Energy and Climate Change - Minutes of EvidenceHC 138

Oral Evidence

Taken before the Energy and Climate Change Committee

on Thursday 17 May 2012

Members present:

Mr Tim Yeo (Chair)

Barry Gardiner

Ian Lavery

Dr Phillip Lee

Christopher Pincher

John Robertson

Sir Robert Smith

Dr Alan Whitehead

________________

Examination of Witnesses

Witnesses: Trewin Restorick, CEO Global Action Plan, Bex McIntosh, Client Associate, Global Action Plan, James Murray, BusinessGreen, Rhian Kelly, Director, Business Environment, CBI, and Dr Andy Johnston, LGIU/Local Energy, gave evidence.

Q1 Chair: Good morning, and welcome to this session of the Committee. As it is the first time some of you have been before us, or certainly for a while, first of all would you introduce yourselves and say what your interest in the CRC Energy Efficiency Scheme is?

James Murray: My name is James Murray. I am the Editor of BusinessGreen. We are a website that covers the low carbon economy and large numbers of our readers are covered by and engaged with the CRC.

Trewin Restorick: I am Trewin Restorick. I am the CEO of a charity called Global Action Plan. We work with a large number of companies who are affected by the CRC. As part of this consultation, we undertook some research to try to get the views of businesses and organisations impacted by the CRC, and I think that is why we are here.

Bex McIntosh: Hi, my name is Bex McIntosh. I am with Global Action Plan as well. I work directly with partners in the business sector and also the NHS. I am co-writer of the report we are launching today and, as Trewin said, really interested in the CRC.

Rhian Kelly: I am Rhian Kelly, Director of Business Environment at the CBI, so I represent businesses that are directly affected by the CRC.

Dr Andy Johnston: I am Andy Johnston. I work for the Local Government Information Unit. We have been working on carbon trading in the public sector for about four years now, even before the CRC. We work with about 100 public sector organisations on reducing carbon emissions from their estate and so on. The reason we are here is we have been canvassing their opinion about what they think about the CRC simplification and its future.

Q2 Chair: Thank you. Perhaps you could each now say whether you are broadly a supporter of the CRC, or a critic of it, and whether your views have been affected by the changes that have been made to it in the last two years.

James Murray: It is a tricky question. We are broadly supportive of the principles of the CRC. There is no doubt that it has had many of its desired effects. We also undertook a survey of our readers that shows that over 90% of senior executives are aware of it. One of the goals was to drive awareness; that has worked: 60% to 70% have taken concrete actions to try to improve energy efficiency, so there is evidence to suggest that has worked. We are broadly in favour of the principles and accept that it has had some benefits. Our position editorially is that we are highly critical of certain elements of it, in particular the administrative burden that has been placed on businesses, the complexity around the league table and certain other elements that seem not to have had the scale of impact that was expected. The tax change is also a fairly sizeable issue for our readers. We take a slightly more nuanced approach in that there is some evidence, again, that that has worked, in that it has driven a price signal into the market to invest in energy efficiency. But nobody likes paying £1 billion of extra tax that they were not aware of, so there is certainly a lot of opposition to it.

Trewin Restorick: We are broadly in favour of the carbon reduction commitment. I think what we have seen is that it has certainly forced companies to start measuring carbon either for the first time-40% for the first time-or around 67% better. We think that is the essential first step in carbon reduction. We think that the changes in policy have caused problems. The performance league table was set up on the basis that it would become a trading scheme. As it isn’t a trading scheme, the performance league tables have lost their relevance in that context. We think they need to be revised and used differently to drive reputational impact. What we have seen is that about 80% of respondents have not changed their attitude at all because of the performance league table, so we think that needs to change.

All the feedback we get from businesses is that it is incredibly burdensome. What the businesses accept is that they have actually made a lot of the changes now and it has been embedded into people’s job descriptions, so that administrative cost will decrease over time, but there are certain things that are really minor irritants to business that need to be simplified at the moment.

Bex McIntosh: I would add to Trewin’s comments to say that consistency is really important. Definitely with the people that I tend to work with, the uncertainty around the CRC means that they can’t plan for the future and that is incredibly important moving forward. If a decision was made that is stuck to, and it is consistent, then essentially people can plan for the future.

Rhian Kelly: I would say, from the CBI’s point of view, that we think the CRC was originally well intended, that we had agreed that there needed to be some policy to incentivise action on energy efficiency, that it needed to pick up on raising awareness on energy efficiency and also making it easier to make the case for capital to invest in energy efficiency measures. But the design and implementation has made it much trickier, particularly in light of the changes in the 2010 emergency Budget where, without any warning, we took away the revenue recycling. That was pretty damaging to the credibility of the scheme for many businesses and it felt a little bit like the rug had been pulled out from underneath them.

Many of the businesses that we are talking to would now say that they are simply working around it, it doesn’t really make any impact on the decisions that they take and in many cases they are just writing it off as a tax and a cost of doing business in the UK. We think that in a sense the CRC has gone past the point of no return and we ought to scrap it-not scrap it for nothing but we ought to be thinking about what other mechanisms we can put in place that would enable reporting and the reputation elements to remain intact. Also we need to think carefully around the financial driver. We obviously have a scheme now that is revenue raising and we don’t have a scheme that incentivises businesses to change their behaviour and take action on energy efficiency.

Dr Johnston: Our position is that the hard work around the CRC has largely been done. The legal opinions that are required, the installation of AMR, getting to grips with information about your energy consumption, putting in software things, all of that has been done. Most of the organisations that we are dealing with now are themselves finding that they are planning for a steady future with how they manage the CRC. They are broadly welcoming the Government’s suggestions for simplification of the scheme-there is some good stuff in there-but also recognising that those simplifications will add to the cost burden. So the administrative burden will go down but the cost of the CRC will go up, as a result of the simplification, but that is a trade-off that they are willing to examine, the view being that whatever comes out at the end of this should still incentivise emissions reduction. That is absolutely key.

We would like it to be a mechanism that provides organisations with the opportunity to respond flexibly, which arguably straight taxes don’t do. As originally envisaged, CRC was a cap and trade scheme and that trading element allowed organisations to strategically manage their carbon emissions. The simplification suggestions include limited trading, and we wouldn’t want to lose that flexibility for organisations. I suppose primarily we want to build on where we are, rather than simply start again with a whole new regime about how emissions are managed within organisations. It has taken the CRC three years to get to this point where we have reliable data; we are just about to make the first payments into the Treasury. Any new scheme will take at least another three years to get up and running, and those years are lost in terms of emissions reduction. They are all going to be spent on the bureaucracy of setting up the scheme.

Chair: General agreement with that-okay.

Q3 John Robertson: That was quite interesting and it leads nicely into my first question. We have about four of you in favour, although you want some updating, simplification and changes, and one that isn’t in favour who really wants it rewritten. The question will be-and I think I know how one will answer-how effective do you think the scheme has been to date in reducing carbon emissions?

Trewin Restorick: Shall I kick off on our research?

John Robertson: Yes.

Trewin Restorick: We sent out surveys through a whole variety of routes, and we got 108 responses from people who are affected by the CRC. So my answers are based on that 108. You could say that might be a slightly distorted view because they are the ones who might be more interested and more engaged in the whole debate. What our research has shown is that the first stage of the CRC was really about getting businesses to start measuring their carbon. I would say that the research shows that it has been successful in that, and that has been an incredibly laborious process because who owns what carbon emissions was quite difficult to work out. But that has been done. It has been successful in that.

In terms of getting businesses higher up the league table, the things that they were asked to do-like putting in automated meters, getting the Carbon Trust recognition-it did that as well. In terms of carbon savings, our research suggests it hasn’t driven many at the moment. I think you would understand that would be the case, because actually for businesses, their real interest is where they were going to be on the league table, and that wasn’t about carbon savings. The next few years will be really important in that.

Q4 John Robertson: Then my second question should perhaps be part of the first question. DECC’s own survey of participants revealed that only 22% of participants have made more investments in energy efficiency, which I think is what you are saying. Of course, that means there are 78% who think something is preventing them from making the investment. What do you think it is?

Trewin Restorick: I think they are looking ahead to next year, because they know they will go further up the league table if they make carbon savings next year. That is, I think, where they are going to make the investment. What we have seen from the research is that they are putting in place all the things to do that, right down to the fact that the CRC is now embedded into job descriptions of facilities managers, energy managers and CRC managers. Businesses are ready for it and are ready to go. What is holding them back at the moment is the uncertainty that Bex mentioned; the message that we get from businesses, time and time and time again, is they want to know and they want consistency. What they are seeing at the moment from Government is inconsistency. Things like the Feed-In Tariff have built a worry that there is a flip-flopping of policy. So if we can stick to the CRC, make the improvements that we all know are necessary, make the league table more reputational, you will see the carbon savings, and if this Committee was to meet in a year’s or 18 months’ time, you would see that.

James Murray: There is also an inherent challenge with energy efficiency over and above the carbon reduction commitment. I was interviewing somebody recently who is trying to sell energy-efficient products, and his quote was, "We thought we had a no-brainer because it saves you money over time, and we don’t". The reason they don’t is partly to do with the organisational structure of a lot of businesses, where the people making the capital investments on how to improve energy efficiency are not the ones necessarily responsible for the energy bills. They see it as a cost rather than the long-term saving that you realise.

Where that relates to the carbon reduction commitment is one of the common criticisms from our readers-and I think the CBI has made the point as well-that there isn’t the connection to any kind of co-ordinated incentives, so that, yes, there is a cost penalty for using too much energy and that is an effective price signal, but there isn’t much in the way of policy to get you over this upfront cost issue. Obviously, the Green Deal is coming for businesses, but we have heard recently that is going to be delayed. One of the recommendations from our White Paper was that if there are to be reforms or a replacement of the CRC, it needs to integrate a bit tighter with something that can incentivise and get people over that initial cost barrier.

Q5 John Robertson: Ms Kelly, what do you think? You were the one that really spoke most against it.

Rhian Kelly: I definitely agree that the announcement effect in the early days did make a difference to businesses understanding and measuring their emissions. We talked to businesses that, as a result of having to comply with the scheme, are having to think much more carefully about how they managed and understood the energy in the business.

I would also agree with what James has just said. One of the challenges we now find is that because there is no revenue recycling, it is really quite difficult to internally argue for the capital to be made available for an energy efficiency project. One of the risks is those projects are not done, and if people had projects lined up with the revenue recycling aspects of the scheme in mind, the moment that was taken away those projects were taken off the table.

