03 November 1998

HMT 5: Lord Marshall sees Role for Economic Instruments in UK´s Climate Change Strategy

There is a role for economic instruments in helping improve business use of energy and reducing greenhouse gas emissions, says Lord Marshall in his report, published today.

Lord Marshall's report 'Economic Instruments and the Business Use of Energy' states that:

all sectors of the economy - business, domestic and transport - will need to play their part in meeting our climate change commitments;

the Government needs to look beyond the current targets agreed at Kyoto, and provide clear, long-term signals to reduce emissions;

a mixed approach, using a number of different measures, will be necessary;

any measures must be subject to careful design and consultation in order to protect the competitive position of British industry and maximise their environmental benefit.

The report reflects the wide measure of agreement among those who were consulted that economic instruments do have a role in helping to meet the UK's climate change commitments. But there was a considerable diversity of views about how this should best be done.

The two leading options identified by Lord Marshall are a system of tradeable emissions permits and taxation. Further details on the two options are available on the attached fact sheet.

Lord Marshall said: "This is undoubtedly a highly complex area, and I am aware that many individuals and organisations have given considerable thought to these issues. My survey has been, though, necessarily brief. More work would undoubtedly be needed before the Government could implement solutions on the ground. But I hope the recommendations I have made today have helped to move the debate forward. I urge the Government to consider these recommendations very carefully, and to subject any further measures to careful design and further consultation in order to protect the competitive position of British industry, and maximise their environmental benefit."

Chancellor Gordon Brown welcomed the report, saying:

"I am very grateful to Lord Marshall for undertaking this complex study and for producing a valuable report which moves the debate forward substantially. His work demonstrates the value in policy formation of cooperation between the private and public sectors, and of wide and open consultation. In developing our response to the problem of climate change, it is important to build consensus between Government, business, and other interested parties.

"Lord Marshall's report makes a number of recommendations, and we shall be considering these very carefully as we develop our strategy on climate change. He has also identified a number of issues of design which require further examination and consultation; the Government will take forward work on these as he recommends."

Notes for editors

In March this year, the Chancellor asked Lord Marshall to lead a Task Force on the subject of whether, and if so, how best, new economic instruments could play a role in the UK in improving the business use of energy, and reducing greenhouse gas emissions. The two leading options examined were a system of tradeable emissions permits, and a tax affecting the business use of energy. The final report also looks at the role of IPPC and negotiated agreements. It contains detailed information on business energy use and expenditure, greenhouse gas emissions, and estimated opportunities for energy saving and emissions reductions by business.
Lord Marshall was assisted by a small Whitehall Task Force: John Gieve, of HM Treasury; Alastair MacDonald, of the Department of Trade and Industry; Dinah Nichols, of the Department of the Environment, Transport and the Regions; and David Howard, of HM Customs and Excise. The Task Force also worked closely with Jenny Barker of the Confederation of British Industry. As part of their study, Lord Marshall and his Task Force consulted extensively with business and other interested organisations. A consultation document was issued in June 1998, and the Task Force has benefited considerably from discussions with the CBI, ACBE and the Green Alliance.
The Government's consultation document on the UK's climate change strategy was published on 26 October. It launches a national debate on how the UK can meet its climate change targets. It stresses that action by Government alone will not be enough - all sectors have a part to play and action by individual firms, local authorities and households will be critical. It also sets out the UK's emissions baseline and projections, and breaks them down by sector. The main policy options for reducing greenhouse gases emissions are outlined. Copies are available from the DETR's website, at http://www.detr.gov.uk, or by contacting DETR Free Literature, PO Box No 236, Wetherby, S3 7NB, tel: 0870 1226 236. For more information, please see DETR Press Notice 891 or contact the DETR Press Office on 0171 890 3041.
At Kyoto in December 1997, developed countries agreed to reduce emissions of a basket of the six main greenhouse gases to 5.2 per cent below 1990 levels over the period 2008-2012. The six gases covered by this legally binding target are carbon dioxide, methane, nitrous oxide, hydrofluorocarbons, perfluorocarbons and sulphur hexafluoride. The Kyoto Protocol permits countries to undertake commitments jointly by forming a so-called bubble. Under this arrangement, the European Community agreed to a 8 per cent reduction. As part of that, the UK agreed to take on a reduction of 12.5 per cent. In its manifesto, the Government also set out a domestic goal of reducing carbon dioxide emissions by 20 per cent below 1990 levels by 2010.
As part of the Protocol, international emissions trading allows a developed country to purchase emissions reductions from other developed countries, so reducing the amount of domestic action which would otherwise be required in that country, and ensuring that the most cost-effective mitigation action is taken. However, the principles, modalities, rules and guidelines for emissions trading remain to be determined.
Copies of Lord Marshall's final report are available from the Public Enquiry Unit, Room 89/2, HM Treasury, Parliament Street, London, SW1P 3AG, 0171 270 4558, and can be found on the Treasury's Internet site.

