The UK Emissions Trading Scheme: a New Way to Combat Climate Change (HC 604-I) Public Accounts Committee 12 May 2004

Evidence given by Sir Brian Bender KCB, Permanent Secretary, and Mr Henry Derwent, Director, Climate, Energy and Environmental Risk, Department for Environment, Food and Rural Affairs.

Q16 Mr. Gerry Steinberg (City of Durham): There is an old expression, is there not Sir Brian, you can baffle people with bullshit, and you have got me baffled, I will tell you! Since becoming a member of this Committee, it must be three or four years ago now, I have read hundreds of reports and I have got to say I could not understand this one. I could understand what it was getting at but I could not understand how you were getting there. I have not got a clue how it was supposed to work.

Sir Brian Bender: Is this a question?

Q17 Mr. Gerry Steinberg (City of Durham): Frankly, I do not think you know either if the truth were known because you can justify anything. It does not look as though I was the only one who was baffled, does it, if you look at the Report, because on page 21, and the Chairman covered it but I think it is worth going back over again because I do not think you told us all you should have done, as I say, I do not think I am the only one who could not understand this scheme because if you look at page 21 and paragraphs 2.29 to 2.31 you were told there were between 420 companies and 3,100 companies that may take part in this scheme. The way I look at it that was because you were giving money away and they expected everybody to come and bite their hands off for the money that was being given away. I would say also I think it is a load of codswallop anyway, frankly because by the time this so-called thing in the sky disappears we will all be dead and so will our kids and our kids' kids, but that is another issue. Why were you only able to attract 34 companies at the end when you were told that there may be 3,100 and they were giving money away as it was? Come on, let's have the truth.

Sir Brian Bender: I am going to ask Mr Derwent to answer the direct question. Your view on climate change is certainly not one the Government shares nor indeed, judging by last night's premiere in Hollywood ---

Q18 Mr. Gerry Steinberg (City of Durham): Sorry?

Sir Brian Bender: There is a new film called The Day After Tomorrow.

Q19 Mr. Gerry Steinberg (City of Durham): I have not got time to look at films. I was busy trying to read this bloody Report which I do not understand.

Sir Brian Bender: Do you want to deal with this point about the number of firms?

Mr Derwent: The paragraph in the Report says correctly that the financial benefit of the incentive ought to outweigh the costs of participating for between 420 and 3,100 firms. That is, if I may say so, the sort of judgement which comes from an economist's analysis on the basis ---

Q20 Mr. Gerry Steinberg (City of Durham): There is a hell of a difference, is there not? They are talking about anything between 420 companies and 3,100 and you are trying to justify the scheme was a success and you could not get 1% of that. That cannot be successful in any sort of situation?

Mr Derwent: Clearly the firms concerned ---

Q21 Mr. Gerry Steinberg (City of Durham): --- And you were giving money away as well.

Mr Derwent: --- looked at the opportunity, looked at the amount of money they thought would be given away, and decided they did not want to participate. In a way we were asking them to walk backwards in a looking glass world, that is to say you volunteer to limit emissions of something which previously had been regarded as undeniably linked to the productivity of firms and a lot people said, "Thanks very much, we will sit this one out." 38 did not but the Report goes through the efforts we went to.

Q22 Mr. Gerry Steinberg (City of Durham): They mailed 5,000 companies, did they not, which they thought might be interested, I think it says in the Report somewhere, and you still only got 30 responses and you were doling money out.

Sir Brian Bender: We were doling money out for companies to take a risk to commit themselves to something. The 30-odd did that and, as I said earlier in response to the Chairman, a lot of positive things have flowed from that in terms of the emissions reductions they were achieving and in terms of the experience ---

Q23 Mr. Gerry Steinberg (City of Durham): They would have done that anyway.

Sir Brian Bender: I repeat that the NAO Report says even for the four companies two-thirds of the reductions for those were as a result of the scheme.

Q24 Mr. Gerry Steinberg (City of Durham): If I remember rightly as well in the Report - I cannot remember exactly where it is now - you had to postpone the auction twice. Were the bells not going? Come on, tell us the truth, what do you really think about it?

Sir Brian Bender: I think it is a pioneering initiative. The City thinks it was a good thing.

Q25 Mr. Gerry Steinberg (City of Durham): You have got your knighthood!