One of the challenges we have inside the scheme at the moment is that the way the league table is designed it is about energy usage, not energy efficiency. If you are a business and you open up a new facility, or you open up a shop or you employ some more people, you will actually go down the league table not up it. We are not measuring the energy efficiency, we are measuring the energy usage and you will get penalised on that basis. Some of the examples of companies we have been talking to are major retailers who say this does not incentivise them to do anything differently. They will work round the scheme. They are still going to do energy efficiency, but it isn’t any thanks to the CRC that they are taking action on energy efficiency. One company is saying that, as a result of what they do across the businesses, each individual facility has its own energy efficiency action plan, but because of the CRC they have to go the extra step and aggregate that up just to comply with the scheme. It isn’t actually changing what they are doing; it is just making the burden of collecting the information harder.

Q6 John Robertson: Then would you like to go back to how it was originally designed, where the revenues from the sale allowances were to be redistributed to participants based on their league table performance? How much of an impact do you think this mechanism would have had on incentivising the uptake of energy efficiency?

Rhian Kelly: It is true that taking away the recycling has taken away some of the incentive for businesses to take action. I guess we are working in a slightly different environment, so while we think that there are opportunities to use mandatory carbon reporting as a form of reporting and reputational drivers that exist in the league table-so take away the league table, implement mandatory carbon reporting-clearly one of the outcomes of the scheme has to be revenue raising. While that remains an outcome of the scheme-and we are not suggesting, given the context, that the Treasury is going to change that any time soon-then we need to work within that. There are a number of ideas floating around, one of which is how you might integrate the CRC into existing taxes, something like the Climate Change Levy, and that is the sort of thinking that we are doing.

Q7 John Robertson: Mr Johnston, local government is probably the biggest employer in the country. How do you see investment there?

Dr Johnston: In answer to your first question about actual emissions reduction data, my answer to that would be it is almost impossible to tell what impact the CRC has had upon that. There are so many variables and there is so little useful data out there that it is very hard to say whether or not investment decisions were driven by CRC or not. Local government and other public sector organisations have all sorts of other targets around carbon emissions and schemes that they are involved in and so on, and whether they were the actual driver for those investment decisions or not I think becomes a bit of a value judgment. We end up going back to the point about the league table and the current state of the data that we have. Even though local government was reporting for many years on the old NI 185, what became clear when the CRC came into effect was that a lot of those data were not-

Q8 John Robertson: Could you tell us what the NI 185 is?

Dr Johnston: It was about energy consumption in local authorities and it was reported back to Government. But the CRC actually made local government realise how inaccurate the data were that they were presenting back. The CRC upped the game around the data, but we are still not at the point where we have really useful data out of the CRC. It will only be after we have the league table running one more or two more cycles that we will know what the real energy consumption is, and so we will know whether or not there has been emissions reduction as a result of the CRC scheme. This is my worry about starting again with a different way of measuring: that we will be back at zero not really knowing what emissions are being-

Q9 John Robertson: Yes, but if we change it constantly do we not have the same problem then? Is there not a time when you have to let something bed in and see whether it works? When you were asked if you were in favour, you all wanted something different, and if we did all that, then that means all of the figures and all the facts that we had before are basically useless.

Trewin Restorick: I don’t think it is about the data collected. The data collected are actually incredibly robust. It is the really stupid things. For instance, one of the businesses we work with wanted to go in and do some work on the database. The person who was to do it had to give their personal date of birth, their personal address and the amount of time-and the fury of this woman when she realised how much time she had to spend doing stuff that, frankly, was pointless. There is a lot of fluff around the administration that could be taken out, but we think the actual data being collected should not change for the reason that you will get the measurements.

Q10 Barry Gardiner: Ms Kelly, carbon productivity is what is really important, isn’t it?

Rhian Kelly: By that do you mean-

Barry Gardiner: You made the point that what we are seeing is the actual carbon emissions, but if you expand your company, if you produce more goods, even if you do that more efficiently, you are going to go down the table instead of up. What we really should be measuring is carbon productivity, isn’t it?

Rhian Kelly: Yes. I have given you one example already, but there are other examples in the, say, water sector where generally I guess they are using a lot of energy and so are tending to come lower down in the league table. That is in spite of any energy efficiency actions that they might be taking. They are not being seen to be credited for it. I think we need to find a way to make sure that you are not penalised in those circumstances, so, yes.

Q11 Barry Gardiner: The table is increasing awareness of emissions, and I think we all welcome that. But actually in the way it is doing it, is it not actually-as is often the case with league tables-at risk of showing companies that are becoming much more carbon efficient as worse performers? Because they have expanded their business, they have used that as an opportunity to increase their productivity per tonne of carbon emitted. Yet, because they have expanded their carbon, they look as if they are worse.

Rhian Kelly: That is absolutely one of the problems. In a certain sense it is increasing awareness, but there was a fairly muted response to the publication of the first league table last year so I am not sure whether you would say, absolutely, it increased awareness. In comparison to existing schemes out there like the Carbon Disclosure Project, which I think has significantly increased people’s awareness and is really a part of-

Q12 Barry Gardiner: On a show of hands, who on the panel thinks that anyone is really taking any notice of the CRC league table? A show of hands?

James Murray: Sorry, the question is whether they are taking notice of the CRC or of the league table?

Barry Gardiner: Is anyone taking-

Dr Johnston: Can I give a qualified response to that? When we got the league table data we did an analysis of them for public sector organisations. We broke them down by sector and by geographical region. At that level, yes, we got a lot of interest. We received 3,000 hits on our website the day that we published those spreadsheets. The big league table, no, I don’t think that had any impact on anyone. But if you make it useful for people then they will begin to use it.

Trewin Restorick: A third of respondents to our survey said that it would drive reputation, but I think what the league table was in the first instance-

Q13 Barry Gardiner: But let us explore that. I am happy to go where you want to go, but let us explore that. Is it giving an accurate picture of what their reputation should be if it is not addressing carbon productivity? That is my point.

Trewin Restorick: What I was going to say was, the first league table was was a list of companies based on a random set of investments that they were asked to make. The automated metering, if you had that you went further up the league table. What we saw was businesses saying, "What do we need to do to get up the league table?" The real key about the league tables is that in subsequent years if they measure-and it can be done in a number of ways-the actual carbon savings, based on turnover or whatever, and it is a good comparator, then the league tables will start to get interesting. Then you will be able to see businesses being compared reputationally with others in their sector-but the first league table, no, because it was a baseline measurement. It didn’t really measure any improvements.

James Murray: If I could just add to that, there is a hugely interesting debate going on about measurements of absolute carbon emissions and carbon efficiency. It is entirely valid and it is important that we measure both in some respects. There is also the environmentally scientific point that the atmosphere doesn’t care how efficient our carbon emissions are, it only cares about the total amount. A lot of businesses will have efficiency targets, but other businesses have also chosen to go down the route of having absolute emission reduction targets because they know if they double in size and emissions only increase by 25%, emissions have still increased by 25%, so there is a problem there.

On the league table point, from a media perspective the initial league table was a failure. It is such a long list and the focus was only ever going to be on the top five at the top and the top five at the bottom. We were ticked off by one company because we mentioned some of the ones at the bottom. Of course, the 100 or so at the bottom were just in alphabetical order, so it was just their bad luck that they ended up at the bottom. I agree with Trewin’s point that-

Q14 Barry Gardiner: In other words, don’t manufacture xylophones?

James Murray: Indeed, yes. Over time it should become more credible, as we get rid of that anomaly and people are really shown on their performance. If the league table stays it does have to be reformed so that that work is done to break it down into sectors, so that we are comparing like with like a little better. There is an argument for saying the league table is one element that really is not having the impact it should.

Rhian Kelly: The other thing to think about the reputational driver is that, when we had the recycling element in, certainly the CRC was something that was discussed around board tables, because they wanted to know both what the cost would be but also what they would get back. With that taken away, the league table doesn’t mean that the conversation happens around the board table and, in fact, we have found it has dropped off boardroom conversations. The CRC might be recognised, they might know the acronym, but I don’t think it is a serious conversation happening around boardroom tables.

Q15 Barry Gardiner: The NAO’s assessment was that if mandatory greenhouse gas reporting is introduced, there could be some duplication with emissions reporting under the CRC scheme. Do you share that feeling?

James Murray: It is a valid concern. It is obvious that if we have both, a lot of companies will be required to report under both and there will be an administrative burden. The counter-argument would be that for years there hasn’t been enough transparency on this. You don’t manage what you don’t measure, so maybe that administrative burden is worth paying. But it is a valid concern that I think Ministers will have to think very carefully about.

Trewin Restorick: But the CRC should be the launch pad. All this effort has gone into what are actually quite robust sets of carbon reporting. So, rather than creating something new and different, the CRC should be the bedrock on which it is built so that the companies have it in place-which we think is one of the strengths -and then that should be extended to whoever mandatory carbon reporting should go to. This should get rid of a lot of the pain of introducing mandatory reporting because you basically already have it.

Q16 Barry Gardiner: Is that generally agreed? No?

Rhian Kelly: No. We would support mandatory carbon reporting, as designed by Defra, because it is actually an internationally recognised way of reporting your emissions. Some of the way in which you report it, under the voluntary guidelines that Defra currently has, is not the same as you are doing under the CRC. So from a business perspective, at this point in time, you are probably going to have to get your data and cut them two different ways. It doesn’t really make sense to be doing that. What we really need is one scheme that is recognised globally, so that we are all measuring carbon in the same way globally, and isn’t complicated. We have said, right from the beginning, we already have in place mechanisms that are recognised so we ought to be using those and not reinventing the wheel for CRC. But also CRC is only one bit of your emissions. The mandatory carbon reporting would actually have a much broader coverage than just what is included in the CRC.

Q17 Barry Gardiner: Has your organisation made those representations to the Minister responsible for cutting business regulation and red tape?

Rhian Kelly: For the last couple of years we have advocated mandatory carbon reporting to Ministers across Government.

Q18 Barry Gardiner: But specifically, given the Government’s drive on cutting duplication of regulation and so on, is this a point that you have made to that Minister?

Rhian Kelly: Yes, and I understand it is being considered.

Barry Gardiner: Considered? Very good; thank you for that.

Dr Johnston: From a local government perspective, I have to say that obviously the arguments about international comparability are not particularly relevant. For local government, or UK public sector organisations, to switch over to a system that is largely driven by international standards would be entirely extra work for no benefit whatsoever.

Q19 Dr Lee: Building on the international dimension, can I just clarify: are these companies and public sector institutions that have signed up offshoring their emissions? Is that their intention? Are you basing it upon a territorial measure of emissions or a consumption-based measure of emissions?

Rhian Kelly: There are some examples I think that have been talked about where to manage your energy usage you might outsource, for example, your data centres. Then if you are a company that provides data centres, you might be thinking about where you want to put them. Intellect has been raising this about how do you manage data centres inside the CRC, because it is clearly high energy usage. There are examples of individual companies who are wondering whether they might want their data centres based here in the UK, or whether they might want to put them in continental Europe because it would actually avoid some of the increased costs.

