CORRECTED TRANSCRIPT OF ORAL EVIDENCE
To be published as HC 1931 -i

House of commons

oral EVIDENCE

TAKEN BEFORE THE

Environmental Audit Committee

Budget 2012

Wednesday 25 April 2012

MISS Chloe Smith MP, JONATHAN MILLS and HELEN DICKINSON

Evidence heard in Public Questions 1 - 82

USE OF THE TRANSCRIPT

1.

This is a corrected transcript of evidence taken in public and reported to the House. The transcript has been placed on the internet on the authority of the Committee, and copies have been made available by the Vote Office for the use of Members and others.

2.

The transcript is an approved formal record of these proceedings. It will be printed in due course.

Oral Evidence

Taken before the Environmental Audit Committee

on Wednesday 25 April 2012

Members present:

Joan Walley (Chair)

Peter Aldous

Mark Lazarowicz

Caroline Lucas

Sheryll Murray

Caroline Nokes

Mr Mark Spencer

Paul Uppal

Dr Alan Whitehead

Simon Wright

________________

Examination of Witnesses

Witnesses: Miss Chloe Smith MP, Economic Secretary, Jonathan Mills, Deputy Director, Energy, Environment & Agriculture, and Helen Dickinson, Deputy Director, Environment & Transport Tax, HM Treasury, gave evidence.

Q1 Chair: Welcome to this afternoon’s session. Minister, I think it is the third time now that you have been before this Committee, so welcome back. I think it is fair to say that we were quite keen to have the Chancellor at some stage, because we did want to have some kind of understanding of the Treasury’s role in the whole greenest Government ever business. Nonetheless, we have a serious of quite detailed questions, so we very much look forward to the session and having some feel of the answers that will inform our future work on the Budget in the run-up to the next comprehensive spending review, but also that will inform our Green Economy work, which we are still finalising at the moment. We have those two particular inquiries in mind.

I would like to start off with a detailed question on the carbon reduction commitment. The Treasury said that it is committed to reforming it. In a way, we would like to know what its future role is going to be. Is it going to be scrapped by the autumn? In the work that we have done, it has been very clear to us that this is a green, environmental tax. It is one where DECC has some responsibility. What we would really like to know is what the Treasury’s objective and intentions are regarding the CRC, and how that marries with it being an environmental tax. We would really appreciate your comments on that, please.

Miss Smith: Certainly, and may I say again it is a pleasure to be here with you, as you say, for the third time?. Chancellor or not, I hope to be able to answer your questions. Just by way of preamble, may I note that I think what you saw in Budget 2012 was a Government that continues to be committed to its green agenda, being the greenest Government ever, increasing the proportion of revenue from environmental taxes, which no doubt we might come on to? Budget 2012 also picked up much that was laid out in previous years and showed progress. We can go through, no doubt, various areas of that.

The starting point you have picked is very interesting because it also underlines one of the main things we were endeavouring to do in Budget 2012, as we have always had to do, which is to find ways to better support business. The CRC is an example, as you rightly say, of a tax that we are looking at consulting upon, but in the spirit of finding ways to reduce burdens on business.

Q2 Chair: In terms of fighting burdens on business, how do you resolve from the sustainable development perspective, where there are perhaps tensions between different Departments, so that we end up with what is right by way of an environmental tax, but which at the same time gives long-term certainty for investments as far as business is concerned?

Miss Smith: If I may, I will try to answer all of those points in my comments, and we will probe on more, I am sure. At the broadest level, if I try to take first the points about how Treasury and other parts of Government work together, that is possibly there in your questions as well. This is a prime example of where the Treasury and DECC are working together. DECC, as you will know, is leading on consulting with simplifying CRC. The Chancellor emphasised many of those messages in the Budget about the need to reduce the administrative burdens on business. Rightly, you point to there being a desire across Government to achieve many things at once, and that is always the challenge of government, so we need to have regard to business at the same time as having regard to our green commitments. That is absolutely the challenge in front of us.

You asked about intentions specifically with relation to the CRC. We are looking to see if administrative burdens can be reduced on business through it. Should significant administrative savings not be deliverable, then the Government will bring forward proposals in the autumn to replace CRC revenues with an alternative environmental tax. The point that I would press to you is that we are engaging with business before then to identify potential options.

Q3 Chair: How do you give a value to the environmental gains that there would be from that, and the business costs?

Miss Smith: As I say, first of all, we are talking to business. That is a piece of that jigsaw. That is a very important piece, because for much of CRC-admittedly, the public sector is on the list as well and you will appreciate that-those large organisations are those that have to carry it out, conduct it, make it happen. That means you do need to talk to them about how they think some of it can be done.

Q4 Chair: It has taken two years, hasn’t it, from the original talks in 2010 to what the new CRC would actually look like? We are two years down the road now and there is still no degree of certainty about what shape it will be, what it will look like in terms of looking to the future. Are you frustrated by the amount of time that it has taken to sort it out?

Miss Smith: In a sense, no, because good policy does take time to develop. I am happy with the position that we are talking to those who have to play a role in making the tax happen. I do think that is the right thing to do.

You also asked about how you could make it sustainable, if you like, alongside businesses, and how you could have regard to other objectives in that review. In brief, there are ways the Government always endeavours to do that, such as through some of the guidance in the Green Book. Much decision-making across Government does have regard to environmental objectives, and this Committee and others have gone into that in some detail. That is a way in which it may be done.

I have not yet introduced the two officials who are here with me, Jonathan Mills and Helen Dickinson. May I just ask you if you have anything you would add on how those objectives are balanced within that?

Q5 Chair: You don’t wish to add anything?

In terms of the frustration about the amount of time it is taking to get the CRC future shape determined, can I just turn to something slightly different, in respect of the mandatory reporting of greenhouse gases? Again, that is something whereby it was a commitment that was clearly set out in the Climate Change Act. Certainly, people who I have spoken to had rather hoped that there would have been a decision by now as to whether or not the Government was going to put that into effect. Again, it seems to be becoming a bit of a key issue, because we had the announcement just a couple of weeks ago or so that the decision on whether or not to do it or how to do it has been deferred still further. Could you perhaps shed light on that for us?

Miss Smith: In brief, I would say that the process of gathering evidence and again trying to get it right does take some time. The Government is currently considering the analysis of responses to a consultation on that point.

Q6 Chair: But what was the Treasury’s view on it?

Miss Smith: If you will excuse me, the Government is working on it. We are, after all, a Cabinet Government.

Q7 Chair: Sorry to interrupt. What we are trying to get to the bottom of in this Committee is where there are different perspectives from business and different Government Departments, whether or not the Treasury has a view as to how you would like it to be. Then that view might go and be sorted out in a Cabinet meeting or in the Regulatory Policy Committee, but what is the Treasury’s view on how this can be put into effect, because it was part of the Climate Change Act?

Miss Smith: I appreciate that is what you are trying to get to the bottom of. There are indeed always a wide range of views on the way things should be done from what you might term "stakeholders". As I say, this particular piece of policy is subject to Government work and the Government in all of its parts works together to do it.

Q8 Chair: So you don’t have a view on what it should be, on whether or not it should be accepted at this stage from the Treasury?

