same order of magnitude, it was not exactly the same, but it was a big impact, if you conceived of it in those terms, and those were provisional official figures, not our own.

Mr Gerrard

  34. Given all your concerns about the Climate Change Levy, it is fairly obvious it is not going to be abolished in the next Budget, I would think; what changes would you like to see, are there specific things you would like to see the Chancellor put in his next Budget in relation to the Climate Change Levy?
  (Mr Roberts) Can I answer that question by just making reference to our general Pre-Budget Report submission, which, first of all, stipulates the desire on the part of the business community generally for fiscal stability, that is the primary objective, from our point of view. Secondly, that there is, nevertheless, clear concern about the economic situation as it might develop in the current global environment, and that we have encouraged the Government to consider having, as it were, a contingency plan, a plan B, ready to put into place come the Budget next spring, should it turn out that the economic conditions in the UK are worse than had been feared. As part of that contingency arrangement, our view is that there may well be sectors, and I think particularly here of manufacturing, which may require some form of favourable treatment in the Budget. And, in that regard, we are doing some work at the moment to look at what might be done, for example, with regard to the Climate Change Levy, and I think you can imagine, as we do, the sort of menu of options, starting from the most desirable, in our perspective, the least likely from the perspective of Government, and working down. So one would be abolition, which, as you suggest, raises questions of realism, but then there might be deferral of the Levy for a period of time until such time as the economic conditions recover; extension of the eligibility for companies to get the 80 per cent discount, which, as we suggest, at the moment are very narrow; building on the Enhanced Capital Allowances scheme to promote investment in clean technologies, so that it is not, as it were, a cash-flow benefit but it actually becomes a tax credit and provides a real financial incentive for companies to invest in clean technologies. So we are looking at, potentially, a menu of things, some of which are more desirable from our point of view and some of which are less desirable from the Government's point of view.

  35. If you start arguing for extensions of exemptions, for instance, on Climate Change, are you actually going to be producing a menu, as you suggested, of objectives, which is just making the whole system more and more and more complicated; when what you have actually said in your submission to us is that one of the guiding principles ought to be simplicity, you said no system will be perfect, and good, simple, pragmatic solutions will succeed where more complex ones fail? Are you not in danger of just making it more and more complicated?
  (Mr Roberts) I think part of the game here is the art of the possible, to be frank. We never would have started from this position in the first place, but we are where we are. And, as you suggested, there are some doubts about the extent to which the Government would actually go right back to the drawing-board and start anew, and, consequently, we are having to deal with the imperfect and making the imperfect a little better. But, you are right, there is a danger that it simply makes the thing more complicated.

Mr Francois

  36. In terms of simplicity, the simplest, easiest, most clear-cut thing is just to abolish it, is it not; it cannot be any simpler than that?
  (Mr Roberts) That would certainly be simple, in terms of getting rid of the tax; there then becomes a question of how do you achieve the carbon reductions, as part of, obviously, the overall Government's objective to meet not only its Kyoto target but its domestic target.

Mr Lucas

  37. Which is exactly my question to you; if we abolish the Climate Change Levy then how does one achieve those targets?
  (Mr Roberts) Part of the answer, I think, is to look particularly at the role of the domestic consumer, the individual. The business community at the moment is going to be directly responsible for half of the total programme of carbon reduction in the Government's climate change programme; when I say directly, that is through measures such as the Climate Change Levy, such as the technical improvements to which the car manufacturers are already committed, but the business community will be indirectly responsible for more than half of the total programme, through, for example, its role as a user of transport. And our view is that really we need to be looking at whether or not that is a fair share of the burden, in trying to achieve our climate change objectives, and to see whether or not the domestic consumer will play a greater part.

  38. So the CBI favours increasing environmental taxes on consumers?
  (Mr Roberts) I think, to be honest, we have not spent a great deal of time looking into how exactly we would approach that, and we are more than conscious—

  39. It is just that I am extrapolating from what you were saying earlier what it says to me, and I think we should call a spade a spade, if that is what you are moving towards?
  (Mr Roberts) There may be other ways of encouraging customers to play their part, other than simply tax. There are other forms of measures at the moment being considered and being developed, such as the Renewables Obligation, which, as it were, looks at the role which electricity suppliers can play in meeting domestic consumers' needs for electricity, but in rather cleaner ways. None of these things are perfect, inevitably, but I think the point I am making is that it is not simply about taxing the domestic consumer, there may be other ways in which you can achieve the objectives.
  (Mr Jackson) I think it is fair to say that there is a role for other sectors. I think one of the points that we would probably like to draw out in our report is the fact that there is a need for a sound analysis, almost a cost/benefit analysis, of all the policies and measures available to Government; something that did not happen with the Climate Change Levy, the Levy was introduced first, the climate change programme was introduced second. So there is a need for a redefinition of what comes first.


 
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