Trewin Restorick: I can’t say statistically, as we didn’t ask that particular question. The anecdotal evidence that we have is that the first bit that businesses thought about was potentially moving their data centres, as Rhian has just said. That is totally true. We actually haven’t seen that happen because when you talk to the businesses, in terms of their data centres, there are a lot of other important elements that they need to maintain the integrity of their data. In most cases, that has overridden what is still a relatively small financial benefit of moving it out of the country. I can only say that anecdotal evidence, from the businesses we have spoken to, is that they have thought about it. I don’t know of any who have actually done it because of a host of other reasons in their decision making.

Q20 Dr Whitehead: Just in terms of the effect of the original design of CRC, Ms Kelly, you mentioned the question of the difference between those who might be receiving the recycled money and those within a company who were responsible for paying the money in the first instance. How did that work out? Also, from Mr Johnston’s point of view, local government: how did that work out in terms of what was done at the time to make that recycling happen within companies effectively?

Rhian Kelly: Of course the recycling never actually happened, but people were putting forward-

Q21 Dr Whitehead: Yes. Presumably a lot of preparations were undertaken?

Rhian Kelly: Yes. People were putting forward-I know it got to boardroom tables-and discussing what the overall bill would be, how recycling would work, the sorts of projects that could be put in place that would enable the recycling, but also obviously enable energy efficiency projects. I know that when the recycling element was taken away the investment case was a lot weaker on those projects, so quite frequently they were taken away and actually not done.

Q22 Dr Whitehead: In terms of discussion around the board table, they could have been specifically allocated for funding further efficiency projects, for example?

Rhian Kelly: Insofar as at that point in time they could understand what they would get back from the recycling mechanism, yes. But it hadn’t been done before, so I don’t think it was as simple as plugging in some calculations and working out what you would get back. There was a general understanding that if you took action and you went up the table, you would get some money back. Therefore, it was worth taking action to go up the table and to get money back.

Dr Johnston: Yes-a similar point. Particularly with the local authorities in our network, there had already been an internal agreement that if we make money out of participation in the CRC then the energy efficiency unit would get either all or a proportion of that money to invest in further reductions. You would get an invest-to-save cycle going on within the organisation. Those mechanisms were pretty much in place before the Comprehensive Spending Review.

The other side to this was the strategic engagement that that also brought to the party. The last round of events that we had was in July, just before the September announcement. We had a room full of finance directors who were talking about a local authority carbon exchange mechanism, a way of local authorities collaborating together to share more learning and possibly sharing projects and things like that. Immediately after the Comprehensive Spending Review, that just melted away, and, given what else was in the Comprehensive Spending Review, finance directors were far more exercised with other, bigger budgets than the energy one.

James Murray: From our readers’ perspective, there was a lot of focus on it. I can absolutely second that. What was interesting, though, was that it was actually quite longer term because in the initial few years of the CRC as it was structured, those penalties and incentive repayments were actually very small. There was talk that it would only be around 10% of what you paid, and we did some modelling. On a £0.5 million energy bill you were just talking about tens of thousands of pounds, which to a large organisation was not going to make a huge difference. But what they were aware of was that that figure, that percentage, was intended to go up over time, so as you moved into the second half of the decade-I think there was risk modelling done-this could end up being a very, very sizeable penalty and/or a very, very sizeable revenue stream. Rhian and Andy, you are absolutely right: that modelling was going on, and there was a stronger investment case for the large numbers of projects.

Q23 Dr Whitehead: The impact assessment that was done by DECC on the scheme, after the recycling was removed, suggested that the scheme was not a cost to business because costs are balanced out by benefit for Government. Do you agree with that analysis?

James Murray: There was a very interesting report yesterday, which we wrote on, from an organisation called Vivid Economics and Green Budget Europe. It made a slightly parallel point that energy and carbon taxation has a much lower drag on GDP than income, VAT and other forms of taxation. I would recommend it; it is a really, really interesting premise. But it kind of makes exactly that point: that if we do have to tackle the deficit the money has to come from somewhere; you get less of a drag because of the way we import energy, because a higher energy bill doesn’t impact on economic activity in the same way that an income tax or-in the case of businesses-a higher capital gains tax might impact. It actually has much less of this impact on GDP, and the benefit for the overall economy will be stronger.

This group of former Chancellors and people from across Europe have written to Finance Ministers this week to make precisely the point that, as we attempt to tackle deficits, there is a strong case for energy and carbon taxes playing a larger role and maybe income and VAT taxes playing a lower role. Yes, maybe there is some truth in that from DECC, but then no business likes paying a £1 billion tax bill. I think the thing that most angered readers and CBI members was the shock nature of it-the fact that it did come without any signal and that all that planning work was for naught.

Dr Johnston: I would just add to that that, in terms of the cost benefit-returning to my first point-the majority of the costs have now gone. They have been spent. Now is the stage when all organisations in the CRC should begin to see the benefits coming in, of better understanding their emissions and putting in place plans to reduce those emissions and thereby saving on the tax. The shame of it is, by transforming it from the scheme as it was to a straight tax, perfectly good invest-to-save type schemes within local government are not getting the support that they should do-even though they would save local government money-simply because of the stepping down of CRC from a strategic level to a much more operational one that turning it into a straight tax actually did.

That is why we feel, whatever comes out of this process, there needs to be a lot of thought given to how we get the senior management within all of the organisations really engaged in whatever new process comes out.

Rhian Kelly: What we have found is that it is now treated as a tax and so is dealt with in different teams. It just goes into the tax team and the tax team just comply with it as a cost of doing business. It is completely separate then from the people who are even thinking about energy efficiency and whether it balances out the actual organisation of the business. That is the case for some, but we also have examples of where budgets that are being used by, say, the energy and climate change teams in companies are having to take out the CRC before they can even then put forward some of that money for investment in energy efficiency. It may be the case that it balances out over the cost of a company, but I think the way companies work, it is not as easy to say that because different pots of money are used in different ways.

Q24 Christopher Pincher: The National Audit Office report into the scheme tells us that, when it launched the scheme, the Department estimated that the cost to participants was going to be somewhere between £7,000 and £29,000, so quite a spread in terms of administrative cost. Based upon the first year of the scheme, the average cost to participants has been between £30,000 and £36,000, so a significant degree above the top level that DECC anticipated. That works out to some £534 million of costs over the next few decades. DECC have said they are going to significantly simplify the scheme and reduce the administrative burden by up to £337 million over the next two decades. Given that they got figures so very wrong in the first place, do you think their cut estimate is reasonable or is it just a "slash and hope" value?

Trewin Restorick: The evidence that we sought of businesses-also, I am sure you have seen the KPMG report that DECC commissioned as well, which suggests that that £35,000 to £36,000 would go down to £15,500 over the four stages. What we saw businesses do when the scheme was introduced was go through an incredibly laborious process of trying to work out where their carbon emissions were, who owned them. Local authorities were looking at schools and whether they were in the remit; people, like Land Securities, were looking at all their retail outlets and trying to work out where their responsibility lay. There was a huge amount of time and effort spent actually trying to work out how big the size of the problem was. Once they did that and then they saw the penalty part-the penalty regime if they got measurements wrong-they then realised that they had to introduce really rigorous carbon reporting, far more rigorous than they had ever done before, and sometimes to introduce that rigour in places where they had very little control. Local authorities then had to get schools to start reporting on their emissions, which gave them a major, major headache because they knew if they got that wrong then they would be penalised and the penalties were large. I think that is why DECC got the number so wrong-the pure administrative complexity of getting hold of that baseline data was huge.

The evidence that we have from the companies we work with is that has been done, and now it is in people’s job descriptions; they have the automated meter readings; the majority of them are fairly comfortable with the measurements they have provided. That is why we think that that administrative burden will come down, because it is now part of the mechanisms of how businesses operate.

Q25 Christopher Pincher: In your view, there is no need to simplify the scheme because you think the cost reductions are priced in already?

Trewin Restorick: There is some there but, like I said, there is a lot of irritating added administrative burdens within the scheme that I think-and I am sure even DECC would acknowledge this-could be taken out without damaging the core data, which is crucial.

Q26 Christopher Pincher: Is that the view shared by everybody?

Dr Johnston: The only thing I would add is, in terms of the additional complexity at the beginning of the scheme, I don’t think anybody was prepared for the poor quality of data that the energy companies held about usage by organisations captured within the CRC. One of the big learning points that came out of the CRC was the frankly awful state of data that power companies held. Sometimes they really did not know what the energy bill was for a particular organisation or a particular set of buildings. There have been estimates for years. Catching up on that-and making sure of the power company’s view on what your energy use was, and the organisation’s view-took a lot of time, and I don’t think people really anticipated that would be such a huge problem.

Rhian Kelly: It just reinforces the points around the credibility of the scheme, but we are beginning to have very intense conversations with members about the simplification measures that have been put forward. But there are already instances emerging where actually, what has been put on the table going forward is going to end up costing businesses more.

Q27 Christopher Pincher: Surely it also raises questions about the credibility of DECC’s numbers because, as I understand it, they are saying that by simplifying the scheme £337 million can be saved. What you seem to be saying is that a lot of that saving is being priced in already. I guess my question is, what is the real saving as a result of the simplifications that DECC is proposing? Is it £337 million, or is it another number? Do we know? Do you have any idea? Do you have a view?

James Murray: It is immensely difficult modelling to do. It is not easy to predict the way reporting will change. More generally, if you look at carbon accounting, we are at the start of a very, very long journey. It is still quite an immature field as a concept. It has really only been going 10 or 15 years. We are where financial accounting was 150 years ago in many ways. But the history tells us that, as the systems become more automated, as people become more experienced at it, the data should get more accurate and the costs should start to come down. At the moment, a lot of people aren’t doing it on bespoke systems. They don’t have IT reporting systems in place the same way you would for financial reporting. A lot of the big software companies are starting to provide those systems and over time the process should become more automated, more accurate and more robust, and in theory costs should come down. But there is an element whereby this modelling is very, very difficult, and I think whatever figures are put out have to be taken with a degree of caution.

Q28 Christopher Pincher: So costs will come down, they are probably going to come down anyway without further simplification, and we don’t really know whether DECC’s figures are right because of the complexity of the modelling. Given that DECC says that simplification can be undertaken, and one of the activities that they say will remove 21% of the total administrative cost is to remove the requirement for participants to submit a footprint report showing those energy supplies that are covered in the scheme, do you think that is the area where the greatest administrative cost reduction can be seen, or are there other things that can be done to reduce the burden on participants?

Trewin Restorick: What we are seeing is there are lots of people entering this market now to make it easier for businesses to capture this data. In the space of the last year we have seen three major software companies entering this space to help businesses collect data. I think that competition, and-as James alluded to-as it becomes more professionalised and mainstream, will drive down costs. The thing that irritates the businesses we work with is the administrative bit around the side. It is like going on to the Environment Agency website and trying to register and it taking them half a day to register on that. It seems there is an elaboration of the administration that is far too great for the scheme’s requirements. We think that is where the savings will be had, but they are impossible to quantify. I think what DECC says will have to be a guesstimate.