Miss Smith: I don’ have one to articulate to this Committee.

Q9 Chair: Have officials been putting a view to BIS and to other Government departments as to what that view should be?

Jonathan Mills: As the Minister has said, we are at a stage of wanting to understand the evidence and evaluate the consultation responses. We have been involved in trying to understand that evidence base with the lead Departments, as we would do on any policy area.

Q10 Caroline Nokes: I wanted to have a bit of a focus-and this might sound counter-intuitive-on the energy-intensive industries and those businesses that are looking for some level of certainty both from the Treasury and DECC going forward as to policy, and a specific question as to the impact assessments that are required for any new regulations and the need for them to be signed off by the Regulatory Policy Committee. Specifically, with reference to mandatory carbon reporting, has that yet been signed off?

Miss Smith: My understanding on the mandatory greenhouse reporting evidence base, as opposed to some of the energy-intensive industries-sorry, forgive me. I think there are two parts to your question, if I am not wrong. There is a bit about energy-intensives and there is a bit about mandatory reporting, unless I am confusing what you are asking. On the mandatory reporting question, the policy, as you will know, is led by Defra. In fact, as Jonathan referred to, there are lead Departments on these things. I think it would be best if detailed questions went to them on that. I am not the lead Minister in that instance.

Q11 Caroline Nokes: Specifically going back to energy-intensive industries, I think the frustration that has been raised by some of Britain’s biggest ceramic industries is the lack of certainty from Government and the delay that they feel is ongoing. Specifically, you said you were talking to businesses and engaging with businesses. Do you feel that we are at a point now where they want a decision and some certainty going forward so they know whether to invest or not, or are you happy that we have this ongoing limbo for some of our big manufacturers?

Miss Smith: I suppose that is a very broad question that goes beyond the mandatory reporting point and goes to probably many other taxes or regulations as well. I would say that discussions and understanding of business should continue at all times. I must say that. I think Budget 2012 particularly sought to be business-friendly and I am sure that is a theme we can return to across questions. Therefore, I would say we, in the Treasury, and all Ministers need to continuously have regard to that in order to keep the economy moving.

For energy-intensive industries in particular-you mentioned the ceramics industry-a lot of work has gone into a package especially for them, which I think you will be aware of from the autumn statement, which I do hope is helpful and sets out some certainty for businesses. Predictability and information that assists in investing is absolutely a priority of this Government for business.

Q12 Caroline Nokes: You mentioned the special status in the autumn statement. How would you respond to the allegation from industry that they are still waiting for more detail?

Miss Smith: I would be happy to help them get that if there was a particular thing they have in mind, I think I had best say.

Q13 Caroline Nokes: Okay, a final question: how is the delay in the decision on mandatory carbon reporting linked to wanting to avoid duplication with CRC reporting, and are you looking at that reporting overlap?

Miss Smith: I am confident that the lead Department would absolutely be doing that. I think you draw out an important point about a lot of the policies, whether it be taxes, regulations, or others in the environmental area, there can be perceived to be various parts where they adjoin, abut, overlap and work together. I do think it is important to aim for simplification, particularly across tax. That is certainly something this Government has set out, not only in the environmental arena.

Q14 Chair: I hope you will forgive me for this, but as someone representing also a ceramics constituency, I think it would be remiss of me if I did not just refer back to Caroline Nokes’ question and say that one of the concerns that parts of the industry have is that the autumn statement was very much about high electricity users of energy. One of the issues in the ceramics sector is about gas users. Therefore, it might mean that there might be a more detailed discussion that is required to look at the overall issues affecting that sector.

Can I just refer again to this issue about the reporting of the greenhouse gases arising from the Climate Change Act? It might be that your officials might be able to help me here, Minister.

Miss Smith: They are very pleased to.

Chair: In terms of the Regulatory Policy Committee, is it the case that the Treasury has signed this off? I understand there is a set of traffic lights that proposals are either detailed as red, amber or green. I wonder if you can just confirm what the status is of getting the greenhouse gas reporting signed off in terms of the Regulatory Committee.

Miss Smith: I can in very general detail.

Q15 Chair: Specifically, I asked the status of whether it is red, amber or green.

Miss Smith: I am afraid that is not the kind of answer we are able to give you. Yes, the Committee does use that method of decision-making, but I don’t think it is appropriate to say what a given Department thinks within that, because it is after all a committee of Government that comes together to discuss such things. Jonathan, would you? Indeed, for what it is worth, this committee is led by BIS.

Q16 Chair: I do find it quite incredible that we are waiting to have some idea as to how the greenhouse gas reporting is going to be incorporated into policy. As I understand it, it has been to the Regulatory Committee twice now and twice been knocked back, but I understand that there is an option that it is fit for purpose. I think we are quite entitled to know which Department it is that deems it is not fit for purpose, or are you saying you cannot tell us that?

Miss Smith: I think you might wish to direct that to a different Minister.

Q17 Chair: Okay, but as far as the Treasury is concerned, can you just help us? Is it the case for the Treasury that you would deem it at least if not green, then amber and fit for purpose?

Miss Smith: That is what is not possible to answer for you, because first the Treasury is not the lead Department on the policy, and second, if you were to ask a non-lead Department for something, I am afraid I cannot do that for you, because it is a collective process of Government.

Q18 Chair: All right, so who could we ask?

Miss Smith: Defra.

Q19 Paul Uppal: Minister, in your previous statement, you were talking about Budget 2012 being very pro-business, very friendly towards business. The feedback from some environmental groups has not really been that enthusiastic. I was interested specifically, as Minister with responsibility for environmental matters, in your input into Budget 2012, your involvement and your role specifically.

Miss Smith: A factual answer to that can be found in my portfolio, which is relevant for today. It covers environmental taxation. Perhaps of less interest to this Committee are the other things I cover, which include welfare, tax credits, charity, excise, and a number of things that I am sure are not of interest to this Committee.

Q20 Paul Uppal: Specifically, can you tell us some more about your involvement with the whole machinations and mechanics of Budget 2012?

Miss Smith: By all means.

Paul Uppal: From an environmental perspective.

Miss Smith: As a junior Minister, it is my role to take decisions that feed into the Budget. I beg your pardon, for the sake of clarity, I missed transport taxation. The two that would be of interest here would be environment and transport taxation.

Q21 Paul Uppal: As a second part of the question, there was not much of an announcement about driving the green economy, but we did hear quite a bit about initiatives in the North Sea. Your perspective on Defra’s and DECC’s input and what they wanted to see specifically in the Budget, was there anything as a sort of feed-in from that perspective? What would they specifically want to see in Budget 2012?

Miss Smith: Is that with reference to North Sea oil and gas?

Paul Uppal: Yes, specifically.

Miss Smith: There has been a particularly interesting piece of work that has gone on, which I am confident you will be aware of, to look at how we can facilitate production, the right production for the UK from our oil and gas in the UK Continental Shelf. That has been, I would say, a particularly good example of joint working with, in that case, DECC. Charles Hendry and I have jointly run a series of meetings with industry that have brought about, I would say, a good understanding of what the industry seeks. I do think that particular piece of package announced in Budget 2012 is a particularly positive example of where we hope to see significant investment back into British business.

