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CRC Energy Efficiency Scheme Order 2010

My Lords, I thank both noble Baronesses and the noble Earl for their constructive and helpful responses to the order. It is encouraging that there has been general support, although noble Lords have raised some legitimate issues and concerns which I will do my best to address. I thought that the remarks of the noble Baroness, Lady Scott, about rising sea levels in Bangladesh and the living experience of climate change provided a helpful anecdote for the current debate on the science. Issues have been clearly identified in relation to the Climatic Research Unit at the University of East Anglia and in the Intergovernmental Panel on Climate Change process, but nothing that has occurred seems to undermine the basic science. The evidence is clear that climate change is happening, and if we do not do something about it quickly, we will be bequeathing to future generations what can only be described as catastrophe. Unfortunately it is affecting the people of Bangladesh now. Although this is not a debate about Copenhagen, it is worth saying that despite the disappointment about a lack of agreement on a legal treaty, none the less we are seeing with the accord a significant number of countries making their own commitment. We have to build on that and work towards the Conference of the Parties 16 meeting to be held in Mexico at the end of this year. In that context, this order is important because perhaps we have not placed the required emphasis on energy efficiency as a means of reducing emissions. I am convinced that there are huge gains to be made if we can motivate individuals and organisations to take energy efficiency seriously. I take the point made by the noble Baroness, Lady Wilcox, about the complexity of and the time taken to produce the order, but with the league table approach and a system of financial penalties and incentives, we have an opportunity to make serious inroads into a sector which we have found very difficult to encourage to take energy efficiency seriously. Perhaps I may start by dealing with the issue of complexity because it is a fair point. Noble Lords very kindly did not comment on the length of the order, but it is not brief and I accept, even though we are talking about large public and private sector organisations which therefore ought to have the capacity to deal with this issue, that there are questions about whether this is too complex a system. I can say that we have consulted fully with the Better Regulation Task Force, which in my experience is not backward in raising issues that have to be dealt with, and I believe that we have gone through all the hoops in that regard. We set out to design a scheme that is as fair and transparent as possible and we engaged extensively with stakeholders to make sure that that was the case. I want to come back to the noble Earl, Lord Attlee, on the question of fairness. His essential point was to ask whether the scheme is fair to the port sector. We have tried to ensure fairness across the sectors, and to an extent the complexity of the order arises from the fact that we have therefore had to engage with a range of intricate organisational structures. I know that this contrasts, for example, with the installation-based approach of the EU ETS, but we do not think that that would have been suitable. I also do not think that it would have identified some of the barriers that I have already referred to. I want to assure the noble Baroness, Lady Wilcox, that we are committed to keeping the scheme under review, and that we will look to identify any opportunities to simplify it. However, in the light of comments made by both the noble Baroness and the noble Earl, this of course has to be an organic process. The order is a first and we need to learn as we go along. We will review it on a regular basis, and if issues are raised which show that in the building of the edifice of the CRC—if we have missed points out or learn that there are problems as we go along—we will be prepared to make amendments from time to time. That has been the approach taken by my department in relation to a number of the interventions that we have made. I can think, for example, of the introduction of banding in the renewables obligation scheme. That was done very much in response to comments and concerns raised by stakeholders. We will continue in the same way. The noble Baroness, Lady Wilcox, referred to the timeline. I probably do not need to go into it, but I am happy to send the timeline to noble Lords if they wish to see it. In brief, the introductory phase is from April 2010 to 2013. The first annual reporting year will start from April this year, the second annual reporting year being 2011 to 2012 and the third from 2012 to 2013, with the first sale of allowances taking place in April 2011. There is always a balance to be struck between wanting to get on with something and wanting to give businesses and public sector organisations time to adjust. I hope that we have got it right and that we can look forward to the introductory year starting in only a few weeks’ time. Both the noble Earl, Lord Attlee, and the noble Baroness, Lady Wilcox, went on to ask how well we have communicated with the organisations that are going to have to deal with the scheme. We have worked very hard with the Environment Agency, the scheme administrator. In April 2009 the agency held eight regional seminars involving more than 600 delegates. Two further national events are scheduled for this year, to be held this month and in March, and the agency wrote to all potential participants during May and June 2009 to inform them about the scheme. My officials and representatives from the Environment Agency have over the past year hosted around 140 events in order to consult on and raise awareness of the scheme. Lastly, what my speaking note calls "newsblast emails"—whatever that means, but it sounds jolly good—have been distributed to our CRC stakeholder list which comprises more than 16,000 individuals. I think it means that we are highlighting what is taking place. There has been an important effort to get this across. I accept that we need to do more and we will be working with the Environment Agency to do all that we can to ensure that the organisations that will be affected know that the scheme is coming their way. I take on board what the noble Earl, Lord Attlee, says about the ports, and I am aware of the concerns that have been expressed. Some noble Lords may have heard from Forth Ports on these issues. One of the concerns is the apparent inability of