Bex McIntosh: What we have to remember is that all these organisations, the CSR teams, the energy teams, have a finite budget for the year and an increased number of changes means that they can’t spend the money on energy reduction in other places or engagement with employees. They have to allocate that budget more on the admin side, so the more and more changes each year that happen, they can’t use that in actually making concrete carbon reduction. I think we have to be really mindful about that with any further proposals.

Dr Johnston: Again, from a local authority perspective, the big simplification was the reduction in the number of fuels that you would have to allow for within the scheme. Again, one of the interesting consequences of the CRC was local authorities finding out that they had jet fuel in various places and all sorts of weird and wonderful fuels, which they had to find and account for. Bringing that down to four basic fuels really simplifies their job a great deal.

The other big complication was for something like a huge unitary authority that can have some 3,000 different buildings. They quite liked the fact that they could rule out 10% of those under the old 90% rule. Having one single footprint report will present local authorities like that with a little bit of extra work, but again most of it has already been done. The simplification of the fuels is the thing that has been really welcomed.

Q29 Christopher Pincher: Do you think that the simplifications, which the Department is consulting on and proposing to bring in, can be brought in more quickly than it is proposing to do? I think 2015 is the date when it is proposing to make these simplifications. Is that something that can be done more quickly, do you think?

Dr Johnston: The cycles of the CRC do have a logic inherent in them in terms of the way that you measure and then you pay. It is actually quite hard to accelerate that process much quicker without causing-what we have been talking about here-a need to do things quickly and in an area of uncertainty. The 2015 start makes sense given the cycles of the way the CRC works.

Rhian Kelly: Just to reiterate the point I made a few minutes ago, we just need to be careful that we are not adding costs. We might be reducing admin costs but adding overall costs.

Q30 Christopher Pincher: Any other comments on the dateline? Well, can I ask one last question then, and that is one around what the Chancellor has said, which is that if major savings in the administrative costs cannot be found then proposals to replace the CRC will be brought forward. Do you think that the necessary cost reductions can be found, whether it is £337 million over two decades or more? Do you think that is a reasonable assumption?

Dr Johnston: I think it is slightly the wrong question, with apologies to George Osborne for that.

Christopher Pincher: He did not ask me to ask you; it is a statement he made.

Dr Johnston: His starting point is that the Treasury would still want £1 billion a year out of this scheme or something similar, so the correct comparison is the administrative burden as opposed to any alternative that might come forward. We have made the case that the simplification plus the age at which the CRC has reached will result in reductions in the cost of administration but-as you correctly pointed out-it is difficult to quantify at this particular moment in time. Then the question becomes, if you are going to scrap the CRC simply because it can’t demonstrate those cost savings, have we compared that with whatever will come along to replace it, given that we will have to start again with whatever comes along to replace it?

Trewin Restorick: Our view on this is that you wouldn’t really start from here in terms of the CRC, but actually it is now in place. Businesses understand it. It is one of the few policy drivers that is persuading large businesses to do more on energy efficiency. It can be improved, it can be made cheaper, but it will eventually work. That is the point we got to, which is: it is not great but it is good enough.

If you replaced it with a tax, you immediately start asking lots of really difficult questions because the CRC hits a certain number of businesses. Would a tax still just be on those businesses or would you have to broaden it? If you broaden it, what would be the impact on all the small businesses at a time when we are looking for growth and expansion there? How would the small business members of the CBI feel about a sudden tax being introduced, and then how does it fit with the Climate Change Levy and all those other things? It is quite easy to say, "Well, we will replace it with this", but actually that replacement process is going to be fraught with all the same discussions that we are probably having now. You are actually then taking the foot off the accelerator of carbon savings when all the science, and all the imperatives to save carbon, is really quite clear. I think you will make savings-number to be decided-but it is the best show in town at the moment.

James Murray: The main issue with the question of possible replacement-and I think virtually all businesses would agree with this-is that, whatever happens, there has to be absolute crystal clarity and stability hereafter. You can make a case either way: whether you look at the merits of a flawed system but a flawed system that is working so we stick with it and try to improve it slightly; or we go for a simpler carbon tax approach with mandatory carbon reporting. Whichever decision is made, for the first time in several years there really does have to be an absolutely clear message to business that this is what is going to happen, this is the timeline for what is going to happen, and this is the level at which the new levy or the reformed levy is set-a level that, because of our emission reduction targets, will need almost certainly to climb over time.

You talk to a lot of businesses that are committed to the green agenda and green NGOs, and their fear is that if we give the signal that we get rid of this without absolute clarity on what we replace it with, you open the door to another big round of lobbying with people saying, "We don’t need a carbon tax" or, "A carbon tax would be counterproductive". You get into all the debates that we had five or six years ago with the formation of the CRC. It is very, very complex to come down one side or the other but, whatever it is, it does need to be communicated far, far better than it has been in the past.

Rhian Kelly: I should also add some words to this. I am not clear that the CRC is having the impact that we want it to have because I don’t think it is working. I think in a sense we are not having the right conversation. The conversation we ought to be having is: what would something different look like? How would we manage it? How would we integrate it into something like the Climate Change Levy? We need to be looking in much more detail at some of the figures that I am sure Treasury has to understand that. That is the conversation I think we ought to be having, not the conversation about further simplification. From the sense of the initial conversations we are starting to have with businesses, I guess there is consultation fatigue on this issue, and a real desire to get something that works in place and not to keep tweaking the existing system, which they don’t believe is working very well.

Q31 Dr Lee: That leads neatly on to my couple of questions. The future of the scheme-are you saying that you support the continued operation of the scheme? Is that your current position?

Dr Johnston: It is certainly our position. In the public sector the feeling is that we have the hang of this one now. We know how it works and we can get on with working with it. We don’t really want to have to spend the time and the money learning a new system.

Q32 Dr Lee: Even if it is not working?

Dr Johnston: The question about whether it is working or not I think is something that we won’t know until we have had two years’ worth of emissions data, so we can see whether or not emissions are going down within organisations, and the research can be done to see whether the CRC was the driver for that. My earlier point was, we simply do not know what is driving emissions reduction or lack of it at the moment.

Q33 Dr Lee: In view of the fact that it is costing business money, how long do we give it to find out whether it works or not?

Trewin Restorick: You say it is not working, but I would-

Dr Lee: I am just quoting Ms Kelly. Forgive me, I am not claiming to be an expert but I have just heard that it is not working according to business.

Trewin Restorick: According to our research-

Dr Lee: How long do we give it?

Trewin Restorick: -the first league table has forced more companies to measure carbon and measure effectively, which was definitely what it was set up to do. It made them introduce the things that they were asked to do in the league table, such as the automated meter reading. Basically, I think the first league table achieved what it set out to do. How much longer do we give it? Next year and the year after you will see whether it actually drives the thing that those league tables will do, which is measure carbon savings.

Q34 Dr Lee: You are saying 2014?

Trewin Restorick: Yes.

James Murray: There is a very strong case-and I think almost everyone would agree-for further research into this, a really robust analysis of the levels of efficacy. There is a lot of anecdotal evidence that says, "It hasn’t been effective; it’s been too much of a burden; we were doing this anyway". But then I was speaking to a consultant at one of the Big 4 accounting firms and put that point to him, and he said a lot of businesses who say, "We would do this anyway"- well, he dismissed that in a rather agricultural manner. It was, "This is not the case. That is what you would say, but for years previous to this energy efficiency made sense and people still didn’t do it so they did need a push". It is a case of, we do need further research to establish the truth of whether the CRC has given them a push or whether the CRC is just an additional burden encouraging them to report, when they were starting to report voluntarily anyway.

Q35 Dr Lee: How do you tease out whether it is the scheme or whether it is the price of energy that is driving these savings?

James Murray: That is the $64 million question.

Q36 Dr Lee: It is the only question, isn’t it?

James Murray: It is the only question, and it would need modelling that is well beyond my capabilities to understand it. The problem is that everyone-

Q37 Dr Lee: Forgive me; basically, we have a dispute over whether it is working or not, we have a dispute over how we can measure it, and we have a dispute about whether it is actually required or not?

Trewin Restorick: There are two things that you can measure it on in the next year: one is, is the additional cost making it worth while to invest in more things? I think that is a very simple question that you can ask businesses; and the second thing is-that the CRC brings in that nothing else does-has the reputational element, the performance league tables, made any difference to investment levels? If you ask businesses and organisations those two questions, you will quite quickly find out whether it is worth while.

Q38 Dr Lee: So we keep the scheme. What would you want to see changed beyond what is in the current consultation?

Trewin Restorick: We think that a lot of the peripheral admin can be removed without harming the core data. We think the league table should be refined, so that they become more reputationally based. The data are all there, so we think that if, for example, you had a sector-based league table that said, of the supermarkets, of the banks, of the accountancy firms, "This is the league table", then the boards will really start to take notice, because there will be a direct competitive comparison with other businesses. We think it should be the basis, but I do totally take on board Rhian’s point about the international element, for mandatory carbon reporting-and somehow to ease that level of burden by somehow bringing those two things together if that is possible.

Dr Johnston: Speaking not with the local government hat on at the moment but a personal view about the CRC, I would be in favour of a harder look at the cap and trade elements that were lost in the Comprehensive Spending Review. There is a strong logic behind having a reducing cap of emissions on organisations that are in the CRC. What that then means is you have to allow those organisations to trade to find the most efficient way of reducing those emissions. All of that is currently being lost from the way that people think about the scheme, but in terms of a market mechanism it is the most efficient and effective way of reducing emissions.

James Murray: If it is to be kept it is absolutely critical that it be integrated, either formally or informally, with some mechanism for really driving investment. The sole purpose of the scheme is to drive investment in energy efficiency measures and bring down the amount of energy that businesses are using. While it has provided a price signal to do that, it really hasn’t yet got over the barrier of upfront cost associated with a lot of energy efficiency measures. Whether it is tax breaks, whether it is the Green Deal for business-whatever it is there has to be some kind of incentive element either alongside or within the scheme.

Q39 Dr Lee: One final question. Explain to me why not making energy more expensive is not a better way of driving this, instead of a complicated administrative procedure like all of this. Why not just make energy more expensive? Because as soon as you make it more expensive businesses go, "Ah, yeah, don’t want to be spending that".

James Murray: It is a strong economic argument for doing it. It is politically very, very difficult for a Government to-

Q40 Dr Lee: Yes. But the evidence is this is costing businesses in another way. We are just fuelling a bureaucracy; we are not actually fuelling the cars or heating the rooms.