Q22 Mr Spencer: To go back to the actual process, could you give us an idea of the timescale we are talking about? How long before Budget day do the discussions start and, as a junior Minister, do you have a power of veto to say, "Oh my goodness, you cannot possibly do that because of the impact on this green industry"?

Miss Smith: On the timetabling point, to be honest, work proceeds year round. Clearly, you have March in your mind. Clearly, both Government and-as I say that awful word-stakeholders know that the Budget is when the Budget is. There is also the autumn statement in 2011 to have regard to.

On how much time an individual Minister might spend on particular things, it will vary of course piece to piece. Obviously, we endeavour to do things in a timely way.

Q23 Mr Spencer: Can I carry on, Chair? Is that all right? Just turning to North Sea oil, clearly the revenues from North Sea oil are really important to the Exchequer.

Miss Smith: Yes.

Mr Spencer: At the same time, your responsibilities towards the green economy and general green issues are very important. I wondered how you grapple with that sort of paradox, that dilemma between the two.

Miss Smith: I suspect, when I began to reel off my list of responsibilities, you get a sense of the balances that have to take place within any portfolio, within any role. If any of us were to argue that we should make Government larger, you might often find that you have one Minister carrying several subject areas at once in that kind of sense.

By way of trying to bring some of these pieces together, the Government’s overall ambition for the tax system is to make it more competitive, to make it simpler, as I have been referring to, to make it fairer and to make it greener. I am sure we will go into that latter one in more detail. We have various tools at our disposal, if you like, to try to achieve that. As I say, we had a package of measures announced at Budget 2012 to contribute to the Government’s objective of maximising what we can produce from the UK Continental Shelf. I think that is widely recognised as a benefit to the UK economy. On that note, while we are on the topic, I think it is very important that we support British business to be there doing that. I would far rather see investment come to the UK than to go to, for example, Norway. I would far rather see British firms conducting the work, so that we have skills and work and investment within the supply chain in Britain. I am also very strongly of the view that we have very high standards in our UK oil and gas industry, and I think those need to be upheld there as well.

In fact, that last point takes you on to how you start to balance some of these things. Clearly, I am not going to sit here and here and say it is unenvironmental to have an oil and gas industry. It is not. It is an industry we need. It is an industry we value. It is an industry we should seek to support in the most environmentally helpful way possible.

Q24 Mr Spencer: If you extend that argument, I suppose the argument then from the Treasury is, "If we don’t do it, somebody else will." It almost knocks the whole of the green agenda out of the way, really, because you could make the argument that whatever we do in the UK, the Chinese and Indians are moving forward at such a rapid rate that we should not make any effort. Am I understanding the argument?

Miss Smith: Sadly, a lot of that is true, in the sense that we live in a global economy. Of course we do. Clearly, China and India have ambitions for their own economies and capital moves around the world. It would be entirely possible, I am sure, for investment to come from those countries into the UK Continental Shelf. While I make no comment on where investment should come from, I want to see the benefit come back to Britain of our industry there, as I say, not only through maximising the hydrocarbons out of it, but clearly in terms of skills and revenue, also as you have noted in your question.

Q25 Mr Spencer: To be positive about it, let us go through the measures within the Budget that were of benefit to the green economy. Could you give us a quick résumé of what you felt was in there that did support the green economy?

Miss Smith: Certainly, I think to start with, as I mentioned in my brief opening remarks, what you saw in Budget 2012 was consolidation of a number of the things we have had previously. I would point first of all to the Green Investment Bank’s Pathfinder, which has now opened for business, which I think is very positive. Secondly, I would point to the carbon price floor, first announced in Budget 2011. Then in Budget 2012, we came forward with figures around it, namely setting the price support rate for 2014-15 at £9.55 per tonne of CO2.

Then flowing from that headline kind of measure, you then see implementation detail coming forward at Budget 2012. Also, you saw other areas then raised at Budget 2012, which I hope will do service to the green agenda by bringing it into a reasonable debate. I would frame our discussion of CRC in that light. I would say it is far better to have the CRC discussed openly and to ask how we can make this perform best, meeting all the objectives we might set for it, than to not do that, than to ignore it and to see it perhaps disliked by stakeholders.

Q26 Mr Spencer: Finally, the Chancellor said in his Budget that gas is cheap and will be the largest source of electricity in the coming years. He also said that environmentally sustainable has to be fiscally sustainable as well. I wondered, in practical terms, how such considerations drive Government’s policy. What has DECC said about that as well? Did DECC feed into that process?

Miss Smith: As I say, on the cross-governmental discussion, such discussions take place, as you know, at all times and in all sorts of ways. Clearly, the Chancellor is the one who stands up to deliver the Budget speech, so clearly they are his words.

The important point is that which the Chancellor made. We cannot do an effective job of meeting our environmental aspirations if we do not have regard to our economy at the same time. We simply would not be in a position to succeed. We need to be fiscally sustainable in order to be environmentally sustainable. As I was just arguing there about CRC, it is really important to help people, in our case businesses or organisations, to meet their environmental responsibilities. The need for fiscal sustainability feeds into that. If people are significantly struggling under debt, whether that be at a household level, or indeed country level, they may well struggle with the notion of spending more, or being asked, or maybe perceived to be being asked, to spend more in an environmental way. We have to find a way to encourage people to do so, and we have to of course keep our country’s economy on track while doing so.

Q27 Caroline Lucas: I come in off the back of that just to observe that your list of the things that you thought made this a greener Budget was not a very long list. On the counterside of it, you have the comments from many green NGOs and many others talking about the road-building, the airport expansion, the subsidies for deep-sea drilling, and the list goes on. Even on your positive side, when it comes to the Green Investment Bank, it is still not punching with the weight that many of us would have liked. The carbon floor price is arguably undermined by the EPS announcement on gas. Could you be a bit candid and say that at this particular time Budget 2012 was not as green as it might have been, because the kind of commentary we have seen from the green groups is absolutely scathing of this greenness of this Budget? Are they just wrong?

Miss Smith: They have said what they have said. I would be delighted to provide some rival quotations, which of course I come equipped with. The point is, as I said in my earlier comments, Budget 2012 built upon many of the green-"green" in inverted commas, if you like-proposals put forward in previous years. I say "green in inverted commas" because I don’t think there is ever such a thing as a purely green policy. I must say that. In Government, as I began by saying, we have to often try to achieve many things at once across a range of policy areas, so I don’t think there is ever such a thing as a green area of the economy. Things naturally have to come together.

Q28 Caroline Lucas: One of the frustrations of those of us who would have liked to have seen the Budget do more for a green economy is that, in fact, investing in the green economy is one of the most labour intensive things you could do, and therefore would create lots of jobs, and be good for the economy. This of course is absolutely counter to the kind of rhetoric we have had from George Osborne along the lines of saying that somehow the green economy is a brake on growth and development in this country. That is the frustration, and I wonder if you would comment on that.