Sir Brian Bender: Mr Steinberg, I am proud of my people for taking this innovative scheme forward and working in such a way with expert advisers, getting something going. It has got a lot of admiration internationally. It has enabled us to be a leader internationally.

Q26 Mr. Gerry Steinberg (City of Durham): But if you could only get 30 companies in the whole country out 5,000 mail shots, it is a mockery, is it not? How can you claim success for that?

Sir Brian Bender: Try again.

Q27 Mr. Gerry Steinberg (City of Durham): Pass the buck, come on Henry!

Mr Derwent: Firstly, I do not think that that sort of response to a mail shot is one which would be regarded as a failure by many ---

Q28 Mr. Gerry Steinberg (City of Durham): If you put a mail shot round my constituency and said, "I'm going to give you 17 quid a shot for something," if you mailshotted one street I reckon I would get everybody coming.

Sir Brian Bender: And commit your people to a contracted risk and if they did not deliver it they would pay out?

Q29 Mr. Gerry Steinberg (City of Durham): But they knew they were going to achieve it anyway because most of them were achieving it to begin with.

Mr Derwent: Not most of them.

Sir Brian Bender: Not most of them.

Mr Derwent: And the data that we had about what happened in the past is not the same as an accurate projection of what that company was going to plan to do in the future. The fact remains we made this as well-known as we possibly could and there were not many companies who were prepared to volunteer, and I think that has to be seen against the subsequent introduction of a mandatory European scheme which has effectively forced people to do this. We tried to begin with to see what happened if you asked people to volunteer.

Q30 Mr. Gerry Steinberg (City of Durham): But the scheme was so daft that companies who could actually exceed what you were asking them to exceed were not allowed to.

Sir Brian Bender: Why do you say they were not allowed to?

Q31 Mr. Gerry Steinberg (City of Durham): It says in the Report. The notes I wrote down when I was reading it actually said there was one company that wanted to exceed their target but they were not allowed to because the scheme prevented them from exceeding it.

Mr Derwent: I may need to go ---

Sir Brian Bender: We will come back to you on that particular point.

Q32 Mr. Gerry Steinberg (City of Durham): There we are, Ineos Fluor. Ineos Fluor wanted to build more emissions reductions, something like 650,000 tonnes, and were not allowed to. You have not even read the Report.

Mr Derwent: The scheme's rules prevented any one company scooping the pool by more than 20% and that was very deliberate because perhaps the most important thing we wanted to do was establish a market with a number of participants and if there had only been two or three companies who together said, "Let's scoop the whole of this," we would have been unsatisfied and not taken it on.

Mr. Gerry Steinberg (City of Durham): Ineos Fluor clicked, did they not, and thought, "We are on a winner here." They thought, "We are going to make a fortune out of this," and you thought to yourselves, "We have got to stop this to stop one company taking it all out." Another issue I would like to take up with you is the Treasury, who are well known for their generosity, gave you £215 million for the whole scheme. Presumably that £215 million was on the basis of possibly 5,000 firms because that is how many you asked and they had given you £215 million to do that but only 38 firms participated and yet you used the £215 million for the 34 firms. I come back to my first point, you were just doling money out. My money! My money!

Chairman: On that expansive note of doling the money out shall we stop for a moment and vote and you can think of a good answer to try and satisfy Mr Steinberg.

The Committee suspended from 3.53 p.m. to 3.59 p.m. for a division in the House.

Chairman: Do you wish to repeat your question?

Q33 Mr. Gerry Steinberg (City of Durham): The question was that the scheme was allocated by the Treasury something like £215 million which could have been used by up to 5,000 firms and yet 34 firms participated and the whole of the £215 million was used for the scheme. That seems quite an outrageous waste of money. If you and the Treasury envisaged that the whole scheme would cost £215 million for 5,000 participants ---

Sir Brian Bender: Can I try and answer better than we have done so far. The first point is the aim of the scheme was not to secure X number of participants, the aim was to secure a significant reduction of greenhouse gas emissions and to give participants an advantage over international competitors because we were convinced that trading was going to be the way forward so there was an advantage by "learning through doing" and we also wanted to provide a benefit to the City in terms of the expertise. We believe that those aims have been achieved. The purpose of the incentive money was to create a market so I would suggest it is not right to focus on the 30 because what they were doing was creating a market in which, for example, 6,000 Climate Change Agreement holders can now meet the targets in their climate change agreements by trading and the auction led to 3.96 million tonnes of CO2 equivalent being saved. That seems to us to be what the scheme was about and why the focus on the 30 risks being misleading.