Bex McIntosh: What you are missing out on is the mandatory carbon reporting, and that is the important element that we have seen-that lots of people wouldn’t report unless you had this mechanism. If you just taxed more through the energy pricing thing-

Q41 Dr Lee: Sure. But the point I made earlier is: if I get a bunch of Indians to do my data processing, is that on my carbon return? If I get somebody to answer phones who is sitting in Vietnam, is that on my carbon return? No, it is not, which makes it all rather pointless. If I am sitting up in the atmosphere, it makes no difference whether it is being emitted from Hanoi or from Parliament. What I cannot get from this is that-this is a really complicated scheme, and, don’t get me wrong, I share the desire to reduce carbon; but business is going to have an increased cost, be it from fuel costs or from the bureaucratic cost. Is not the fuel cost a simpler and more efficient way of doing it than this, is my point?

Dr Johnston: It is simpler and more efficient from Government’s point of view. The issue comes up with a sort of elasticity around this. How expensive does energy have to get before it triggers the behaviour changes that we are looking at? We have had experience here with the fuel duty escalator, for example. The economy said, "The price has to be up here in order to change behaviour", and basically Government bailed out somewhere down there because it became politically difficult. This is the problem with just straight tax with nothing else around it. It is very hard for politicians-forgive me. It is so expensive that it triggers the behaviour change that you want, which is why you need other mechanisms within the policy to incentivise people to do things, as well as just punish them through hard economics.

Trewin Restorick: You are right; of course, you are right. All the research said the ultimate driver is price. So if energy prices go up substantially above the rate of inflation, businesses will act. You just have to look at it in a broader tax situation, which is that we should tax the things we don’t want, which is wasted resources, and put less tax on things that we want, which is employment. If you were to do a shift away from things like National Insurance on to energy prices and resource prices, then that is completely the macro picture and that is what you should try to do.

James Murray: Although of course that does then need intelligent and workable mechanisms to deal with fuel poverty issues and to deal with carbon leakage issues that come alongside it, because there is that tangible risk that-on a pure economics level, an academic level-it is an absolutely valid point.

Rhian Kelly: I guess what we would all agree on is that where we are at the moment, people are complying, but I don’t think people are changing as a result of the scheme. What we all agree on is we need policy that works and encourages people to change behaviour, which actually makes the case for energy efficiency. We agree that we need a policy that does that, but I don’t think what we have in front of us today actually does that. We do need to be careful about increasing energy costs across the board, because it could have quite significant unintended consequences. So I don’t think the answer is simply to say, "Well, let’s just ratchet up energy costs for everybody", and everybody will react appropriately.

Chair: Thank you very much for that. We are grateful for your time. We have another set of witnesses to interview, so we have to move on.

Examination of Witnesses

Witnesses: Paul Wilson, DECC, Niall Mackenzie, DECC, Neil Emmott, Environment Agency, and Tony Grayling, Environment Agency, gave evidence.

Q42 Chair: Good afternoon. Thank you for coming in. You have heard what has been said before, so feel free to refer to that in your answers if you wish.

Could you just tell us how many consultations there have been so far on the CRC Energy Efficiency scheme?

Niall Mackenzie: Good morning, Mr Chairman. That is a very good question. Off the top of my head I couldn’t. This will sound terribly bureaucratic in the way I say it, but it depends what you call a consultation. For formal written consultations, I think it is three. But certainly this administration has been very keen to have a proper in-depth discussion with CRC participants. For example, in the course of last year we have published a range of discussion documents and I had a lot of discussions with participants, which haven’t been formal consultations, about how we can simplify and improve the scheme. For example, there were two sets of publications we published last year, which we consulted on, but the formal legal consultation on that was only published last month.

Q43 Chair: Do you accept that constantly making little changes to schemes like this does create extra risk of uncertainty for the participants?

Niall Mackenzie: I do. The main point to highlight, though, is that we have only made two sets of changes since the scheme was set up, although I do accept that the constant discussion about what to change has made people think that there are more changes going on. After the Spending Review announcement, the Government announced an initial set of changes, principally to put back the first year of having to buy allowances, and changing the timing of some of the elements of the scheme in order to create legal space in which to have these discussions. So it was the bare minimum and a very quick win; those are the obvious implications, which were done in November 2010. Then the big changes are the ones we are consulting on now.

Q44 Chair: Obviously we absolved the Department of Energy and Climate Change from responsibility for the Treasury raid on the scheme, which removed most of the incentive and reward and was sort of an act of theft. But I don’t suppose that had unqualified support. I am not asking you to reveal any interdepartmental discussions. Nevertheless, it is not only that: the normally very circumspect National Audit Office say, "Based on experience to date, on-going instability in the design of the scheme will create costs that could be avoided". Do you accept that?

Niall Mackenzie: I read that sentence to be future instability-continuing instability-that is, if we don’t make a decision. If we continue to prevaricate, yes, that will increase costs because people are delaying investment. Just going to the point on the end of revenue recycling, my Secretary of State was very clear at the time that it was a joint decision between the Departments and that it was a measure to tackle the deficit, so I wouldn’t want to hide behind Treasury in this instance.

Q45 Chair: That is very honourable of you, but I do hope that behind the scenes you protested vigorously about this. What assessment have you carried out on the impact that all this instability is having on the participants?

Niall Mackenzie: In terms of a thorough analysis, we haven’t. We are very aware that continuing lack of clarity on the future will have an effect. It is the natural reaction. Certainly-and it was referred to by the previous set of witnesses-my Ministers are very clear that, once we have done this consultation and we have clear messages from respondents, we want to fix the scheme and leave it alone. Regulatory instability is something my Ministers have been very clear that they want to stop. That is why we have taken the time we have-over a year-to get this right so that we can consult people.

For example, I was in Manchester yesterday running a consultation event with participants, and Paul was in Belfast the previous day. One of the key questions we are asking participants is, "Do you want to change it in the way we are proposing, or now that you understand the scheme"-and this is the point mentioned by a number of people in the previous session-"would you rather just stay with the scheme you understand?" We will be genuinely guided by participants.

We have seen a range of areas where we think we can simplify the scheme-particularly with the end of revenue recycling-and a lot of the complexities in the scheme arose because we were trying to make it absolutely fair in how money was passed back-that it was passed back to participants. Now that we are no longer doing that, we can remove a lot of the complexity; perhaps be slightly less fair but make it simpler. That is the main driver of the consultation. So we are asking participants, "What is your preference in the way we do this?" Also I think one of the questions from the Committee, "What about the speed of change?", we are asking people as well. We are very conscious that when the scheme was first introduced, it was a complex scheme for people to get their heads round. A lot of people were confused by the speed with which it came in. If we rush change too quickly that might increase costs, so we will be guided by participants as to the speed of change and what they want to change. We want the benefits of the scheme to be retained and the bureaucracy removed.

Q46 Chair: Once this round of consultation is concluded and decisions are made, after that do you anticipate a period of stability?

Niall Mackenzie: Yes.

Q47 John Robertson: Ms Kelly from the CBI said the system was well intended but the credibility was damaged. She was basically not in favour of the system, as it needs to be replaced with something else. How do you feel about that comment from such a large body of business?

Niall Mackenzie: This has to be seen in the context of: this is a new tax. No business is going to vote for a tax if it can be avoided. When we talked to participants-including members of the CBI-the energy managers and the middle-ranking staff, who are trying to do their best to reduce energy costs, were very much in favour of the scheme. Quite often they tell us about incidents where they have been paying the energy costs of warehouses that they no longer own, or are meant to be closed, and Energy does not have a grip of. But they can’t speak out in favour of the scheme, or improvements in the scheme, because the CEO and the Finance Director are taking the view, "We don’t want to pay this tax we have to pay, that businesses of a smaller size do not have to pay".

Q48 John Robertson: Of course nobody wants to pay tax. That is human nature, but people do realise that they have to pay it to get a service. Do you agree with the NAO’s analysis that, taking into account the expected price allowances, the scheme will have a net cost to business of £5.75 billion by 2030?

Niall Mackenzie: The NAO figures are all taken from our analysis, so I wouldn’t dispute them. The whole point of the CRC, though, is that we regard it very much in two chunks. I see business wouldn’t. There is the taxation element and then there is the behaviour change and administrative costs. We are not going to change the tax rate. That is up to the Treasury. They set the tax rate. We are trying to reduce the administration costs, and perhaps I should make clear as well-in the context of the previous witnesses-that all the analysis that we are talking about in our impact assessment about energy savings is cost-effective, i.e. the cost of installing equipment is more than compensated within two to four years by the return in lower energy costs.

We are not expecting vast capital equipment expenditure in the early days under the CRC. We are expecting very simple things, like DECC itself has done. You can achieve a lot just by not having the heating on at the weekend if you don’t have staff in the building, and it is little things like that that make a big change. We know that, but that isn’t happening with a wide variety of participants in the CRC.

Q49 John Robertson: What impact will the decision not to recycle revenue have on business? For example on their international competitiveness, if it increases their cost relative to other EU Members? Something a wee bit topical these days.

Niall Mackenzie: Yes. Again, you have to remember who is in the CRC. It is not energy-intensive industry that is subject to the EU Emissions Trading System and climate change agreements. There has been some overlap that the simplification proposals are seeking to remove, so those industries are not covered if they are in another scheme. These aren’t industries that are highly energy intensive. On average, the commercial participants have turned over about £1 billion a year-an average annual electricity spend of between £3.5 million and £5.5 million a year. Against this you have to set administration costs of about £8,000 a year-we have checked going forwards, and that is an estimate-and their purchasing allowances of about £500,000.

These costs are relatively small in the scheme of things. I don’t deny these could be the costs that break the camel’s back, but that is not what industry is telling us. In our discussions over the past year no one has said to me, "This level of taxation will put my company out of business, will make us relocate". They have complained about it.

Q50 John Robertson: The end of your previous answer-when I asked you about the £5.75 billion, which must mean an impact on a great number of, particularly small companies. This will have an increasing effect, will it not, as time goes on, as we get more and more into the process?

Niall Mackenzie: Again, the £5.5 billion has to be seen over the timeframe of 20 years. This is an annual cost to the average commercial participant of £500,000.

Q51 John Robertson: Hold on a second. You just told me in the previous answer that the costs were not that much, and that in the case of some companies they were down under that. So if it is a company of that size and that is a big expenditure to them-and you are saying it is not much-then this kind of money to a company of that size will be a lot of money in the future.

Niall Mackenzie: But this is for 2,000 companies. This is estimated averages, so it will vary from company to company. If your turnover is £1 billion a year, I suggest £500,000 on tax is not going to put most companies out of business.

Q52 John Robertson: But the smaller companies, it will, won’t it?

Niall Mackenzie: There are no small companies. You have to use 6,000 MW hours a year of electricity to get in the scheme. These are all big companies, large energy users. They may not have a lot of employees, some of them, but they have quite a large turnover.