Miss Smith: I will, and I shall use the words of the Prime Minister, in fact, who at the Clean Energy Summit is drawing attention to announcements of £4.7 billion of investment in UK renewables, supporting 15,000 new jobs in the last year alone. That is significant. Clearly, that is the kind of thing we all want to see. It is testament to the excitement that there is in many of these new sectors. We have discussed in other meetings of this Committee and elsewhere about what the green economy is. Can there be such a thing that is separately known as the "green economy" separate to the rest of the economy? My view is that there is not such a separate thing. We have to make the whole of the economy greener.

Caroline Lucas: I agree with you there, but you have to look at doing it.

Miss Smith: I suspect that that is something we would all agree with.

Q29 Dr Whitehead: How are you getting on with your work on a definition of a green tax?

Miss Smith: I knew you would ask me that, Mr Whitehead. I particularly wanted to confirm to the Committee that the work is proceeding. I am not in a position today to complete the announcement, so although you may wish to ask me that, I had best give you the short answer upfront, because the work is still proceeding. As I have laid out in an answer to your previous question, I do think it is important to get the work right, and so to take time over it. I know that my predecessor outlined to you last year the broad principles that we would like to see the definition based upon, which is namely that the tax should be explicitly linked to the Government’s environmental objectives and that its primary objective is to encourage environmentally positive behaviour and that the tax is structured in relation to environmental objectives, for example around polluting behaviour. Work absolutely proceeds using those principles as a bedrock, and I hope that assists the Committee.

Q30 Dr Whitehead: Last November, I think you answered one or two questions saying the Government was finalising its work. Is proceeding a step back from finalising?

Miss Smith: No, no, there is no cigarette paper there.

Q31 Dr Whitehead: So you are finalising and proceeding-you are proceeding to finalise. Is that fair to say?

Miss Smith: We are doing the work-words of fewer syllables.

Q32 Dr Whitehead: And in proceeding to finalise, are you talking to other Departments that would have an interest in this, such as DECC and Defra on what they think about the definition?

Miss Smith: Of course, in short, yes. Again, this kind of area would naturally be discussed between Government Departments, although because it rests on taxation, clearly the Treasury would be in the lead.

Q33 Dr Whitehead: Do they support your predecessor’s view that green taxes might exclude fuel and aviation taxes?

Miss Smith: As I said, we are in the process of the work-we are in the process of finalising the work. The point is those principles are strongly agreed. As the Committee will be well aware, there is legitimate debate over what might be in such a list. There is no getting away from that fact. The ONS uses one list. The OECD has a different one. EuroStat has an approach. All give rise to slightly different items being on that list. There is indeed a range of opinion. As I have referred to in answer to your other questions, this is a piece of work that the Government is doing, and we should be able to announce the results.

Q34 Dr Whitehead: When the Chancellor announced in the Budget that he was proposing a simplified CRC that has been discussed, which is not at present within the extant definition of the green tax as put forward by ONS, if no resolution was reached on how that could best be simplified, that could be replaced by a different environmental tax.

Miss Smith: Indeed, he did announce that, yes.

Dr Whitehead: How could he have said that when he does not know what the environmental tax is going to be?

Miss Smith: I think the two pieces of work proceed, as I say.

Q35 Dr Whitehead: When the new definition of green tax is finalised, will the possible new definition of environmental tax that might take over from CRC, which is not an environmental tax, be an environmental tax according to the new definition, or maybe not?

Miss Smith: I counted four hypotheticals in that sentence, so I would hope so in all cases.

Q36 Dr Whitehead: Is the answer yes?

Miss Smith: No, I am sorry. I am being flippant. I do think there were a number of hypotheticals there. There are two very serious pieces of work there, one on CRC and one on this definition. Clearly, you would seek for there to be read-across between them. Helen, would you like to come in at all on anything that I have noted there about taxation?

Helen Dickinson: I was just going to add to the principles that you described previously for what might now be seen as an environmental tax, and the Carbon Reduction Commitment would fall within that.

Q37 Dr Whitehead: Would it fall within the current ONS definition or the new definition that is being worked on?

Helen Dickinson: The Minister previously set out principles for what might count as an environmental tax, and the Carbon Reduction Commitment would fall within those principles.

Dr Whitehead: You mean the new definition.

Miss Smith: Alan, I think it is hard to refer. We are working towards a definition. The three items I read out to you would be, I would say, principles that sit behind that definition. For clarity, those three principles are not the definition themselves.

Q38 Dr Whitehead: Alongside that, are you working on the issue that this Committee highlighted previously, which is the concern that environmental tax is becoming increasingly complex and difficult to understand? Are you looking at how, for example, green taxes carry out the implied definition of what a green tax is, which is to change behaviour, and presumably in principle to be applied for green purposes?

Miss Smith: I would say that work continuously goes on. It should absolutely be in the aspiration of any policy to be understandable and possible to carry out. I would go back to the discussion we have had about the CRC as a good example there.

Q39 Dr Whitehead: Would the general idea that the green tax is a tax on bads and is allocated for goods be something you support in terms of that review and definition?

Miss Smith: In terms of taxing bads, that is certainly in the principles we spoke about. For example, the third one I mentioned, where you might focus on polluting behaviour, and you would seek for a green tax to be one that is structured in relation to tackling bads, as you say. In terms of allocating towards goods, the principle will remain across British taxation, if you like, that you do not hypothecate every last pound to an explicit objective. Clearly, we need to operate a range of public services from the revenue available, and I do not think there has ever been an explicit allocation all the way down the line.

Q40 Dr Whitehead: That is what the CRC was originally supposed to do though, was it not-reallocate to goods?

Miss Smith: As the Chair said, it has moved on in its time and clearly it is under review now.

Q41 Chair: Can I just follow that up? If in the autumn you do decide to replace the CRC with an environmental tax, is it the Treasury’s intentions that if there were to be a new tax, you would want to have the commitments of the carbon reporting and greenhouse gas reporting in that?

Miss Smith: It is hard to answer that as fully as you would like me to without the work yet being completed, but I would be happy to come back to you as soon as I am able to on that note.

Q42 Chair: The problem we have is that it is all very well and good to have a fait accompli as to what the Treasury position is once it has made that decision. What we are trying to do in this cross-cutting way is to understand how that decision is arrived at, so that it has the opportunity as far as the environmental aspect of it is concerned and the requirements of the Climate Change Act to be as far-reaching as possible. Not knowing any of the thought processes coming out of the Treasury in this process of decision-making is really difficult for us.

Miss Smith: I understand the point you make. Certainly, I understand the point you are making, considering how many Departments your Committee has to work across. I am sure that has taxed you over decades in this Committee. I would dispute slightly the premise perhaps of your point in terms of the CRC work that is going on. I do think it has been laid out relatively clearly why we would be undertaking that piece of work, how we are going to go about it, which I noted at the beginning in terms of discussing with business. It is a matter of public record, for example, the CBI’s views on it. That is, no doubt, a contribution that will be made to that process. Equally, the Chancellor has also been clear about how that process will then finish, so I would certainly expect the CRC to be clear in the autumn.

Q43 Chair: It is just really difficult to know, as far as the Treasury is concerned, what are the circles that have to be squared. We do not even know what that reference point is really, and the resistance there appears to be. Is there resistance towards the reporting of greenhouse gas emissions-the disclosure of that?