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Lord Marshall's report on economic instruments and the business use of energy

Remit

In March 1998, the Chancellor of the Exchequer asked me to lead a Task Force on the subject of whether and, if so, how best to use new economic instruments to improve the industrial and commercial use of energy and help reduce emissions of greenhouse gases.

This is a very complex area and a wide range of views has been expressed to me. This report offers my recommendations. Mine has been necessarily only a brief survey. More work would be needed before the Government could implement solutions on the ground. But I hope this report takes the debate forward.

Summary of main conclusions and recommendations

On the role of business and other sectors:

It is clear to me that all sectors of the economy - business, domestic and transport - will need to play their part if we are to meet our legally binding target for reducing greenhouse gas emissions set under the Kyoto Protocol, and the UK's domestic goal of a 20 per cent cut in carbon dioxide emissions on 1990 levels by 2010.

I am also keenly aware that the commitments agreed at Kyoto were only the beginning. Even more challenging requirements are expected to emerge from future international negotiations. This emphasises the need for Government to look beyond the current targets and timetable, and provide clear, long-term signals to reduce emissions.

On whether economic instruments have a role to play:

In my view, a mixed approach will be necessary. Within that context, I believe that there is a role for economic instruments in helping improve business use of energy and reducing greenhouse gas emissions as part of a package of measures, alongside existing regulations, voluntary and negotiated agreements, and other measures, and appropriate action on the part of other sectors. However, any measures must be subject to careful design in order to protect the competitiveness of British industry and maximise their environmental benefit.

On the two leading options:

(a) A system of tradeable emissions permits

The system of international greenhouse gas trading provided for in the Kyoto Protocol, which should be in place by 2008, will be part of the long-term solution to reducing emissions. I am very pleased that international trading will be available to the UK as part of the solution to achieving its commitments.

Any trading scheme will require a robust system of monitoring and verification. A starting point for this may be the framework provided by the Integrated Pollution Prevention and Control (IPPC) Directive.

Practical considerations lead me to the conclusion that it may not be sensible for Government to introduce a fully fledged, statutory scheme domestically in the UK at this stage.

But I urge the Government to step up its consultations with interested parties to resolve the complex issues involved in designing a trading scheme. Strong business input into design will be essential. Such consultation should inform the UK's negotiating position for the international scheme as well as developing expertise domestically so that British firms are ready, and our financial institutions well positioned, to lead in these new markets.

As a first step, I recommend that the Government seriously consider a dry-run pilot with interested players, as soon as possible, as a means of learning lessons for the participation of our industry in the international scheme.

(b) On tax

Even when the international trading scheme is fully developed, it is unlikely that all businesses will be involved. Indeed, I doubt whether it will ever be practical for the majority of small and medium sized enterprises (SMEs) and less intensive users in industrial and commercial sectors to participate in the international trading scheme. Taken together, these firms account for around 60 per cent of total carbon dioxide emissions from business, and may offer scope for significant improvements in energy efficiency and reductions in emissions.

Hence, my conclusion is that there probably is a role for a tax if businesses of all sizes and from all sectors are to contribute to improved energy efficiency and help meet the UK's emissions targets.

In order to help businesses plan for future investment and maximise the environmental impact of a tax, a clear signal should be given of the long-term direction of policy, with changes in the rates of tax made in a gradual and predictable way.

Any tax must be designed in a way that protects the competitive position of British industry. To this end, I recommend that:

the revenues are recycled in full to business, with at least some of the revenues channelled into schemes aimed directly at promoting energy efficiency and reducing greenhouse gas emissions - perhaps through 'carbon trust' type schemes to promote low carbon technologies, and/or energy audits/advice for SMEs.

consideration be given to the treatment of energy intensive industries, with the aim of reducing the overall impact on the heaviest users, whilst retaining some incentive for all users to save energy at the margin; a system of rebates, perhaps with the relief targeted at plant level, seems the leading option here.

any measures are subject to detailed consultation about their design.

Given current policy objectives for the domestic sector, the leading option for a tax would, in my view, appear to be a 'downstream' tax on the final use of energy by industrial/commercial consumers, with the tax rates reflecting (at least in broad terms) the carbon content of different fuels.

The design of any tax should ensure that Combined Heat and Power (CHP) is not disadvantaged. It should also aim, where possible, to increase incentives for the take-up of renewable sources of energy.

# = pounds sterling

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