Q53 John Robertson: Has DECC carried out an impact assessment on the participants’ competitiveness?

Niall Mackenzie: No.

Q54 John Robertson: Why not?

Niall Mackenzie: Again, we have used the average cost increases and taken the view that that is not a significant issue. We have done a lot of analysis.

Q55 John Robertson: Surely it is an issue to these companies?

Niall Mackenzie: It is not an issue. In terms of coming back to us, they are not saying competitiveness is an issue in relation to this. This is not what they are objecting to.

Q56 John Robertson: I bet you they will after they have read what you have just said. Surely the No. 1 priority for any company is its competitiveness, and you are saying it is not a problem for them.

Niall Mackenzie: But this scheme, the way it is intended to operate, is to improve competitiveness. We are talking about cost-effective energy efficiency measures. These are energy efficiency measures, which more than pay for themselves within a short period of time. If companies take up these measures they not only reduce their tax liability under the CRC, they improve their competitiveness and are better than their European counterparts who aren’t facing the similar incentives.

Q57 John Robertson: Yet the CBI representative says she wants rid of it and she wants it replaced by something else.

Niall Mackenzie: Yes.

Q58 John Robertson: She is wrong, and you are right?

Niall Mackenzie: She is entitled to her view; she is representing her members. All I am saying is-

John Robertson: The same members you are talking about that do not have a problem?

Niall Mackenzie: The same members who object to the tax and the bureaucracy. They don’t object to the intention of the scheme. I think that is why we are consulting, to see how far we can reduce the administrative costs. But the Government has been quite clear that the tax take is going to stay the same.

Q59 John Robertson: This Government has not been adverse to changing taxes. Have you asked them to change tax?

Niall Mackenzie: You would have to ask the Chancellor; I can’t-

John Robertson: I am asking you; have you asked him?

Niall Mackenzie: It is not for me to ask the Chancellor questions.

Q60 Barry Gardiner: Mr Mackenzie, Mr Wilson, how long have you been involved in the design of the CRC?

Niall Mackenzie: It may feel like a lifetime but I took over in January 2009, in terms of CRC.

Barry Gardiner: Mr Wilson?

Paul Wilson: July last year for me.

Q61 Barry Gardiner: July last year. So, Mr Wilson, you post-date the Permanent Secretary’s letter to us on 28 February 2011, but Mr Mackenzie you don’t.

So, Mr Mackenzie, you are one of the people whose advice on the design of the CRC has been consistently to a high standard and evidence-based; is that correct?

Niall Mackenzie: I don’t recall the detail of the letter, but if that is what it says, I want-

Q62 Barry Gardiner: That is what the Permanent Secretary said to us in her letter, when responding to my question about why the scheme had been designed. This was a question on 24 November, as to why the scheme had been designed in such a way that Mr Wynn Owen told us that he had no reason to believe that the changes we have made-taking £3.5 billion out of it-would make any changes to the carbon reductions. Can you shed any greater light on that?

Niall Mackenzie: Yes, and Paul may want to add. Again, it comes down to how the scheme is designed. They are cost-effective energy efficiencies, and our economists-I think economists generally-would say if everyone behaved in theoretical terms, people would be investing in those energy efficiency changes and saving the companies money. In the real world, companies obviously have a lot of pressures in terms of where they invest their money and when they choose to make that investment.

Barry Gardiner: Sorry, but-

Niall Mackenzie: I am getting there. I do apologise if I am taking time. So the whole point is that the drivers of the scheme are not entirely based on the tax, and this comes back to some of the other questions. Price alone does not change company’s behaviour. Energy prices have gone up a lot in recent times. The Climate Change Levy taxes energy use, and it has done for 10 or so years, and still companies and the public sector are not taking up cost-effective energy efficiency. So removing the revenue recycling is not going to affect the carbon take.

Q63 Barry Gardiner: Indeed. So why was it designed in a way that we could have got £3.5 billion out of it in the first place but we did not bother to?

Niall Mackenzie: Sorry, why was the revenue recycling originally designed in? Two reasons: one, the previous Administration were very keen to make sure that there were lots of accusations of stealth taxes and didn’t want this to be seen as such; therefore, it was going to be revenue neutral. I think there were commitments by a number of Ministers about the revenue neutrality during the consultations on CRC. The other reason was, to help with revenue, the Chancellor provided an incentive. As some of the previous witnesses said, it was thought it might help with people’s business cases.

One of the problems we found during the range of consultations, 2009-10, was that people were not quite sure what carbon price to use in their investment scenarios. Was it just going to be the difference between what they paid out and what they got back? Was it just the reward they thought they were going to get? So that is a side benefit-and it is entirely a side benefit and not a factor in the decision-of ending revenue recycling, because there is no doubt about what the price impact is.

Q64 Barry Gardiner: Thank you very much. We will lay that one to rest now. According to the National Audit Office, the scheme is only going to deliver approximately 2.6% reduction in emissions from participants. Is that an adequate level of progress for all the hassle it has caused?

Niall Mackenzie: Ultimately that is a political judgment as to how much you have to do to get the results you want.

Q65 Barry Gardiner: Our total aspiration has to be a great deal bigger than that, doesn’t it?

Niall Mackenzie: Yes. I don’t recall the 2.6% figure, but 20 million tonnes is what we are projecting currently for the non-traded benefits, i.e. outside the electricity reduction. The actual carbon reduction from reduction in gas and other fuels, between now and 2030, I think is 31 million tonnes, including the electricity as well. But that will not be reflected in the-

Q66 Barry Gardiner: By the end of the Third Carbon Budget period what is the total-

Niall Mackenzie: By the end of the Fourth Carbon Budget period, 2027, we are projecting I think 32 million tonnes in total. But the actual carbon budget benefit will be 21 million tonnes because the electricity benefits are within the EU Emission Trading System cap, so in carbon budget terms it is 21 million tonnes between now and I think 2030, but 2027 is the end of the Fourth Carbon Budget.

Q67 Barry Gardiner: The end of 2022-you don’t know the figures for that?

Niall Mackenzie: I don’t off the top of my head. I will come back to that if I may. Someone will find that figure for me.

Q68 Barry Gardiner: That is fine. In its impact assessment in 2010, the Department identified that redistributing the proceeds from allowance sales to participants-based on their league table performance-would play an important part in incentivising take-up of the efficiency measures. So why hasn’t the Department assessed the impact of removing revenue recycling on participants’ behaviour?

Niall Mackenzie: The main reason is that the decision to remove revenue recycling was not based on behaviour change of participants. As Ministers made clear at the time and subsequently, the decision was to fund the deficit. One of the things we have looked at, in reappraising the simplification, is what changes that has made to our assumptions. We haven’t specifically taken out the issue of revenue. It is like when you said, how much of the changed numbers has been due to that? Again it is quite difficult to do, and we would rather stick to the areas where it is easier or there are assumptions that were set out clearly in the previous impact assessment, which we can update now. It is not going to change our view of whether we remove revenue recycling or not, so I did not quite see the purpose of doing so.

Q69 Barry Gardiner: Does that mean you would be-I suppose, the phrase would be-"fighting shy" of finding that there had been a deleterious impact from doing that? Would it not be more transparent just to say, "Let’s run the calculation; let’s see what the impact has been"? If in fact it has reduced the effort and the commitment to reduce emissions, then we need to be upfront about that.

Niall Mackenzie: I don’t think it is fighting shy. It is a matter of prioritising the limited resources we have that-

Q70 Barry Gardiner: To more be politically advantageous?

Niall Mackenzie: In terms of even managing my own team, I think it is probably more fruitful to focus on things that will inform the design of the scheme rather than finding out more about decisions that have definitely contained-

Q71 Barry Gardiner: Okay, well, let’s look at some of the information that you found out in your survey. Your survey of participants had 22% who said that the scheme resulted in more investments in energy efficiency; 78% said it hadn’t. What are you doing about the 78%?

Niall Mackenzie: Again, is the glass half full or empty? A figure of 22% in one year is quite good, I think. We have changed behaviour in 22% of the target market within a year. Quite a lot of retailers would be quite happy with that return on advertising, so-

Q72 Barry Gardiner: It is not really advertising though, is it?

Niall Mackenzie: Sorry, not a particularly good analogy, perhaps. But 22% is not a bad figure, and I think this is only the first year. Again, as some of the previous witnesses were saying, a lot of the reputational drivers happen over time. The first league table talks about history, effectively. This October’s league table and the one next year will show how people from the common baseline have changed their behaviour. If you ask me in 18 months or two years’ time and we still only have 22% changing behaviour, then we will be concerned, and I will be concerned.

Q73 Barry Gardiner: We will maybe come back to common baselines in a minute. Yes, Mr Wilson?

Paul Wilson: Can I add to what Niall said there. It may be that this comes back partly to the fact that all of the savings we are seeking to incentivise are cost effective.

Barry Gardiner: Sorry, I did not catch that.

Paul Wilson: It may be that all of the energy savings that we are seeking to incentivise with the CRC are cost effective. For example if the robust reporting in the CRC has helped an organisation to realise that, in this particular area, they are using far more energy than they should, maybe they then look at that and think, "Well, of course, it’s in our own interest, regardless of the CRC allowance price, to save that energy". They might not give the CRC credit for that, but it may have been a factor in terms of helping them identify that there was that possible saving in the first place. That may be a factor in why it was 22% and not higher.

Barry Gardiner: I think I understand that.

Niall Mackenzie: I think the point is, the survey data are the best we have, but there is a suspicion that not many companies are going to vote in favour of a tax.

Q74 Barry Gardiner: Your impact assessment also showed a net economic benefit of £4.9 billion. What reliance can be placed on the assessment, given the uncertainty about future energy prices, the lack of evidence about the take-up of efficiency measures and so on? This is really finger-in-the-wind stuff, isn’t it?

Niall Mackenzie: I think it is a bit more than finger in the wind. We have spent a lot of time trying to do the best we can. I am not going to say to you that I am guaranteeing it is that figure. If it was I might go and work in the City and make some investments on the basis of that, if that was accurate.

Barry Gardiner: On a probability basis-

Niall Mackenzie: It is the best we can do.

Q75 Barry Gardiner: No, I understand that. I am not trying to say, yes, it is definitely going to be £4.9 billion. But if you were to give me a probability range here, which is based on the calculations, what would it be? Is it a 70% change of £4.9 billion, or is it a range between £3.5 billion and £6 billion? Give me a feel for it.

Niall Mackenzie: I am sure we have a range, although I am not sure I have it with me. The main point I would make is that part of the reason in publishing this is to get people to challenge us on it and provide evidence on how we can improve it. That is why we are asking quite a lot of questions about the impact assessment. I know it is a bit catch-22 for most of the participants because the commercial ones want to get on and make their money. They don’t want to spend their time checking our figures. But we are trying our best to get the best figures we can. [Interruption.]