Miss Smith: I am sorry. As I said in my previous answers on that, in terms of greenhouse gas reporting, that is a Defra lead. I am afraid you would wish to direct your Committee there on that one. In terms of squaring the circle more generally-

Q44 Chair: Do you have a personal view on it, Minister?

Miss Smith: There are many squares and there are many circles in government.

Chair: I know, but do you have a personal view on it? I mean, are you urging your officials, when they are negotiating this on your behalf, to go down a certain route, go for this or go for that? It is just very difficult whether or not the Treasury has any views on it.

Miss Smith: In terms of policies on which other Departments lead, we-

Q45 Chair: No, but the Treasury has input into that decision-making. I am not asking you to tell us what is going to come out of the sausage machine; I am just trying to find out what Treasury view is put into it.

Miss Smith: Indeed.

Chair: You have no view on it?

Miss Smith: I only wish that government wasn’t like making sausages, and I am sure all of us do, as elected representatives, wish that, but I am trying to be as clear as I can be on the areas for which I can speak. You will appreciate that I can only speak on my portfolio, and hopefully I have done that for the Committee.

Chair: It just makes it very difficult, and I wonder what the purpose of a Committee session is, if we cannot have any inkling as to what the thought processes are inside the Treasury. Anyway, I think perhaps we will just move on.

Q46 Simon Wright: The Coalition Agreement includes a commitment to increase the proportion of revenue raised from environmental taxes. Why wasn’t that commitment referenced in the Budget documents?

Miss Smith: Not for any sinister reason, I don’t believe. It absolutely remains part of the Coalition Agreement. There is no dispute about that, and as I said to Alan, it is a piece of work that we are very much proceeding with.

Q47 Simon Wright: But in the meantime, where are we able to look to see the figures showing progress towards that commitment?

Miss Smith: I think with regard to the principles I have set out, and indeed with regard to somebody else’s words earlier this morning, extant definitions, of which there are several, I hasten to add, you would of course be able to track various figures which are in the public domain about what a given line item raised year on year.

Simon Wright: So over the last couple of budgets what is the overall effect? What has the change been?

Miss Smith: Against which definition are you asking?

Simon Wright: This is the issue, I suppose, isn’t it? We are the sort of middle period where we cannot clearly see how we are supposed to reference what we are measuring, so what definition would you be using as an internal measure at this time to show your own progress towards that Coalition commitment?

Miss Smith: As I say, the work proceeds towards that definition, so I think at this point, it is not possible for me to give you a clear answer in the form you are seeking.

Q48 Simon Wright: So we don’t know the answer? All right. Can you say then, while we don’t have a definition, how this Budget does deliver progress towards the ambition towards that commitment?

Miss Smith: Certainly, and I think just drawing on the notes of clarity that Helen provided, I have six items I could briefly list that meet the three principles laid out already, which are climate change levy, aggregates levy, landfill tax, the EU ETS, the CRC, which you have now gone over quite some way, and the carbon price support, and in answer to your question, I would particularly pick the carbon price support and say that clearly that Budget 2012 set out the price, at what level. I have already quoted that. I am happy to go over that again, but that is a very clear example where specifically Budget 2012 moved on and provided very helpful, I think, updates on something was announced at Budget 2011, something that is really very important policy for the Government. We are very, very proud of the carbon price law. It puts us out as quite a leader, I think, in Europe to be able to say that we are doing that, and it is something which we-and I do hope the Committee-can be very proud as a strong environment signal within a policy.

Q49 Simon Wright: Could I also ask a point of process? In the run-up to the Budget, what roles do you play with other Departments in supporting and encouraging them to bring forward environmental tax proposals of their own?

Miss Smith: As I answered to Mark, clearly as a Minister I have a range of portfolio areas. Within that, I would have regular conversations that come under these general topics. I would have regular conversations with DECC Ministers and Defra Ministers, for example. There are others in other policy areas, but not for this Committee. In the course of those conversations, of course we cover plenty, and as I also said, it is certainly no secret when the Budget is, so I hardly need often to encourage people to come forward; so there is a conversation on both sides.

Q50 Simon Wright: Were there any Departments bringing forward what we might think of as green taxes, but which were not ultimately carried forward into the Budget?

Miss Smith: I think if I remember rightly, you were with me in Exeter when I spoke to Caroline Spelman about this at a previous Committee session, and I think you went through some material there. There are conversations which go ahead year round, there are ideas which go ahead year round, some in the Cabinet room, some, if you like, in the tearoom, some in the front page of the newspaper. There are conversations in all sorts of ways, and the Budget has to, by its very nature, take a very careful balance across what can be afforded and what can be provided.

Q51 Chair: Just on that point, in our previous report, one of our recommendations was that the Treasury should publish statistics, including in its annual report, on the proportion of environmental tax under both the Treasury and ONS definitions, and it was a great regret to us that when the Government responded to our report, that was not one of our recommendations that the Government gave a response to. In response to the questions from Simon Wright just now, it would be useful if you could tell us whether or not you are starting to provide that measurement on both sets of statistics, because without that measurement, it is really difficult to be able to progress and chart how we are getting along this path of sustainability.

Miss Smith: I do see the point you make, of course I do, and I just take this opportunity to reiterate, the Government wishes to meet the point laid out in the Coalition Agreement. There is no doubt about that, and there is no doubt that there is a-

Chair: But on the measurements?

Miss Smith: -question of measurement to be done. However, it is particularly difficult for me to answer that question for you here today, because as I have already said, the Treasury has not-

Q52 Chair: But this is our sixth report, 2010. It is some time since we published that report. Are we ever going to get a response to it? It is outstanding. It was July 2011 when we did that report. We are still waiting for an answer. It just gets very frustrating.

Miss Smith: The work is proceeding, is being finalised and I hope to be able to update you shortly.

Chair: So when might we expect to have some response formally to our recommendation there?

Miss Smith: I hope to be able to update you shortly.

Chair: Okay, thank you very much indeed.

Q53 Caroline Lucas: I wanted to go back to the North Sea, if that is all right, and the Chancellor said that his aim was ensuring we extract the greatest possible amount of oil and gas from our reserves in the North Sea, but in a sort of introduction to that section in the Budget, one of the objectives of the tax changes that were made is listed to be meeting the UK’s carbon reduction targets. That being the case, have you calculated what the measures in the Budget will mean for increased emissions from burning oil that would otherwise have stayed in the ground? In other words, as a result of the changes that you are making on oil in the Budget, what will that mean for the emissions therefrom?

Miss Smith: I understand the question you are asking. I don’t believe I have that figure. If I may, I will just check with Jonathan.

Jonathan Mills: I think this goes to the point that was being raised earlier about the impact of activity in the North Sea on emissions, and the Committee will be aware that it is worth highlighting here that the system of emissions monitoring and reduction that is in the UK is embodied in the Climate Change Act and the Carbon Budget, and in the international framework is based on where the emissions are territorially produced, so what the emissions in the UK will be is the thing that is targeted by the Climate Change Act, and other countries are responsible for all the emissions in their territories. Helen will correct me if I am wrong, but I don’t think that the modelling suggests that the level of activity in the North Sea in such a highly globalised market, as is the case for oil, would be likely to have an impact on UK territorial emissions.