Q34 Mr. Gerry Steinberg (City of Durham): The 30 might be misleading but at the end of the day I will ask the Treasury clearly you were very satisfied with them spending the whole of the amount of the money which you had put aside for, let's be generous, 3,000 firms rather than 5,000 firms. Why did you not just say to them spend 1% because only 1% of firms were participating?

Mr Moran: As Sir Brian said, when we considered the proposal from what was then DETR it was not predicated on participation by a particular number of companies, it was focusing on the level of reduction of emissions achieved and stimulating emissions trading; it was not focusing on how many companies would participate.

Q35 Mr. Gerry Steinberg (City of Durham): I just do not understand that answer at all; I have got to be quite honest. You were just printing money, firms were just getting it. This is the final question. Look at figure 9 on page 24, that just proves my point, does it not?

Mr Derwent: Figure 9 shows the initial price.

Q36 Mr. Gerry Steinberg (City of Durham): Exactly.

Mr Derwent: Which is somewhere below the auction price, as you might expect in many IPNs or any other releases of stocks to the market, which then climbed back up for a while and the market then decided that there was no reason to fear for the supply and came back down to a level which is probably a little bit above that now but that is the way the market is identifying the cost.

Q37 Mr. Gerry Steinberg (City of Durham): Exactly. All I can see - and I may be totally wrong - is that there was a killing made and now they are virtually worthless. If they were shares, they would have reached a peak, they would have been worth a fortune for those who first got in on it, and now they are virtually worthless.

Mr Derwent: I think price today is affected quite considerably by an uncertainty in the market given this detailed development of the EU Emissions Trading Scheme and given that the number of firms in the UK scheme that will be transferred into the ETA is very unclear.

Mr. Gerry Steinberg (City of Durham): That was the next point I was going to go on to but I am not.

Q38 Chairman: Before I ask the next questioner to come in I think I am going to ask the National Audit Office to try and explain this to us because I think we are getting answers which are somewhat elliptical. I want the National Audit Office to try and explain to the Committee what figure 6 on page 18, which is about the baseline targets, and what figure 8 on page 22, which is about the progress of auction, actually tell us and I want the National Audit Office to comment on what I think is the truth of this which is is this another way of putting it: that the companies would have received most if not all of this £111 million by doing nothing? In fact, they chose to do more but they could have received all of the money by doing nothing. Could the National Audit Office for the benefit of members of the Committee try and explain this in simple terms.

Mr Shapcott: If I can answer that last point first. The companies are incentivised to reduce emissions in two ways, one is by the incentive money from Defra which takes them up to their targets under the scheme but they then have an incentive to go beyond that, which is the opportunity to sell the excess in the market at £2.50 a tonne, or whatever the market place is from time to time. In a sense that is illustrating how this economic system of regulation is going further than perhaps their strict obligations under environmental regulation. Turning to figure 6, if I could draw the Committee's attention to the two lines shown for the four companies, first of all, the higher one, the solid line in each case is the baseline the company has been allocated under the scheme, so they have an opportunity to bid into the scheme any reductions that they make compared to that baseline. The bids they actually made resulted in them acquiring targets that are shown by the dotted lines which are further down in every case. The actual performance they achieved is not shown on that figure. It is in fact aggregated in figure 4 on the previous page. The actual performance is to go below what they require as a target under the scheme and their aggregate emissions in 2001. Finally figure 8, this is illustrating the progress of the auction. Just to recap on the way in which the auction operated. It began with, if you like, the auctioneer announcing a price of £100 a tonne and inviting the companies to say what quantity of reductions they would deliver at that price. When that quantity is multiplied by that price the result was compared with the budget available. It was way in excess of that budget so they went on to the next round with a lower price and there were successive rounds in that way with lower and lower prices and at each round the company had an opportunity to review the quantity that they were bidding into the auction. Eventually, as you can see, they reached a price of £50 at which the quantity bid by the companies at that price exactly spent the budget of £215 million and at that point the auction was terminated.

This is an uncorrected transcript of evidence taken in public and reported to the House. The transcript has been placed on the internet on the authority of the Committee. Neither witnesses nor Members have had the opportunity to correct the record. The transcript is not yet an approved formal record of these proceedings.