Q76 Barry Gardiner: Have they just been passed to you?

Niall Mackenzie: No, unfortunately, that is the answer to your previous question. By the end of the Third Carbon Budget, the non-traded savings will be just under 10 million.

Q77 Barry Gardiner: 10 million what?

Niall Mackenzie: Tonnes of CO2, so it will be another 11 million in the Fourth Carbon Budget.

Q78 Barry Gardiner: That is 33% up on what you projected in your original June predictions of 2010.

Niall Mackenzie: If you have it in front of you that must be right.

Q79 Barry Gardiner: That is what Mr Wynn Owen told us. He said it would be 7.5 tonnes of CO2.

Niall Mackenzie: He must have, yes. It must be more then.

Q80 Barry Gardiner: Given the inherent uncertainties that we talked about, that places a premium on monitoring and evaluation, yes?

Niall Mackenzie: Yes.

Q81 Barry Gardiner: When does the Department intend to carry out its first evaluation?

Niall Mackenzie: The survey KPMG did for us was our first stab at that, and I think we will be carrying on for every year of the scheme. One of the things we are looking at, at the moment-and the NAO Report did highlight it-is that we don’t have an evaluation plan in place yet, which is regrettable. We should do. We should have it in place before the scheme starts. We haven’t, primarily due to resourcing. One of the issues that we are wrestling with at the moment is just how to evaluate some of the discussion touched on in the previous session. How do we demonstrate that any changes are due to the CRC as opposed to what else is happening in the landscape? That is what we are currently working on. Certainly, my hope is that we would publish plans as to how we propose to tackle that. To ask people’s opinion we will use a combination of our own resource and academics, to try to measure that, and the helpful evidence that the Environment Agency pick up direct from participants.

Q82 Barry Gardiner: Basically what you are saying is, "We don’t have an answer to that yet, but we are working on it"?

Niall Mackenzie: Correct. Yes.

Q83 Barry Gardiner: Have you carried out any sensitivity analysis on the impact of reducing or increasing the price of carbon allowances, from the initial level of £12 per tonne?

Niall Mackenzie: I recall we did some when we first started looking at allowance prices. We have done less of that recently. My recollection is that-I think as one of the previous witnesses said-investment in these cost-effective energy efficiencies isn’t that price-sensitive, because normal economic models still work. If people were following economic theory they would be making the investment now, so how high you have to make the tax to change people’s behaviour is very difficult to say.

Q84 Barry Gardiner: What you are saying here is manna to my ears-if only you would say it to your friends who are running the Green Deal. It might be an idea to say that to them: that the simple arithmetic does not always drive behaviour. I say that in passing, but it seems to me that what you are quite accurately articulating in this sphere needs to be rammed home in the other. Would you not agree?

Niall Mackenzie: I don’t think I would agree, but then I am not up to speed with the Green Deal. The other thing to bear in mind of course is that the Chancellor will have a key role in the setting of the price going forward. Obviously we will want to discuss with his officials what view he has on what is the right price, but I don’t anticipate him reducing it below £12.

Q85 Barry Gardiner: There is one other thing that I think is fairly important and it goes to what you were talking about-setting a common baseline. How is Parliament going to assess how cost-benefit estimates have evolved when your impact assessments, between 2010 and 2012, are not directly compatible? They are based on different timescales: one a 15-year period starting at 1.1; one a 14-year period starting at another and lasting for 20 years. That just makes people think: one, why have you changed it; and secondly, why have you changed it in a way that there is such lack of transparency about what is going on?

Niall Mackenzie: I think there is complete transparency because you are citing all the elements, so you can see what we have said.

Q86 Barry Gardiner: No. I mean transparency in terms of an impact assessment; if I am looking at this, I cannot compare apples with apples, can I?

Niall Mackenzie: No. That is partly because the methodology we are using, Government impact assessments, is comparing the change in policy with the status quo and the status quo obviously has changed. So in the latest impact assessments we are comparing against the current CRC, whereas in the previous impact assessments we were comparing against a world that didn’t have a CRC. So we are not consulting on whether we scrap the CRC, because then the counterfactual would be the same as 2010 and then you would have a legitimate concern about time periods. Some of the fundamentals have changed, so it is in the interim Government guidance on our standard behaviour on which time periods we use, and so on.

Q87 Barry Gardiner: I don’t think the NAO would accept that answer because they have been quite critical about this. The 2010 impact assessment assumed that the scheme would last for 15 years. It measured capital and administrative costs over a 15-year period and benefits over a 24-year period. The 2012 impact assessment assumes the scheme will last for 14 years, measures administrative costs and benefits over a 20-year period but capital costs over a 14-year period. Why?

Niall Mackenzie: This isn’t a very helpful answer, but Treasury guidance on what we should be doing changed, so we followed it. I am not an analyst, but I guess the tension we always have is, do we follow exactly the same methodology as the previous one, so people can compare apples with apples, or do we change it to the current one in Government, so that they can compare our impact assessment with the Green Deal impact assessment in other parts? So with constant changes, the way we do analysis, updating and attempting to improve it, is not any kind of attempt to obfuscate if that is possibly the result. It is to try to make it more accurate, more consistent and more up to date.

Barry Gardiner: I don’t know if the Treasury has a get-out clause in these things, but it seems that you have used it on a number of occasions in your evidence to us this morning. But I take your evidence at face value; thank you.

Q88 Christopher Pincher: Staying with the beauty of numbers-just some different numbers. The Environment Agency is responsible for the administration of this scheme. But in the financial year 2011-12 the budget for the administration of the scheme was not agreed until November 2011, which is more than half way through the financial year. Mr Mackenzie, is that normal practice?

Niall Mackenzie: I would start by saying we did agree numbers. We did not have a signed letter. I had not written the letter to Tony setting out the absolute budget, not only for CRC but the other areas I am responsible for that the agency administers, the EU Emissions Trading System and climate change agreements, which is in the scheme. We are just getting them to take over administration from ourselves, so the final issuing of the letter was delayed for those administrative reasons. I am not defending it. We should have done it earlier. But there wasn’t a lack of financial control. We just hadn’t sent the letter. The Environment Agency still submitted monthly actual spend and forecast, invoiced us quarterly in arrears, so we are not giving the agency money in advance of need. The financial controls were there. They were not nailed down exactly in the way they should be in this instance, in terms of having the funding letter set out.

Q89 Christopher Pincher: For a period of time-and I am not clear on what that period of time is-there was a letter in the post, but it wasn’t posted and received. How long-

Niall Mackenzie: Over a six-month period we were discussing the final drafting of the letter to cover all the issues, which I wanted to make sure were agreed: what the agency was going to do with the money the Department was giving it, when they were going to do it by and how they were going to account for it.

Q90 Christopher Pincher: But doesn’t that mean that, because the spend was not nailed down, therefore, it is not possible to baseline and, from that baseline, analyse spend and efficiency against that spend because you weren’t absolutely clear exactly how much you were going to have in the final letter when it was signed?

Tony Grayling: If I could add to what Niall has said, there is quite close supervision of spending and-as Niall said-we report monthly and we invoice quarterly. But the money that is given to us by the Department is only a part of the money we have for running the scheme because most of it is raised through fees on the participants in fact, so they have oversight of our work in that respect too. There is constant and close communication between our staff and the folk at the Deputy of Energy and Climate Change. There was no disagreement during this period. It is just that we were working out certain elements of the funding settlement.

Niall Mackenzie: For example, if there is an extra piece of work-particularly in development and changes to the scheme-Treasury rules quite rightly say that participants can’t be charged for development of new thinking. If we want the agency staff to help us with it, we have to pay for the agency staff. So until I have told Tony exactly what I want done and how I want it done, and he tells me how much it will cost in terms of his staff time, we can’t finalise the figures. So the figures sometimes change during the year.

What should happen is we should have the letter signed off before the start of the financial year, and amend it if other things come up, but because it took time to sort out all the bells and whistles, it was delayed. We have now done a position.

Q91 Christopher Pincher: What was the difference, if any, between the budget numbers in November and what they originally talked about in April?

Niall Mackenzie: When we were talking to the National Audit Office, one of the issues was if we could prove what the differences were because figures moved around quite a bit. I don’t have that figure here. It wasn’t significant. It would be-I don’t know-£10,000, £20,000, something like that, in relation to CRC. The principal reasons for the delay to the letter were drafting around what work we wanted done and climate change agreements.

Q92 Christopher Pincher: With the CRC?

Niall Mackenzie: With the CCA-so a completely separate scheme, which the agency has agreed to take on and administer, because I am confident they will administer it much more efficiently and effectively than DECC has hitherto, and we are at a hiatus in that scheme. We were still at that point discussing the scoping of the work, and that is what led to the delay.

Q93 Christopher Pincher: It appears that the EA is relatively efficient, because in 2010-11 you collected £5.4 million from participants and you ended up with a surplus of £1.8 million; what are you going to do with the difference?

Tony Grayling: That is a snapshot, actually. We anticipate that by the end of the first phase of the scheme, if not in balance we will be close to balance because from this year we will be depreciating the financing costs of the set-up for the IT system, which was funded through grant money from the Department but needs to be recovered from participant fees. In fact we are slightly under-recovering, in terms of the level of charge on a subsistence annual basis, because there are two elements to the fee participants pay. There is a registration fee and then there is an annual subsistence fee. So that £1.8 million figure is correct, but it is only a snapshot, and by the end of the first phase we expect to be near to balance.

Q94 Christopher Pincher: I understand it is a snapshot. I also understand that the £1.8 million, or some of it, will be used to finance the agency’s registration audit activities, which you just mentioned. What are those activities, because, if there is a one-off registration, what ongoing registration activity do you have?

Tony Grayling: There is only one registration. But, you are right, we have ongoing compliance activity. Neil, you are the expert.

Neil Emmott: That is right. So participants were checked when they came into the scheme, up to a certain point, and then a number of improvements were made as a result of that. But also there was then a flagging of which had presented the higher-risk participants than for subsequent compliance audits. So when those participants subsequently report and we want to check their data-obviously you can’t do that in-depth all at once-we are going through a process of compliance audits. The higher-risk participants are the ones who are audited first in that process, and the intention is to audit all of their reporting data in the rest of this first phase for all participants, but doing the high-risk ones first. So the fact that we have some carry-forward charge income partly covers that ongoing audit activity.

Q95 Christopher Pincher: Do you feel that your cost estimates are accurate and there is no need to revisit the way in which you have done your estimating?

Tony Grayling: There is a constant need to review them because you have to estimate the number of participants you are going to have in the scheme, in advance of the scheme being set up, and, to a lesser extent, estimate what cost of administering the scheme is going to be put on the agency as a consequence, although we are quite experienced at that side of it from having run a number of these schemes. So we would anticipate, in light of what comes out of the simplification consultation and the forms that may ensue, that we will need to revisit the level of charges to ensure that we are recovering the right amount of money, but not too much and not too little.