the ports to influence their tenants’ emissions. For instance, I note in a briefing sent out by Forth Ports that, ""it is worth remembering that electricity on-sales represent a substantial revenue stream"." I take that to mean that this is a profit centre: the more electricity that tenants use, the more income is generated for the ports. That is a problem, of course, because the CRC is designed as an incentive which seeks to reverse that. There are financial and reputational rewards for those who use less energy. I know also that there have been concerns about what might kindly be described as erratic tenants. I would add that there is nothing to stop any port from asking its tenants to take responsibility for their own emissions by connecting directly to the grid. The noble Earl asked whether I would continue to look at the matter. I will continue to do so but, as I said, this is the start of a process. Noble Lords have not raised the issue of schools, for instance, but concerns have also been raised about schools being brought within a local authority’s responsibility. I again give the assurance that we will be monitoring the scheme and its introduction very closely. If it proves that we have to make changes, we will want to do so. However, I also want to give certainty to businesses that we are not going to suddenly come in and change it after a few months. We need to see how it works in practice, and give some stability to those organisations as well. I turn to the question of price and trading. We have had very happy debates on the EU ETS and issues to do with the carbon price. The noble Baroness is probably aware that because Copenhagen was not all we wanted it to be, the EU has not been able to say that it will go from a 20 per cent to a 30 per cent emission target. We wanted that as it would have had a positive impact on the carbon price, which is low at the moment and is undoubtedly causing some difficulties. Obviously, we do not want that to happen in relation to the allowances on this scheme. I am advised that we think we have got it right, but again, we will have to look at that very carefully. On the issue of auditing, my understanding is that we are currently drafting guidance for the Environment Agency on the criteria that equivalent schemes must meet to be recognised as equivalent to the CTS under the early action metric. I take the point the noble Baroness raises: there has to be integrity in the system, and people have to trust the measurement; she is absolutely right. Throughout the whole emission trading sector, the point about clean development mechanisms is that integrity of the measurement system is critical. One of the unnoticed gains from Copenhagen was the agreement in the accord to have, for the first time, a much more vigorous process in relation to measurement. It applies just as much here as it does to wider international trading schemes. As for the impact on business, I turn first to the noble Baronesses, and come back to the issue of price and the question of whether there will be sufficient robustness in the system to make businesses want to take this seriously. We think that it is going to work; it is designed to encourage cost-effective emission reductions. The problem has always been that although the amount of savings we think will come through reduced energy demand is £1 billion a year, energy costs in the budget of large organisations can typically be quite low. That is the problem we face: directors of finance going to their boards do not see it as a major expenditure item, yet from our point of view, we have to get across to them that this is serious. In many cases, it takes very little effort for organisations to become more energy efficient. I believe that the combination of the allowances system, the incentives for organisations that do well, and, perhaps in some cases, the league table, will provide the necessary incentives. In my opening remarks, I referred to the fact that government departments will be enrolled in this scheme, even though some of them do not reach the thresholds. League tables will have a very powerful impact on government departments themselves. Noble Lords know that my department moved into its offices in Whitehall Place in October 2008—in a building with the lowest rating for energy efficiency that you can have. We took a bit of punishment for this, but we have improved. This shows that external pressure, combined with leadership inside the organisation, can lead to that kind of change. I turn to the issue of renewables and why they are not raised here. This is a question I asked my officials too. The noble Baroness is quite right; no differentiation is made in relation to where electricity comes from. The reason is that we are talking about ensuring energy efficiency; that, in essence, is taken as the currency. I suspect that we could have a theological debate about that, but this has been decided in terms of simplicity. That is why you do not get different recognition for renewable, nuclear or, hopefully in the future, carbon capture and storage, or whatever. The noble Baroness, Lady Wilcox, asked why we group private equity funds with their investee companies. This raises the whole issue of what the correct governance structure is in these kinds of circumstances. We have taken the decision that grouping organisations in the CRC is determined by whether or not there is a parent-subsidiary relationship as defined in the Companies Act. Where such a relationship exists, we think it is appropriate for the subsidiary company to be grouped under the parent to ensure that accountability is applied at the correct level. The criteria set out in the Companies Act involve a level of influence of parents over their subsidiaries that should be sufficient for private equity funds to encourage their investee companies to become more energy efficient. Private equity funds have an excellent opportunity to use their strategic overview of different companies to facilitate the take-up of best practice, and can use their influence to raise energy efficiency up the corporate agenda. I also think that in deciding to use this approach, we will overcome the problem that the noble Baroness rightfully raised in her opening remarks. I am encouraged by the generally positive response to this order tonight. We will be looking very carefully at implementation and at issues that arise when the scheme is introduced. Overall, however, I think that this could be very positive and powerful in ensuring that energy efficiency in this country takes a further leap forward in the next few years. Motion agreed. Sitting suspended.