Q54 Caroline Lucas: Does that mean that the emissions have been calculated or they haven’t been calculated, because presumably you have to calculate what the emissions will be to then work out whether or not it is going to have an effect on the carbon reduction target?

Jonathan Mills: What it is saying is you would not expect the extraction of oil from the North Sea to be having a measurable, significant effect on the amount of possible fuel use in the UK.

Miss Smith: In part that is because the emissions are driven by usage, not by extraction. What we use comes clearly from what we extract plus what we import, broadly speaking, so what we use will then drive the emissions.

Q55 Caroline Lucas: Are you therefore saying that the extraction in the North Sea would simply displace oil and gas that would otherwise be imported? You would not foresee that that would be displacing any other kind of energy generation form, whether that be renewables or anything else? The concern of many in the Green lobby is that by giving a subsidy to more drilling in the North Sea, there will be cumulatively more emissions as a result of that than there would be under the status quo if you had not done that.

Miss Smith: I do not agree with their fear there. I think the point is that the UK is an economy that still uses fossil fuels, clearly still has a demand for fossil fuels. That will not stop in the immediate future. What this Government is doing is of course moving that on towards our emissions reductions targets, which of course we are committed to and I hope to the satisfaction of your friends you are referring to. To get us there to that far longer-term objective, of course we are encouraging other sources of energy to come forward, renewables in particular, through, for example, the measures laid out in the electricity market reform proposals.

Q56 Caroline Lucas: But presumably by choosing to put £3 billion into this by subsidising it, you are expecting to get more out of it than you would do if you were simply importing it as usual. The UK estimates an additional 1.7 billion barrels of oil will be extracted from the decommissioning relief, for example. So it looks to me as if more oil and gas is being extracted under this scenario than would have been the case without this particular measure being put in place.

Miss Smith: I believe we will get more out of the UK Continental Shelf, and as per the reasons laid out before, I think that is very good for the British economy.

Q57 Caroline Lucas: Even if it not very good for British carbon emissions?

Miss Smith: As I say, I believe it is very good for the British economy, but that does not have to affect the statement that you have just made.

Caroline Lucas: No, but there are trade-offs there and that is kind of what we are trying to get at.

Miss Smith: Indeed, there are trade-offs.

Q58 Caroline Lucas: I would suggest that if we don’t even know how many emissions are going to be created as a result of this particular tax measure, then it is hard to know how the Treasury has made that trade-off explicit.

Jonathan Mills: I think the trade-off that you are implying is that the amount of petrol and diesel used in the UK is a function of the amount that we extract from the North Sea. The modelling and analysis that we would do would suggest that, in a highly integrated global market such as that for oil, that is not the case. The things that will be driving fossil fuel consumption in the UK, vehicle fuel consumption in the UK, will be a function of a whole range of other variables related to the overall economic situation, locational choices, alternative vehicle technologies, energy efficiency, fuel efficiency standards for vehicles and so on, and so the amount that happens to be extracted from the North Sea in respect of global markets doesn’t have a material impact, as I understand it, on the levels of fossil fuel consumption and therefore emissions from UK vehicle fleets.

Q59 Caroline Lucas: Imports from which countries will be displaced as a result of the measures announced here and the extra oil that you are going to be getting from the North Sea?

Jonathan Mills: The interactions of different suppliers in international oil markets are extremely complicated, and lots of speculators make fortunes from guessing rightly or wrongly on that, and I wouldn’t want to claim to be able to do that at the moment.

Chair: Caroline, I think Sheryll just wanted to come in on that point.

Q60 Sheryll Murray: Just on the point of the North Sea oil extraction, surely it follows that if we don’t utilise the oil closest to our shores, we are going to have to import that quantity of oil from perhaps the Middle East or somewhere else, and so that would have a higher carbon footprint than the oil that we are producing in the North Sea anyway.

Jonathan Mills: That could be true.

Miss Smith: Yes, I would certainly expect that to be true. A barrel of oil, tangible as it is, has to travel.

Sheryll Murray: That is right, and so really that would mean that doing it the way we are is the greenest and most sustainable way.

Miss Smith: It could be possible to draw that conclusion, and I would particularly just return to the objective that that section of Budget 2012 really laid out and really stress, which is that we considered the changes that would be most effective in unlocking investments in the UK. Forgive me, before you arrived, Sheryll, we were talking about the importance of that up and down the UK supply chain, not only for what you put in a car, but clearly for the jobs that hinge on it in the UK, and I do feel it is particularly important to unashamedly focus on that.

Sheryll Murray: Thank you.

Q61 Caroline Lucas: Would you not say though that if one of the objectives of the Government as a whole is to wean ourselves off fossil fuels, which it is-that is an objective of Government, as stated-then by investing more in our own industry, we are going to have more of a vested interest and therefore more difficulty in extracting ourselves from that than if we continued imports for a shorter time? If we are working towards a scenario whereby we are going to be ultimately replacing fossil fuels with green energy sources, then the more that we are locked into a whole set of processes in our industry, the more difficult it will be to extract ourselves from that.

Miss Smith: There are probably two things I need to say in answer to that. One is to split off gas from oil at this stage, and perhaps you may wish to go into a broader set of questions around gas, which is separately very interesting.

Chair: We will come on to gas in a moment.

Miss Smith: Exactly, I had a feeling we would. So if I may, Caroline, just to finish, the other important thing to say is, don’t forget that one of the major pieces that was announced in Budget 2012 relating to oil was about decommissioning. By its very nature, that is about stopping using oil, and you will be as aware as anybody that the stuff runs out, and in the UK Continental Shelf, we can be fairly clear about when that will occur. It will occur in the coming decades. What we are talking about is putting in place a structure that supports the taxation that we have placed on oil production from the UK Continental Shelf in such a way that allows an orderly reduction, an orderly wind-down in production, certainty in the investment that you might need in order to facilitate to wind-down of production, all of which is geared towards the wind-down of production.

Q62 Caroline Lucas: But if the British taxpayer is subsidising the wind-down of individual rigs in order then to be able to invest in more, because you have just put more investment into this whole field, that doesn’t help us very much, does it? Why is the British taxpayer having to subsidise extremely rich oil companies to decommission individual rigs? Presumably they will use that money anyway simply to go and invest in greater drilling, so somehow painting this as a helpful, green measure does not add up.

Miss Smith: To be fair, I am painting it as a helpful economic measure.

Caroline Lucas: Okay, that is at least good. But why are we subsidising it?

Miss Smith: I think through the decommissioning we are not. What we are doing is putting in place certainty that will allow the orderly decommissioning. It is about the point at which companies can be sure they will gain the relief that they were always going to gain anyway. That is not a new subsidy invented by Budget 2012 and I would be very happy to discuss that in more detail if needed, and you would be welcome to discuss with officials, if required.

The point therefore is that the decommissioning work cannot be said to be a form of subsidy in that sense. The point that you might also then find interesting is about what else those firms always have the choice to do, and as I said at the beginning, they always have the choice to take their capital to Norway, or indeed to Canada, and I do think it is important that we attract capital and investments to the UK for solidly economic reasons, but I do also think it is important that those firms can see that the UK is also a centre for renewables. If you think about the location of the North Sea, it is also a place where you will find that many companies are putting up infrastructure that relates to renewables, which is to be welcomed.