Q96 Christopher Pincher: Because in 2011-12 you estimate that you will collect £1.6 million from participants. That is a very different sum from the sum you collected in 2010-11. Therefore, do you think in the future you are going to have to charge more-or where are you going to get your extra spending from-or do you think that that amount of money is all you are going to need to administer the scheme?

Tony Grayling: As I have described, we think that is the amount of money we will need to end up in balance at the end of the first phase of the scheme, which ends in March 2014. Of course, we will then have to look again at what level of ongoing subsistence fees we may need for future phases of the scheme to be in balance. But the reason much more money was raised in the first year was the registration fees.

Q97 John Robertson: The registration has been an absolute shambles, hasn’t it? Turning to your figures, 42% of the participants had errors in their registration. Why so high?

Tony Grayling: First of all I would like to say there was a very high level of compliance with the scheme, in the sense that 97% of eligible organisations had registered by the due deadline, which we regard as being a very high level of compliance. You are however also correct that quite a number of them made registration errors. There were a variety of reasons for that, and perhaps the most common is not understanding how to register the group structure of their organisation. That is one of the issues that is of course being looked at, as part of the simplification proposals, and hopefully it will not recur, partly because the organisations themselves will be more experienced next time round but also because if the simplification proposals go ahead, as they have been put, then there will be more flexibility for-

Q98 John Robertson: Should you not have been helping them?

Tony Grayling: We did a great deal to try to help the organisations to register, and we very proactively engaged with them to correct any errors that they may have made in the registration system. We work very closely with our customers. We have a help desk and an e-mail inquiry system. We have organised numerous workshops and seminars to try to educate potential participants in how they can comply with the scheme, because we are very keen to get a very high level of compliance.

Q99 John Robertson: What steps have been taken to reduce the number of incidents of non-compliance in the reporting phase?

Tony Grayling: We are in the beginning phase of the auditing. We don’t yet have clear results from that auditing. I don’t know if you are able to give us the progress report on that.

Neil Emmott: Yes, okay. First, dealing with the level of reporting-just to echo what Tony said-we saw quite a high level of compliance to start with. I wouldn’t like to sit here and say the agency is taking the credit. I think participants did a very good job, the majority of them reporting on time. We had about 94% of them reporting on time, the rest 6% late. The step we took there-this is just about whether they have reported, not about whether their data are right, and I will come on to that whether the data are right in a moment-is that we contacted them. What we are trying to achieve is the right balance between helping and promoting compliance, versus taking enforcement action where people don’t comply. In this first year it is a complex scheme. Participants are getting used to it. We are trying to focus more on assisting compliance-helping participants rather than coming down on them like a ton of bricks if they get it wrong.

Q100 John Robertson: So you mean a fairly light touch?

Neil Emmott: I would say we have tried to be balanced and supportive and not heavy-handed. We contacted those remaining 6% to remind them of their obligation to report, about 90 of them did so within a month, and then there was a smaller group, 37, to whom we issued notice of intent to serve civil penalties if they didn’t report.

Niall Mackenzie: If I might add-and this comes down to the cost of the scheme as well-I think we have all been surprised at how poor a lot of participants have been at understanding their own energy use. There has been a significant misreporting-people just not understanding what their own energy use was-and so one of the benefits of the scheme, although it is also a cost, has been getting companies and public bodies to get a grip on their energy use.

Q101 John Robertson: Is this by accident, by design or just lack of knowledge of how to look at it?

Niall Mackenzie: It is a small cost for most of these businesses and public sector bodies, which in the case of the private sector they can often pass on, or there are bigger returns on investment elsewhere. It is not a priority. I don’t think it is negligence. It has not been a priority and CRC has changed it into a priority, and on that measure the scheme so far is a success.

Q102 John Robertson: Going back then, are you going to take a tougher approach on this for these people and have a harder hand?

Neil Emmott: You mean in terms of the next phase-

John Robertson: Yes.

Neil Emmott: -or in terms of the 37 I mentioned? We obviously try to take a balanced approach, but the less responsible a participant has been, the more one errs towards-"errs" is not the right word-moves towards the use of the firmer end of the enforcement range. We have a whole range of tools we can use-from sending reminder letters, sending enforcement letters, through to serving civil penalties; or even, at the end of the day, there are criminal prosecution options in the legislation. We would want to use those very much as a last resort.

Q103 John Robertson: With the expertise you have gained, what would you say was the future in terms of that? What is harder, law enforcing or advising?

Neil Emmott: We will always continue to want to advise, of course. It is a complex scheme and we want to support participants, whom we view as our customers, as much as possible. We work within the framework of Government statutory guidance; that emphasised that in the first year of the scheme, we ought to give a bit more leeway. In the second year of the scheme one would expect that, with participants being more accustomed to the scheme, and following the statutory guidance, there would be a greater potential for enforcement action to be taken. But we still want to support and promote compliance in the first instance, rather than going too much the other way towards simply punishing people.

Q104 Dr Whitehead: Mr Mackenzie, you have estimated that the simplifications to the scheme will reduce administration costs by, what, some £337 million over the next two decades. You have estimated the overall costs at £534 million over the next two decades. That is a 63% saving. Is that right?

Niall Mackenzie: That is right.

Q105 Dr Whitehead: That is a major saving in the administrative costs, isn’t it?

Niall Mackenzie: Yes.

Tony Grayling: If I were to add to that, looking at the simplification proposals and our experience of operating the scheme in this phase, we would say that-at least anecdotally-there are some grounds for believing that the measures will reduce the administrative burden on participants. If you look at the sorts of difficulties we get presented to us at our inquiry desk, they concern things such as Climate Change, Agreement exemptions, how to report on residual fuels, and issues related to developing the footprint report, particularly the one I have already mentioned about the complexities of how to represent their company structure in the scheme. I think our operation experience suggests that there will be savings as a result of-

Q106 Dr Whitehead: How are these going to be monitored in terms of ensuring that those savings will be achieved? I assume the Department will set up some process to do that.

Niall Mackenzie: Yes. That is part of our evaluation strategy, and of course the irony is that the most effective way to monitor it would be to require participants to measure it and tell us. But then that adds to the bureaucracy, so we are not going to do that. I think there will have to be a combination of survey data-like the KPMG one we did this year-and anecdotal talking to participants. I am confident, particularly with the expertise of the Environment Agency, who will be administering three similar schemes targeted at different types of business and the public sector, that we can learn lessons and, hopefully over time, streamline the administration even further with greater use of IT reporting.

Q107 Dr Whitehead: But if mandatory greenhouse gas reporting is introduced there is going to be some duplication, isn’t there, which may presumably put the administrative burdens up?

Niall Mackenzie: It would put the total administrative burdens up, yes. Were mandatory reporting to be brought in and targeted at different things-I think as a number of witnesses in the previous session said-CRC has a very robust measurement of a subset of issues, for which voluntary reporting gives quite a menu of options that companies can pick. Both ourselves and Defra-we are working very closely together on this-have made it clear that, were mandatory reporting to be brought in, the data that had been compiled by participants in CRC or the EU Emissions Trading System, or indeed climate change agreements, would be sufficient for that part of the company’s mandatory reporting.

I think there was a concern expressed in the previous session about requiring companies to re-cut information. It is an intention, were that to be the policy, that we wouldn’t require it. Companies might choose to do it to make their data in the UK equivalent with American or Far Eastern operations, if the data were slightly different. We have allowed companies to make that choice, but we are very keen-and certainly my Minister, Greg Barker, is very keen-that we are not going to be requiring companies to resubmit very similar data.

Q108 Dr Whitehead: Would you think there would be some sort of redundancy in the reputation incentive on the league table-we have heard about that-should mandatory reporting come in?

Niall Mackenzie: I don’t think so. Ultimately that would be a decision for Ministers, but I think the designs are very different with current voluntary reporting. It covers transport emissions, goes much wider, and there is a degree of flexibility in what you choose to report. The beauty of the CRC system is everyone is reporting exactly the same energy use, and it is being checked by an independent regulator.

One of the things we have highlighted in the simplification is that the actual data that are published in the league table is something we are very much up for review on, because the current metrics were designed for revenue recycling, so they are overly complex. We are taking the detail of that out of the legislation and that will be set by administration. So at one end you could just have the CO2 figures or you could have a range of data. That was one of the points that was also mentioned in the previous session, that a lot of companies are giving us their turnover as a voluntary thing they can give for the league table. I think it was Mr Gardiner who talked about carbon efficiency. For those companies that do declare their turnover, you can see the carbon efficiency from the league table. But I don’t think we would be in a position where we would want to require companies to give us turnover, because for unlisted companies that can be a sensitive issue.

Q109 Dr Whitehead: You launched your consultation on the £337 million major saving at the end of March. The Chancellor in the Budget said if major savings in the administrative cost can’t be found, he is going to replace the CRC with another scheme. What could he have meant, in the light of the major savings you had already set out in the consultation?

Niall Mackenzie: First of all, I can reassure you that Government was joined up and that the two announcements were made in full knowledge of each other.

Dr Whitehead: Really?

Niall Mackenzie: Yes, really. We are asking-

Q110 Dr Whitehead: So was that not a major saving, then, that the Chancellor was reviewing? Did he have a different idea of what a major saving might be?

Niall Mackenzie: I think we are asking participants-and we would be interested to hear what the Committee’s view is-is it a major saving or not? Is it sufficient? Is it enough? It is a genuinely open question.

Q111 Dr Whitehead: Forgive me, but we just agreed that a 63% reduction was a really major saving in administrative costs, did we not?

Niall Mackenzie: Yes.

Q112 Dr Whitehead: Do you have in mind a really, really, really major saving?

Niall Mackenzie: Ministers will take the decision as to whether we have gone far enough. We have put a proposition on the table and if there are more savings to be had, which don’t cut across the efficacy of the scheme, we will grab those. We want this to be as simple as possible, and then Ministers collectively will have to decide whether we have gone far enough or not. I can’t speculate as to what their decision might be, but it is to be seen in that context. As I think a number of the witnesses said in the previous session, that has to be judged with what any alternative regime might be.

Q113 Dr Whitehead: In your judgment, is it reasonably conceivable that a scheme-something like the CRC in the form that we know it-could continue, if the savings that were made to it were substantially greater than those you have already set out in your consultation paper?

Niall Mackenzie: It is not my decision. We have set out quite clearly what the savings are we can do.

Q114 Dr Whitehead: I wasn’t asking for a decision; I was asking for-

Niall Mackenzie: You are asking me to speculate, and obviously it is speculating about what decision Ministers are going to take, which I can’t do.

Chair: On that note of uncertainty, we will draw these proceedings to a close. Thank you very much for your time and your answers. If there are further points of clarification we seek, we will be in touch with you again.

Prepared 7th May 2013