Q63 Caroline Lucas: The very last thing I was just going to say was thank you for the clarification. If it is not going into decommissioning, that is helpful to know. Nonetheless, there is a £3 billion tax break essentially that is going to oil companies, while, in the renewables field, the solar power scheme has been massively scaled back, because there wasn’t enough money in the pot. There are strategic choices to be made here and it just feels that the signal being given out from this Budget is one that suggests that it is business as usual when it comes to fossil fuels and the revolution to renewables simply isn’t really happening.

Miss Smith: Hopefully I could perhaps try to complete the clarification by pointing out the line items that you might have in mind in the Budget. We have a copy here, but I am sure you will be familiar with it yourself anyway. The large number that you see coming back in as a result of the oil and gas measures in Budget 2012 is about revenues that have then been unlocked. It is about the taxation revenues coming back into the Exchequer, and you will find that is one of the largest numbers there in the book. That comes about through having encouraged investment. In my view, that is extremely helpful, and if a tax regime can achieve that kind of revenue, then I think it is on at least some counts doing a very good job, because I think it plays directly to jobs and growth in the UK, which of course we all seek.

Q64 Dr Whitehead: On the impact assessments of the field allowances, there is a statement here, "Carbon assessment: oil and gas production installations produce carbon emissions. However, oil and gas installations are within the scope of the EU emissions trading system". What do you think that means?

Miss Smith: If you will forgive me, I am just checking the item here.

Chair: By all means.

Helen Dickinson: I think this is saying that emissions produced by oil and gas installations will be required to purchase allowances under the EU Emissions Trading Scheme to cover those emissions, and hence there is a cap on the overall level of emissions within the EU trading system.

Q65 Dr Whitehead: This is the emissions they produce in the process of extracting?

Helen Dickinson: Yes.

Dr Whitehead: So is that an implicit indicator that the Treasury has some understanding of the idea that there may be a cap on the emissions that may result from oil and gas production overall and that they may then have to take a view about what those emissions mean in terms precisely of that overall European emission cap?

Jonathan Mills: Going back to the previous answer on this, I understand the specific reference in the impact assessment is to the emissions that are created just through the industrial process of extraction, which then produces the fuel. Where fossil fuels are consumed in the UK, then that would count under the Carbon Budget, as previously described. I may be misinterpreting your point, but what that is not saying is that in some way the EU ETS covers the total emissions that might be associated with every barrel of oil that is extracted from the North Sea wherever it is consumed, because of the basis on which emissions are monitored in the UK under Carbon Budgets, under the Kyoto Protocol. Those emissions are scored at the point in the place where somebody burns them, where the activity takes place, which is the question I think that we were exploring earlier.

Q66 Dr Whitehead: That is rather similar to disassociating the production of guns in the UK with anybody shooting anybody with them.

Miss Smith: If there were an international trading scheme for it, I am sure it would be on it. I beg your pardon, that is another flippant answer, but the point is that in terms of emissions, clearly there is an international scheme in place to trade with the EU ETS, and clearly there is a requirement to monitor those emissions in an orderly way. Indeed, they would have to be measured somewhere, and international agreements bind that, the Kyoto Protocol being one of them.

Q67 Dr Whitehead: Yes. I think my point is that that may be the case, but apparently not in the Treasury.

Miss Smith: Indeed. The impact assessment is a Treasury document, and indeed, by virtue of that, yes, the Treasury recognised that there are emissions from oil and gas installations, as Jonathan has explained.

Dr Whitehead: But forgive me, that is not a tough call to conclude, is it, really?

Miss Smith: I am sorry, I thought that was the question you were asking.

Q68 Dr Whitehead: I suppose I was being a little flippant, but for an impact assessment to say, "Oil and gas production installations produce carbon emissions", is a bit obvious, isn’t it?

Miss Smith: It is better than saying something untruthful.

Dr Whitehead: But that is far as we go, is it, as far as the Treasury is concerned in terms of its understanding of the effect of these policies?

Miss Smith: Absolutely not, and I hope that is partly the point of the Committee session. Yourself, myself and officials have clearly had an exchange on that, which I hope assists.

Q69 Paul Uppal: Sorry, we are going to stick with the oil obsession, but I will try to cut out some of the stuff, so that we can get on to gas as well. The Office for Budget Responsibility has spoken at length about the corrosive effect of high oil prices, and I seek a Treasury view on that, and then I will probably just link that to another question I was going to ask, but I will put it in the round as well. Does the Treasury have any plans to see oil companies shoulder more of the burden in terms of reducing structural deficit and putting their shoulder to the wheel in that respect.

Miss Smith: Certainly, and I would peg that right back to something specifically in Budget 2012, which is details of the fair fuel stabiliser, which I think is very important in answering both of your questions. Budget 2011 set out the genesis of that idea and said that when oil prices are high, it is right that oil and gas companies make a proportionately higher contribution to the public purse. That is what we asked them to do at Budget 2011, and then at Budget 2012, we followed that up with details of the way in which we can make that work for the future. So I think the answer to both halves of your question is that indeed we recognise that the global oil price is certainly high at present, and we have laid out a way in which we hope to use that to ensure that global-or indeed any-oil and gas firms operating in the UK can contribute properly to our economic challenge, to our public finances challenge.

Q70 Peter Aldous: I think I am right in saying that the Government are soon going to be consulting on a package to support further investment in gas. Can you just outline what form that consultation would take, and will you be considering further tax incentives to boost investment in gas?

Miss Smith: The Government has announced plans to publish a new gas generation strategy. That is to be published in the autumn. Its focus will be on ensuring security of supply by setting out any Government interventions that might be needed to look at barriers to investment in gas generation. The Government will be issuing evidence very shortly which would, I hope, speak to industry investors and indeed obviously interested parliamentarians as well, and I know that your constituency will take a very solid interest in it, as will many of the areas around my neck of the woods. We share an East Anglian interest in that matter, which is looking very hopeful, I would say, for our local economy.

You asked about tax measures within that. I think clearly if we are doing a call for evidence, we would like to hear from the industry about what ideas might be out there. I would note something just briefly with reference back to the work done on oil and gas in terms of the field allowances, for example, where we were very open and said we wanted to hear from industry. I think we were particularly open in the way we ran that process. I am confident that the dialogue with industry will continue there. I am afraid it is probably unsurprising that I can’t quite sit here and announce a whole batch of tax policies for you, but I have confidence that that is a robust process for getting in solid views from industry and investors.

Q71 Paul Uppal: How much do the levy exemption certificates for combined heat and power cost the Treasury each year?

Helen Dickinson: I can have a look. Excuse me.

Miss Smith: Excuse me, if you want a specific number, we can ensure we get that to you. Would you like to ask a different question in the meantime?

Q72 Paul Uppal: I will just move on, because it was a leading question. The Combined Heat and Power Association has very much expressed concern that half of the existing capacity will be switched off as a result of removing the levy exemption certificates, and that will then obviously increase emissions and the amount of gas we import. I was just wondering whether that analysis was something that had been taken into account in making the decision on the levy, and whether it was an analysis you shared.

Miss Smith: A lot of discussion of course took place with the industry on that point, on the various matters around combined heat and power, of which LECs is one. I do think the LECs question is quite interesting. It is hard to find a defender of them that says they worked really well. I do think they were an obvious candidate for reform for a number of reasons.

Q73 Paul Uppal: What were those reasons? I know it is slightly unfair, because it was done before you were in.

Miss Smith: Indeed, but I think I would point to the obvious point, that it was not an efficient functioning market, I am given to understand, in those certificates. I don’t believe they ended up doing the function that had been hoped of them. I think also clearly again, taking this right back to Budget 2012, you saw various measures there that seek to absolutely underline our support for CHP in various other ways and to seek for that to be effective and functional.

Q74 Paul Uppal: The Government’s heat strategy says that combined heat and power plant, often powered by gas, can increase efficiency by 30% when compared to separate gas and electricity plants combined. Will you be revisiting that decision on removing the levy exemption certificates or perhaps looking at other incentives for combined heat and power?

Miss Smith: As I say, I think you saw various other items of support in the Budget for CHP. On LECs, Budget 2012 effectively confirmed what Budget 2011 set out, which is that the exemption for CHP electricity supplied by electricity utilities, for example, through LECs, would end. So I think that is a fairly final type of confirmation across two Budgets. Just to briefly give some examples of what then was in Budget 2012, input fuels used to generate heat in CHP plants will be exempt under the carbon price floor, which I think is in fact very much what industry asked for and should be very welcome, subject to-

Dr Whitehead: I didn’t quite catch what kind of plants, sorry.

Miss Smith: I am sorry. It is CHP, Combined Heat and Power.

Dr Whitehead: What kind of plants were they?

Miss Smith: I am sorry-

Chair: No, it is okay. I think we are going to answer Mr Aldous’ original question, which is what the Treasury-

Dr Whitehead: I didn’t hear the answer.

Chair: No, and I think it would be helpful if perhaps you could just speak up a little bit so we can all hear.

Miss Smith: I am very sorry. I am so sorry.

Chair: The acoustics are very bad in this room.

Miss Smith: I am clearly mumbling into my notes. I was saying, just for absolute clarity, hopefully for the record, that input fuels used to generate heat in CHP plants will be exempt under the carbon price floor.

Q75 Dr Whitehead: All input fuels?

Miss Smith: Yes.

Dr Whitehead: Regardless of origin?

Miss Smith: Yes.

Helen Dickinson: Those input fuels used to generate heat will be exempt under the carbon price floor.

Miss Smith: So it is about generation, not origin, yes.

Q76 Dr Whitehead: How do you distinguish generation of electricity from generation of heat in CHP plants?

Helen Dickinson: There is a methodology to do that, which means that those input fuels which are used to generate electricity then ensure that the CHP electricity is on a level playing field with other forms of electricity.

Chair: I think it would be very helpful to have whatever analysis the Treasury are using to calculate that.

Q77 Dr Whitehead: What if you switch the electricity output/heat output depending on the time of the day and according to the heat load?

Helen Dickinson: I think we will need to write you a note with the detail of how that works, but yes.

Dr Whitehead: It would be helpful to explain that, I must admit, yes.

Miss Smith: We are very happy to do that. There is a method for doing that, very happy to share that with the Committee.

Dr Whitehead: Don’t be too technical.

Miss Smith: I beg your pardon, may I just begin to answer Peter’s numerical question? On page 50 of the Red Book, you will see line item 15, which gives you the answer you required.

Q78 Peter Aldous: Just going back over one of the questions, Minister, as I said, the Combined Heat and Power Association express the concern that by removing the LECs you will increase emissions and there will be an increase in the amount of gas we import. Do you share that analysis or not?

Miss Smith: No, I don’t share that concern. As I say, I think the LEC decision was taken over two Budgets with a significant amount of interaction with the industry on that point. It was always a question, as probably so many things are, of trying to weigh up what evidence or viewpoint is presented with what might appear to be robust and certainly what might appear to be affordable as well.

Q79 Peter Aldous: Was there consultation with DECC on the decision?

Miss Smith: Indeed. Yes, again it would be a case of Government discussion on that.

Peter Aldous: That was a view that DECC shared or not?

Miss Smith: As I say, it was a case of Government discussion on those points.

Madam Chairman, I am terribly sorry, may I note I understood we were finishing at 3.45pm on this session, and I wondered if that was your understanding as well.

Chair: We understand it is going to end at 3.45pm and we are almost there, so I would just like Mr Aldous to be able to complete his question.

Peter Aldous: I think I have completed my question.

Q80 Mark Lazarowicz: Just one brief question. I am sorry I was not here, by the way, for the first part of this session, but I was in the main Chamber in the debate.

On this question of the effect of Budget 2012 on CHP, the CHP Association suggests that the removal of LECs would lead to a reduction in the amount of electricity produced by CHP from 7% to 4%, but presumably you must have a different conclusion if there were measures in the Budget. Does the Treasury believe that the Budget decisions would lead to an increase in the amount of electricity produced by CHP or not, and if so, what figure? If you do not have the answer there, could you perhaps supply it later?

Miss Smith: Let me look into that, if there is a data question behind it. I don’t believe there is.

Mark Lazarowicz: The question we have is whether the Budget would lead to a reduction in CHP and the electricity, certainly.

Miss Smith: If I may, let me look into that and come back to you if that is a figure possible to come to, but what I would just note that is really important, I think, to say from Budget 2012 is that CHP does remain incentivised through public subsidy. You have the example I just gave on input fuels being exempt under the carbon price floor. You then have the point about climate change levy rates and the difference made there. I think there are multiple measures therefore in Budget 2012 that seek to assist the CHP industry.

Q81 Dr Whitehead: Can I just briefly follow up the question-and I appreciate we are coming to an end-of the exemption of input fuels for heat purposes and the calculation by CHPA that the ending of LECs is likely to reduce the provision of electricity, reduced from 7% to 4%? Part of that may be a rational calculation on what component of CHP gets a better deal, so if you are the operator of a CHP plant, there are a number of circumstances under which you may decide to produce less electricity and more heat and vice versa, and that depends to some extent on the loads, the demand at any one particular time, but may also depend on the extent to which you get penalised for one and an advantage for the other. Has the Treasury done an examination of that?

Miss Smith: We are certainly well aware of the behavioural point you raise. I think the point of analysis I would refer you to is what industry was telling us, which is that they would prefer the relief to be on heat, so in many ways we were responding to what we were hearing directly from industry on that point.

Q82 Chair: Just for a point of clarity, just finally on this: is it likely that the Treasury could revisit its decision on removing the levy exemption certificate?

Miss Smith: As I said to Peter, as Budget 2012 confirmed effectively the Budget 2011 decision, I would say that clearly much analysis has gone into it over a considerable period of time, and I would say it stands as a decision.

Chair: Okay, fine. I think we have reached the end of the session, so can I say thank you very much indeed to you and to your officials for coming along? I hope we have put the message through that we would like some feedback from the Treasury about our earlier reports, and certainly we shall be taking up the evidence and look forward to the return of further pieces of information that you have promised in the course of this. Thank you very much indeed.

Prepared 14th June 2012